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: 55200  Threads: 1  Questions: 21802  Slow queries: 0  Opens: 54  Flush tables: 1  Open tables: 47  Queries per second avg: 0.394
                                    [sqlstate] => 00000
                                    [protocol_version] => 10
                                    [thread_id] => 1766
                                    [warning_count] => 0
                                )

                            [count:protected] => 16
                            [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] => 680
                                    [limitstart] => 680
                                    [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
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                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                    [start] => 680
                                                )

                                            [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
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                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [start] => 680
                                                                )

                                                            [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] => 680
                                                                                )

                                                                            [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
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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
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                                                                                            [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
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                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
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                                                                                                            [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] => 680
                                                                                                )

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

                                                                                            [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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                                                                                                            [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
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                                                                                                    [attrBlacklist] => Array
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                                                                                                            [0] => action
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                                                                                                        )

                                                                                                )

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

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [start] => 680
                                                                                                    [limitstart] => 680
                                                                                                    [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
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                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [HTTP_AUTHORIZATION] => 
                                                                                                    [HTTP_HOST] => wordpress.hubtech.tv
                                                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots)
                                                                                                    [HTTP_FROM] => support@search.yandex.ru
                                                                                                    [HTTP_ACCEPT_ENCODING] => gzip,deflate
                                                                                                    [HTTP_ACCEPT] => */*
                                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                                    [SERVER_SIGNATURE] => 
                                                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                                                    [SERVER_NAME] => wordpress.hubtech.tv
                                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                                    [SERVER_PORT] => 80
                                                                                                    [REMOTE_ADDR] => 84.201.133.89
                                                                                                    [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] => 51532
                                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                                    [REQUEST_METHOD] => GET
                                                                                                    [QUERY_STRING] => start=680
                                                                                                    [REQUEST_URI] => /?start=680
                                                                                                    [SCRIPT_NAME] => /index.php
                                                                                                    [PHP_SELF] => /index.php
                                                                                                    [REQUEST_TIME_FLOAT] => 1519183683.822
                                                                                                    [REQUEST_TIME] => 1519183683
                                                                                                )

                                                                                            [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] => 1519183684
                                                                                                            [session.timer.last] => 1519183684
                                                                                                            [session.timer.now] => 1519183684
                                                                                                            [session.client.browser] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots)
                                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                                (
                                                                                                                    [data:protected] => stdClass Object
                                                                                                                        (
                                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                                (
                                                                                                                                    [commentaries] => stdClass Object
                                                                                                                                        (
                                                                                                                                            [limitstart] => 680
                                                                                                                                            [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
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                                                                                            [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
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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] => 680
                                                                                    [limitstart] => 680
                                                                                    [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_HOST] => wordpress.hubtech.tv
                                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots)
                                                                                    [HTTP_FROM] => support@search.yandex.ru
                                                                                    [HTTP_ACCEPT_ENCODING] => gzip,deflate
                                                                                    [HTTP_ACCEPT] => */*
                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                    [SERVER_SIGNATURE] => 
                                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                                    [SERVER_NAME] => wordpress.hubtech.tv
                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                    [SERVER_PORT] => 80
                                                                                    [REMOTE_ADDR] => 84.201.133.89
                                                                                    [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] => 51532
                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                    [REQUEST_METHOD] => GET
                                                                                    [QUERY_STRING] => start=680
                                                                                    [REQUEST_URI] => /?start=680
                                                                                    [SCRIPT_NAME] => /index.php
                                                                                    [PHP_SELF] => /index.php
                                                                                    [REQUEST_TIME_FLOAT] => 1519183683.822
                                                                                    [REQUEST_TIME] => 1519183683
                                                                                )

                                                                            [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] => 1519183684
                                                                                            [session.timer.last] => 1519183684
                                                                                            [session.timer.now] => 1519183684
                                                                                            [session.client.browser] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots)
                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                (
                                                                                                    [data:protected] => stdClass Object
                                                                                                        (
                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                (
                                                                                                                    [commentaries] => stdClass Object
                                                                                                                        (
                                                                                                                            [limitstart] => 680
                                                                                                                            [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] => 680
                                                                    [limitstart] => 680
                                                                    [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_HOST] => wordpress.hubtech.tv
                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots)
                                                                    [HTTP_FROM] => support@search.yandex.ru
                                                                    [HTTP_ACCEPT_ENCODING] => gzip,deflate
                                                                    [HTTP_ACCEPT] => */*
                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                    [SERVER_SIGNATURE] => 
                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                    [SERVER_NAME] => wordpress.hubtech.tv
                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                    [SERVER_PORT] => 80
                                                                    [REMOTE_ADDR] => 84.201.133.89
                                                                    [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] => 51532
                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                    [REQUEST_METHOD] => GET
                                                                    [QUERY_STRING] => start=680
                                                                    [REQUEST_URI] => /?start=680
                                                                    [SCRIPT_NAME] => /index.php
                                                                    [PHP_SELF] => /index.php
                                                                    [REQUEST_TIME_FLOAT] => 1519183683.822
                                                                    [REQUEST_TIME] => 1519183683
                                                                )

                                                            [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] => 1519183684
                                                                            [session.timer.last] => 1519183684
                                                                            [session.timer.now] => 1519183684
                                                                            [session.client.browser] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots)
                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                (
                                                                                    [data:protected] => stdClass Object
                                                                                        (
                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                (
                                                                                                    [commentaries] => stdClass Object
                                                                                                        (
                                                                                                            [limitstart] => 680
                                                                                                            [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
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
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                                    [content_type] => market-commentary
                                    [title] => The Trouble with Porosity and Prosperity
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                                    [fulltext] => 

“We’re all one thing, Lieutenant. That’s what I’ve come to realize. Like cells in a body. ’Cept we can’t see the body. The way fish can’t see the ocean. And so we envy each other. Hurt each other. Hate each other. How silly is that? A heart cell hating a lung cell?” 

-"Cassie" in the novel The Three

I am a philosophical nomad disguised in Western clothing, a wondering drifter, masquerading in a suit near a California beach. Sand forms the foundation of my being and its porosity is at once my greatest strength and deepest wound. I have become after 70 years, a man who believes that no belief is sacred. I have ideals and moral standards, but I believe them specific to me. Had I inherited your body and ego, “I” could just as clearly have assumed “yours.” If so, I wonder, if values are relative, then what are mortals to make of them, and what would a judging God make of us? If a collective humanity is to be rooted in sandy loam, spreading its ideological seeds through howling winds only to root in mutant form at different places and different times, can we judge an individual life?

I despair that my only answer is “not easily.” The conclusion at its logical end makes us all innocent and equal. We are born innocent, falter, but no matter, we remain mostly innocent. My problem, however, is that if there are no absolute standards, it may minimize life’s value. Concrete, as opposed to porous sand, provides a firmer foundation for judgment, but sand I suspect is the soil into which we are insecurely grounded. All one thing, masquerading as ourselves.

The global economy and its financial markets are insecurely grounded as well. Decades and indeed centuries have taught us that both inflation and deflation are the enemies of stability and growth, but knowing which one is just around the corner can be difficult. Before the advent of central banks in the early 20th century, prices were just as likely to go up as down. A bountiful harvest or supply shock miracle could sink prices just as easily as the discovery of gold and silver in the New World could raise them. Even after the miraculous “discovery” of the modern central banks printing press, a miscue or fat fingered mistake by one of the “wise men” could lead to depression and accompany deflation. The world of the 1930s and the more recent lost decades of Japan give testament. Prices change – and while they usually go up these days, sometimes they do not. We are at such a moment of uncertainty.

That one or the other should be favored, is a fascinating debate. Currently, almost all central bankers have a targeted level of inflation that approaches 2%. Some even argue for higher levels now that deflationary demons approach in peripheral Euroland. They argue that the 2% level is sort of like a firebreak. Once inflation approaches zero, goes their theory, the deflationary firestorm is difficult to stop. With interest rates at zero and quantitative easing approaching potential political maximums, there is little water left to pour on the flames. Best then to keep inflation at a reasonable 2% so that the zero hour never comes. They have a point, but then how to explain to the average 30-year-old citizen that if so, his/her retirement dollar will only be worth half as much come 65, and if inflation averages 3%, it will only be worth a third. Actually, a 30-year-old citizen of the 1970s (yours truly), has experienced a 75% depreciation of his purchasing power. The cost of a firebreak can be expensive insurance.

And why, goes the argument, are lower prices so bad? Didn’t Wal-Mart get famous by featuring everyday low prices, and what’s so bad about 3-buck-a-gallon gas at the pump? More dollars in consumer pocketbooks suggests more spending, stronger growth rates and ultimately more jobs. Jim Grant, one of the most gifted financial historians of our day, has long argued that economies did just fine during bouts of deflation in the 18th and 19th centuries – in fact, in many cases, they did better. America in the 1880s was a period of good deflation with output rising by 2% to 3% from 1873 to 1893. Two percent targeted inflation, he would argue, is the “con” of central bankers who know nothing better than to create money during a financial crisis and then to keep creating it during the inevitable recovery. Grant has a point. If that is their job, then indeed they have been good at it.

But Grant must know, I suspect, that our modern finance based economy is not your 19th century Oldsmobile, if there had been one. “That indeed is the problem,” he might counter. In fact, Grant has even written a book supporting that thesis titled “The Trouble with Prosperity.” Prosperity has created inflation and excess, he would argue. My problem though (getting back to the introductory quote’s reference to a heart cell as opposed to the lung cell) is that much of our 21st century economy has been planted in the sandy loam of finance as opposed to the concrete foundation of investment and innovation. Stopping the printing press sounds like a great solution to the depreciation of our purchasing power but today’s printing is simply something that the global finance based economy cannot live without. Going home again, to paraphrase Thomas Wolfe, is something you just can’t do. Modern economies have grown used to inflationary sand and cannot grow in the concrete based economy that Grant eulogizes in his magnificently written histories.

Why not? Simple math, I suppose. Our 2014 U.S. Oldsmobile requires 4% nominal growth just to keep it running, and Euroland economies need at least 3%. Having created outstanding official and shadow banking credit of nearly $100 trillion with an average imbedded interest rate of 4% to 5%, the Fed presses must crank out new credit (nominal growth) of approximately the same 4% to 5% just to pay the interest rate tab. That of course wasn’t the case in Grant’s 19th century version – there was very little debt to service. But now at 500% to 600% of GDP (shadow debt included), it’s a Sisyphean struggle just to stay above water. Inflation, in other words – or in simple math – is required to pay for prior inflation. Deflation is no longer acceptable.

Such is the dilemma facing central bankers (and supposedly fiscal authorities) in 2014 and beyond: How to create inflation. They’ve made a damn fine attempt at it – have they not? Four trillion dollars in the U.S., two trillion U.S. dollar equivalents in Japan, and a trillion U.S. dollars coming from the ECB’s Draghi in the eurozone. Not working like it used to, the trillions seem to seep through the sandy loam of investment and innovation straight into the cement mixer of the marketplace. Prices go up, but not the right prices. Alibaba’s stock goes from $68 on opening day to $92 in the first minute, but wages simply sit there for years on end. One economy (the financial one) thrives while the other economy (the real one) withers.

Perhaps sooner rather than later, investors must recognize that modern day inflation, while a necessary condition for survival, is not a sufficient condition for increasing wealth at a rate necessary to satisfy future liabilities associated with education, health care, and a satisfactory retirement. The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side – from the dreaded government side – where deficits are anathema and balanced budgets are increasingly in vogue. Until then, Grant’s deflation remains a growing possibility – not the kind that creates prosperity but the kind that’s the trouble for prosperity.

-William H. Gross

© Janus Capital Group

[description] => I am a philosophical nomad disguised in Western clothing, a wondering drifter, masquerading in a suit near a California beach. Sand forms the foundation of my being and its porosity is at once my greatest strength and deepest wound. I have become after 70 years, a man who believes that no belief is sacred. I have ideals and moral standards, but I believe them specific to me. Had I inherited your body and ego, “I” could just as clearly have assumed "yours." If so, I wonder, if values are relative, then what are mortals to make of them, and what would a judging God make of us? [author] => William Gross [legacyinterface_firm_id] => 242 [published_on] => 2014-11-03 [digest_date] => 2014-11-03 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-03 17:59:10 [created_by] => 948 [modified_on] => 2014-11-03 17:59:41 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1841 [hits] => 0 ) [1] => stdClass Object ( [legacyinterface_commentary_id] => 1766 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15004 [apv_conversation_id] => 2636 [content_type] => market-commentary [title] => Weekly Market Summary [slug] => fatpitch_110214 [fulltext] =>

After dropping to a 6 month low in mid-October, SPX has since risen more than 10% in two weeks. The bounce has been at a torrid pace.

We had been expecting a more complex bottom to form at the low. Why? The market had risen 60% since it's last 10% correction in mid-2012.  A more typical basing at the low, to reset sentiment and breadth, seemed warranted before resuming the uptrend. This now appears to have been wrong.

Instead, SPX, DJIA and NDX all rose to new bull market highs this week. SPX has now completed its 9th "v-shaped bounce" since 2013. According to Dana Lyons, "v-shaped bounces" occurred once every 1.6 years from 1950 to 2012; since then, they have occurred every 2 months (post). To us, that reflects an unflinchingly bullish and aggressive investor psychology. The data supports that view.

This market is well-known for doing the unprecedented. According to SentimentTrader, SPX traded more than 0.5% above its 5-dma for 10 days in a row in the past two weeks. In the prior 75 years, this has only happened twice before, both at bear market lows (1982 and 2002). In other words, a rare rip higher, that has only happened after multi-year bear markets, just occurred after a mild, four week drop. It's incredible and completely unexpected.

Perhaps the most distinguishing characteristic of the current rally is this: SPX has made a series of 12 daily "higher lows" in a row. According to Paststat, there have been only 9 other instances in the past 20 years where SPX has made more than 10 "higher lows" in a row (post). This raises the question of what typically happens next.

We normally think of strength like this as initiating a broader move higher. But that was the case in just 2 of these 9 instances: December 2003 and July 2009. Both of these came within a few months of a new bull market, and in both cases, SPX continued higher. December 2003 is shown below (left side of chart).



In the majority of instances (7 of 9), SPX struggled in the weeks ahead. If SPX continued to move higher, it quickly gave those gains back. In the chart above, November 2004 is an example (right side of chart). Over the next 4 weeks, SPX made no progress. In fact, it made no net progress over the next half year.

The same pattern is true recently. SPX made more than 10 "higher lows" in January, March and May 2013, a year renowned for its remarkable strength. But each of these preceded weakness. SPX was lower 4, 5 and 7 weeks later, respectively.



1995 is the year most like 2013. In 1996, SPX finally closed below its 200-dma after a long streak above (circle), similar to what has just happened in 2014. Later in 1996, SPX made a streak of more than 10 "higher lows" in a row. The market was lower 6 weeks later. After a move higher, it was also lower 5 months later.



Trader's expectations now are that December and January seasonality will override any negative factors; this might eventually be true, but that expectation should probably be tempered a bit. In two of the examples shown above (1996 and 2005), SPX struggled in December or January.

So, while the current streak in SPX, and the other indices, is impressive, the precedent has been for consolidation and/or weakness to follow. It may last only a week or so but it has also lasted much longer.

It's not just the stair step higher over 12 days that suggests limited immediate upside, it is also the pace of gains.

Below is an update of a QQQ chart from last week. The past 12 days surpassed any initial thrust out of a low the markets have seen in the past 4 years. The green shaded bars are all the same proportional size and equal the past 12 days' gain. In the past, the market has given back a third or more of those gains in the weeks ahead. Many times, the market did not move substantially higher over the next month or longer (red line).

Similarly, using SPX, the rate of change in the past 12 days is 8.3%. The only time in the past 4 years that has been exceeded was after the 20% fall in 2011 that ended a 5 month correction. Even then, those gains were subsequently given back (right side of chart). Two other instances were nearly as strong; the first was within the first year of the bull market (left side of the chart) and the other after the 4 month correction in 2010 (middle of the chart). In the best case, the market chopped for several weeks.



Breadth was washed out at the mid-October low. It was one of several reasons to expect a rebound over the next month. But now breadth has moved to the opposite extreme. Even after a low more significant than the one recently, consolidation and/or weakness followed.

Below is a chart using McClellan oscillator, NYMO (bottom panel). On Tuesday and again on Friday, it closed above 80. This is rare. Below are the 8 prior times in the past 5 years. In 2010 and 2011, all of the gains from the low were given up in the weeks ahead. The last instance was in September 2013 and initiated a 5% fall over the next 3 weeks.



According Andrew Kassen, the last 12 NYMO readings over 80 resulted in a median fall of 5% in SPX. And when, as happened this week, there were two NYMO readings over 80 in the same week, SPX fell by a minimum of 4% (median of 7%, average of 11%).

Similarly, the rate of change in SPX Advance/Decline reached the highest level in its 5 year history this week. In 13 of the 14 prior times it has reached an extreme, it has given up subsequent gains in the weeks ahead. In the one exception, all gains were given up within 2 months. In 4 instances, SPX dropped hard. This confirms the findings from the other studies above.



Two other studies are of note.  The first has to do with sentiment.

We stated last week that the sentiment picture was mixed: some of indicators suggested a washout but others did not. Perhaps the most bullish was the equity-put call ratio, which had reached a relative extreme and then rolled over. In the past, this has been a buy signal for SPX (chart from McMillan).



But other sentiment measures do not concur. Equity fund flows (including ETFs) show a scant $3b outflow for October. For a 10% correction, this is minor. Flows were only negative two weeks in a row; for comparison, in mid-2012, flows were negative 6 weeks in a row and then continued to be negative off and on over the next several weeks. In the week just ended, $8.8b flowed into equities, the highest since August 20. This is hardly the profile of a bearish investment community.



Similarly, SentimentTrader, via a post by Brian Johnson (here), shows that retail investors were already back at a bullish extreme within a week of a 6 month low. The last time this happened was in June 2010 when SPX was on its way lower in the middle of a 4 month correction.  Overall when this has happened in the past, near term results for SPX were modest but returns past 1-month were negative.



The speed of the recent rebound suggests that investors were unfazed by the sell off and therefore unafraid of buying equities. This is not surprising given the number of sharp, v-shaped bounces the market has experienced since 2013. But if past is prologue, the study above suggests future returns may be limited until sentiment is more fully reset.

(As an aside, this week, NAAIM showed the largest two week gain in bullish investors in the survey's 8 year history and Investors Intelligence showed the largest one week gain in bulls in the past 12 years).

The second study has to do with the sharp bounce in small caps this week. According to Paststat, large gains like those seen this week are given back over the next week, with a median drawdown of more than 3% in the next two weeks (post).



In summary, a number of studies show a poor risk/reward profile in the near term for US equities. That does not mean that equities will fall. This market has shown a strong propensity to defy precedents. This might well be another such situation. The question for us is always risk vs reward. We believe the odds of a 5% rally appear much smaller than those for a 5% retracement. Therefore, initiating new longs here is uninteresting.

We are very cognizant of two strong positives. The first is trend. As we stated last week, a reliable buy signal triggered on October 22 with SPX at 1930, when both its MACD and 13-ema crossed positive. This set up has marked every low since December 2011.  This set up is still active and suggests higher highs are ahead. We don't like to fight the primary trend.



The other is seasonality. November through January are regarded as the strongest three month period of the year. We'll have more to say about this in a future post, but for now, investors should be aware that equities should remain buoyant through next Tuesday's election and often for a few days after. The "perfect" time for some equity weakness would be into mid-November (yellow shading; chart from Stock Almanac).



Non-farm payrolls (NFP) are reported on Friday. This has been a bullish day for 2 years, with SPX closing higher 19 of the last 23 times.

Our weekly summary table follows.

 

© The Fat Pitch

http://fat-pitch.blogspot.com

[description] => A number of studies show a poor risk/reward profile in the near term for US equities. That does not mean that equities will fall. This market has shown a strong propensity to defy precedents. This might well be another such situation. The question for us is always risk vs reward. We believe the odds of a 5% rally appear much smaller than those for a 5% retracement. Therefore, initiating new longs here is uninteresting. [author] => Urban Carmel [legacyinterface_firm_id] => 514 [published_on] => 2014-11-02 [digest_date] => 2014-11-02 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-02 02:39:09 [created_by] => 945 [modified_on] => 2014-11-02 02:40:03 [modified_by] => 945 [checked_out_time] => 2014-11-02 02:40:16 [checked_out] => 945 [asset_id] => 1832 [hits] => 0 ) [2] => stdClass Object ( [legacyinterface_commentary_id] => 1767 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15005 [apv_conversation_id] => 2637 [content_type] => market-commentary [title] => Weighing the Week Ahead: What the End of QE Means for the Individual Investor [slug] => newarc_110214 [fulltext] =>

We have a jam-packed week of earnings data, important economic news, and the mid-term elections. Surely one of these topics should be the market theme for the upcoming week.

But old habits die hard. I expect the mainstream media to parse everything through the prism of the Fed – at least for another week or so. Each new piece of data will raise the question:

What is the message for investors in the post-QE world?

Prior Theme Recap

In my last WTWA (two weeks ago) I predicted that we would be asking whether the market correction was over. Continuing my hot streak of guessing the upcoming issue, that was definitely the right question. I did not have a strong personal answer, but there were both winners and losers among those cited.

Had I been able to write last weekend, I am not sure that I would have been as successful with the theme of the week. I always plan for the week ahead, but I cannot always write about it. There were plenty of moving parts last week!

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

In general, the week of the employment report provides an easy guess about what will dominate the news. This week we also have the mid-term elections and plenty of earnings news. Normally one of those would be the theme, but I am going out on a limb. I expect all to get some play, but the media focus remains on the “old news” of the Fed and the decision to end QE. For several years the interpretation of news has been easy: What does “X” mean for Fed policy? It will take time to make a transition.

We have lived through an era where both good and bad economic news were modified by the concept that the Fed would react in the opposite direction. Have we finally reached a time when good news will be good?

I expect at least one more week of Fed fixation. Each event will raise the question: What does the end of QE mean for the individual investor?

There are several viewpoints:

  • The QE Diehards will not let go. They subscribe to a mindset where the Fed does not have a dual mandate, but a single-minded pursuit of supporting stock prices. This is true no matter which party controls the White House or the Congress, and regardless of the political affiliation of the Fed Chair. These sources expect a new round of QE if and when stock prices decline.
  • The end of QE will lead to an imminent stock market collapse. Chief proponents cited the comments from St. Louis Fed President Bullard as responsible for turning the decline in stock prices. They stuck to that story no matter what else happened.
  • QE policy had only a small effect on the economy.
  • QE has not changed that much. The most important impacts come not from ongoing purchases but from the continuing size of the balance sheet. Bill McBride displays a sophisticated understanding of this point, and he explains it well.

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 and it was mostly good.

  • Q3 GDP beat expectations with a gain of 3.5%. At first blush this is great news (Wonkblog has details). Several sources correctly noted that some of the surprise gains came from defense spending and exports. This is true. It is also true that government spending, especially at the state and local level, has been a continuing big drag. I really do understand the need for commentators with a political viewpoint to speak out, especially right before an election. I only wish that investors were better at tuning out these arguments. Please see “The Ugly” for more discussion. Todd Sullivan posts the savvy “Davidson” who explains how this all fits, including this chart:

Screen-Shot-2014-10-31-at-11.09.58-AM-580x420

avgchgreport

  • Consumer confidence hit the highest levels since 2007. Doug Short covers both the Conference Board and University of Michigan versions.

dshort mich sentiment

The Bad
There was not very much bad news. Readers are invited to nominate ideas in the comments, but remember that we are focusing on recent developments, not a list of continuing macro concerns.

The Ugly

Negative campaigning. With only a few days of attack ads left before the election, most people profess to hate the negative ads. Campaigns continue to use them because they are effective, especially with late-deciding fence sitters.

At another time the US congressional election might be an important market story. This time is different:

  • Voters are unhappy about the economy and show a preference for Republican economic policies (The Hill).
  • Anxiety reigns. William Galston expertly analyzes a host of non-economic issues (Politico).
  • Nate Silver’s respected 538 gives the GOP a 201 chance of taking control of the Senate as well as padding their advantage in the House.
  • The policy impact will be small, since we have already been dealing with gridlock. Those who want to see no new policies may celebrate. Those who think action is needed can wait for two more years.

The drumbeat of negativity affects your investing. Matt Phillips explains nicely how the overall economy is strong, yet many are not participating. We cannot help others with our investment accounts; we can only make the best choices given the economic reality. He includes a good summary of important economic indicators.

Ebola fear is another good example. Check out this “crash course” on how Ebola pushes every fear button in our instincts, generating emotional reactions.

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.

Americans will believe anything if you provide a chart – a new scientific study reported in Businessweek. I was bombarded with “scary” chart packages for Halloween. Few sources seem to be doing the hard and thankless work of fighting this stuff. Not enough page views.

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, Dwaine 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 has a new method for TIAA-CREF asset allocation. 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.”

David Rosenberg does not see a recession until at least 2016. His reasoning is similar to what I have cited here for several years.

The Week Ahead

We have a big week for economic data.

The “A List” includes the following:

  • Employment report (F). Always a complex story, with maximal spin potential.
  • ISM Index (M). Good concurrent read on the manufacturing economy with some leading characteristics.
  • Initial jobless claims (Th). The best concurrent news on employment trends.
  • Auto sales (M). Independent read on the economy for those who like to see some non-government data.

The “B List” includes the following:

  • ISM services index. (W). Services make up the larger portion of the economy, but the series has less history the manufacturing counterpart.
  • ADP private employment (W). Valuable alternative measure of employment growth.
  • Trade balance (T). September data will impact final Q3 GDP.
  • Construction spending (M). September data. Interesting, but a volatile series.
  • Factory orders (T). Another volatile series from September.

Tuesday’s mid-term Congressional election is likely to shift power to Republicans, but unlikely to have a significant market impact. Other big stories of the week might 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 made a quick shift from bearish to bullish. There is excellent breadth among the strongest sectors and very high ratings. Felix does not anticipate tops and bottoms, responds pretty quickly when there is evidence of a change. The penalty box can be triggered by extremely high volatility and volume. It is similar to a trading stop, but not based only on price. This came into play two weeks ago when we moved to partial long positions. Last week the trading accounts were back to fully invested.

Dr. Brett has a great post on price-based stop losses and the advantages of using a catastrophic risk method instead.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com. Felix also makes a daily afternoon appearance at Scutify.

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” is summarized 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:

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

If you missed this section from a few weeks ago, I urge you to check out the Investor Section of the earlier WTWA.

Some readers commented about the last WTWA installment, saying that I seemed to be disagreeing with Felix about how October would play out. I was recommended, as I have throughout the year, that investors should use market volatility to trim positions that hit price targets and add new stocks on dips. This was not intended as a short-term prediction for October, but practical advice for investors.

Most investors who try to time the market by anticipating corrections fail to move quickly to get back in. The result is that they miss some really big moves. If you have a disciplined trading approach (like Felix) it is easier to accept that a trade is not working and reverse course.

Michael Batnick has a day-by-day account of the thinking of an average investor trying to time the decline. To appreciate fully, you need to read the entire log!

tumblr_ne6bdaLr8A1tvtougo1_1280

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:

Alan Steel has five simple but powerful words from Humphrey Neill’s 1954 book, two of his ten tips to guarantee failure:

1) Follow the Public

2) Be Impatient

Only five words but better than any book on investing.

Did you know that on October 16th 2014 in the US Stockmarket, the volume of share dumping exceeded ALL THE DAYS in the last 850 Days? IN ONE DAY!

Read the entire post for the full story.

And now the individual investor may be returning. Josh Brown, in his maiden column for Fortune, explains. Regular readers know that I regard Josh as one of the best and most important voices helping the individual investor. In our office we accord him our highest honor – we take CNBC off mute and turn the TIVO back to listen! We wish him a wide and well-deserved readership.

Stock suggestions from a Barron’s investor conference. Sources like this provide ideas that you probably would not find from your own screening method, although I do have some of the themes.

Quit grumbling that the playing field is not level. Kid Dynamite explains that you could pay for premium data access and it still would not make any difference.

Time to add to commodities? Barron’s evaluates this contrarian play.

Goldman Sachs recommends “cyclical laggards.” I do, too.

Market timing does not work. Two more evidence-based entries on this continuing theme:

  • The multiple errors of Dennis Gartman, whose regular appearances on CNBC do not provide information about the overall record.
  • Professional timer observer Mark Hulbert provides the discouraging results. A few of the pros showed a small advantage, but no one succeeded at calling tops and bottoms.
  • Alan Steel, quoting some good sources, passes along this summary:

“It was just a few weeks ago that all was right in the world…except Syria, ISIS, Iraq, terrorism, Greece, Portugal, Brazil, Ukraine, Russia and QE ending…

“And then along came Ebola; all 8 cases, in the US, and the unfortunate death of one of those ill.

“What has been the price for that revolutionary new fear, against the backdrop of the previous myriad of items on the “crisis list?”

“A few trillion dollars in world-wise stock market corrections.

“But what happened?

“Well, with the exception of a few minor differences in scope, you and I could have slept through this “terrible October” and been none the worse.

Pulling this all together, Abnormal Returns explains what the individual investor should do – create a personal margin of safety. Tadas uses his broad knowledge and experience to pull together advice from several leading sources. If you had followed this approach over the last few years, you would have been able to stick with your program during the tough times. It will be of equal help in the future.

If you are stuck in gold, you might consult us about some good alternatives. 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

The change in Fed policy is unimportant. It was a major story because it was the technical end of the program. For those who have been monitoring the actual policy, what has changed? The bond purchases had already been tapered to $15 billion per month from the former $85 billion. The timing was known. There was no surprise.

I am amazed that anyone attributed a 10% rebound from the bottom to a vague comment about QE4 from Bullard, a non-voting member. This is a perfect example of how people force evidence into a pre-conceived theory. How do these observers explain the continuing rally after QE4 was rejected?

There is a very sharp difference between two viewpoints, both of which I have highlighted in the past.

One group ignores changes in economic growth, geopolitical risks, and corporate earnings, attributing the entire stock market rise to QE. Here is a typical example, posted by a professional bubble-caller:

54514427b229aa0f48614b73.png

I really like the “ALWAYS” as a description of two occasions!

A Stronger Viewpoint – the Chart

I really wish that someone would earn a Silver Bullet by analyzing the myriad versions of the QE chart. Here is some help to get going. When a policy changes (and this is stuff I taught in class decades ago) you can choose several different candidates as the starting point:

  • When the idea surfaces
  • When the idea gains credence
  • When there is the hint of a serious proposal
  • When the policy is adopted
  • When the policy is implemented

If you want to do a serious analysis you must use the same definition for each point. You cannot use the “Labor Day Jackson Hold hint” for one starting point and then wait until the last gasp of QE3 for another. I hope that this is blindingly obvious. Those who violate these rules simply look for big sweeps of stock market changes and adjust the starting and ending points to fit. They can cite impressive “sources” since the underlying data are accurate. The flaw is implementation of the chart, not raw data.

The pieces fit, but the conclusion is deceptive. There has been a long period of economic growth, probably helped a little by QE, but we will never know for sure. On two occasions the growth faltered, and the Fed expanded policy. There is little inference to draw from the two pauses in policy.

A Stronger Viewpoint – the Policy

Could this happen again? Perhaps, but it is very unlikely. If the current economic recovery, which seems much stronger than that at the end of the prior two QE periods, should falter the Fed will face a choice. The current mood is to focus on forward guidance rather than QE.

Bob McTeer explains the skepticism among Texans, especially about money printing. As you read his take, remember that he is a level-headed conservative.

We will gradually learn to focus less on the Fed and more on the data. Until that happens, investors will continue to enjoy opportunities.

More sophisticated analysts understand that Fed policy has changed only slightly. The most important effects come not from the continuing purchases but the size of the balance sheet. Justin Wolfers provides a great explanation with this conclusion:

But for all the hubbub about the decision to end quantitative easing, realize that the degree of monetary support the economy is receiving tomorrow will be no smaller than it was receiving yesterday.

If you do not understand this, imagine that there is a poker game and we are trying to spot the least knowledgeable player…..

© Dash of Insight

www.dashofinsight.com

[description] => Pulling this all together, Abnormal Returns explains what the individual investor should do – create a personal margin of safety. Tadas uses his broad knowledge and experience to pull together advice from several leading sources. If you had followed this approach over the last few years, you would have been able to stick with your program during the tough times. It will be of equal help in the future. [author] => Jeff Miller [legacyinterface_firm_id] => 312 [published_on] => 2014-11-02 [digest_date] => 2014-11-02 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-02 12:51:04 [created_by] => 945 [modified_on] => 2014-11-02 12:51:48 [modified_by] => 945 [checked_out_time] => 2014-11-02 12:52:00 [checked_out] => 945 [asset_id] => 1833 [hits] => 0 ) [3] => stdClass Object ( [legacyinterface_commentary_id] => 1763 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15001 [apv_conversation_id] => 2630 [content_type] => market-commentary [title] => The Single-Engine Global Economy [slug] => prosyn_110114 [fulltext] =>

TOKYO – The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).

The second engine – the eurozone – has now stalled after an anemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.

So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.

Falling oil prices may provide cheaper energy for manufacturers and households, but they hurt energy exporters and their spending. And, while increased supply – particularly from North American shale resources – has put downward pressure on prices, so has weaker demand in the eurozone, Japan, China, and many emerging markets. Moreover, persistently low oil prices induce a fall in investment in new capacity, further undermining global demand.

Meanwhile, market volatility has grown, and a correction is still underway. Bad macro news can be good for markets, because a prompt policy response alone can boost asset prices. But recent bad macro news has been bad for markets, owing to the perception of policy inertia. Indeed, the European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds, while the Bank of Japan only now decided to increase its rate of quantitative easing, given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further.


To continue reading, go here: http://www.project-syndicate.org/commentary/us-growth-and-weakening-global-economy-by-nouriel-roubini-2014-10
 
© Project Syndicate
[description] => The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers. [author] => Nouriel Roubini [legacyinterface_firm_id] => 345 [published_on] => 2014-11-01 [digest_date] => 2014-11-01 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-01 02:34:06 [created_by] => 945 [modified_on] => 2014-11-01 02:34:55 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1829 [hits] => 0 ) [4] => stdClass Object ( [legacyinterface_commentary_id] => 1764 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15002 [apv_conversation_id] => 2631 [content_type] => market-commentary [title] => Point and Go Figure [slug] => sungarden_110114 [fulltext] =>

What a Key Technical Indicator is Saying About Market Risk Today

I will admit that “Point and Figure” (P&F) charting is not something I have spent years studying.  I do know that according to Investopedia and other sources I have read recently, it is gaining followers.  P&F charts tend to be longer-term in their view, and they project and name an actual price “target” for the stock or index you are tracking.

But this article is not a dissertation on P&F.  It is about a recent perusal of the major markets by my team and me, simply asking what P&F charts are saying about the potential for a second helping of the market decline we saw earlier this month.  Here is a summary of what we found, using ETFs as a surrogate for some of the major market benchmarks, and P&F price targets which appeared on Stockcharts.com as of 10/28/14:

Point and Go Figure

Sungarden Investment Research 2014

Is this a forecast?  No.  But it does look like the type of picture we’d expect to see if the brutal middle of October was more of a warning shot than a quick, investor spasm on the way to glorious new highs.  The S&P 500 Index has outperformed the Dow Jones Industrial Average handily this year, and that is suspicious, since they often roll up and down together.  Small cap stocks, currently down for 2014 as of 10/28/14, are still likely to be considered a logical source of capital if big money portfolio captains decide to sell things off before too long.  And Europe is reminding us that in the current era, it is they who catch a cold when the U.S. sneezes.

© Sungarden Investment Research

www.sungardenresearch.com

[description] => I will admit that “Point and Figure” (P&F) charting is not something I have spent years studying. I do know that according to Investopedia and other sources I have read recently, it is gaining followers. P&F charts tend to be longer-term in their view, and they project and name an actual price “target” for the stock or index you are tracking. [author] => Robert Isbitts [legacyinterface_firm_id] => 402 [published_on] => 2014-11-01 [digest_date] => 2014-11-01 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-01 02:42:16 [created_by] => 945 [modified_on] => 2014-11-01 02:43:11 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1830 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 1765 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15003 [apv_conversation_id] => 2634 [content_type] => market-commentary [title] => Don’t Be Spooked by Market Volatility—Opportunity Is Still Knocking! [slug] => global_110114 [fulltext] =>

One of the greatest fears this October—possibly the most volatile month of the year—has been the correlation between the S&P 500 Index’s ascent in the first three quarters of the year and the possible ramifications of the end of quantitative easing (QE). 

It’s well known that Japan and Singapore have been buying their countries’ blue chip stocks with their excessive money printing. Today, about 1.8 percent of the Japanese market is owned by the Bank of Japan. American investors fear the Federal Reserve might do the same and take away the punch bowl, so to speak.

As you can see, the S&P 500 Index has been rising in tandem with government securities, and it’s uncertain what will happen when QE ends. 

In 30 Years, the XAU Never Experienced a Losing Streak of More Than 3 Years
click to enlarge

The Ebola epidemic has also contributed toward moving the needle to the fear side of the spectrum and driven investors to seek shelter not in gold necessarily but in so-called “Ebola stocks.” For every negative, as tragic as they often are, there is a positive. When a major hurricane hits Florida, for instance, insurance stocks fall while real estate stocks rise. The deadly Ebola virus, on top of an aging demographic, has helped make health care and biotechnology pop this year. The Daily Reckoning’s Paul Mampilly, in fact, calls this rally “the biggest biotech market ever.”

Possibly. Before we get too excited, let’s look at the numbers. Over the last 10 years, the S&P 500 Biotechnology Index has had a rolling 12-month percentage change of ±23. As of this writing, the index is up 32 percent, meaning it’s up by only 1.3 standard deviation. In other words, biotech is behaving approximately within its expected range.

Gold bullion, over the same period, has had a percentage change of ±19—not so dramatically different from biotech—and is down by 1.3 standard deviation. Again, this is “normal” behavior.

Uncomfortable with the Volatility of Gold? It's much like biotechnology stocks
click to enlarge

As you can see, biotech corrected and then rallied firmly into the sell zone. Seventy percent of the time, it’s normal for the asset class to rise and fall one standard deviation. As I always say, each asset class has had its own DNA of volatility over the last 10 years. Knowing this helps you manage your expectations of how they perform.

Asset ClassStandard Deviation
WTI Crude Oil 34%
Gold Stocks 34%
Emerging Markets 29%
S&P 500 Index 17%

Even health care and biotech companies not actively working toward finding treatments and vaccines for the virus seem to have incidentally benefited from the rally. California-based Gilead Sciences and New Jersey-based Celgene, for instance—both of which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX) and were named by Motley Fool as two of the four most important stocks of the last 16 years—have hit all-time highs. Gilead Sciences concentrates mostly on drug therapies for HIV and hepatitis B, while Celgene conducts similar work for cancer and inflammatory disorders.  

Celgene and Gilead Sciences Hit All-Time Highs
click to enlarge

And it’s not just American health care stocks that are doing well. We’ve been impressed lately with the performance of the Stock Exchange of Thailand Health Care Index and Bangkok Dusit Medical Services, Thailand’s largest private hospital operator, which we hold in our China Region Fund (USCOX). Both the index and the equity have excelled year-to-date, delivering 57 percent.

Thai Health Care Services One of the Top-Performing Sectors in Asian Industries
click to enlarge

Bullion and Gold Stocks
As for gold, between mid-August and October 3, the precious metal completely ignored the fact that September is historically its best-performing month, tumbling 9 percent from $1,310 to $1,190. It soon rebounded in the days leading up to Diwali.

Gold stocks, on the other hand, have yet to recover. Since the end of August, the NYSE Arca Gold BUGS Index has plunged 25 percent to lows we haven’t seen since April 2005. The Market Vectors Junior Gold Miners ETF has lost nearly 30 percent; the Philadelphia Gold and Silver Index (XAU), 25 percent.

On a few occasions I’ve pointed out that in the last 30 years, the XAU has never experienced a losing streak of more than three years. As of this writing, it’s lost close to 17 percent, with only two months left. The cards are definitely stacked against the XAU, but I remain optimistic it can continue the trend.   

In 30 Years, the XAU Never Experienced a Losing Streak of More Than 3 Years
click to enlarge

Many investors are understandably concerned that mining companies in West Africa will suffer because of Ebola. Several companies operating in the three hardest-hit countries have indeed been hurt by the virus, some of them being forced to halt production. However, none of our funds has any direct exposure to them. Three companies that we own in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX)—IAMGOLD, Newmont Mining and Randgold Resources—continue to operate normally in the region.

Here I must remind investors that we recommend 10-percent holding in gold: 5 percent in bullion, 5 percent in stocks. Rebalance every year.

Looking Past Ebola
One of our most important tenets at U.S. Global is to always stay curious. That includes being familiar with world events and determining how they might affect our funds. Ebola certainly falls into this category, but that doesn’t necessarily mean our funds will undergo any significant changes based on this unfortunate event. Again, other factors have contributed, including the so-called October effect. We remain committed to our fundaments and pick stocks because they’ve been well-screened and fit in our results-oriented models.

Happy investing, and stay safe!

 

Index Summary

  • Major market indices finished higher this week.  The Dow Jones Industrial Average rose 3.48 percent. The S&P 500 Stock Index gained 2.72 percent, while the Nasdaq Composite advanced 3.28 percent. The Russell 2000 small capitalization index rose 4.89 percent this week.
  • The Hang Seng Composite rose 2.78 percent; Taiwan rose 3.80 percent and the KOSPI rose 2.01 percent.
  • The 10-year Treasury bond yield rose six basis points to 2.33 percent.

 

 

Domestic Equity Market

The S&P 500 Index advanced sharply again this week, closing at a new all-time high.  Equity markets rallied on earnings and were pushed higher on Friday on news that the Bank of Japan increased its quantitative easing (QE) program by roughly $135 billion dollars. This more than offsets the Federal Reserve’s exit from its own QE program and just reinforces the idea that continual increases in global liquidity is good for risky assets such as stocks.

S&P 500 Economic Sectors
click to enlarge

Strengths

  • The technology sector led the way in a very strong week as MasterCard and Visa both rallied by more than 13 percent to pace the sector. Both companies reported strong quarterly earnings results with increased spending and higher fees as positive drivers. Electronic Arts was not far behind, rising 12.7 percent this week as it also beat quarterly expectations and continued its turnaround.
  • The health care and financial sectors were just fractionally behind technology. Health care experienced broad-based strength with health care suppliers and managed care companies particularly strong. Financials were also very strong with good results from insurance companies leading the way.
  • Goodyear Tire & Rubber was the best-performing stock in the S&P 500 this week, rising 16.43 percent. The company reported very strong results relative to expectations and reaffirmed expectations for 2015-2016.

Weaknesses

  • The materials sector managed to eke out a small gain but was dragged down by the big mining companies, Freeport-McMoRan and Newmont Mining, as the dollar rallied and commodities were generally under pressure.
  • Other areas of weakness included commodity chemicals, construction materials and homebuilders.
  • A notable underperformer this week was Facebook, which fell 7 percent as the company guided for sharply higher expenses next year that caught analysts by surprise.

Opportunities

  • Earnings season remains in full swing next week with a few notable companies to watch for including Priceline.com, Michael Kors and Qualcomm just to name a few.
  • Next week is also a big week for meaningful economic reports with both the ISM manufacturing index and nonfarm payrolls coming out. Employment data has recently surprised on the upside and has the potential to be a positive market mover next Friday.
  • The market made a fresh new high this week and the bull market continues.

Threats

  • After two very strong weeks the market may take a breather to consolidate recent gains.
  • The market has become somewhat dependent on global central bankers to move higher and with additional easing steps unlikely after a recent flurry of activity the market may languish.
  • Geopolitical tensions continue to be at elevated levels and there is always the possibility of a political misstep that impacts the markets.

 

The Economy and Bond Market

U.S. Treasury bond yields rose across the board again this week as the Federal Reserve exited its quantitative easing program. The Fed surprised the market somewhat with a more hawkish tone in the statement released after Wednesday’s FOMC meeting. A few weeks ago a more hawkish tone wouldn’t have been a surprise, but the market’s expectations of the Fed had shifted quite a bit with global growth expectations getting reined in. The market’s reaction was particularly acute in shorter maturities that are more sensitive to Fed interest rate increases.

Two-Year Treasury Yield
click to enlarge

Strengths

  • The Bank of Japan surprised the market on Friday by increasing its quantitative easing (QE) program by roughly an additional $135 billion dollars.
  • In addition to Japan, other global central bankers are responding to sluggish economic growth. The Bank of England set a lower-than-expected minimum regulatory capital ratio, which set off a significant rally in banking stocks and is effectively “easier” monetary policy. The Swedish central bank also cut interest rates to zero this week.
  • Third-quarter GDP grew a better-than-expected 3.5 percent, demonstrating some economic resilience.

Weaknesses

  • Durable goods orders fell 1.3 percent in September and were much weaker than expected.
  • Housing data points remain weak with home prices falling and mortgage applications falling 5 percent last week.
  • While widely expected, the Fed completely wound down its QE program this week and is incrementally less accommodative.

Opportunities

  • Global central banks are easing again, offsetting the incremental Fed tightening. This remains a positive for fixed income globally.
  • Next week is a big week for economic data as the ISM manufacturing index (a purchasing managers’ index or PMI) and nonfarm payrolls are released. The recent global trend for PMIs has been weak and it wouldn’t be surprising if the ISM manufacturing index disappointed, allowing bonds to rally.
  • Short-term bonds have been relatively volatile in recent weeks and with yields moving higher the past two weeks, a reversal would not be surprising.

Threats

  • The European bank stress tests have come and gone, and while generally in-line with expectations and not too troubling, there remains work to be done to restructure the European banking system before the next downturn or panic.
  • Quantitative easing has ended and the next logical step would be an interest rate hike. While estimates of when that may occur remain fluid, the Fed’s relatively hawkish tone increases the risk to the bond market.  
  • With geopolitical situations in Ukraine, Iraq and Syria, Greece’s economy, and new Ebola fears, investor anxiety remains high along with further volatility.

 

 

Gold Market

For the week, spot gold closed at $1,171.09 down $59.81 per ounce, or 4.86 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 14.67 percent. The U.S. Trade-Weighted Dollar Index jumped 1.31 percent for the week.

DateEventSurveyActualPrior
Oct 28 U.S. Durable Goods Orders 0.5% -1.3% -18.2%
Oct 28 U.S. Consumer Confidence Index 87.0 94.5 86.0
Oct 30 U.S. GDP Annualized QoQ 3.0% 3.5% 4.6%
Oct 30 Germany CPI YoY 0.9% 0.8% 0.8%
Oct 31 Eurozone Core CPI YoY 0.8% 0.7% 0.8%
Nov 02 HSBC China Manufacturing 50.4 -- 50.4
Nov 03 U.S. ISM Manufacturing 56.2 -- 56.6
Nov 05 U.S. ADP Employment Change 220K -- 213K
Nov 06 U.S Initial Jobless Claims 285K -- 287K
Nov 07 U.S. Change in Nonfarm Payrolls 235K -- 248K

Strengths

  • Despite declining gold prices, demand for the precious metal remains strong. In September, Chinese gold imports from Hong Kong rose to the highest level in five months as retailers increased purchases before the holiday season. In the United States, gold coin sales are heading for their first back-to-back monthly increase since January. Volume rose to 58,000 ounces as we entered the last week of the month, compared to 50,000 ounces in September.
  • Although gold premiums had fallen to below $10 per ounce earlier this week in India, they rallied on Wednesday to reach roughly $15 per ounce. The initial decline was due to the winding down of the Diwali holiday. However, the premium spiked up after rumors emerged that the Reserve Bank of India or the Ministry of Finance might impose more restrictions on gold imports.
  • A number of gold companies reported misses on production this week, but Alacer Gold reported strong third quarter results. The company saw gold production increase 27 percent which helped to drive production costs lower.  In addition, Alacer’s cash balance rose by $28 million to $320 million. 

Weaknesses

  • This week we saw gold markets wildly affected by central bank policy makers across the world. In the United States, a more hawkish tone from the Federal Reserve, combined with the official announcement of the end of Quantitative Easing (QE), pushed gold prices down. On Friday, the Bank of Japan surprised investors with a substantial expansion in its asset purchases and a commitment to double its purchases of equities, making the central bank the single biggest holder of Japanese equities.  These two events, combined with stronger-than-expected, third-quarter GDP data from the U.S., caused a selloff in gold and gold stocks this week.
  • Investors should remember that U.S. elections are next week and the current administration is putting the best face possible on what has been an anemic recovery.  Even Alan Greenspan noted this week that QE has failed to right the economy, but did lift asset prices.   For example, while the Fed desperately sought to stimulate the housing sector, the homeownership rate in the third quarter came in at 64.4 percent, the lowest level since 1995.  Furthermore, while QE has been halted, the Fed will continue to reinvest the principal payments from mortgage-backed bonds and roll over any maturing Treasury securities from its $4.5 trillion portfolio. We are living in a world of unrepayable debt, money printing, and governments buying equities to create a wealth effect – yet life goes on without a worry.
  • As a consequence of this week’s announcement from the Federal Reserve, gold traders turned bearish for the first time in six weeks. A Bloomberg survey revealed nine bearish forecasts from analysts, compared to only five bullish.

Philadelphia Gold and Silver Index (XAU) Appears Due for a Correction
click to enlarge

Opportunities

  • Related to the above point on U.S. GDP growth, the third quarter yielded stronger-than-expected results due to a substantial increase in government spending. As it turns out, 0.83 percent of the GDP gain was attributed to government spending, primarily defense spending. JP Morgan, in response to this data, reduced its forecast for fourth-quarter GDP growth from 3.0 percent to 2.5 percent, explaining that this type of increase is usually associated with payback the following quarter.
  • Alan Greenspan has come out with interesting points on the current global economic environment. The former Federal Reserve Chairman referred to QE as a pile of tinder that hasn’t been lit. Furthermore, due to the global turmoil, Greenspan stated that gold is a good place to invest money due to its value as a currency outside of government policy. In fact, he argues that gold is the premier currency, more so than the dollar.
  • Civilian wages and salaries appear to be on the rise, which is a powerful source of inflation. Higher wages, which lead to higher incomes, fuel higher demand and pull up prices. The long-awaited arrival of strong inflationary pressures in the United States appears to be on the horizon.

Pay Attention to Rising Trend in Wages
click to enlarge

Threats

  • Depressed oil prices are contributing to the deflationary environment. Without any catalyst to boost oil prices, gold will continue to face the headwinds from global deflation.
  • Social unrest has come to the capital of Burkina Faso, Ouagadougou, after a proposal to enable the current president to stand for another five-year term, was submitted to parliament. Protestors have set fire to parliament, city hall and the headquarters of the ruling party. Mining companies in the region have been negatively affected. Specifically, Roxgold declined 27 percent this week on the news, despite the fact that the company reported being unaffected by the unrest.
  • There is speculation that Red Kite Group, a London hedge-fund manager, has bought more than half of the copper held in London Metals Exchange warehouses. Although no material news has been reported, such substantial control over supply could have serious implications.
Frank Talk Insight for Investors
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October 28, 2014
Talking Turkey with John Derrick
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October 27, 2014
As the Eurozone Stalls, China Cuts the Red Tape
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October 21, 2014
New Jobs Data: America off the Mat, Ready for the Next Round
A Blog by Frank Holmes, C.E.O. and Chief Investment Officer
 

Energy and Natural Resources Market

Brent Oil Price REquired by Countries to Balance Fiscal Budgets per Billion U.S. Dollars
click to enlarge

Strengths

  • Oil and gas refining stocks outperformed this week in a strong-dollar environment. The S&P Supercomposite Oil & Gas Refining & Marketing Index was up 3.88 percent. Marathon Petroleum and Tesoro were up 5.96 and 8.72 percent, respectively, following strong earnings reports.
  • Chemicals stocks outperformed the broader resources space this week. The S&P Supercomposite Chemicals Industry Index rose 1.12 percent this week, as Agrium was up 5.81 percent, bouncing significantly off of prior lows.
  • Iron and steel stocks rallied for the third week in a row. The Bloomberg World Iron/Steel Index was up 1.82 percent and U.S. Steel, which reported impressive quarterly results this week, closed up 8.45 percent.

Weaknesses

  • Precious metals stocks significantly underperformed this week, with gold and silver stocks declining substantially after the announcement from the Federal Reserve. The NYSE Arca Gold Miners Index and the Global X Silver Miners ETF were down 14.37 percent and 14.31 percent, respectively.
  • Industrial metals stocks continue to underperform amid a slower global growth environment. The S&P/TSX Capped Diversified Metals and Mining Index declined 1.74 percent this week.
  • As oil prices continue to decline, WTI crude dipped below $80 per barrel during the week, eventually closing at $80.57 per barrel. The continued depression of oil prices, led by perceptions of weak global demand and ample supply, continue to create headwinds in the commodities space.

Opportunities

  • One of the largest potential benefits to oil prices continues to stem from the OPEC meeting taking place at the end of November. As depressed prices weigh on revenue, any action the cartel takes to limit supply would send oil higher.
  • While sentiment remains mixed, certain analysts are projecting future oil prices to rebound. With refineries in the United States absorbing crude inventories, WTI could rise to as much as $90 per barrel by the end of 2014. On a relatively longer timeline, Barclays forecasts that Brent prices could be back over $100 per barrel by the end of 2015.

Threats

  • Expanded stimulus in Japan and newly implemented stimulus in the eurozone serve to weaken both the yen and euro, which will cause the dollar to rally further. While it seemed as if the dollar had reached an upper limit, there is still the possibility that the currency could inflate even further. On a positive note, however, the long-term benefits of the stimulus policies (if effective) could spur global growth, which would boost commodity demand and prices.
  • Global growth fears and the deflationary environment have yet to dissipate. Commodities will remain depressed if market sentiment does not shift.

 

 

Emerging Markets

Strengths

  • Two of the best-performing countries this week were Russia and Brazil. Both increased key rates in order to address their struggling economies and currencies. In Russia, the central bank raised the key rate to 9.5 percent, above analyst estimates. Brazil’s central bank policy makers voted five to three to raise the benchmark lending rate by 25 basis points to 11.25 percent. The MICEX Index closed up 7.83 percent this week, while the Ibovespa Brasil Sao Paulo Stock Exchange Index rose 5.17 percent this week.
  • China was one of the best-performing countries in Asia this week, as its central government stressed policy support for consumption and property, as President Xi Jinping hinted on potential expansion of free trade zones to other parts of the country beyond Shanghai.
  • Turkish stocks continued to rally this week as falling oil prices and synchronized global stimulus boosted the country’s economic outlook. The Borsa Istanbul 100 Index rallied 1.46 percent, making this the third-straight weekly increase.

Weaknesses

  • Greek stocks suffered this week after the Minister of Administrative Reform, Kyriakos Mitsotakis, said there will be a climate of uncertainty until February’s elections. Yields on Greek 10-year bonds jumped 73 basis points to over 8 percent this week. The Athens Stock Exchange closed down 7.62 percent.
  • The South Korean won was among the worst-performing currencies in Asia this week, after the U.S. Federal Reserve officially ended its quantitative easing (QE) program and the Bank of Japan unexpectedly decided to accelerate the expansion of its monetary base to mitigate the impact of higher sales taxes to reflate the economy.
  • Depressed commodity prices, particularly oil and industrial metals, have led investors to maintain a sour outlook on commodity-sensitive emerging markets. Slowing growth in China and Europe has led to significant outflows from exporting emerging markets and their currencies for the past few weeks.  

Opportunities

  • Brazil’s recent rate hike creates a significant opportunity in one of the world’s largest emerging markets. The country’s economy, currently in recession, has been dealing with a depreciating currency and inflation pressures. Tighter monetary policy should help strengthen the real and subdue inflation, providing a boost to Brazil’s future growth.
  • Upcoming third-quarter earnings reports for China’s Internet and e-commerce bellwethers, along with the peak online shopping season, should refocus investor attention to the secular growth potential of mobile Internet in China enabled by a lifestyle change with rising smartphone penetration.  China already represents 35 percent of global e-commerce sales as of 2013, and rising adoption by small businesses and the rural population could bring China’s share to 50 percent by 2018, according to Morgan Stanley.

China's Mobile Internet Lifestyle to Continue to Grow
click to enlarge

  • Lower oil prices, while detrimental to exporting emerging markets, has been a tailwind for oil-consuming emerging markets. With oil prices continuing on a downward trend, it appears this tailwind will still be in effect in the near future.

Threats

  • A direct contrast to the situation in Brazil, the rate hike in Russia will likely harm the country’s economy. This is the fourth time this year that Russia has raised rates in order to defend the crumbling ruble. Despite positive reactions in the equities market, the currencies market was less understanding. The ruble slid to record lows this week in spite of the rate increase. Therefore, the policy move seems to be rather ineffective for the time being. Furthermore, current borrowing costs in Russia are unsustainably high and are strangling economic growth. The economic environment in Russia is only becoming more concerning.

The Ruble Falls as Central Bank Raises Rates
click to enlarge

  • The recent push from the Chinese government to promote breastfeeding, through educational programs and initiatives, has added more lactation rooms in public buildings. This move could dampen investor sentiment toward infant formula makers.
  • The implementation and expansion of monetary stimulus in the eurozone and Japan will likely push up the U.S. dollar, which climbed to new highs on Friday. A further rise in the dollar will continue to be a threat to emerging markets.

© US Global Investors

www.usfunds.net

[description] => One of the greatest fears this October—possibly the most volatile month of the year—has been the correlation between the S&P 500 Index’s ascent in the first three quarters of the year and the possible ramifications of the end of quantitative easing (QE). [author] => Frank Holmes [legacyinterface_firm_id] => 464 [published_on] => 2014-11-01 [digest_date] => 2014-11-01 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-01 21:58:38 [created_by] => 945 [modified_on] => 2014-11-01 21:59:27 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1831 [hits] => 0 ) [6] => stdClass Object ( [legacyinterface_commentary_id] => 1755 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14993 [apv_conversation_id] => [content_type] => market-commentary [title] => Trick or Treat? Slow Global Growth Hits Cyclical Sectors Hardest [slug] => royce_103114 [fulltext] =>

Investors can be forgiven if they felt like Halloween arrived a little early this year.

Volatility has returned to the equity markets with a vengeance of late. Investors fear that the pronounced economic malaise that currently holds Europe and Asia in its grasp may spread to the U.S. As of October 13, the small-cap Russell 2000 Index was down 12.9% from its 2014 high on July 3.

While there have been a number of mild pullbacks in recent years, the small-cap market had not seen a double-digit correction for more than three years prior to this most recent decline. Interestingly, the third quarter of 2014 also saw the first negative quarter for the small-cap index in the last nine.

A closer look at the correction-to-date and the just-completed third quarter reveals some compelling developments that began with a down month in July in which the Russell 2000 lost 6.1%. Federal Reserve Chair Janet Yellen's comments about "stretched" valuations within small-cap, specifically biotech and the social media end of technology, made an already anxious small-cap market even more uneasy.

Most of our Featured Funds were also down during the month, though most outperformed their respective benchmarks. In August, the Russell 2000 rebounded with a 5.0% gain, and in this strong positive month most of these same portfolios trailed their benchmarks—again, as we would typically expect.

September, however, was an unusual month that dispensed with history's more familiar script. The pace of global economic growth was questioned while here in the U.S. Fed tapering continued to wind down.

What, then, made September, and ultimately the third quarter, so unusual and far more of a trick than a treat for most equity investors?

It was not the 6.1% decline for the Russell 2000 in September. September was unusual because it did not matter where you were on the quality spectrum, which often provides down market protection. What mattered in this unpredictable period was one's sector exposure.

Our sector exposure varies, but for the most part our Featured Fund portfolios have been overweight most recently in economically sensitive sectors, including Consumer Discretionary, Energy, Industrials, Information Technology, and Materials, and underweight in more defensive areas such as Health Care and Utilities.

During September, mounting concerns about the slowing pace of global growth disproportionally hit economically sensitive areas of the market, resulting in steep net losses within the Russell 2000 for Consumer Discretionary (-5.3%), Energy (-15.4%), Industrials (-7.4%), and Materials (-8.6%).

Two unwanted tricks were handed out with these declines: First, the sell-offs have tended to be highly indiscriminate, taking little account of small-cap companies with the kind of strong fundamentals that we seek, such as strong balance sheets, positive cash flows, and high returns on invested capital.

Second, the violent swings of high volatility have lasted well into October. As of October 23, the Halloween month was positive for small-caps but negative for most large-cap indexes as well as most non-U.S. indexes, regardless of cap size.

Corrections are of course a normal part of the equity landscape. From our perspective, the market dislocations of September and October seem to be driven, at least for the moment, by a clear sentiment shift in global growth expectations.

We have always thought that having a long-term investment horizon is of paramount importance. This is especially true in a transitional phase from Fed-driven liquidity to a more exclusively growth-driven market.

Uncertainty might abound right now to the point where many investors may feel like they're lost in a haunted house, but our approach remains consistent and we have stayed calm.

The indiscriminate selling has allowed us to re-enter some of our favorite names at absolute valuations with which we are very comfortable. And finding what we think are excellent businesses at attractively discounted prices is our favorite kind of treat—at Halloween or any other time of year.

Royce Featured Funds Average Annual Total Returns as of Quarter-End 9/30/14 (%)

 Average Annual Total ReturnsAnnual Expenses
FUNDQTR1YTD1ONE-
YEAR
THREE-
YEAR
FIVE-
YEAR
10-
YEAR
15-
YEAR
SINCE
INCEPTION
DATEGROSS
OPERATING
EXPENSES
NET
OPERATING
EXPENSES
Pennsylvania Mutual -7.58 -5.70 3.29 18.32 12.56 8.45 10.78 16.002 1/1/1900 0.93 0.93
Premier -8.55 -1.85 5.86 16.13 12.55 10.05 11.88 12.13 12/31/1991 1.09 1.09
Micro-Cap -10.03 -9.11 -2.78 9.31 7.71 7.30 10.63 11.76 12/31/1991 1.56 1.56
Low-Priced Stock -9.83 -1.69 2.21 7.75 6.70 6.31 10.22 11.12 12/15/1993 1.51 1.49
Total Return -6.47 -3.91 4.44 17.93 13.08 7.99 9.98 11.06 12/15/1993 1.18 1.18
Heritage -7.38 -4.69 1.23 15.47 10.99 8.98 10.50 13.12 12/27/1995 1.49 1.49
Opportunity -8.99 -6.24 3.79 24.81 14.61 9.00 12.21 12.82 11/19/1996 1.17 1.17
Special Equity -7.06 -6.91 -1.04 16.50 11.60 8.15 11.11 9.38 5/1/1998 1.13 1.13
Value -5.60 -2.37 5.87 15.16 10.44 9.18 N/A 10.86 6/14/2001 1.48 1.48
Value Plus -6.53 -2.72 5.12 18.30 10.55 7.72 N/A 11.87 6/14/2001 1.49 1.49
100 -9.00 -6.47 0.12 16.58 10.54 9.62 N/A 10.49 6/30/2003 1.51 1.51
Dividend Value -7.41 -4.31 3.91 18.32 13.54 9.34 N/A 9.17 5/3/2004 1.52 1.52
Global Value -9.81 0.15 4.34 5.87 7.29 N/A N/A 4.90 12/29/2006 1.84 1.70
International Smaller-Cos -7.04 -0.92 4.30 10.04 7.56 N/A N/A 6.00 6/30/2008 2.08 1.70
Special Equity Multi-Cap -0.44 4.88 12.03 20.80 N/A N/A N/A 15.39 12/31/2010 1.46 1.24
Russell 2000 Index -7.36 -4.41 3.93 21.26 14.29 8.19 7.93 N/A N/A N/A N/A
Russell Microcap Index -8.21 -6.78 2.78 22.77 13.60 6.36 N/A 6.71 N/A N/A N/A
Russell 1000 Index 0.65 7.97 19.01 23.23 15.90 8.46 5.33 15.18 N/A N/A N/A
Russell Global Small Cap Index -6.70 -1.36 4.39 15.11 10.10 8.32 7.65 4.04 N/A N/A N/A
Russell Global ex-U.S. Small Cap Index -6.21 0.86 4.94 12.05 8.14 8.83 7.62 4.07 N/A N/A N/A

1 Not Annualized
2 For Pennsylvania Mutual, the average annual total return shown is for the 40-year period ended as of the date shown above rather than since the Fund's inception.

Important Performance and Expense Information

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 180 days of purchase may be subject to a 1% redemption fee payable to the Fund (2% for Royce Global Value and International Smaller-Companies Funds). Redemption fees are not reflected in the performance shown above; if they were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained here. All performance and expense information reflects results of the Fund’s oldest share Class (Investment Class or Service Class, as the case may be). Gross operating expenses reflect each Fund’s gross total annual operating expenses, including management fees, any 12b-1 distribution and service fees, other expenses, and any applicable acquired fund fees and expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2015 to the extent necessary to maintain net annual operating expenses, (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business), to no more than 1.24% for the Service Class of Royce Special Equity Multi-Cap Fund, to no more than 1.49% for the Service Class of Royce Low-Priced Stock Fund, and to no more than 1.69% for the Service Class of Royce International Smaller-Companies Fund. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses through April 30, 2024 to the extent necessary to maintain net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) to no more than 1.99% for the Service Class of Royce International Smaller-Companies Fund. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by any applicable Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies. Shares of a Fund’s Service, Consultant, R, and K Classes bear an annual distribution expense that is not borne by the Fund’s Investment Class. The Royce Funds, other than Royce Special Equity Multi-Cap Fund, invest primarily in securities of micro-cap, small-cap, and/or mid-cap companies, which may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund Investors” in the respective prospectus).

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. 

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 performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

© The Royce Funds

[description] => As of October 13, the small-cap Russell 2000 Index was down 12.9% from its 2014 high on July 3—a double-digit correction not seen in more than three years. With the U.S. economy slowly improving and Fed tapering winding down as scheduled, what is driving this pullback? Co-Chief Investment Officer Francis Gannon talks about economic growth beyond our borders and how it has been playing a role in shifting investor sentiment. [author] => Francis Gannon [legacyinterface_firm_id] => 379 [published_on] => 2014-10-31 [digest_date] => 2014-10-31 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-31 14:48:16 [created_by] => 948 [modified_on] => 2014-10-31 14:48:27 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1821 [hits] => 0 ) [7] => stdClass Object ( [legacyinterface_commentary_id] => 1756 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14994 [apv_conversation_id] => [content_type] => market-commentary [title] => Buyer Beware: A Notable Divergence [slug] => advisorshares_103114 [fulltext] =>

By John Del Vecchio, CFA, portfolio manager of Ranger Alternative Management and AdvisorShares Ranger Equity Bear ETF (HDGE)

As a short selling portfolio manager, we constantly monitor market relationships for positive or negative divergences in the broad equity market indexes. One of the most important relationships is that between price and volume. In a bullish scenario, one would want to see volume expand as price rises. This typically means that large institutions are increasing their bets to equity markets as indexes and individual stocks strengthen and prices are rising. Conversely, rising prices coupled with weak volume expansion often indicates that shares are being transferred from strong institutions to weak retail investors.

The chart below, which illustrates the relationship between the index value of the S&P 500 and the volume of all equities, is an important indicator to measure the strength of the market, especially considering we are near all-time nominal highs.

Notice that in the early 1980’s, the index bottomed out and began a large secular bull run. In fact, one of the largest in modern history. During that time period, volume expanded as the markets vaulted higher, with a very strong correlation between the two.

Then, as markets topped out in 2007, so did the volume. The great crisis of 2008-09 was underway, and the volume in the market was at record levels as investors all ran for the exit signs at once. However, as the market bottomed in 2009 and started a cyclical bull market, a massive bearish divergence formed. On the far right hand side of the chart, the indexes have marched toward all-time highs, but the volume is only about as much as 2006. Thus, we are seeing less buying power fuel the markets higher.

We find this relationship worrisome because the demand for stocks is tepid at best. Over the past couple of years, when there have been meaningful pullbacks in the market, it has been met with much higher volume than the subsequent rallies. This lack of conviction in buying equities sets the market up for greater volatility and downside performance as everyone once again races toward the exit door at the first sign of trouble. Couple this with fewer short sellers participating in the markets given the huge rally over the last five years, and there’s even fewer market participants available to buy stock as prices fall and provide stability to financial markets. This too will exacerbate the downside. So, while the level of bullish advisors may have been excessive to the number of bears at the most recent high, it hasn’t been met with corresponding volume. Thus people may be saying one thing (“markets are going higher”) while doing something else (selling aggressively into declines). Buyer beware.

© AdvisorShares

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There is no shortage of discussions on Small Cap underperformance of late (see the familiar Chart 1). Many reasons have been proposed to account for the recent momentum breakdown:

Chart 1

  • Small Caps have had a good run for a number of years and performed well last year too. It's time for profit taking.
  • Small Cap valuations are running high. This is true based on our decades long data which monitors the relative valuations of Small Caps versus Large Caps (see "Stock Market Internals" section).
  • Market sentiment turned negative; high risk, volatile Small Caps take a beating.

Here we throw in yet another idea as food for thought. This rationale takes a deeper look at the fundamentals: the leverage of companies' balance sheets. With the Fed mulling over a rate increase, investors may have already started to avoid companies with excess leverage. Unfortunately, the data suggests that Small Caps, on average, are in this camp.

Leverage Ratios Creeping Up Among Small Caps

Our data crunching shows that the leverage ratios have been creeping up among Small Caps since the 2010 lows (relative to Large Caps). From a leverage affordability standpoint (interest rate coverage ratio for example), Small Caps are also showing signs of deterioration.

We looked at two leverage ratios: 1) Total Debt to Total Assets; and, 2) Long Term Debt to Equity. Each is presented as a ratio of ratios (Charts 2 and 3), to demonstrate Small Caps' leverage relative to Large Caps. Rising lines mean rising leverage among Small Caps relative to their Large Cap counterparts.

Both charts show the rising trend of Small Cap leverage since the 2010 low. Total Debt to Total Assets ratio of ratios is approaching its long run average, while the Long Term Debt to Equity ratio of ratios has exceeded its long term average, a significant jump from 2010.

Chart 2

Chart 3

Charts 2 and 3 also show that Small Cap leverage levels have historically been lower than Large Caps' (long-term average ratio of ratios is below one). This is not surprising since loans are normally harder to come by for higher risk, small companies, especially in Health Care and Tech sectors, where Small Cap companies have generally relied on equity funding, instead of loans.

As of now, average Total Debt to Total Assets among Small Caps stands at 16.0%, lower than Large Caps' 26.8% (Table 1). However, breaking down by sectors, we see that leverage is significantly lower for Small Caps' Health Care and Info Tech sectors, which drags down the average. Small companies in Consumer Staples, Energy, and Telecommunication Services actually have higher leverage ratios than their corresponding Large Cap sectors. A similar pattern can be observed when looking at the Long Term Debt to Total Equity ratio (Table 2).

Table 1

Table 2

Loans May Become Less Affordable Among Small Caps

Sometimes low leverage ratios do not speak for a better balance sheet, if a company's earnings power does not keep up with the cost of servicing loans. Chart 4 shows that Small Caps' interest coverage ratio (EBIT/interest expenses) relative to Large Caps' has been on the decline since 1998, and now stands at historical lows.

Rising interest rates could further exacerbate this situation as small companies tend to have floating rate bank loans or bonds with shorter maturities. The latter means that most Small Cap companies may have to refinance their loans at higher interest rates leading to even higher loan service expenses.

Chart 4

Conclusion

Small Caps' balance sheets and debt servicing capacity are not in the healthiest state to weather higher interest rates (relative to Large Caps). This could be part of the big picture of weakening Small Cap performance. Small Cap investors should place an emphasis on companies with relatively stronger balance sheets, and higher earnings power in order to accommodate an environment of rising interest rates.

© The Leuthold Group

[description] => Small Caps' balance sheets and debt servicing capacity are not in the healthiest state to weather higher interest rates (relative to Large Caps). This could be part of the big picture of weakening Small Cap performance. Small Cap investors should place an emphasis on companies with relatively stronger balance sheets, and higher earnings power in order to accommodate an environment of rising interest rates. With the Fed mulling over a rate increase, investors may have already started to avoid companies with excess leverage. Unfortunately, Small Caps, on average, are in this camp. [author] => Jun Zhu [legacyinterface_firm_id] => 520 [published_on] => 2014-10-31 [digest_date] => 2014-10-31 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-31 15:07:39 [created_by] => 948 [modified_on] => 2014-10-31 15:08:41 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1823 [hits] => 0 ) [9] => stdClass Object ( [legacyinterface_commentary_id] => 1758 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14996 [apv_conversation_id] => [content_type] => market-commentary [title] => Quick Hit on Q3 GDP: #QUAD4 Confirmed [slug] => hedgeye_103114 [fulltext] =>

TakeawayWith this [soon-to-be-revised-down, pre-election Q3 GDP print], the U.S. economy is squarely in #Quad4 and should remain there throughout Q4

It’s busy morning for our Macro Team here at Hedgeye with Keith live on Fox Business with Maria Bartiromo for the 9am hour, this Q3 GDP release and a busy day of customer meetings in New York. Fortuitously, we have a #process that allows us to quickly and appropriately contextualize this Q3 GDP “beat”:

Yes, that’s #Quad4, and yes, #Quad4 is bearish for asset prices:

The good news for growth bulls is that the YoY number (i.e. the one 20 years of backtest data suggests the market actually cares about) came in above our +1.9% estimate at +2.3%. The bad news is that that figure is still down from +2.6% in Q3.

#GrowthSlowing, in rate-of-change terms.

Refer to our note from last night titled, “NERVOUS ABOUT GROWTH AND CAN’T SLEEP? WE DON’T BLAME YOU…” for more details on why the U.S. economy is set to slow further here in Q4. The 20 charts in that note are very easy to consume and startling, to say the least.

Best of luck out there!

DD

Darius Dale

Associate: Macro Team

© Hedgeye Risk Management

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Earlier this fall, I attended the International Manufacturing Technology Show in Chicago, where companies from around the world came to showcase new products that utilize the latest in cutting edge manufacturing technologies, such as machine tools, robotics and various automation components. The biannual tradeshow is the largest of its kind in the world, a virtual theme park for manufacturing geeks. Despite the oft-mentioned talk of offshoring, manufacturing in America continues to grow at a healthy pace, driven by autos, aerospace and energy-related fields. Thanks to the expansion of these relatively higher value-added industries, productivity of manufacturing in the U.S. has seen impressive improvement in recent years. Capital spending has also been robust as companies seek to capitalize on business opportunities. However, such manufacturers are also keen to adopt more automation and robotics to help keep fixed costs in check. 

“Collaborative robots” were among the new products I saw at this September’s show. The majority of today’s industrial robots are not made to work alongside humans as they are simply too powerful and not equipped with safety systems. On a production line, robots are typically housed inside metal cages to keep their human operators safe. This isn’t much of an issue if you have a large enough factory but as manufacturers seek to replace human processes with robots, they often find that the existing factory floor space is insufficient to make these metal cages. That’s where these collaborative robots come into play. These robots are equipped with sensors and other safety systems allowing them to operate in tight spaces alongside employees. They are also covered in a soft foam material and color coded to differentiate them from other non-collaborative robots. It will be interesting to see how this new type of robot is accepted in the market over the next few years. 

Something else that caught my eye during the show was a project to build a car with a 3D printer. These 3D printing products, also known as additive manufacturing, had me feeling quite skeptical. Individual components were showcased as they were completed but ultimately, I wasn’t impressed. The parts looked like a lump of unfinished rubbery string, not aesthetically pleasing. I had been envisioning a ready-to-go product coming off the printer but the technology does not seem to be there yet. Don’t get me wrong. I think 3D printing is an exciting technology, but there are clearly areas where 3D printing will make sense and others where it won’t at all. Products like medical implants seem to be a good application, given the ability to customize the dimensions easily. However, slow production cycles and stringent quality requirements may limit adoption of 3D printing in areas like autos and aerospace. We will keep our eyes open for any technology breakthroughs that can speed up the adoption of such printing for manufacturing purposes. 

Attending these tradeshows rarely leads to immediate investment decisions. However, they do help us better understand the industry and factors that may affect a sector’s future growth. And hey, where else can I play blackjack with a two-armed robot dealer. 

Kenichi Amaki 
Portfolio Manager 
Matthews Asia 

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.

© Matthews Asia

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Market and Economic Review

Similar to earlier this year, the third quarter featured further evidence of a multi-speed economic recovery across the globe. Central banks reacted in a less-than-coordinated fashion compared to years prior, with the European Central Bank (ECB) and the Bank of Japan (BOJ) loosening monetary policy while the U.S. Federal Reserve (the Fed) retained more of its status quo as detailed further below. The ECB caught markets off guard by cutting interest rates and announcing new stimulus plans. ECB President Mario Draghi stated that a combination of factors led to the decision to implement these new measures including a downward movement in all indicators of inflation expectations along with disappointing data on GDP within the Euro Zone.

Meanwhile, the BOJ noted that the Japanese economy continued to recover moderately, while also acknowledging that a well-publicized sales tax hike in April hindered GDP. Japanese Prime Minister Shinzo Abe continues to look to strike the delicate balance of addressing his country’s debt problems while looking to stimulate economic growth. As for China, expectations are that growth will continue to fall. Early in the fourth quarter, the World Bank released projections for China for 2014 and 2015 that showed growth easing to 7.4% for this year and down modestly from there to 7.2% in 2015.

During the third quarter, the relative strength of the U.S. economy, compared to other developed markets, drove the U.S. Dollar to rally sharply against a basket of global currencies including both the Euro and the Yen. Meanwhile, geopolitical risks continued to dominate headlines. While the unresolved Ukrainian crisis fell from the front pages, the world turned its attention to the growing threat of ISIS in the Middle East and the potential of another extended military campaign ensnaring some of the world’s biggest economies. Also of note during the third quarter was the sharp fall in oil prices driven by a combination of factors including a strengthening U.S. Dollar, increasing supply and diminished demand driven by slowing growth in China.

Click here to read more

© AMG Funds

[description] => Similar to earlier this year, the third quarter featured further evidence of a multi-speed economic recovery across the globe. Central banks reacted in a less-than-coordinated fashion compared to years prior, with the European Central Bank (ECB) and the Bank of Japan (BOJ) loosening monetary policy while the U.S. Federal Reserve (the Fed) retained more of its status quo as detailed further here. [author] => Team [legacyinterface_firm_id] => 492 [published_on] => 2014-10-31 [digest_date] => 2014-10-31 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-31 17:15:51 [created_by] => 948 [modified_on] => 2014-10-31 17:18:41 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1826 [hits] => 0 ) [12] => stdClass Object ( [legacyinterface_commentary_id] => 1761 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14999 [apv_conversation_id] => [content_type] => market-commentary [title] => 5 Things To Ponder: "Spooky" Things [slug] => streettalk_103114 [fulltext] =>

I love this time of year, in particular it is the festivities surrounding one of the biggest commercial shopping days of the year - Halloween. According to Wikipedia:

"Halloween, or Hallowe'en, is a contraction of "All Hallows' Evening",also known as Allhalloween, All Hallows' Eve, or All Saints' Eve, and is a yearly celebration observed in a number of countries on 31 October, the eve of the Western Christian feast of All Hallows' Day.

Halloween initiates the triduum of Allhallowtide, the time in the liturgical year dedicated to remembering the dead, including saints (hallows), martyrs, and all the faithful departed believers. Within Allhallowtide, the traditional focus of All Hallows' Eve revolves around the theme of using "humor and ridicule to confront the power of death."

According to many scholars, All Hallows' Eve is a Christianized feast initially influenced by Celtic harvest festivals, with possible pagan roots, particularly the Gaelic Samhain. Other scholars maintain that it originated independently of Samhain and has solely Christian roots."

However, most importantly, it is a great time to spend with family and friends, dress up in costumes and over indulge in the many "treats" that come along with the celebration.

I thoughts this weekend's reading list should maintain the focus of "scary" ponderances now that the Federal Reserve has ended their latest monetary iterations.  So with that said, grab a Reese's or two from your kids treat bucket and enjoy this weekends "5 Things To Ponder."

1) Zombie Land, USA by Elizabeth MacDonald via Fox Business

"Historic bailouts have increased the number of corporate zombies living off of easy money, hindering restructurings and holding back the expansion of healthier companies, restructuring experts here and in the U.K. warn.

"Capital is not being recycled and reinvested, impeding the “creative destruction” process Austrian economist Joseph Schumpeter says is vital for any healthy economy.  Executives at big accounting firms like Ernst & Young have also warned zombie companies are grabbing market share from healthy companies."

2) The Fed's Lack Of Conviction Is Warranted by Mohamed El-Erian via Bloomberg

"Fed officials welcomed the continued improvement in the economy, particularly signs that the underutilization of labor resources is gradually 'diminishing,' though only 'gradually' despite 'solid gains and a lower unemployment rate.' On the second element of its dual mandate -- stable inflation -- the central bankers acknowledged the fall in market measures of forward inflation but played down the risk of damaging deflation by also pointing to other metrics of inflationary expectations.

This apparent lack of conviction, while frustrating to many, is understandable and warranted.

Because it faces a historically unusual mix of cyclical, structural and longer-term issues, the behavior of the U.S. economy isn't easy to capture well with existing models, including those used by the central bank. The nation’s policy response has fallen well short of the “first best” given the constraints imposed by the political polarization in Congress on virtually every policy-making entity other that the Federal Reserve; and the central bank doesn't have sufficient instruments to compensate for this."

3) The $75 Trillion Spectre by Szu Ping Chag via The Telegraph   

"Global shadow banking assets rose to a record $75 trillion (£46.5 trillion) last year, new analysis shows.

The value of risky investment products, mortgage-backed securities and other non-bank entities increased by $5 trillion to $75 trillion in 2013, according to the Financial Stability Board (FSB).

Shadow banking, which is not constrained by bank regulation, now represents about 25pc of total financial assets - or roughly half of the global banking system. It is also equivalent to 120pc of global gross domestic product (GDP)."

 What could possibly go wrong?

4) The Truly Scary Picture Of American Wellbeing Since 1979 by J. Bradford Delong via Project Syndicate

"The story goes like this: Since 1979 – the peak of the last business cycle before the inauguration of Ronald Reagan as President – economic growth in the United States has been overwhelmingly a rich-only phenomenon. Real (inflation-adjusted) wages, incomes, and living standards for America’s poor and middle-class households are at best only trivially higher. While annual real GDP per capita has grown 72%, from $29,000 to $50,000 (in 2009 prices), almost all of this growth has gone to those who now occupy the highest tier of the US income distribution."

Also Read: For 90% Of American's There Has Been No Recovery and The Statistical Recovery Continues

5) Trick Or Treat - $65 Oil Is Coming by Derek Thompson via The Atlantic

"Gas prices are falling below $3 a gallon across the United States for two big reasons: (1) the world economy is growing slower than we hoped, and (2) global oil production is improving faster than we expected."

Also Read: How Long Can The Shale Boom Last by Nick Cunningham via ZeroHedge

Also Read: Houston We Have A Fracking Problem

BONUS GOODIE BAG:

We're Way Overdue For A Real Correction by Joe Calhoun via Alhambra Partners

"Investors seem to think that markets are binary, either rising or falling, bull or bear, but the market actually spends a lot of time doing neither. An old Wall Street adage says that tops are a process while bottoms are an event. When we think back about previous markets we often forget how long things take to happen. Looking back on a long term chart tends to compress the time frame and we remember things happening a lot faster than they actually did. Turning points in markets, despite the old saying, take time to happen. Bottoms are remembered to the month."

When You See It...Run by John Hussman via Hussman Funds

"The next several sessions could contain a significant further short-squeeze or a vertical collapse, and we have very little predictive basis for that distinction.Longer term, we continue to view present market conditions as among the most hostile in history, coupling rich valuations with market internals that remain unfavorable on historically reliable measures. So allow for any sort of action in the near term, but recognize that from a full-cycle perspective, we continue to view a 40-50% market loss as having very reasonable plausibility over the completion of this market cycle.

To reiterate what I wrote in June 2008, just before the market collapsed, “Again, falling interest rates, moderate valuations, and very strong market action early into the rebound are useful in separating sustainable advances (even sustainable bear-market rallies) from the fast, furious, prone-to-failure variety.” Those would still be among the primary considerations that would lead us to an optimistic or aggressive market outlook. As always, the strongest market return/risk profiles we identify are associated with a material retreat in valuations coupled with an early improvement in market action. We’ll take our evidence as it arrives."


"I'll bet living in a nudist colony takes all the fun out of Halloween." -- Author Unknown

Wishing you a scary, and delightful weekend.

Please send emails and comments to lance@stawealth.com or tweet me.

Lance Roberts

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management.

© Streettalk Live

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The ECB’s stress test is a positive – but only first – step

Stress testing is performed in a number of arenas. Tools and parts are stressed to ensure that they will stand up to extreme conditions. Medical patients are stressed to detect heart disease. Computer systems are stressed to ensure that they can operate stably at peak times.

In 2009, American banks became the subject of stress tests. For both regulators and firms, this was an appropriately named endeavor. Nonetheless, the exercise helped stabilize the U.S. banking system after the financial crisis, and legislators consequently saw fit to include regular testing for large banks in the Dodd-Frank Act. 

The eurozone was eager to import the stress-testing model, but its early adaptations were incomplete and not fully credible. Last Sunday, the European Central Bank (ECB) released the results of its comprehensive assessment (CA), a more rigorous analysis of the Continent’s banks. The ECB’s work was ambitious, covering four times the number of banks included in the Federal Reserve’s annual review. 

The project had two stages: the first was an asset quality review (AQR), which reviewed balance sheet assets to determine whether they had been properly evaluated by the banks (and their local supervisors). The AQR also set a strong starting point for the second phase of the effort, which was a stress test. 

Prior attempts of this kind in Europe were criticized for not being sufficiently harsh. But on the surface, the results of the CA seemed rigorous, and Europe’s banks issued lots of capital in anticipation of their release. 

 

The headlines following the publication of outcomes have focused on the relatively small number of banks that must raise more capital. Although 24 of the 130 banks covered “failed” the CA, this was based on end-2013 data. Since then, 12 of the banks have added a combined €56 billion to their capital, leaving just 13 institutions still facing shortfalls. 

Investors were relieved that there were no nasty surprises, particularly among the largest institutions, and markets shrugged off the weaknesses of the Italian banks, four of which have to raise a combined €3.3 billion. Investors also seem pleased with the enhanced level of transparency brought to Europe’s banks, with more than 1,000 data points now available for each of them. But before concluding that all is well, several things bear noting:

  • The findings concluded that the banks had overvalued their combined assets by €48 billion. More important, the AQR also revalued €136 billion in assets as non-performing loans. These are sizeable numbers that raise questions about the judgment of banks and their national regulators. 

  • The scenario the stress test used might not have been the most stressful. Macro and market variables were not projected to decline by nearly as much they are in the Federal Reserve’s capital reviews. Further, the scenario the ECB used did not include any deflation, which many analysts think could occur if the eurozone returns to recession. 

  • The exercise was based on existing definitions of capital adequacy, not the more- stringent Basle III standards that will be phased in over the next few years. Under “fully loaded” Basle III, 11 additional institutions would have “failed” the assessment, with many others passing by only the thinnest of margins. Many banks in Europe also have very low leverage ratios, the simple comparison of capital to assets that removes the influence of bank risk models.

Taken together, this implies that Europe’s banks – particularly those in the eurozone – will need to continue improving the quality of their capital for some time to come. 

Starting next month, the ECB takes over regulatory authority for the 123 largest eurozone institutions – and the CA covered about 82% of those assets. This is the next and crucial step toward creation of a eurozone-wide Bank Resolution Fund, which is scheduled to be initiated in 2016. The approval of the contributing countries will be required, though, and this might not be the easiest task. 

National regulators will continue to oversee smaller banks across the Continent. This is notable because the credit crunch that has assailed Europe since 2008 has hit small- and medium-sized enterprises (SMEs) particularly hard; SMEs are often financed by smaller, regional institutions that tend to have strong ties with local political interests. 

All told, the comprehensive assessment was a very important step. It undoubtedly encouraged a number of institutions to strengthen their capital bases. The application of unified asset quality rules will certainly make it easier to compare institutions and sectors, and it was a key milestone in the long journey toward a eurozone-wide banking system. 

But the lack of credit growth across Europe is as much, if not more, a function of demand. Public and private sectors are heavily indebted; corporations and households are still busy deleveraging; and we are probably starting to see demographic changes weigh on the willingness to borrow. So while one source of Europe’s stress may have eased, many others remain. 

Declining Oil Prices: The Gain and the Pain

Earlier this year, there was some speculation that high oil prices might be headed higher in reaction to mounting geopolitical tensions. But surprisingly, oil prices tumbled from around $115 a barrel in mid-June to around $85 a barrel today. At the current oil price range, there are winners and losers. For the United States, the world’s largest oil producer and consumer, lower oil prices are a mixed bag. 

Gasoline and other motor fuel purchases in total U.S. consumption expenditures amounted to roughly $250 billion in 2013, after adjusting for inflation. Although the percentage drop in gasoline outlays likely will be substantially smaller than the 25% decline in the oil price, the bottom line is that household budgets have more dollars for discretionary spending. Since consumption accounts for nearly 70% of American gross domestic product (GDP), this should give an extra boost to growth in the quarters ahead. 

But there are others who stand to lose. Drilling for oil will be less viable if oil prices do not stabilize. Oil prices have held around $100 per barrel since early 2011, the longest period of such elevated prices. Persistently high oil prices aided the economics of new technological developments, which ultimately resulted in a nearly 50% increase in oil production during 2006-2013. 

There are a number of estimates of the oil price that would make production unsustainable. A recently publishedlist from Reuters places the breakeven price in the $70-$80 per barrel range. Shale oil, the primary reason for the jump in oil production, is likely to suffer if oil prices decline below this range. 

Oil firms have hedged against low oil prices, but the extent is unclear. Recent earnings reports of oil companies are mixed. The obvious question that follows is how investment in the oil industry will fare in the quarters ahead if profits decline and oil prices fail to stabilize. 

Investment in oil and gas structures and equipment summed to about $150 billion during third quarter of 2014 after adjusting for inflation, which is close to 1% of U.S. GDP and about 7% of business investment. Growth in this sector was strong during 2010-12, but it slowed thereafter. 

It is within reason to conclude that the unfavorable price environment is not supportive of an acceleration of investment in this sector. The projected weakness of growth across the global economy, excluding the United States and United Kingdom, introduced an element of pessimism to the crude oil market. Until this sentiment turns, investment in oil and gas exploration in the United States can be expected to moderate. 

The United States is the second-largest importer of crude oil. Imports of petroleum products are likely to decline to 3.2 billion barrels in 2014 from a peak of 5 billion barrels in 2005. The large reduction in oil imports has helped to narrow the trade deficit and lift real GDP. 

From an employment perspective, payroll employment in the oil and gas industry has expanded sharply in the past five years, showing a gain of about 60,000 jobs. While lower oil prices could dent the momentum, this represents a small fraction of the total number of jobs created during the five years of economic expansion. 

In sum, the net impact of lower oil prices for the United States is probably positive. But there are entries on both sides of the ledger. That represents a huge change from a generation ago. 

Outbreak

The Ebola virus has spread rapidly through West Africa and even more rapidly in the world’s consciousness. While we should be most concerned about the terrible human toll of the outbreak, the economic toll is rising as well. 

For the countries where infection has been most prevalent, normal patterns of commerce have been substantially interrupted. Many people have been confined to their homes because of fear or fiat. Supply chains have frayed. Public and private resources have been diverted to fight the epidemic. Tourism is well down. 

Developing countries in West Africa have received some increased attention in recent years for more favorable reasons. Many are resource-rich and have consequently attracted substantial foreign investment. Populations in the region are growing rapidly, leading some to predict that these “frontier markets” may drive world growth in the decades ahead. The current epidemic will put a damper on such enthusiasm. 

Outside of the most affected areas, Ebola has gone viral in people’s perceptions. While there has been only a handful of cases in the United States, fear of infection has spread far more quickly. Some travelers in the Dallas airport have sported surgical masks, even though the virus cannot be contracted by inhaling air. Domestic airline bookings are off from normal seasonal patterns. Governors are calling for broad quarantines. As the headlines accumulate, so does the anxiety, which is not what retailers need going into the holiday season. 

 

And while many factors have contributed to the market’s volatility, Ebola is frequently cited as another brick in the rising wall of worry that faced investors earlier this month. 

The World Bank estimates that about 80% of the economic costs of the Severe Acute Respiratory Syndrome (SARS) outbreak of 2003 and the bird flu outbreak of 2005 resulted from behavioral impacts, not the direct expenses of dealing with the disease. Ebola has already infected and killed more people than either of those two, so the potential for economic impacts could be far greater. A cure for the ailment, physically and mentally, would be most welcome.

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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This week, the U.S. Department of Commerce will provide the markets and the public with the first look at the health of the economy in the third quarter of 2014, when it releases the figures on gross domestic product (GDP). The consensus of economists, as polled by Bloomberg News, expects that the U.S. economy expanded at a 3% annualized rate in the quarter, after posting a 4.6% increase in the second quarter, which in turn, was a rebound from the weather-impacted 2.1% drop in GDP in the first quarter of 2014.

Although the Great Recession ended in the middle of 2009, and the U.S. economy (as measured by GDP) surpassed its pre-Great Recession peak in late 2011, many Americans still don’t feel comfortable about the economy. In a recent Gallup poll, nearly 40% of Americans listed one or more concerns about the economy as the most important problem facing the United States. While the latest reading is still far below the nearly 90% of Americans who listed economic issues as the biggest problem facing the United States in early 2009 (during the depths of the Great Recession), the 40% reading is still well above the “normal” level of around 20-25% seen in the mid-2000s.

Our view remains that the U.S. economy is in the middle stages of a recovery that began in mid-2009. Based on the data, the odds of a recession occurring in the next several years are low, as the slow pace of the recovery thus far has prevented the excesses that typically precede a recession -- overbuilding, overspending, overinvesting, etc. -- from building up. But the slow pace of the recovery -- especially the labor market, and in particular wage growth -- has contributed to the feeling among a large percentage of Americans that the economy is not where it should be at this stage in the business cycle.

The following figures provide a somewhat alternate look at the economy over the past several years. Without citing any of the usual government reported statistics (GDP, jobs report, retail sales, industrial production, durable goods orders, etc.), these figures on economic uncertainty, crane rental rates, and restaurant customer traffic tell a story that is remarkably similar to the one told by the official data on the economy: The economy is improving, and in many cases is back to normal, but in some areas remains stubbornly weak.

The Economic Policy Uncertainty Index is compiled by researchers at Stanford University and the University of Chicago, and it measures mentions of economic policy uncertainty in over 1,000 newspapers across the country [Figure 1]. While investors have plenty to worry about today, the index is currently near 20-year lows, despite fears of Ebola and worries about the Islamic State militants, Ukraine, and a global growth slowdown in Europe, China, and elsewhere. Earlier spikes in the Economic Policy Uncertainty Index included:

  • 2008 and 2009, due to the Great Recession and the rancor over the fiscal stimulus, the Federal Reserve’s (Fed) quantitative easing (QE) program, the auto sector bailout, and the Troubled Asset Relief Program (TARP)
  • 2010, around the debate and passage of the Affordable Care Act
  • 2011, around the debt ceiling debacle and the downgrade of U.S. government debt by Standard & Poor’s
  • 2012 and 2013, around the fiscal cliff, government shutdown, and
    the sequester

In short, economic uncertainty -- likely a drag on economic growth in 2011, 2012, and 2013 -- has faded as a concern in 2014, consistent with the Fed’s most recent Beige Book. (See last week’s Weekly Economic Commentary, “Beige Book: Window on Main Street.”)

The crane rental rates in Figure 2 are collected by Rouse Asset Services and track the rental rates for boom cranes used on large construction sites around the country. Rates are up by nearly 25% since early 2011 (the earliest data we have available), and a quick look around any major metropolitan area around the country should tell you why. The rise of giant construction cranes across the country, after a long absence, is a very visible sign of the recovery in the economy. Although business spending on structures -- the area of the economy that is most closely tied to crane rental rates -- is not yet back to pre-Great Recession peaks, this segment of GDP typically lags the overall economy. Uncertainty around the durability of the recovery in the early years of this decade led to pent-up demand among businesses for new and expanded space, which has given rise to an uptick in activity at commercial building sites. Low rates to finance all the spending -- partially as a result of the Fed’s actions -- have helped. We continue to expect that business capital spending on structures may be a positive contributor to overall GDP growth in the coming quarters.

The data on customer traffic in restaurants, compiled by the National Restaurant Association, show that customer traffic in restaurants across the country is very close to being back to normal, after struggling in the early part of the recovery (2009 and 2010) and again around the fiscal issues in 2011 and 2012 [Figure 3]. While not quite back to the levels seen in 2004-2007, customer traffic in restaurants is on the upswing, and anyone who has been out to dinner on a weekend night lately knows that translates into long wait times for tables. A better housing market, the improved labor market, pent-up demand from earlier in the recovery, and the discipline to not overbuild restaurants in the prior cycle have led to the recent increase in customer traffic.

Although there are other “real world” indicators on the health of the U.S. economy (we promise to bring you more in forthcoming editions of the Weekly Economic Commentary), the three discussed here are indicative of the health of the U.S. economy more than five years into the economic expansion that began in mid-2009. It’s in recovery, but a slow recovery, and not quite “back to normal.” We hope you are not reading this while waiting for a table at your favorite restaurant!

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.

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 # 1-322687 (Exp. 10/15)

© LPL Financial

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  • ​We believe select investors looking to reposition portfolios may benefit from a move to senior secured floating rate loans.
  • CLOs have been an important source of demand in the market, and even with more strict risk retention rules just announced under Dodd Frank, we think demand will remain strong.
  • While the Fed has criticized some banks for not following their leveraged lending guidelines, Fed members themselves, in our view, do not appear concerned about loans having a major impact on financial stability.

With volatility returning to the markets, some investors are seeking diversification and downside protection in the leveraged loan market. The unique nature of loans – floating rate, secured debt instruments at the top of the corporate capital structure – affords a hedge against rising rates and may provide principal protection if economic conditions worsen. Chief Investment Officer Global Credit Mark Kiesel, portfolio manager Beth MacLean and product manager Rudy Pimentel discuss why they see value in loans, PIMCO’s approach to credit selection and risk management in bank loan portfolios, and the many ways loans can play a role in an investor’s portfolio.

Q: Mark, you have been adding loans to many of the portfolios that you manage – what makes them attractive to you and your team? 
Kiesel: We have been adding loans for three main reasons: They have limited interest rate risk and short effective maturities, they often provide good downside protection and they offer compelling value today.

First, as floating rate instruments, loans allow us to take “pure” credit risk – this is, without the interest rate or duration risk we see in investment grade and high yield corporate bonds. In a rising rate environment, a loan’s coupon rises as rates rise. Of course, the reverse is true when rates fall.

Loans also tend to have shorter maturities than those of most corporate bonds. A newly issued loan typically has a maturity of five to seven years, compared with 10 years for a traditional high yield bond and up to 30 years for an investment grade bond. What’s more, because loans are callable and usually include some amortization and required payments from the issuer’s excess cash flows, their average life is usually less than three years.

Second, loans are secured by the assets of the company issuing the debt and are senior in its capital structure. That means loans generally have the highest priority and degree of principal protection if the issuer defaults. Thus, a company’s loans tend to perform better than its bonds in periods of economic stress when corporate defaults begin to rise.

Finally, with spreads, or yield premiums over Treasury bonds, that are similar to those of high yield bonds, loans look very compelling on a relative basis. And with recent yields for the JPMorgan Leveraged Loan Index at 5.85% as of 16 October 2014, we find them attractive on an absolute basis also.

So loans offer compelling value, they help reduce interest rate and credit risk when compared with similar corporate bonds and their unique characteristics may provide diversification benefits for client portfolios. This is why we ask: Got loans?

Q: Beth, describe your investment process – what sets PIMCO apart in the loan business? 
MacLean: PIMCO’s investment process and portfolio management are uniquely designed to reduce potential threats. Our approach combines PIMCO’s long-term macroeconomic outlook with careful bottom-up, fundamental research, providing a framework for credit selection that is underpinned by our deep knowledge of industries and companies. Furthermore, our research process and active monitoring of portfolio positions help us avoid credits whose fundamentals could deteriorate if economic conditions worsen or a number of company-specific risks materialize. We don’t reach for yield; we believe that paying attention to both credit fundamentals and valuations helps us maximize returns for our clients over the full credit cycle.

While each portfolio has unique guidelines reflecting specific client objectives and risk tolerances, our investment strategy has always emphasized careful credit selection and downside protection. We focus on the larger corporate issuers, companies with high barriers to entry and robust capital structures, with bonds beneath the loan and a strong equity valuation as well. These larger cap companies – compared with the growing number of smaller, middle market issuers that have come to market this year – are leaders in their industry, giving them structural advantages and more financial flexibility than smaller market participants. And we also favor more defensive sectors, like healthcare, or those with steady cash flows, like cable television. (See our Global Credit Perspectives, “Emphasize Barriers to Entry,” September 2014.)

The portfolios we manage are highly diversified across issuers and industries, and our credit philosophy aims to position our clients’ assets in the credits that can withstand the most challenging parts of economic and credit cycles. Further, because we focus on larger cap, more liquid issuers, we may experience above-average liquidity in the market, compared with others who follow a broader index strategy, which would include smaller, illiquid loans.

Q: Beth, where do you think we are in the credit cycle today? 
MacLean: Well, I am a hockey fan, so I would say we are in the second period – they still have to clear the ice and play another 20 minutes before we see a change in the cycle. Credit fundamentals remain strong, with corporate issuers having benefitted from years of profit growth and open capital markets – both of which have allowed them to deleverage and to shift maturities out several years. While overall leverage has been rising modestly in recent transactions, cash flow coverage generally remains strong, given the low rate environment. Defaults are low, and with global central banks remaining highly accommodative to support recovery in the private sector, we expect them to remain low at 2%–3% per year for the next couple of years.

With this strong fundamental backdrop, any market volatility that is driven by supply, demand or exogenous events should provide opportunities to buy select loans at attractive prices.

Q: So, what has driven the recent price volatility in the credit markets? 
MacLean: It really is all about the “technicals” – a catch-all term for anything not related to credit fundamentals. This year, volatility in the loan market has been led by the high yield market (see our October 2014 Viewpoint, “We Don’t Call It Junk Anymore: Time to Look at High Yield Again”). Both early in the summer and in recent weeks, outflows from high yield funds fueled a high yield market correction that quickly spilled over to the loan markets. As we have seen in past technical corrections, often the larger, higher quality loans are the first to be sold since they are used to raise cash for redemptions. Counterintuitively, they tend to underperform in the early parts of a selloff. However, in an extended risk-off environment, we would expect these loans to outperform the lower quality, higher beta names.

Additional technical pressure today arises from the new issue calendar. Although we are already nearing record issuance, we saw a surge in new issue activity in September and at least $20 billion in additional issuance remains in the pipeline. This heavy supply will likely lead to more attractive prices for these new issues and the rest of the market.

On the positive side, however, collateralized loan obligation (CLO) issuance remains very strong, so there remains a natural bid, both for new issues and for loans trading in the secondary market. And in technically driven market corrections, we often see institutional investors step in to take advantage of attractive valuations. CLOs have been an important source of demand in the market, and even with more strict risk retention rules just announced under Dodd Frank, we think the near-term impact will be for continued strong demand from a pull-forward effect before the rules are implemented, which will not be for two years. Longer term, larger managers with access to capital from private equity or insurance company parents, for example, will still be able to issue CLOs. We are also likely to see new companies formed – partnerships of hedge funds and CLO managers, perhaps – that may be able to issue CLOs under the new rules. Finally, there are already alternatives to CLOs in credit opportunity funds and other funds that use leverage, and I expect that we will see more of this type of vehicle established as these new rules come into effect.

Q: Rudy, what types of investors are buying loans today? 
Pimentel: The short answer is that most are, from individual investors to large corporations. While each has unique investment goals and objectives, they typically invest in loans to minimize risk within their credit allocation – interest rate risk, credit risk or both – without giving up much current income. Some recognize that a long-term strategic allocation to loans can have meaningful diversification benefits.

Individual and institutional investors have added loans to their portfolios in recent years through mutual funds, whose collective assets have grown to $140 billion and now make up nearly 20% of the loan market. Much has been written about recent outflows from loan mutual funds. However, we view this as part of the natural rebalancing of investors’ portfolios and a byproduct of the large inflows the industry experienced in the preceding years. So far this year loan funds have experienced outflows representing less than 10% of assets, which compares with inflows in 2013 representing 75% of assets. Historically, we have seen mutual fund investors add exposure when they become concerned about the risk of rising interest rates, so we could see mutual fund inflows again next year if the Federal Reserve begins its rate hiking cycle.

Pension funds, insurance companies, banks and, to a lesser degree, endowments, foundations and sovereign wealth funds have also been increasing their exposure to loans. These investors may use loans as part of their high yield allocation, or as a strategic investment. Some establish separately managed accounts, which enable them to tailor the investment guidelines to their risk tolerance and specific investment objectives.

We have worked with many investors with higher risk tolerances to apply two to three turns of leverage to loan portfolios to seek enhanced returns. Leverage can amplify risks as well as returns so we don’t typically leverage credit exposure in our loan mutual funds. And while PIMCO’s New Neutral thesis sees lower rates for longer, it also posits that when the Fed does eventually raise the fed funds rate, it will do so gradually and only to around 2%. This suggests that if used prudently, leverage can be an effective tool in some investors’ toolkits, particularly as global central banks remain accommodative and the economy continues to heal.

And finally, as Beth mentioned, CLOs remain an important vehicle for a subset of institutional investors to take exposure to loans. While CLOs are highly leveraged structures, with many deals having 10 times more assets than equity, they offer investors a menu of risk and reward investment options – from AAA-rated debt to unrated, equity-like tranches.

PIMCO’s ability to offer different investment options allows our clients to choose vehicles that closely match their specific investment objectives and risk tolerances.

Q: Finally, Beth, we have to ask about the recent comments from the Fed regarding concerns over leveraged lending standards. What are your thoughts on the topic? 
MacLean:
 Well, we covered this in depth in a piece earlier this year. Most recently, the Fed has criticized some banks for not following their leveraged lending guidelines, and we expect the Fed and other regulators will remain focused here. However, when questioned, New York Fed President William Dudley recently stated that he did not believe the leveraged loan market poses any systemic risk, and Fed Vice Chairman Stanley Fischer earlier this year remarked that the loan market was “not big.” So Fed members themselves do not appear concerned about loans having a major impact on financial stability.

To us, the Fed’s guidelines seem too blunt a tool, with a one-size-fits-all approach that does not really work across a diverse universe of issuers. But there are some very aggressive deals being printed today and some market practices with which we strongly disagree. That underscores why PIMCO’s investment approach, with careful, bottom-up credit selection and active monitoring of portfolios, is so important.

Further, given our size in the market, strong credit research team, focus on high barriers to entry, defensive positioning and diverse portfolios, we believe our client portfolios are well positioned to weather episodes of market volatility. A move to senior secured floating rate loans could be a solution for select investors looking to reposition portfolios.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. Collateralized Loan Obligations (CLOs) may involve a high degree of risk and are intended for sale to qualified investors only. Investors may lose some or all of the investment and there may be periods where no cash flow distributions are received. CLOs are exposed to risks such as credit, default, liquidity, management, volatility, interest rate and credit risk. Floating rate loans are not traded on an exchange and are subject to significant credit, valuation and liquidity risk. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

 

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

 

This material contains the opinions of the authors but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world.

©2014, PIMCO.

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Dear Reader:

CARDS AGAINST HUMANITY

There’s no way I can adequately describe this game. The game’s website (http://cardsagainsthumanity.com/) says, “Cards Against Humanity is a party game for horrible people. Unlike most of the party games you've played before, Cards Against Humanity is as despicable and awkward as you and your friends.” It’s all true and one of the most fun games I’ve played in a long time . It was introduced to me by my friends Karla and Bob. Deena and I have become addicted, as has everyone we’ve introduced it to. If you’re not familiar with Cards Against Humanity, take a look.

I DON’T UNDERSTAND

I recently read an article headlined, “Morgan Stanley paying $275 million to settle SEC charges.” Seems the firm settled with the SEC for failure to disclose adequately the delinquency status of home mortgages backing the security deals that it financed and sold. According to the article, the mortgages underlying the securities had a total value of about $2.5 billion. As is all too common in these cases, Morgan Stanley neither admitted to nor denied the charges and, no surprise, the firm spokesman said, “We’re pleased to have resolved this matter.” Even better, the bank said the payment would be charged against its 2013 results and wouldn’t affect its earnings in 2014.

I really don’t want to single out Morgan Stanley; it just happens to be the most recent article I read. As the story noted, the SEC settlement was latest in a series of federal actions against the Wall Street banks.

I may be naïve, but I don’t think so. There is something seriously wrong when major financial institutions can make billions misleading customers and then get away with “neither admitting nor deny allegations,” simply paying millions in penalties and proceeding about their business. If a small firm like ours engaged in such practices, we wouldn’t be in jail, we would be under the jail. I don’t understand.

MORE INTERESTING TIDBITS

From the same BA article

  • In New York City, women are legally allowed to be topless in public.
  • However, it is illegal to have sex on a motorcycle in London.
  • And, in Mumbai, Personal Displays of Affection (PDA) are a punishable offence.
  • New Yorkers speak more than 800 languages (and I struggle with one).

SOMETHING FOR NOTHING

This is for real! Sign up at https://www.bookbub.com/home/ and you’ll receive a daily list of ebooks available for free (or in some cases $0.99). We’re not talking about books no one wants or has never heard of, but ones you might really like to have. In my first week, I downloaded a half-dozen. CAVEAT: it’s like eating popcorn. Once you “buy” the free book, you’re likely to want to have a bunch of the author’s other publications – and they’re not free. As a result I think I bought 15 more. Obviously, whoever thought up this marketing ploy is a fan of behavioral finance. Still, the first one is FREE!

WHO WINS?

An interesting story in British Air’s Highlife magazine compared a variety of venues in London and New York; here are some of the results:

                                     Winner

Museums                                London – 173 vs 131 for New York

Art Galleries                           London – 857 vs. 721 for New York

Public Libraries                     London – 383 vs. 229 for New York

Bookstores                            London – 802 vs. 777 for New York

Population                             London – 8,336,697 vs. 8,173,194 for New York

Green space (sq km)           London – 1,572 vs. 1,214 for New York

Major live music venues     London – 349 vs. 277 for New York

Restaurants                           London – 37,450 vs. 24,149 for New York

Restaurants (Michelin starred) London – 64 vs. 62 for New York

Cinema screens                   London – 349 vs. 277 for New York

Film Festivals                        London – 566 vs. 501 for New York

 

Bars                                        New York – 7,224 vs. 2,143 for London

Did I mention I read this in a British Air publication?

GURUs

If you’ve been reading my NewsLetter, you’ll know one of my favorite subjects is “gurus.” Here’s another example of the folly of following the advice of self-appointed gurus from my friend Bob Veres’ most excellent Newsletter.

From Guru Marc Faber’s website:

“[He] is considered one of the world's premier economists and stock market investors. Known for his ‘contrarian’ investment approach, Dr. Faber is renowned for his timely market predictions.”

From Bob’s Newsletter:

 

“If you want an extreme example, consider Marc Faber, a Swiss investment guru who predicted the crash of 1987, and who recently predicted an imminent market crash in 2014. Ritholtz spent some time researching Faber’s track record in between these calls, and found that Faber announced that ‘stocks have likely peaked’ in September 2009. In 2010, he predicted imminent hyperinflation, saying that it was not a matter of if, but when. In 2011, he announced that the bear market had begun. Later in the same year, he predicted that the dollar’s value would fall to zero. In 2012, he predicted a 1987-style crash sometime during the year, and he repeated the prediction in 2013, and now again in 2014.”

POPULATION CONTROL?

According to the U.S. Department of Agriculture via USA Today, the cost of raising a child born in 2013 is $245,340 (http://usat.ly/VzQ16a). Housing is the single-biggest expense, averaging about $73,600 or 30% of the total cost of raising a child, followed by child care/education at 18%. Sure am glad mine are grown.

AND ONE MORE

This is a compilation of scenes from National Geographic videos. It doesn’t get much better. https://www.youtube.com/embed/Hodomt6bBOw

COOL GADGET

A 64GB USB 3.0 ScanDisk Flash Drive from Amazon for $20.55! I have no idea what I’m going to do with them, but I bought two.

http://www.amazon.com/SanDisk-Extreme-Flash-Drive-SDCZ80-016G-X46/dp/B007YXA5S8/ref=sr_1_1?ie=UTF8&qid=1408903538&sr=8-1&keywords=scandisk+3.0

NATURALLY

 

 NOT LIKE I REMEMBER LIFE WHEN I GREW UP

There’s lots of discussion about Baby Boomers, Generation X and Millennials, but a recent article in AARP’s Magazine made me think that rather than age differences, I might be missing the really big demographic issues. Here are some statistics that led me to that conclusion:

  1970  2013
Households consisting of a married couple and their children  40% 19%
  1960 2012
Adults who are married 72% 51%
Births to ummarried women 5% 41%

SPEAKING OF AARP: GUESS WHO SHOWED UP IN A RECENT ISSUE.

http://www.aarp.org/money/investing/info-2014/what-financial-advisers-credentials-mean.1.html

THIS IS WHO I REMEMBER

In 1970, John Wayne hosted a variety show celebrating America's history. Included in the cast were: Ann Margret, Lucille Ball, Jack Benny, Dan Blocker, Roscoe Lee Browne, George Burns, Owen Bush, James Caldwell, Glen Campbell, Johnny Cash, Roy Clark, Bing Crosby, Phyllis Diller, Edward Faulkner, Lorne Greene, Harry Hickox, Celeste Holm, Bob Hope, Kay E. Kuter, Michael Landon, Forrest Lewis, Dean Martin, Dick Martin, Ross Martin, Greg Morris, Ricky & David Nelson, Hugh O'Brian, Dan Rowan, William Shatner, Orville Sherman, Red Skelton, Tom Smothers, Leslie Uggams, Jesse Vint, John Wayne, Patrick Wayne, Dennis Weaver, Dan White, Hal Williams, and The Doodletown Pipers. Watch it at: https://www.facebook.com/photo.php?v=10203900770857211.

AND THIS IS WHAT I REMEMBER

The Bates List Finder

It was my Outlook.

CHECK OUT YOUR STATE

WORTH WATCHING

By now you may have seen one or both of these; however, if not, they’re worth your time.

10 Life Lessons From A Navy Seal

Naval Admiral William McRaven’s University of Texas Commencement Address

http://www.youtube.com/watch?v=pxBQLFLei70

Jim Carrey’s (a Jim Carey you won’t recognize) commencement address at Maharishi University

http://www.youtube.com/watch?v=V80-gPkpH6M

KICKSTARTER BEFORE KICKSTARTER

From the KickStarter Blog – “In 1713, Alexander Pope set out to translate 15,693 lines of ancient Greek poetry into English. It took five long years to get the six volumes right, but the result was worth the wait: a translation of Homer’s Iliad that endures to this day. How did Pope go about getting this project off the ground? Turns out he kind of Kickstarted it. A year later, Pope crafted his pitch: ‘This Work shall be printed in six Volumes in Quarto, on the finest Paper, and on a letter new Cast on purpose; with Ornaments and initial Letters engraved on Copper,’ he wrote.

In exchange for a shout-out in the acknowledgements, an early edition of the book, and the delight of helping to bring a new creative work into the world, 750 subscribers pledged two gold guineas to support Pope’s effort before he put pen to paper. They were listed in an early edition of the book…

In 1783, Mozart took a similar path. He wanted to perform three recently composed piano concertos in a Viennese concert hall, and he published an invitation to prospective backers offering manuscripts to those who pledged:

‘These three concertos, which can be performed with full orchestra including wind instruments, or only a quattro, that is with 2 violins, 1 viola and violoncello, will be available at the beginning of April to those who have subscribed for them (beautifully copied, and supervised by the composer himself).’

Alas, not all projects reach their funding goals, and Mozart fell short. A year later he tried again, and 176 backers pledged enough to bring his concertos to life. He thanked them in the concertos' manuscript.”

AND WHO OWNS WHAT?

I know this is a bit hard to read. If you go to http://sploid.gizmodo.com/fascinating-graphic-shows-who-owns-all-the-major-brands-1599537576/+caseychan, you can see the chart enlarged.

AND ONE MORE

This is a compilation of scenes from National Geographic videos. It doesn’t get much better. https://www.youtube.com/embed/Hodomt6bBOw

DAVID vs GOLIATH

And who’s surprised? In the battle to hold anyone providing financial advice to consumers to a fiduciary standard, I fear $$$ will win. According to TD Ameritrade Institutional’s analysis of lobbying spending so far in the 2014 campaigns, [industry lobbyist] SIFMA has spent $3.96 million, followed by the National Association of Insurance and Financial Advisors, which has spent $1.4 million. On the fiduciary side, barely registering on that scale are the Investment Advisor Association, which has spent $80,000, and the Financial Planning Association, at $40,000. Caveat Emptor!

FOR EXAMPLE

The Republican-controlled House passed a budget that bars the Securities and Exchange Commission from imposing a fiduciary standard on broker-dealers during the federal fiscal year beginning October 1. The language, which also bans spending to write and adopt broker-dealer fiduciary rules, was approved in an amendment by voice vote. I’m still scratching my head about this. FOR SHAME!!

DOUBLE TAKE

Speaking of National Geographic naturally makes me think of photography and that makes me think of my client Maggie Silverstein. Maggie, a well-known South Florida portrait photographer just published her book Double Take: Portraits Over Time. With 50 photo sets the images chronicle the essence of childhood through the years and mark the delicate transition into adulthood. Dave Barry, Pulitzer Prize winning author who wrote the Afterword described Double Take best in his inimitable style. “If you’re a parent, you know where I’m going with this. Five minutes have passed, maybe six, and now Rob is a married man in his thirties.”

You can preorder Double Take from Books and Books

http://www.booksandbooks.com/search/apachesolr_search/maggie%20silverstein

DID YOU KNOW

  • At least according to Reddit via BuzzFeedNEWS:
  • The computer used to guide the Apollo 11 moon mission was less powerful than a modern calculator.
  • We built an atomic bomb twenty years before we had color television.
  • Lead rhymes with read. Lead also rhymes with read.
  • The blue whale’s heart is the size of a Volkswagen Beetle.
  • We figured out how to put a man on the moon before we figured out putting wheels on luggage.

CAVEAT INVESTOR

A tongue in cheek video about a client interviewing a potential advisor at a large brokerage firm. Created by my friend Bob Veres.

https://www.youtube.com/watch?v=0UZkv8HWsnc

NICE STORY

I think you’ll enjoy this, especially if you’re a frequent flyer like me. “Getting stranded on the runway when your flight gets hit with last-minute delays is enough to fray the temper of even the most

sanguine flier. But passengers on one severely delayed flight this week found themselves having an altogether more uplifting experience, when the pilot ordered pizza for the entire plane.”

GOOD STUFF

If you do any international traveling, one of the issues you’ll face is “tipping.” Like, who knows? Well, here’s a great link that spells out the politically correct amount in most countries around the world.

http://matadornetwork.com/abroad/ultimate-global-tipping-cheat-sheet-infographic/

SOAP BOX

In keeping with Caveat Investor and to continue my regular soap box rants on “suitability vs. fiduciary,” I thought I’d share an excerpt from Scott Simon’s most excellent Morningstar Advisor column. It’s kind of long, but well worth reading (and heeding). Scott is a member of our ad hoc Committee for the Fiduciary Standard and the trip he references is the one I wrote about in my last NewsLetter.

You can find Scott’s complete article at http://www.morningstar.com/advisor/t/93869173/the-conundrum-of-mary-jo-white.htm.

Last week, I set out from California on a journey to the center of the (political) earth in Washington, D.C., to join up with a small band--we happy few--of colleagues to meet with Mary Jo White, Chair of the SEC….

Fitting a Square Peg into a Round Hole

The fundamental, underlying problem faced by Chair White, of course, is reconciling the fiduciary standard of conduct that requires RIAs to put the "best interests" of their investor clients first with the fiduciary duty owed by stockbrokers as agents to the interests of their B/D principals. I've written about this conundrum before, but it wouldn't hurt to review the issues at hand here once again. In a nutshell, stockbrokers have a fiduciary duty to do what's in the best interests of their employer, but they don't have a fiduciary duty to do what's in the best interests of their investor clients. That's an inherent conflict of interest that no serious-minded person well-versed in these issues can "harmonize" in any way.

It's impossible to serve two masters at the same time, which is why it's impossible for a stockbroker to give investor clients objective advice based on a fiduciary standard. Because stockbrokers don't have to follow a fiduciary duty, the only way they can provide investment advice is if it's mere happenstance and not to be relied on in making serious decisions.

The problem begins when a B/D entity advising its investor clients from a strategic perspective is also the manufacturer of the products being offered as the solution. In order to be a good employee of the B/D, a stockbroker must do the best job that it can to sell products manufactured by the B/D. When a stockbroker sells a product, the advice that it provides to an investor client must be incidental in nature as a matter of law. This, in effect, means that the investor cannot depend on the stockbroker's advice when it tells the investor that the product is suitable for it.

Legally, then, a client making investment decisions is to ignore the stockbroker's advice and not rely on it because often it's inherently biased against the best interests of the client. That's because the B/D is the manufacturer of the products. If a stockbroker seeking to sell a product isn't able to do so, it might miss out on its quarterly bonus check or a trip to Hawaii with the spouse and kids, or even lose his job.

The regulations are straightforward. A B/D is in the business of manufacturing products and selling them to anyone who wants to buy them. There's nothing wrong with that. In fact, it's the same as if a B/D were a car dealer employing salespeople attempting to sell, say, a Ford to anyone who steps on the lot. But there's a big difference: the car buyer already knows what the dealer wants to do--sell him a Ford--even before setting foot on the lot.

But few investors have any awareness of the motivations of Wall Street. Indeed, Wall Street has done an excellent job blurring the distinction between what stockbrokers really are—Ford salespersons with a single-minded motivation to sell the products manufactured by their Ford-dealer employer—and the fairy tale of what's portrayed: a friendly client-centric experience with the best interests of their clients at heart. The investing public simply doesn't understand the difference between the advertising they see and the contracts they sign. Reading the provisions found in some of these contracts is akin to a seminar on how to pluck a goose without the goose knowing that it's been plucked.

Although Wall Street's business model, as noted, is the same as that of the Ford dealer--to sell products to anyone who comes along--there is one difference: Wall Street won't even match the transparent but honest motivations of a Ford dealer. Truth in advertising and Wall Street just don't seem to go well together in the same sentence.

If Wall Street were really interested in having a total commitment to the long-term interests of its clients, it would embrace a fiduciary standard. But it does just the opposite: It lobbies in Washington, spends big bucks on politicians, and does everything it can as an industry to avoid what a fiduciary standard requires. In 2007, former SEC chair Christopher Cox described the Wall Street business model as a "witch's brew of hidden fees, conflicts of interest" which is "at odds with investors' best interests." (Note in this regard that the Department of Labor's proposed rule is titled, "Conflict of Interest Rule-Investment Advice.") As I've said before, it's just as easy--actually, easier--to follow a fiduciary standard, to do what's in the best interests of investors within a truly client-centric business model.

FOR EXAMPLE

The Republican-controlled House passed a budget that bars the Securities and Exchange Commission from imposing a fiduciary standard on broker-dealers during the federal fiscal year beginning October 1. The language, which also bans spending to write and adopt broker-dealer fiduciary rules, was approved in an amendment by voice vote. I’m still scratching my head about this. FOR SHAME!!

WARNING

This is a repeat from a few years ago but with all of the news about hackers I thought it was worth repeating.

Warning from the NY Times via Readers Digest. When you decide on a new password, don’t use any of the five most common: 123456, 12345, 123456789, password, iloveyou. Guess I have a lot of passwords to replace.

FEELIN’ OLD!

“I was feeling pretty creaky after hearing the TV reporter say ‘To connect to me, go to my Facebook page, follow me on Twitter, or try me the old-fashioned way: email.’”

LOOKING FOR A JOB?

LUCK vs SKILL

In 1934, Professors Graham and Dodd, the fathers of fundamental investing, published their seminal book, Security Analysis that, according to Wikipedia, “…chided Wall Street for its myopic focus on a company's reported earnings per share, and were particularly harsh on the favored ‘earnings trends.’ They encouraged investors to take an entirely different approach by gauging the rough value of the operating business that lay behind the security.” Basically, Graham and Dodd reminded the reader that buying stock is an investment in a business and the price of the stock should be related to the value of the business.

Well, it seems some investors are still chasing stories, not fundamentals. The “hot” opportunity of the Alibaba IPO is a case in point. A WSJ article quoted a number of investors on their plans regarding the IPO. One, a salon owner said, “”I want to buy Alibaba on Friday, whatever the price [my emphasis]…This is an amazing opportunity. It will help pay for my kids’ college.” I hope for his kids’ sake he’s right but, if so, it will be due to blind luck, not thoughtful investing. What might go wrong?

As a valuation expert and Dartmouth business school professor noted, “I’m not even sure what my cash flow rights are. That’s troublesome. Taken by itself, this wouldn’t ruin it for me. But the second issue is a history of disclosure disputes between Chinese [companies listed in the U.S.] and the SEC. And finally, the company’s based out of a country whose corporate-governance culture is still evolving, to put it gently. These are things I have no idea how to model. It goes back to the distinction between uncertainty and risk. I know how to price risk. But what do I do with uncertainty?”

HOW LONG DOES IT TAKE TO EARN $1 MILLION?

It depends – turns out it makes a huge difference where you live (from Martina).

How long would it take for an average person to earn that special sum? To find out, The Economist looked at how much the main breadwinner in an average household makes each year (before tax). On this measure, America creates the swiftest millionaires. South of the border, Mexicans can expect to toil for three centuries to earn the same.

 

 THE BEST OF THE BEST

I frequently write about the difference in the legal responsibilities of an investment advisor and a broker. Unfortunately, it’s difficult to convey accurately the significance of that difference, but I came across a Wall Street Journal article that provides a bit of an idea of the risk of conflicts of interest. Here’s the link to “J.P. Morgan Faces More Questions on Conflicts of Interest. SEC Looks at Whether Clients Were Steered to Banks' Own Funds; Inquiry Echoes Move by Bank Regulator.” http://online.wsj.com/articles/j-p-morgan-faces-more-questions-on-conflicts-of-interest-1407514915. Here are some excerpts from the article:

“Financial advisers can operate under different rules depending on whether they register as an investment adviser with the SEC. If they do, they must adhere to a so-called fiduciary standard requiring them to recommend only those investment products that are in the best interests of their clients. Others generally adhere to a different standard that allows them to recommend products that are merely suitable for the individual. Generally, investment specialists in J.P. Morgan's private bank who have discretion over client assets are bound by a fiduciary standard, whereas private bankers, who are relationship managers, are not.”

“The Securities and Exchange Commission is investigating whether J.P. Morgan Chase & Co. inappropriately steered private-banking clients to its own investment products and away from those offered by outside firms, according to people close to the probe.”

The article also notes that “J.P. Morgan in recent months has beefed up its disclosures to clients. In a May disclosure to clients, J.P. Morgan said it prefers its own funds, ‘unless we think third-party managers offer substantially differentiated portfolio construction benefits,’ according to a document reviewed by The Wall Street Journal. ‘Consequently, we expect the proportion of JPMC managed strategies will be high (in fact, up to 100 percent)’ in strategies such as cash and fixed income.”

That last observation reminded me of a comment I heard a few years ago at a meeting I attended in New York with the heads of the Wealth Management divisions of many of the major brokerage firms and trust companies. The discussion was around firms moving to “open architecture,” i.e., not restricting investment offerings to the firm’s proprietary product but offering the best available investments from different companies. After many participants bragged about how they were embracing the idea, one brave and honest soul said, “Wait, we all know what ‘open architecture’ really means. We scoured the world and discovered we offer the best of everything.” I guess Morgan agrees.

FROM AN OLD FRIEND

 

I met Dick Davis a LONG time ago when he was writing an investment column for the Miami Herald and publishing the Dick Davis Digest, an extraordinary newsletter that reflected Dick’s review of hundreds of financial newsletters and institutional research publications. Dick has retired and now writes his own unique blog. Below is the introduction to his first issue (he’s now on #3). I enjoy his eclectic musings, so I thought I’d introduce you Dick’s blog. You can find him at http://www.dickdavisblog.com/.

Dick Davis, here…….. CAN I COME IN?…………………………………..

Thanks. It’ll just be a short visit. I’m not selling anything; I have no agenda. Just wanted to say “hello” and leave you with something that may be helpful. You are receiving this because you are family, friend or acquaintance, perhaps from long ago. I’ll be 86. How does an old man blessed with the precious gift of life use that gift wisely? For me, one way is to share with you what I think is worth sharing, mostly excerpts from the articles, blogs, essays and quotations that I’ve accumulated in my “Wisdom” file over the years. My hope is that what I find wise, you will too. If some of these offerings can help you make wise choices in your pursuit of happiness, I’ll be a happy camper.

The subject is not finance; it is the business of living. As a broadcaster and writer, part of my job was sharing the wisdom of others. So this is just an extension of what I have always done–along with some personal observations.

And here’s a recent entry:

Airline Humor

One of the biggest irritants of modern day flying is having to wait forever on the ground, sealed inside the motionless plane, waiting for take-off. Pulitzer-prize humorist, Dave Barry, in an online column for the Miami Herald, puts it this way: “A century ago, it took a week to get from New York to California; today you can board a plane at La Guardia and six hours later–think about that: six hours later!–you will, as if by magic, still be sitting on the plane at La Guardia because “La Guardia” is Italian for “You will never actually take off.” Perhaps the funniest satire on airline travel is a classic skit from the “Carol Burnett Show” on “no-frills” airlines. Carol plays the stewardess, while comedian Harvey Korman plays the first class passenger and Tim Conway, the coach passenger. This skit appeared some 40 years ago (9/20/1975). Click here and decide if it has stood the test of time. WHERE DO THEY FIND THE TIME? I find it hard to believe, but according to the Journal of Financial Planning, high net worth individuals (they define that as individuals with earnings between $100,000 and a million) spend over 48 hours/week on social media.

BAD NEWS FOR ACTIVE MANAGERS

From S&P Dow Jones Indices

  • Very few funds can consistently stay at the top. Out of the 687 funds that were in the top quartile as of March 2012, only 3.8% had managed to stay there at the end of March 2014. Further, 1.9% of the large-cap funds, 3.2% of the mid-cap funds and 4.11% of the small-cap funds remain in the top quartile.
  • For the three years ending in March 2014, 14.1% of large-cap funds, 16.3% of mid-cap funds and 25% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. Random expectations would suggest a rate of 25%.
  • An inverse relationship exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that no large-cap or mid-cap funds
  • managed to remain in the top quartile at the end of the five-year measurement period. These figures paint a poor picture of the lack of long-term persistence in mutual fund returns.
  • Similarly, only 3.1% of large-cap funds, 3.6% of mid-cap funds and 5.5% of small-cap funds maintained top-half performance over five consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.3%.
  • The transition matrices track the performance of top and bottom quintile performers over subsequent time periods. The data shows the likelihood for the best-performing funds to become the worst-performing funds and vice versa. Of 426 funds that were in the bottom quartile, 28.64% moved to the top quartile over the five-year horizon, while 28.57% of those top-quartile funds moved into the bottom quartile during the same period.

The moral? Beware of chasing attractive returns from active managers. It’s likely to be yesterday’s story.

BAD (GOOD) NEWS FOR GOLFERS

According to Bloomberg Business Week, golf is suffering. From its peak in 2002, the number of golfers in the U.S. dropped 24% by 2013. In fact, the number of golfers today is lower than it was in 1990. Building new courses is not for the faint hearted at an average cost of $4.25 million. In 2013, only 14 new courses were built in the U.S. while almost 160 shut down. The good news, at least for those still playing, the cost of equipment has dropped significantly due to shriveling demand. For example, some drivers priced at $299 less than two years ago are now selling for $99.

GO FIGURE

Headline on Yahoo Finance for August 1st

S&P500 INDEX POSTS WORST FALL SINCE APRIL; INDEXES DOWN FOR JULY

How many investors do you figure bailed out of the market with this news?

Here’s the WSJ Headline for August 26th

S&P 500 PUSHES TO ANOTHER RECORD

Short-term market timing can be hazardous to your wealth!

GLOBILIZATION CONTINUED

According to Bloomberg Business Week, in Silicon Valley:

  • One-third of the startups are founded by Indian Americans.
  • In 2010, Asian Americans became the majority of the tech workforce in the Valley making up 50.1%.
  • In 2011, 64% of the Valley’s foreign born talent had a B.A. or higher in science and engineering.
  • In 2012, 51% of the Valley’s population spoke a language other than English exclusively at home.
  • The largest annual influx of residents was from Mexico (followed in order by Texas, Arizona, Washington and Illinois).

ENGINEERING MADE SIMPLE

 

As I have two masters degrees in engineering, I can vouch for this process:

         


 

 GREAT BIRTHDAY!

Deena and I attended Jean Sinclair and Bob Veres’ Insider’s and Leadership Forums on my birthday where 400 attendees (the best-of-the-best-of-the-best of the country’s financial planners) sang Happy Birthday and we received the following very cool awards.

Harold Evensky, chairman of Evensky & Katz/Foldes financial in Coral Gables, FL and Professor of Practice at Texas Tech University in Lubbock, TX, received the Insider's Forum Leadership Award. The award recognizes more than 40 years of outstanding service to the profession in a leadership role.

At the annual Leadership Forum dinner event, Deena Katz, Associate Professor in the Department of Financial Planning at Texas Tech University and co-chair of Evensky & Katz/Foldes financial in Coral Gables, FL, was presented with the Leadership Forum Iconoclast Award, recognizing in her career an ability and willingness to consistently think outside the box and move the profession forward in creative new directions.

FINALLY!

DO YOU TWEET? Then please follow us at https://twitter.com/EvenskyKatz

Hope everyone is having a great Fall, and hope you’ve enjoyed this issue of my NewsLetter. See you again in a few months.

Cordially Yours,


Harold Evensky, CFP®, AIF®

Chairman, Evensky & Katz / Foldes Financial Wealth Management

© Evensky & Katz

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Small-cap stocks sold off in the third quarter, but now is not the time to abandon the market cap segment. Jonathan Coleman, Co-Portfolio Manager of the Janus Venture Fund, gives his perspective on current small-cap valuations, and why an allocation to small caps is beneficial in an environment where the U.S. economy is on stronger footing than the rest of the world.

After recent sell-off, small caps deserve a closer look

It’s officially gut-check time for small-cap investors again. Risk tolerances waned in the third quarter, and similar to previous periods when risk tolerances faded, small-cap stocks bore the brunt of the sell-off.

At a 10,000 foot view, the sell-off may have seemed warranted. The global economy is slowing, and that’s putting it mildly. The Fed is wrapping up quantitative easing. And heading into the third quarter, valuations for small-cap equities looked stretched, especially compared to their large-cap brethren. We suggest you don’t let a few clouds at the 10,000 foot level obfuscate the view of what’s currently going on in small caps, however.

Many small-cap investors have a history of heading for the exits when a few clouds have gathered, and subsequently missed out on much of the asset class’ potential. This is why the gap between the Russell 2000 Growth Index’s returns and the returns captured by the average small-cap investor is much greater than the disparity between the Russell 1000 Growth Index’s returns and the returns captured by the average large-cap investor. The current macroeconomic and market environment presents another moment when small-cap investors should take a closer look and understand what drove recent volatility, and what we believe could lie ahead for the asset class.

A closer look at valuations

Stocks enjoyed sharp gains in 2013, and nowhere was the ride more enjoyable than for U.S. small-caps. However, much of that rise was fueled by multiple expansion, rather than earnings growth, which left most small-cap stocks trading at the higher end of historical valuations. Perhaps more alarming, a few pockets of the small-cap market were trading at valuations not seen since the last tech bubble.

A number of stocks tied to hyper-growth industries such as biotech, consumer Internet and cloud computing are yet to turn a profit, and instead trade at high multiples of revenue. We’ve said for more than a year now that these pockets of the market are a dangerous place to play. While a few of these companies will be game changers in the respective environments in which they compete, a large portion of these stocks have been bid up by momentum investors who are willing to pay an exceedingly high price for potential, unproven growth. And while momentum stocks have sold off some during the spring and summer, they would still need to fall much further to appeal to an investor base using traditional valuation metrics such as a discounted cash flow analysis.

This narrow set of risky stocks has grabbed headlines, and we believe it caused investors to question small-cap valuations more broadly. A broad sell-off ensued in the third quarter, and has left a wide swath of small-cap companies that were not part of the momentum hype with attractive valuations. Consider that as of September 30, all profitable firms in the Russell 2000 Index trade at only a 4.6% premium to their long-term averages since 2001. Similarly, if one strips out the biotech/pharma and Internet software and services subsectors, where many of the momentum stocks lie, the rest of the index has a P/E ratio that is actually 1.1% below its average level since 2001.*

The premium valuation in which small caps trade relative to large caps has also come back to normalized levels. Reasonable valuations suggest small caps could once again start outperforming their large-cap peers, if you believe they face similar growth prospects. In fact, we believe small-cap growth rates could be higher.

If global economic growth looks weak, stay close to home

Fears about the global economy caused risk tolerances to snap back, and small caps to sell off broadly, but somewhat ironically, small-cap stocks will likely be less impacted by the weak global economy than larger companies. On average, U.S. small-cap companies derive only 18% of their revenue internationally, compared to 40% for U.S. large-cap companies. For small-cap companies, the operating environment has remained the same or has slightly improved during the year.

Where to go from here

We don’t expect the high level of returns that small-cap growth stocks achieved in 2013. The era of multiple expansion is largely over, and earnings growth will be needed to drive returns from here. But with small-cap stocks currently standing at a much more reasonable starting point, and with more of their revenues generated from the sole source of economic stability around the globe (the U.S. economy), we think the market cap segment will be an important source of returns in what is likely to be a lower return environment. In our view, turning your back on the asset class now would mean repeating the mistake that has historically plagued many small-cap investors.

*Furey Research Partners

Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus at 877.33JANUS (52687) or download the file from janus.com/info. Read it carefully before you invest or send money.

Mutual fund investing involves market risk. Investing involves risk, including the possible loss of principal and fluctuation of value.

Past performance is no guarantee of future results.

The views expressed are those of the portfolio manager(s) and do not necessarily reflect the views of others in Janus’ organization. They are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent.

Janus makes no representation as to whether any illustration/example mentioned in this document is now or was ever held in any Janus portfolio. Illustrations are only for the limited purpose of analyzing general market or economic conditions and demonstrating the Janus research process. References to specific securities should not be construed as recommendations to buy or sell a security, or as an indication of holdings.

Funds that emphasize investments in smaller companies may experience greater price volatility.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

Investment products offered are: NOT FDIC-INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

Janus Distributors LLC

FOR MORE INFORMATION CONTACT JANUS
151 Detroit Street, Denver, CO 80206 I 800.668.0434 I www.janus.com 

C-1014-76039 10-30-15

© Janus Capital Group

[description] => Small-cap stocks sold off in the third quarter, but now is not the time to abandon the market cap segment. In this article, Jonathan Coleman, Co-Portfolio Manager of the Janus Venture Fund, gives his perspective on current small-cap valuations, and why an allocation to small caps is beneficial in an environment where the U.S. economy is on stronger footing than the rest of the world. [author] => Jonathan Coleman [legacyinterface_firm_id] => 242 [published_on] => 2014-10-30 [digest_date] => 2014-10-30 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-30 15:48:39 [created_by] => 948 [modified_on] => 2014-10-30 15:49:00 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1815 [hits] => 0 ) [18] => stdClass Object ( [legacyinterface_commentary_id] => 1750 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14992 [apv_conversation_id] => [content_type] => market-commentary [title] => Europe Must Act Now [slug] => guggenheim_103014 [fulltext] =>

Things in Europe are bad and policymakers appear already to have fallen behind the curve. The reality is the ECB will need to purchase at least another €1.5 trillion in assets, and even that may not be enough to avert a severe slowdown.

This article first appeared in the Financial Times.

In recent conversations—whether with the U.S. Federal Reserve, the European Central Bank, the U.S. Treasury, or the International Monetary Fund—one theme is playing large and loud: things in Europe are bad and policymakers appear already to have fallen behind the curve. Quantitative easing in Europe is coming, but too slowly to avert a severe slowdown and perhaps even a hard landing.

The depreciation of the euro, while welcome, will not be enough to lift the economy out of the doldrums and more must be done both in terms of monetary policy and fiscal reforms. In plain language, France must start taking significant steps to reduce social benefits and improve its fiscal balance (a bitter pill to swallow). Germany must reduce its fiscal surplus, which Chancellor Angela Merkel appears ready to do through increased military and infrastructure spending. Italy must move to reduce its fiscal structural imbalance. Others on the periphery must do their part too by staying the course on austerity and continuing with further structural reform. The European Investment Bank stands ready to support infrastructure investment, but at a scale that currently appears too small to make much of a difference.

In the meantime, the ECB will work as quickly as it can to expand its balance sheet. The problem is simply that there may not be enough assets to buy. Mario Draghi, ECB president, has made it clear that the ECB must increase its balance sheet by at least €1 trillion—a tough mandate as the balance sheet will continue to shrink in the coming year as the earlier longer-term refinancing operation assets roll off. The reality is the ECB will need to purchase at least another €1.5 trillion in assets, and even that may not be enough.


The much heralded asset-backed securities purchase program will only yield about €250 billion to €450 billion in assets over the next two years. More LTRO (or the newer targeted LTRO) will prove a challenge as sovereign bond yields in Europe are so low that a large balance sheet expansion through this means seems impractical. Perhaps there is another €500 billion to €750 billion to do over the next year or two. Outright purchases of sovereign debt would prove politically difficult, as many would interpret such purchases as violating the ECB’s mandate, and the matter would probably end up in the European courts.

Current Tools Will Not Get Job Done

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policymakers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly.

How is this affecting the markets? The recent rally in U.S. fixed income is materially different than when rates last approached 2 percent. Previously, the Federal Reserve was actively managing the yield curve to reduce long-term borrowing costs in order to stimulate the economy. The current rally is caused by a massive deflationary wave unleashed upon the United States by beggar-thy-neighbor policies in Europe and Asia.


Rate Hike in 2016 or Later?

The precipitous decline in energy and commodity prices, and competitive pressures on prices for traded goods, will probably push inflation, as measured by the Fed’s favored personal consumption expenditures index, back down toward 1 percent. This raises the likelihood that any increase in the policy rate by the Fed will be pushed into 2016 or later.

With inflationary expectations falling and the relative attractiveness of U.S. Treasury yields over German bunds and Japanese government bonds, U.S. long-term rates are likely to continue to be well supported with limited room to rise, a dynamic that could push them lower from here.

In the real economy, the decline in energy prices should offset the effect of reduced exports, which is supportive of U.S. growth in the near term. This should help equities recover from the recent storm of volatility as we move deeper into the fourth quarter, which is a time of seasonal strength for the stock market. However, this may prove to be the rally to sell. Results from currency translations for large, multinational companies will likely weigh heavily on S&P 500 earnings in the first half of 2015.

It is too early to be making decisions for next year, but the events overseas provide ominous portents of things to come. If we do get a sign of a bear market in U.S. equities, it could be that the events in Europe presage what lies ahead for the United States. Is it too late to change these shadows of dark foreboding? It is hard to tell but time is not on our side.
 

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.

[description] => Things in Europe are bad and policymakers appear already to have fallen behind the curve. The reality is the ECB will need to purchase at least another €1.5 trillion in assets, and even that may not be enough to avert a severe slowdown. [author] => Scott Minerd [legacyinterface_firm_id] => 186 [published_on] => 2014-10-30 [digest_date] => 2014-10-30 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-10-30 15:52:09 [created_by] => 948 [modified_on] => 2014-10-31 14:45:38 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1816 [hits] => 0 ) [19] => stdClass Object ( [legacyinterface_commentary_id] => 1751 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 14988 [apv_conversation_id] => [content_type] => market-commentary [title] => How Exchange-Traded Futures Can Improve the Efficiency of Gold & Currency Linked ETFs [slug] => advisorshares_103014 [fulltext] =>

Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE), share their thoughts about the gold space.

With a number of gold and currency linked ETFs now using exchange traded futures to gain their gold and currency exposure versus the alternative of holding physical gold/hard foreign currency, we discuss below some of the key features of these futures markets which, in our view, mitigate most if not all of the concerns investor may have about these futures based ETPs.

  • Physical delivery / Exchange for Physical help to limit basis risk
    Most gold ETFs that use futures to gain gold exposure will use the COMEX 100 ounce gold futures contract which is the most liquid gold futures contract in the world. The Commodity Exchange (COMEX) is a commodity exchange owned by the Chicago Mercantile Exchange (CME) - as part of its gold exchange the COMEX offers warehousing for its members. This facilitates a key feature of the COMEX gold future which is that it can be physically settled – in other words traders can choose to settle open contract positions they hold at maturity with delivery of physical gold. The warehousing facilities that the exchange offers provides a convenient method for traders to complete physical delivery with the gold held in the exchange’s vaults being readily transferred between members accounts at low  cost. In practice the way this happens is that a member that chooses to store gold at the COMEX is able to classify some or all of its gold as “registered” meaning that these bars are available for delivery to settle open futures positions. In effect “registered” gold provides backing for the futures contracts traded on the exchange and while the ratio of registered gold to futures contracts outstanding fluctuates on a daily basis, this physical delivery mechanism that the exchange provides is a key feature for the efficient functioning of the gold futures market. Similarly the foreign exchange (FX) futures contracts that trade on the CME are all settle for physical delivery. Ultimately from the point of view of an investor, the major implication of the physical delivery mechanism is that the price of gold or FX rates on futures markets must by definition closely track the price of gold or FX rates on cash markets otherwise there would be an opportunity to trade one market against the other and earn risk free profits.

    Another feature of futures markets that mitigates the potential for so-called “basis risk” (the extent to which prices in the futures market are different from prices in the cash market is the “exchange for physical” (EFP) mechanism. In an EFP transaction, one market participant holds a long asset position via a futures contract while another market participant holds the exact same long asset position but via the physical market. If the participant that holds the futures contract wishes to switch into a physical holding and the other wishes to switch their physical holding into a futures position, it is possible for the two parties to agree to exchange their respective holdings in a private off-exchange agreement but then settle the transaction on the exchange. There are a number of commercial reasons for why the two parties might want to do this but fundamentally, from the point of view of an investor in a futures-backed ETF, the EFP mechanism provides another control mechanism limiting the potential for basis risk between the two markets.
  • Bridging liquidity between the cash and futures markets
    Another significant benefit of the EFP mechanism is that it effectively provides a bridge between the liquidity available in the futures market and that available in the cash market. Traders in the cash market are able to provide liquidity to the futures markets, hedge their risk in the cash market but then swap the hedge from the cash market to the futures market using the EFP mechanism. In effect, this means that for a market participant looking to transact on the futures market, the true extent of available liquidity is not just the liquidity available in the futures markets but a greater amount reflecting the liquidity available on both markets. And given that the liquidity in cash markets can at times be multiples of what is readily “visible” on futures market, this can significantly extend the depth of futures markets allowing market participants greater capacity to transact larger transactions.

Source: Chicago Mercantile Exchange. Past performance is not indicative of future results.

The chart above shows the average daily volume trades (in USD billions) of gold, euro, yen and pound contracts on the CME, with the average daily volume for the 2 year US note, a highly liquid contract also on the CME, shown for reference. In combination with cash markets, this chart reflects the huge capacity available for executing both gold and FX transactions on futures markets.

  • Block trades also enhance liquidity
    A block trade is mechanism available to futures market participants that permit them to negotiate an off-exchange transaction but then settle the transaction on the exchange in the traditional manner. A block trade must generally be reported to the exchange within 5-15 minutes depending on the specific contract transacted. The benefit of the block trade is that it gives participants the ability to execute a large transaction at a “fair and reasonable single price” that is negotiated privately between the two participants and which would be difficult to achieve if the transaction was negotiated openly on the exchange. Block trades must meet minimum size thresholds and are open only to “eligible contract participants” pre-approved by the exchange.
  • “Trade at Settlement” can help to reduce tracking error
    Another feature of the COMEX gold future that facilitates efficient execution is the Trade At Settlement (TAS) facility. TAS matches bids and offers from market participants who wish to execute their futures trades at the exchange’s Daily Settlement Price. By using TAS, a futures-backed gold ETF can be guaranteed execution at or close to the Daily Settlement Price thereby avoiding the need to execute the transaction in the open market. Tracking error is also therefore minimized as the Daily Settlement Price is the price used to calculate the ETF’s NAV at the close.
  • Mitigating credit risk
    The final feature of futures markets which is of critical importance to investors in futures-backed ETFs is that they place the credit risk (the risk that either participant in the transaction does not meet their obligations) that the participant faces against the exchange rather than against the other participant in the transaction.  So while both participants may negotiate and agree a transaction directly with each other, in the process of settling the transaction, both participants’ counterpart in the transaction is transformed to become the exchange (rather than the other participant). And to the extent that an exchange is a regulated entity mandated to demand “adequate” amounts of collateral from participants to protect against market risk, this significantly mitigates the risk that a futures-backed ETF might bear from transacting off-exchange with any individual market participant.

© AdvisorShares

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=> 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 [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] => 680 ) [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] => 680 [limitstart] => 680 [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_HOST] => wordpress.hubtech.tv [HTTP_CONNECTION] => Keep-Alive [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots) [HTTP_FROM] => support@search.yandex.ru [HTTP_ACCEPT_ENCODING] => gzip,deflate [HTTP_ACCEPT] => */* [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => wordpress.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 84.201.133.89 [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] => 51532 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => start=680 [REQUEST_URI] => /?start=680 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1519183683.822 [REQUEST_TIME] => 1519183683 ) [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] => 1519183684 [session.timer.last] => 1519183684 [session.timer.now] => 1519183684 [session.client.browser] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 680 [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] => 680 [limitstart] => 680 [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_HOST] => wordpress.hubtech.tv [HTTP_CONNECTION] => Keep-Alive [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots) [HTTP_FROM] => support@search.yandex.ru [HTTP_ACCEPT_ENCODING] => gzip,deflate [HTTP_ACCEPT] => */* [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => wordpress.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 84.201.133.89 [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] => 51532 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => start=680 [REQUEST_URI] => /?start=680 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1519183683.822 [REQUEST_TIME] => 1519183683 ) [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] => 1519183684 [session.timer.last] => 1519183684 [session.timer.now] => 1519183684 [session.client.browser] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 680 [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] => 680 [limitstart] => 680 [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_HOST] => wordpress.hubtech.tv [HTTP_CONNECTION] => Keep-Alive [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; YandexBot/3.0; +http://yandex.com/bots) [HTTP_FROM] => support@search.yandex.ru [HTTP_ACCEPT_ENCODING] => gzip,deflate [HTTP_ACCEPT] => */* [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => wordpress.hubtech.tv [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 84.201.133.89 [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] => 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“We’re all one thing, Lieutenant. That’s what I’ve come to realize. Like cells in a body. ’Cept we can’t see the body. The way fish can’t see the ocean. And so we envy each other. Hurt each other. Hate each other. How silly is that? A heart cell hating a lung cell?” 

-"Cassie" in the novel The Three

I am a philosophical nomad disguised in Western clothing, a wondering drifter, masquerading in a suit near a California beach. Sand forms the foundation of my being and its porosity is at once my greatest strength and deepest wound. I have become after 70 years, a man who believes that no belief is sacred. I have ideals and moral standards, but I believe them specific to me. Had I inherited your body and ego, “I” could just as clearly have assumed “yours.” If so, I wonder, if values are relative, then what are mortals to make of them, and what would a judging God make of us? If a collective humanity is to be rooted in sandy loam, spreading its ideological seeds through howling winds only to root in mutant form at different places and different times, can we judge an individual life?

I despair that my only answer is “not easily.” The conclusion at its logical end makes us all innocent and equal. We are born innocent, falter, but no matter, we remain mostly innocent. My problem, however, is that if there are no absolute standards, it may minimize life’s value. Concrete, as opposed to porous sand, provides a firmer foundation for judgment, but sand I suspect is the soil into which we are insecurely grounded. All one thing, masquerading as ourselves.

The global economy and its financial markets are insecurely grounded as well. Decades and indeed centuries have taught us that both inflation and deflation are the enemies of stability and growth, but knowing which one is just around the corner can be difficult. Before the advent of central banks in the early 20th century, prices were just as likely to go up as down. A bountiful harvest or supply shock miracle could sink prices just as easily as the discovery of gold and silver in the New World could raise them. Even after the miraculous “discovery” of the modern central banks printing press, a miscue or fat fingered mistake by one of the “wise men” could lead to depression and accompany deflation. The world of the 1930s and the more recent lost decades of Japan give testament. Prices change – and while they usually go up these days, sometimes they do not. We are at such a moment of uncertainty.

That one or the other should be favored, is a fascinating debate. Currently, almost all central bankers have a targeted level of inflation that approaches 2%. Some even argue for higher levels now that deflationary demons approach in peripheral Euroland. They argue that the 2% level is sort of like a firebreak. Once inflation approaches zero, goes their theory, the deflationary firestorm is difficult to stop. With interest rates at zero and quantitative easing approaching potential political maximums, there is little water left to pour on the flames. Best then to keep inflation at a reasonable 2% so that the zero hour never comes. They have a point, but then how to explain to the average 30-year-old citizen that if so, his/her retirement dollar will only be worth half as much come 65, and if inflation averages 3%, it will only be worth a third. Actually, a 30-year-old citizen of the 1970s (yours truly), has experienced a 75% depreciation of his purchasing power. The cost of a firebreak can be expensive insurance.

And why, goes the argument, are lower prices so bad? Didn’t Wal-Mart get famous by featuring everyday low prices, and what’s so bad about 3-buck-a-gallon gas at the pump? More dollars in consumer pocketbooks suggests more spending, stronger growth rates and ultimately more jobs. Jim Grant, one of the most gifted financial historians of our day, has long argued that economies did just fine during bouts of deflation in the 18th and 19th centuries – in fact, in many cases, they did better. America in the 1880s was a period of good deflation with output rising by 2% to 3% from 1873 to 1893. Two percent targeted inflation, he would argue, is the “con” of central bankers who know nothing better than to create money during a financial crisis and then to keep creating it during the inevitable recovery. Grant has a point. If that is their job, then indeed they have been good at it.

But Grant must know, I suspect, that our modern finance based economy is not your 19th century Oldsmobile, if there had been one. “That indeed is the problem,” he might counter. In fact, Grant has even written a book supporting that thesis titled “The Trouble with Prosperity.” Prosperity has created inflation and excess, he would argue. My problem though (getting back to the introductory quote’s reference to a heart cell as opposed to the lung cell) is that much of our 21st century economy has been planted in the sandy loam of finance as opposed to the concrete foundation of investment and innovation. Stopping the printing press sounds like a great solution to the depreciation of our purchasing power but today’s printing is simply something that the global finance based economy cannot live without. Going home again, to paraphrase Thomas Wolfe, is something you just can’t do. Modern economies have grown used to inflationary sand and cannot grow in the concrete based economy that Grant eulogizes in his magnificently written histories.

Why not? Simple math, I suppose. Our 2014 U.S. Oldsmobile requires 4% nominal growth just to keep it running, and Euroland economies need at least 3%. Having created outstanding official and shadow banking credit of nearly $100 trillion with an average imbedded interest rate of 4% to 5%, the Fed presses must crank out new credit (nominal growth) of approximately the same 4% to 5% just to pay the interest rate tab. That of course wasn’t the case in Grant’s 19th century version – there was very little debt to service. But now at 500% to 600% of GDP (shadow debt included), it’s a Sisyphean struggle just to stay above water. Inflation, in other words – or in simple math – is required to pay for prior inflation. Deflation is no longer acceptable.

Such is the dilemma facing central bankers (and supposedly fiscal authorities) in 2014 and beyond: How to create inflation. They’ve made a damn fine attempt at it – have they not? Four trillion dollars in the U.S., two trillion U.S. dollar equivalents in Japan, and a trillion U.S. dollars coming from the ECB’s Draghi in the eurozone. Not working like it used to, the trillions seem to seep through the sandy loam of investment and innovation straight into the cement mixer of the marketplace. Prices go up, but not the right prices. Alibaba’s stock goes from $68 on opening day to $92 in the first minute, but wages simply sit there for years on end. One economy (the financial one) thrives while the other economy (the real one) withers.

Perhaps sooner rather than later, investors must recognize that modern day inflation, while a necessary condition for survival, is not a sufficient condition for increasing wealth at a rate necessary to satisfy future liabilities associated with education, health care, and a satisfactory retirement. The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side – from the dreaded government side – where deficits are anathema and balanced budgets are increasingly in vogue. Until then, Grant’s deflation remains a growing possibility – not the kind that creates prosperity but the kind that’s the trouble for prosperity.

-William H. Gross

© Janus Capital Group

[description] => I am a philosophical nomad disguised in Western clothing, a wondering drifter, masquerading in a suit near a California beach. Sand forms the foundation of my being and its porosity is at once my greatest strength and deepest wound. I have become after 70 years, a man who believes that no belief is sacred. I have ideals and moral standards, but I believe them specific to me. Had I inherited your body and ego, “I” could just as clearly have assumed "yours." If so, I wonder, if values are relative, then what are mortals to make of them, and what would a judging God make of us? [author] => William Gross [legacyinterface_firm_id] => 242 [published_on] => 2014-11-03 [digest_date] => 2014-11-03 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-03 17:59:10 [created_by] => 948 [modified_on] => 2014-11-03 17:59:41 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1841 [hits] => 0 ) [1] => stdClass Object ( [legacyinterface_commentary_id] => 1766 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15004 [apv_conversation_id] => 2636 [content_type] => market-commentary [title] => Weekly Market Summary [slug] => fatpitch_110214 [fulltext] =>

After dropping to a 6 month low in mid-October, SPX has since risen more than 10% in two weeks. The bounce has been at a torrid pace.

We had been expecting a more complex bottom to form at the low. Why? The market had risen 60% since it's last 10% correction in mid-2012.  A more typical basing at the low, to reset sentiment and breadth, seemed warranted before resuming the uptrend. This now appears to have been wrong.

Instead, SPX, DJIA and NDX all rose to new bull market highs this week. SPX has now completed its 9th "v-shaped bounce" since 2013. According to Dana Lyons, "v-shaped bounces" occurred once every 1.6 years from 1950 to 2012; since then, they have occurred every 2 months (post). To us, that reflects an unflinchingly bullish and aggressive investor psychology. The data supports that view.

This market is well-known for doing the unprecedented. According to SentimentTrader, SPX traded more than 0.5% above its 5-dma for 10 days in a row in the past two weeks. In the prior 75 years, this has only happened twice before, both at bear market lows (1982 and 2002). In other words, a rare rip higher, that has only happened after multi-year bear markets, just occurred after a mild, four week drop. It's incredible and completely unexpected.

Perhaps the most distinguishing characteristic of the current rally is this: SPX has made a series of 12 daily "higher lows" in a row. According to Paststat, there have been only 9 other instances in the past 20 years where SPX has made more than 10 "higher lows" in a row (post). This raises the question of what typically happens next.

We normally think of strength like this as initiating a broader move higher. But that was the case in just 2 of these 9 instances: December 2003 and July 2009. Both of these came within a few months of a new bull market, and in both cases, SPX continued higher. December 2003 is shown below (left side of chart).



In the majority of instances (7 of 9), SPX struggled in the weeks ahead. If SPX continued to move higher, it quickly gave those gains back. In the chart above, November 2004 is an example (right side of chart). Over the next 4 weeks, SPX made no progress. In fact, it made no net progress over the next half year.

The same pattern is true recently. SPX made more than 10 "higher lows" in January, March and May 2013, a year renowned for its remarkable strength. But each of these preceded weakness. SPX was lower 4, 5 and 7 weeks later, respectively.



1995 is the year most like 2013. In 1996, SPX finally closed below its 200-dma after a long streak above (circle), similar to what has just happened in 2014. Later in 1996, SPX made a streak of more than 10 "higher lows" in a row. The market was lower 6 weeks later. After a move higher, it was also lower 5 months later.



Trader's expectations now are that December and January seasonality will override any negative factors; this might eventually be true, but that expectation should probably be tempered a bit. In two of the examples shown above (1996 and 2005), SPX struggled in December or January.

So, while the current streak in SPX, and the other indices, is impressive, the precedent has been for consolidation and/or weakness to follow. It may last only a week or so but it has also lasted much longer.

It's not just the stair step higher over 12 days that suggests limited immediate upside, it is also the pace of gains.

Below is an update of a QQQ chart from last week. The past 12 days surpassed any initial thrust out of a low the markets have seen in the past 4 years. The green shaded bars are all the same proportional size and equal the past 12 days' gain. In the past, the market has given back a third or more of those gains in the weeks ahead. Many times, the market did not move substantially higher over the next month or longer (red line).

Similarly, using SPX, the rate of change in the past 12 days is 8.3%. The only time in the past 4 years that has been exceeded was after the 20% fall in 2011 that ended a 5 month correction. Even then, those gains were subsequently given back (right side of chart). Two other instances were nearly as strong; the first was within the first year of the bull market (left side of the chart) and the other after the 4 month correction in 2010 (middle of the chart). In the best case, the market chopped for several weeks.



Breadth was washed out at the mid-October low. It was one of several reasons to expect a rebound over the next month. But now breadth has moved to the opposite extreme. Even after a low more significant than the one recently, consolidation and/or weakness followed.

Below is a chart using McClellan oscillator, NYMO (bottom panel). On Tuesday and again on Friday, it closed above 80. This is rare. Below are the 8 prior times in the past 5 years. In 2010 and 2011, all of the gains from the low were given up in the weeks ahead. The last instance was in September 2013 and initiated a 5% fall over the next 3 weeks.



According Andrew Kassen, the last 12 NYMO readings over 80 resulted in a median fall of 5% in SPX. And when, as happened this week, there were two NYMO readings over 80 in the same week, SPX fell by a minimum of 4% (median of 7%, average of 11%).

Similarly, the rate of change in SPX Advance/Decline reached the highest level in its 5 year history this week. In 13 of the 14 prior times it has reached an extreme, it has given up subsequent gains in the weeks ahead. In the one exception, all gains were given up within 2 months. In 4 instances, SPX dropped hard. This confirms the findings from the other studies above.



Two other studies are of note.  The first has to do with sentiment.

We stated last week that the sentiment picture was mixed: some of indicators suggested a washout but others did not. Perhaps the most bullish was the equity-put call ratio, which had reached a relative extreme and then rolled over. In the past, this has been a buy signal for SPX (chart from McMillan).



But other sentiment measures do not concur. Equity fund flows (including ETFs) show a scant $3b outflow for October. For a 10% correction, this is minor. Flows were only negative two weeks in a row; for comparison, in mid-2012, flows were negative 6 weeks in a row and then continued to be negative off and on over the next several weeks. In the week just ended, $8.8b flowed into equities, the highest since August 20. This is hardly the profile of a bearish investment community.



Similarly, SentimentTrader, via a post by Brian Johnson (here), shows that retail investors were already back at a bullish extreme within a week of a 6 month low. The last time this happened was in June 2010 when SPX was on its way lower in the middle of a 4 month correction.  Overall when this has happened in the past, near term results for SPX were modest but returns past 1-month were negative.



The speed of the recent rebound suggests that investors were unfazed by the sell off and therefore unafraid of buying equities. This is not surprising given the number of sharp, v-shaped bounces the market has experienced since 2013. But if past is prologue, the study above suggests future returns may be limited until sentiment is more fully reset.

(As an aside, this week, NAAIM showed the largest two week gain in bullish investors in the survey's 8 year history and Investors Intelligence showed the largest one week gain in bulls in the past 12 years).

The second study has to do with the sharp bounce in small caps this week. According to Paststat, large gains like those seen this week are given back over the next week, with a median drawdown of more than 3% in the next two weeks (post).



In summary, a number of studies show a poor risk/reward profile in the near term for US equities. That does not mean that equities will fall. This market has shown a strong propensity to defy precedents. This might well be another such situation. The question for us is always risk vs reward. We believe the odds of a 5% rally appear much smaller than those for a 5% retracement. Therefore, initiating new longs here is uninteresting.

We are very cognizant of two strong positives. The first is trend. As we stated last week, a reliable buy signal triggered on October 22 with SPX at 1930, when both its MACD and 13-ema crossed positive. This set up has marked every low since December 2011.  This set up is still active and suggests higher highs are ahead. We don't like to fight the primary trend.



The other is seasonality. November through January are regarded as the strongest three month period of the year. We'll have more to say about this in a future post, but for now, investors should be aware that equities should remain buoyant through next Tuesday's election and often for a few days after. The "perfect" time for some equity weakness would be into mid-November (yellow shading; chart from Stock Almanac).



Non-farm payrolls (NFP) are reported on Friday. This has been a bullish day for 2 years, with SPX closing higher 19 of the last 23 times.

Our weekly summary table follows.

 

© The Fat Pitch

http://fat-pitch.blogspot.com

[description] => A number of studies show a poor risk/reward profile in the near term for US equities. That does not mean that equities will fall. This market has shown a strong propensity to defy precedents. This might well be another such situation. The question for us is always risk vs reward. We believe the odds of a 5% rally appear much smaller than those for a 5% retracement. Therefore, initiating new longs here is uninteresting. [author] => Urban Carmel [legacyinterface_firm_id] => 514 [published_on] => 2014-11-02 [digest_date] => 2014-11-02 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-02 02:39:09 [created_by] => 945 [modified_on] => 2014-11-02 02:40:03 [modified_by] => 945 [checked_out_time] => 2014-11-02 02:40:16 [checked_out] => 945 [asset_id] => 1832 [hits] => 0 ) [2] => stdClass Object ( [legacyinterface_commentary_id] => 1767 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15005 [apv_conversation_id] => 2637 [content_type] => market-commentary [title] => Weighing the Week Ahead: What the End of QE Means for the Individual Investor [slug] => newarc_110214 [fulltext] =>

We have a jam-packed week of earnings data, important economic news, and the mid-term elections. Surely one of these topics should be the market theme for the upcoming week.

But old habits die hard. I expect the mainstream media to parse everything through the prism of the Fed – at least for another week or so. Each new piece of data will raise the question:

What is the message for investors in the post-QE world?

Prior Theme Recap

In my last WTWA (two weeks ago) I predicted that we would be asking whether the market correction was over. Continuing my hot streak of guessing the upcoming issue, that was definitely the right question. I did not have a strong personal answer, but there were both winners and losers among those cited.

Had I been able to write last weekend, I am not sure that I would have been as successful with the theme of the week. I always plan for the week ahead, but I cannot always write about it. There were plenty of moving parts last week!

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

In general, the week of the employment report provides an easy guess about what will dominate the news. This week we also have the mid-term elections and plenty of earnings news. Normally one of those would be the theme, but I am going out on a limb. I expect all to get some play, but the media focus remains on the “old news” of the Fed and the decision to end QE. For several years the interpretation of news has been easy: What does “X” mean for Fed policy? It will take time to make a transition.

We have lived through an era where both good and bad economic news were modified by the concept that the Fed would react in the opposite direction. Have we finally reached a time when good news will be good?

I expect at least one more week of Fed fixation. Each event will raise the question: What does the end of QE mean for the individual investor?

There are several viewpoints:

  • The QE Diehards will not let go. They subscribe to a mindset where the Fed does not have a dual mandate, but a single-minded pursuit of supporting stock prices. This is true no matter which party controls the White House or the Congress, and regardless of the political affiliation of the Fed Chair. These sources expect a new round of QE if and when stock prices decline.
  • The end of QE will lead to an imminent stock market collapse. Chief proponents cited the comments from St. Louis Fed President Bullard as responsible for turning the decline in stock prices. They stuck to that story no matter what else happened.
  • QE policy had only a small effect on the economy.
  • QE has not changed that much. The most important impacts come not from ongoing purchases but from the continuing size of the balance sheet. Bill McBride displays a sophisticated understanding of this point, and he explains it well.

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 and it was mostly good.

  • Q3 GDP beat expectations with a gain of 3.5%. At first blush this is great news (Wonkblog has details). Several sources correctly noted that some of the surprise gains came from defense spending and exports. This is true. It is also true that government spending, especially at the state and local level, has been a continuing big drag. I really do understand the need for commentators with a political viewpoint to speak out, especially right before an election. I only wish that investors were better at tuning out these arguments. Please see “The Ugly” for more discussion. Todd Sullivan posts the savvy “Davidson” who explains how this all fits, including this chart:

Screen-Shot-2014-10-31-at-11.09.58-AM-580x420

avgchgreport

  • Consumer confidence hit the highest levels since 2007. Doug Short covers both the Conference Board and University of Michigan versions.

dshort mich sentiment

The Bad
There was not very much bad news. Readers are invited to nominate ideas in the comments, but remember that we are focusing on recent developments, not a list of continuing macro concerns.

The Ugly

Negative campaigning. With only a few days of attack ads left before the election, most people profess to hate the negative ads. Campaigns continue to use them because they are effective, especially with late-deciding fence sitters.

At another time the US congressional election might be an important market story. This time is different:

  • Voters are unhappy about the economy and show a preference for Republican economic policies (The Hill).
  • Anxiety reigns. William Galston expertly analyzes a host of non-economic issues (Politico).
  • Nate Silver’s respected 538 gives the GOP a 201 chance of taking control of the Senate as well as padding their advantage in the House.
  • The policy impact will be small, since we have already been dealing with gridlock. Those who want to see no new policies may celebrate. Those who think action is needed can wait for two more years.

The drumbeat of negativity affects your investing. Matt Phillips explains nicely how the overall economy is strong, yet many are not participating. We cannot help others with our investment accounts; we can only make the best choices given the economic reality. He includes a good summary of important economic indicators.

Ebola fear is another good example. Check out this “crash course” on how Ebola pushes every fear button in our instincts, generating emotional reactions.

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.

Americans will believe anything if you provide a chart – a new scientific study reported in Businessweek. I was bombarded with “scary” chart packages for Halloween. Few sources seem to be doing the hard and thankless work of fighting this stuff. Not enough page views.

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, Dwaine 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 has a new method for TIAA-CREF asset allocation. 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.”

David Rosenberg does not see a recession until at least 2016. His reasoning is similar to what I have cited here for several years.

The Week Ahead

We have a big week for economic data.

The “A List” includes the following:

  • Employment report (F). Always a complex story, with maximal spin potential.
  • ISM Index (M). Good concurrent read on the manufacturing economy with some leading characteristics.
  • Initial jobless claims (Th). The best concurrent news on employment trends.
  • Auto sales (M). Independent read on the economy for those who like to see some non-government data.

The “B List” includes the following:

  • ISM services index. (W). Services make up the larger portion of the economy, but the series has less history the manufacturing counterpart.
  • ADP private employment (W). Valuable alternative measure of employment growth.
  • Trade balance (T). September data will impact final Q3 GDP.
  • Construction spending (M). September data. Interesting, but a volatile series.
  • Factory orders (T). Another volatile series from September.

Tuesday’s mid-term Congressional election is likely to shift power to Republicans, but unlikely to have a significant market impact. Other big stories of the week might 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 made a quick shift from bearish to bullish. There is excellent breadth among the strongest sectors and very high ratings. Felix does not anticipate tops and bottoms, responds pretty quickly when there is evidence of a change. The penalty box can be triggered by extremely high volatility and volume. It is similar to a trading stop, but not based only on price. This came into play two weeks ago when we moved to partial long positions. Last week the trading accounts were back to fully invested.

Dr. Brett has a great post on price-based stop losses and the advantages of using a catastrophic risk method instead.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com. Felix also makes a daily afternoon appearance at Scutify.

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” is summarized 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:

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

If you missed this section from a few weeks ago, I urge you to check out the Investor Section of the earlier WTWA.

Some readers commented about the last WTWA installment, saying that I seemed to be disagreeing with Felix about how October would play out. I was recommended, as I have throughout the year, that investors should use market volatility to trim positions that hit price targets and add new stocks on dips. This was not intended as a short-term prediction for October, but practical advice for investors.

Most investors who try to time the market by anticipating corrections fail to move quickly to get back in. The result is that they miss some really big moves. If you have a disciplined trading approach (like Felix) it is easier to accept that a trade is not working and reverse course.

Michael Batnick has a day-by-day account of the thinking of an average investor trying to time the decline. To appreciate fully, you need to read the entire log!

tumblr_ne6bdaLr8A1tvtougo1_1280

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:

Alan Steel has five simple but powerful words from Humphrey Neill’s 1954 book, two of his ten tips to guarantee failure:

1) Follow the Public

2) Be Impatient

Only five words but better than any book on investing.

Did you know that on October 16th 2014 in the US Stockmarket, the volume of share dumping exceeded ALL THE DAYS in the last 850 Days? IN ONE DAY!

Read the entire post for the full story.

And now the individual investor may be returning. Josh Brown, in his maiden column for Fortune, explains. Regular readers know that I regard Josh as one of the best and most important voices helping the individual investor. In our office we accord him our highest honor – we take CNBC off mute and turn the TIVO back to listen! We wish him a wide and well-deserved readership.

Stock suggestions from a Barron’s investor conference. Sources like this provide ideas that you probably would not find from your own screening method, although I do have some of the themes.

Quit grumbling that the playing field is not level. Kid Dynamite explains that you could pay for premium data access and it still would not make any difference.

Time to add to commodities? Barron’s evaluates this contrarian play.

Goldman Sachs recommends “cyclical laggards.” I do, too.

Market timing does not work. Two more evidence-based entries on this continuing theme:

  • The multiple errors of Dennis Gartman, whose regular appearances on CNBC do not provide information about the overall record.
  • Professional timer observer Mark Hulbert provides the discouraging results. A few of the pros showed a small advantage, but no one succeeded at calling tops and bottoms.
  • Alan Steel, quoting some good sources, passes along this summary:

“It was just a few weeks ago that all was right in the world…except Syria, ISIS, Iraq, terrorism, Greece, Portugal, Brazil, Ukraine, Russia and QE ending…

“And then along came Ebola; all 8 cases, in the US, and the unfortunate death of one of those ill.

“What has been the price for that revolutionary new fear, against the backdrop of the previous myriad of items on the “crisis list?”

“A few trillion dollars in world-wise stock market corrections.

“But what happened?

“Well, with the exception of a few minor differences in scope, you and I could have slept through this “terrible October” and been none the worse.

Pulling this all together, Abnormal Returns explains what the individual investor should do – create a personal margin of safety. Tadas uses his broad knowledge and experience to pull together advice from several leading sources. If you had followed this approach over the last few years, you would have been able to stick with your program during the tough times. It will be of equal help in the future.

If you are stuck in gold, you might consult us about some good alternatives. 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

The change in Fed policy is unimportant. It was a major story because it was the technical end of the program. For those who have been monitoring the actual policy, what has changed? The bond purchases had already been tapered to $15 billion per month from the former $85 billion. The timing was known. There was no surprise.

I am amazed that anyone attributed a 10% rebound from the bottom to a vague comment about QE4 from Bullard, a non-voting member. This is a perfect example of how people force evidence into a pre-conceived theory. How do these observers explain the continuing rally after QE4 was rejected?

There is a very sharp difference between two viewpoints, both of which I have highlighted in the past.

One group ignores changes in economic growth, geopolitical risks, and corporate earnings, attributing the entire stock market rise to QE. Here is a typical example, posted by a professional bubble-caller:

54514427b229aa0f48614b73.png

I really like the “ALWAYS” as a description of two occasions!

A Stronger Viewpoint – the Chart

I really wish that someone would earn a Silver Bullet by analyzing the myriad versions of the QE chart. Here is some help to get going. When a policy changes (and this is stuff I taught in class decades ago) you can choose several different candidates as the starting point:

  • When the idea surfaces
  • When the idea gains credence
  • When there is the hint of a serious proposal
  • When the policy is adopted
  • When the policy is implemented

If you want to do a serious analysis you must use the same definition for each point. You cannot use the “Labor Day Jackson Hold hint” for one starting point and then wait until the last gasp of QE3 for another. I hope that this is blindingly obvious. Those who violate these rules simply look for big sweeps of stock market changes and adjust the starting and ending points to fit. They can cite impressive “sources” since the underlying data are accurate. The flaw is implementation of the chart, not raw data.

The pieces fit, but the conclusion is deceptive. There has been a long period of economic growth, probably helped a little by QE, but we will never know for sure. On two occasions the growth faltered, and the Fed expanded policy. There is little inference to draw from the two pauses in policy.

A Stronger Viewpoint – the Policy

Could this happen again? Perhaps, but it is very unlikely. If the current economic recovery, which seems much stronger than that at the end of the prior two QE periods, should falter the Fed will face a choice. The current mood is to focus on forward guidance rather than QE.

Bob McTeer explains the skepticism among Texans, especially about money printing. As you read his take, remember that he is a level-headed conservative.

We will gradually learn to focus less on the Fed and more on the data. Until that happens, investors will continue to enjoy opportunities.

More sophisticated analysts understand that Fed policy has changed only slightly. The most important effects come not from the continuing purchases but the size of the balance sheet. Justin Wolfers provides a great explanation with this conclusion:

But for all the hubbub about the decision to end quantitative easing, realize that the degree of monetary support the economy is receiving tomorrow will be no smaller than it was receiving yesterday.

If you do not understand this, imagine that there is a poker game and we are trying to spot the least knowledgeable player…..

© Dash of Insight

www.dashofinsight.com

[description] => Pulling this all together, Abnormal Returns explains what the individual investor should do – create a personal margin of safety. Tadas uses his broad knowledge and experience to pull together advice from several leading sources. If you had followed this approach over the last few years, you would have been able to stick with your program during the tough times. It will be of equal help in the future. [author] => Jeff Miller [legacyinterface_firm_id] => 312 [published_on] => 2014-11-02 [digest_date] => 2014-11-02 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-02 12:51:04 [created_by] => 945 [modified_on] => 2014-11-02 12:51:48 [modified_by] => 945 [checked_out_time] => 2014-11-02 12:52:00 [checked_out] => 945 [asset_id] => 1833 [hits] => 0 ) [3] => stdClass Object ( [legacyinterface_commentary_id] => 1763 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15001 [apv_conversation_id] => 2630 [content_type] => market-commentary [title] => The Single-Engine Global Economy [slug] => prosyn_110114 [fulltext] =>

TOKYO – The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).

The second engine – the eurozone – has now stalled after an anemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.

So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.

Falling oil prices may provide cheaper energy for manufacturers and households, but they hurt energy exporters and their spending. And, while increased supply – particularly from North American shale resources – has put downward pressure on prices, so has weaker demand in the eurozone, Japan, China, and many emerging markets. Moreover, persistently low oil prices induce a fall in investment in new capacity, further undermining global demand.

Meanwhile, market volatility has grown, and a correction is still underway. Bad macro news can be good for markets, because a prompt policy response alone can boost asset prices. But recent bad macro news has been bad for markets, owing to the perception of policy inertia. Indeed, the European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds, while the Bank of Japan only now decided to increase its rate of quantitative easing, given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further.


To continue reading, go here: http://www.project-syndicate.org/commentary/us-growth-and-weakening-global-economy-by-nouriel-roubini-2014-10
 
© Project Syndicate
[description] => The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers. [author] => Nouriel Roubini [legacyinterface_firm_id] => 345 [published_on] => 2014-11-01 [digest_date] => 2014-11-01 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-01 02:34:06 [created_by] => 945 [modified_on] => 2014-11-01 02:34:55 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1829 [hits] => 0 ) [4] => stdClass Object ( [legacyinterface_commentary_id] => 1764 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15002 [apv_conversation_id] => 2631 [content_type] => market-commentary [title] => Point and Go Figure [slug] => sungarden_110114 [fulltext] =>

What a Key Technical Indicator is Saying About Market Risk Today

I will admit that “Point and Figure” (P&F) charting is not something I have spent years studying.  I do know that according to Investopedia and other sources I have read recently, it is gaining followers.  P&F charts tend to be longer-term in their view, and they project and name an actual price “target” for the stock or index you are tracking.

But this article is not a dissertation on P&F.  It is about a recent perusal of the major markets by my team and me, simply asking what P&F charts are saying about the potential for a second helping of the market decline we saw earlier this month.  Here is a summary of what we found, using ETFs as a surrogate for some of the major market benchmarks, and P&F price targets which appeared on Stockcharts.com as of 10/28/14:

Point and Go Figure

Sungarden Investment Research 2014

Is this a forecast?  No.  But it does look like the type of picture we’d expect to see if the brutal middle of October was more of a warning shot than a quick, investor spasm on the way to glorious new highs.  The S&P 500 Index has outperformed the Dow Jones Industrial Average handily this year, and that is suspicious, since they often roll up and down together.  Small cap stocks, currently down for 2014 as of 10/28/14, are still likely to be considered a logical source of capital if big money portfolio captains decide to sell things off before too long.  And Europe is reminding us that in the current era, it is they who catch a cold when the U.S. sneezes.

© Sungarden Investment Research

www.sungardenresearch.com

[description] => I will admit that “Point and Figure” (P&F) charting is not something I have spent years studying. I do know that according to Investopedia and other sources I have read recently, it is gaining followers. P&F charts tend to be longer-term in their view, and they project and name an actual price “target” for the stock or index you are tracking. [author] => Robert Isbitts [legacyinterface_firm_id] => 402 [published_on] => 2014-11-01 [digest_date] => 2014-11-01 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 1 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-11-01 02:42:16 [created_by] => 945 [modified_on] => 2014-11-01 02:43:11 [modified_by] => 945 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 1830 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 1765 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 15003 [apv_conversation_id] => 2634 [content_type] => market-commentary [title] => Don’t Be Spooked by Market Volatility—Opportunity Is Still Knocking! [slug] => global_110114 [fulltext] =>

One of the greatest fears this October—possibly the most volatile month of the year—has been the correlation between the S&P 500 Index’s ascent in the first three quarters of the year and the possible ramifications of the end of quantitative easing (QE). 

It’s well known that Japan and Singapore have been buying their countries’ blue chip stocks with their excessive money printing. Today, about 1.8 percent of the Japanese market is owned by the Bank of Japan. American investors fear the Federal Reserve might do the same and take away the punch bowl, so to speak.

As you can see, the S&P 500 Index has been rising in tandem with government securities, and it’s uncertain what will happen when QE ends. 

In 30 Years, the XAU Never Experienced a Losing Streak of More Than 3 Years
click to enlarge

The Ebola epidemic has also contributed toward moving the needle to the fear side of the spectrum and driven investors to seek shelter not in gold necessarily but in so-called “Ebola stocks.” For every negative, as tragic as they often are, there is a positive. When a major hurricane hits Florida, for instance, insurance stocks fall while real estate stocks rise. The deadly Ebola virus, on top of an aging demographic, has helped make health care and biotechnology pop this year. The Daily Reckoning’s Paul Mampilly, in fact, calls this rally “the biggest biotech market ever.”

Possibly. Before we get too excited, let’s look at the numbers. Over the last 10 years, the S&P 500 Biotechnology Index has had a rolling 12-month percentage change of ±23. As of this writing, the index is up 32 percent, meaning it’s up by only 1.3 standard deviation. In other words, biotech is behaving approximately within its expected range.

Gold bullion, over the same period, has had a percentage change of ±19—not so dramatically different from biotech—and is down by 1.3 standard deviation. Again, this is “normal” behavior.

Uncomfortable with the Volatility of Gold? It's much like biotechnology stocks
click to enlarge

As you can see, biotech corrected and then rallied firmly into the sell zone. Seventy percent of the time, it’s normal for the asset class to rise and fall one standard deviation. As I always say, each asset class has had its own DNA of volatility over the last 10 years. Knowing this helps you manage your expectations of how they perform.

Asset ClassStandard Deviation
WTI Crude Oil 34%
Gold Stocks 34%
Emerging Markets 29%
S&P 500 Index 17%

Even health care and biotech companies not actively working toward finding treatments and vaccines for the virus seem to have incidentally benefited from the rally. California-based Gilead Sciences and New Jersey-based Celgene, for instance—both of which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX) and were named by Motley Fool as two of the four most important stocks of the last 16 years—have hit all-time highs. Gilead Sciences concentrates mostly on drug therapies for HIV and hepatitis B, while Celgene conducts similar work for cancer and inflammatory disorders.  

Celgene and Gilead Sciences Hit All-Time Highs
click to enlarge

And it’s not just American health care stocks that are doing well. We’ve been impressed lately with the performance of the Stock Exchange of Thailand Health Care Index and Bangkok Dusit Medical Services, Thailand’s largest private hospital operator, which we hold in our China Region Fund (USCOX). Both the index and the equity have excelled year-to-date, delivering 57 percent.

Thai Health Care Services One of the Top-Performing Sectors in Asian Industries
click to enlarge

Bullion and Gold Stocks
As for gold, between mid-August and October 3, the precious metal completely ignored the fact that September is historically its best-performing month, tumbling 9 percent from $1,310 to $1,190. It soon rebounded in the days leading up to Diwali.

Gold stocks, on the other hand, have yet to recover. Since the end of August, the NYSE Arca Gold BUGS Index has plunged 25 percent to lows we haven’t seen since April 2005. The Market Vectors Junior Gold Miners ETF has lost nearly 30 percent; the Philadelphia Gold and Silver Index (XAU), 25 percent.

On a few occasions I’ve pointed out that in the last 30 years, the XAU has never experienced a losing streak of more than three years. As of this writing, it’s lost close to 17 percent, with only two months left. The cards are definitely stacked against the XAU, but I remain optimistic it can continue the trend.   

In 30 Years, the XAU Never Experienced a Losing Streak of More Than 3 Years
click to enlarge

Many investors are understandably concerned that mining companies in West Africa will suffer because of Ebola. Several companies operating in the three hardest-hit countries have indeed been hurt by the virus, some of them being forced to halt production. However, none of our funds has any direct exposure to them. Three companies that we own in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX)—IAMGOLD, Newmont Mining and Randgold Resources—continue to operate normally in the region.

Here I must remind investors that we recommend 10-percent holding in gold: 5 percent in bullion, 5 percent in stocks. Rebalance every year.

Looking Past Ebola
One of our most important tenets at U.S. Global is to always stay curious. That includes being familiar with world events and determining how they might affect our funds. Ebola certainly falls into this category, but that doesn’t necessarily mean our funds will undergo any significant changes based on this unfortunate event. Again, other factors have contributed, including the so-called October effect. We remain committed to our fundaments and pick stocks because they’ve been well-screened and fit in our results-oriented models.

Happy investing, and stay safe!

 

Index Summary

  • Major market indices finished higher this week.  The Dow Jones Industrial Average rose 3.48 percent. The S&P 500 Stock Index gained 2.72 percent, while the Nasdaq Composite advanced 3.28 percent. The Russell 2000 small capitalization index rose 4.89 percent this week.
  • The Hang Seng Composite rose 2.78 percent; Taiwan rose 3.80 percent and the KOSPI rose 2.01 percent.
  • The 10-year Treasury bond yield rose six basis points to 2.33 percent.

 

 

Domestic Equity Market

The S&P 500 Index advanced sharply again this week, closing at a new all-time high.  Equity markets rallied on earnings and were pushed higher on Friday on news that the Bank of Japan increased its quantitative easing (QE) program by roughly $135 billion dollars. This more than offsets the Federal Reserve’s exit from its own QE program and just reinforces the idea that continual increases in global liquidity is good for risky assets such as stocks.

S&P 500 Economic Sectors
click to enlarge

Strengths

  • The technology sector led the way in a very strong week as MasterCard and Visa both rallied by more than 13 percent to pace the sector. Both companies reported strong quarterly earnings results with increased spending and higher fees as positive drivers. Electronic Arts was not far behind, rising 12.7 percent this week as it also beat quarterly expectations and continued its turnaround.
  • The health care and financial sectors were just fractionally behind technology. Health care experienced broad-based strength with health care suppliers and managed care companies particularly strong. Financials were also very strong with good results from insurance companies leading the way.
  • Goodyear Tire & Rubber was the best-performing stock in the S&P 500 this week, rising 16.43 percent. The company reported very strong results relative to expectations and reaffirmed expectations for 2015-2016.

Weaknesses

  • The materials sector managed to eke out a small gain but was dragged down by the big mining companies, Freeport-McMoRan and Newmont Mining, as the dollar rallied and commodities were generally under pressure.
  • Other areas of weakness included commodity chemicals, construction materials and homebuilders.
  • A notable underperformer this week was Facebook, which fell 7 percent as the company guided for sharply higher expenses next year that caught analysts by surprise.

Opportunities

  • Earnings season remains in full swing next week with a few notable companies to watch for including Priceline.com, Michael Kors and Qualcomm just to name a few.
  • Next week is also a big week for meaningful economic reports with both the ISM manufacturing index and nonfarm payrolls coming out. Employment data has recently surprised on the upside and has the potential to be a positive market mover next Friday.
  • The market made a fresh new high this week and the bull market continues.

Threats

  • After two very strong weeks the market may take a breather to consolidate recent gains.
  • The market has become somewhat dependent on global central bankers to move higher and with additional easing steps unlikely after a recent flurry of activity the market may languish.
  • Geopolitical tensions continue to be at elevated levels and there is always the possibility of a political misstep that impacts the markets.

 

The Economy and Bond Market

U.S. Treasury bond yields rose across the board again this week as the Federal Reserve exited its quantitative easing program. The Fed surprised the market somewhat with a more hawkish tone in the statement released after Wednesday’s FOMC meeting. A few weeks ago a more hawkish tone wouldn’t have been a surprise, but the market’s expectations of the Fed had shifted quite a bit with global growth expectations getting reined in. The market’s reaction was particularly acute in shorter maturities that are more sensitive to Fed interest rate increases.

Two-Year Treasury Yield
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Strengths

  • The Bank of Japan surprised the market on Friday by increasing its quantitative easing (QE) program by roughly an additional $135 billion dollars.
  • In addition to Japan, other global central bankers are responding to sluggish economic growth. The Bank of England set a lower-than-expected minimum regulatory capital ratio, which set off a significant rally in banking stocks and is effectively “easier” monetary policy. The Swedish central bank also cut interest rates to zero this week.
  • Third-quarter GDP grew a better-than-expected 3.5 percent, demonstrating some economic resilience.

Weaknesses

  • Durable goods orders fell 1.3 percent in September and were much weaker than expected.
  • Housing data points remain weak with home prices falling and mortgage applications falling 5 percent last week.
  • While widely expected, the Fed completely wound down its QE program this week and is incrementally less accommodative.

Opportunities

  • Global central banks are easing again, offsetting the incremental Fed tightening. This remains a positive for fixed income globally.
  • Next week is a big week for economic data as the ISM manufacturing index (a purchasing managers’ index or PMI) and nonfarm payrolls are released. The recent global trend for PMIs has been weak and it wouldn’t be surprising if the ISM manufacturing index disappointed, allowing bonds to rally.
  • Short-term bonds have been relatively volatile in recent weeks and with yields moving higher the past two weeks, a reversal would not be surprising.

Threats

  • The European bank stress tests have come and gone, and while generally in-line with expectations and not too troubling, there remains work to be done to restructure the European banking system before the next downturn or panic.
  • Quantitative easing has ended and the next logical step would be an interest rate hike. While estimates of when that may occur remain fluid, the Fed’s relatively hawkish tone increases the risk to the bond market.  
  • With geopolitical situations in Ukraine, Iraq and Syria, Greece’s economy, and new Ebola fears, investor anxiety remains high along with further volatility.

 

 

Gold Market

For the week, spot gold closed at $1,171.09 down $59.81 per ounce, or 4.86 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 14.67 percent. The U.S. Trade-Weighted Dollar Index jumped 1.31 percent for the week.

DateEventSurveyActualPrior
Oct 28 U.S. Durable Goods Orders 0.5% -1.3% -18.2%
Oct 28 U.S. Consumer Confidence Index 87.0 94.5 86.0
Oct 30 U.S. GDP Annualized QoQ 3.0% 3.5% 4.6%
Oct 30 Germany CPI YoY 0.9% 0.8% 0.8%
Oct 31 Eurozone Core CPI YoY 0.8% 0.7% 0.8%
Nov 02 HSBC China Manufacturing 50.4 -- 50.4
Nov 03 U.S. ISM Manufacturing 56.2 -- 56.6
Nov 05 U.S. ADP Employment Change 220K -- 213K
Nov 06 U.S Initial Jobless Claims 285K -- 287K
Nov 07 U.S. Change in Nonfarm Payrolls 235K -- 248K

Strengths

  • Despite declining gold prices, demand for the precious metal remains strong. In September, Chinese gold imports from Hong Kong rose to the highest level in five months as retailers increased purchases before the holiday season. In the United States, gold coin sales are heading for their first back-to-back monthly increase since January. Volume rose to 58,000 ounces as we entered the last week of the month, compared to 50,000 ounces in September.
  • Although gold premiums had fallen to below $10 per ounce earlier this week in India, they rallied on Wednesday to reach roughly $15 per ounce. The initial decline was due to the winding down of the Diwali holiday. However, the premium spiked up after rumors emerged that the Reserve Bank of India or the Ministry of Finance might impose more restrictions on gold imports.
  • A number of gold companies reported misses on production this week, but Alacer Gold reported strong third quarter results. The company saw gold production increase 27 percent which helped to drive production costs lower.  In addition, Alacer’s cash balance rose by $28 million to $320 million. 

Weaknesses

  • This week we saw gold markets wildly affected by central bank policy makers across the world. In the United States, a more hawkish tone from the Federal Reserve, combined with the official announcement of the end of Quantitative Easing (QE), pushed gold prices down. On Friday, the Bank of Japan surprised investors with a substantial expansion in its asset purchases and a commitment to double its purchases of equities, making the central bank the single biggest holder of Japanese equities.  These two events, combined with stronger-than-expected, third-quarter GDP data from the U.S., caused a selloff in gold and gold stocks this week.
  • Investors should remember that U.S. elections are next week and the current administration is putting the best face possible on what has been an anemic recovery.  Even Alan Greenspan noted this week that QE has failed to right the economy, but did lift asset prices.   For example, while the Fed desperately sought to stimulate the housing sector, the homeownership rate in the third quarter came in at 64.4 percent, the lowest level since 1995.  Furthermore, while QE has been halted, the Fed will continue to reinvest the principal payments from mortgage-backed bonds and roll over any maturing Treasury securities from its $4.5 trillion portfolio. We are living in a world of unrepayable debt, money printing, and governments buying equities to create a wealth effect – yet life goes on without a worry.
  • As a consequence of this week’s announcement from the Federal Reserve, gold traders turned bearish for the first time in six weeks. A Bloomberg survey revealed nine bearish forecasts from analysts, compared to only five bullish.

Philadelphia Gold and Silver Index (XAU) Appears Due for a Correction
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Opportunities

  • Related to the above point on U.S. GDP growth, the third quarter yielded stronger-than-expected results due to a substantial increase in government spending. As it turns out, 0.83 percent of the GDP gain was attributed to government spending, primarily defense spending. JP Morgan, in response to this data, reduced its forecast for fourth-quarter GDP growth from 3.0 percent to 2.5 percent, explaining that this type of increase is usually associated with payback the following quarter.
  • Alan Greenspan has come out with interesting points on the current global economic environment. The former Federal Reserve Chairman referred to QE as a pile of tinder that hasn’t been lit. Furthermore, due to the global turmoil, Greenspan stated that gold is a good place to invest money due to its value as a currency outside of government policy. In fact, he argues that gold is the premier currency, more so than the dollar.
  • Civilian wages and salaries appear to be on the rise, which is a powerful source of inflation. Higher wages, which lead to higher incomes, fuel higher demand and pull up prices. The long-awaited arrival of strong inflationary pressures in the United States appears to be on the horizon.

Pay Attention to Rising Trend in Wages
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Threats

  • Depressed oil prices are contributing to the deflationary environment. Without any catalyst to boost oil prices, gold will continue to face the headwinds from global deflation.
  • Social unrest has come to the capital of Burkina Faso, Ouagadougou, after a proposal to enable the current president to stand for another five-year term, was submitted to parliament. Protestors have set fire to parliament, city hall and the headquarters of the ruling party. Mining companies in the region have been negatively affected. Specifically, Roxgold declined 27 percent this week on the news, despite the fact that the company reported being unaffected by the unrest.
  • There is speculation that Red Kite Group, a London hedge-fund manager, has bought more than half of the copper held in London Metals Exchange warehouses. Although no material news has been reported, such substantial control over supply could have serious implications.
Frank Talk Insight for Investors
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October 28, 2014
Talking Turkey with John Derrick
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October 27, 2014
As the Eurozone Stalls, China Cuts the Red Tape
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October 21, 2014
New Jobs Data: America off the Mat, Ready for the Next Round
A Blog by Frank Holmes, C.E.O. and Chief Investment Officer
 

Energy and Natural Resources Market

Brent Oil Price REquired by Countries to Balance Fiscal Budgets per Billion U.S. Dollars
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Strengths

  • Oil and gas refining stocks outperformed this week in a strong-dollar environment. The S&P Supercomposite Oil & Gas Refining & Marketing Index was up 3.88 percent. Marathon Petroleum and Tesoro were up 5.96 and 8.72 percent, respectively, following strong earnings reports.
  • Chemicals stocks outperformed the broader resources space this week. The S&P Supercomposite Chemicals Industry Index rose 1.12 percent this week, as Agrium was up 5.81 percent, bouncing significantly off of prior lows.
  • Iron and steel stocks rallied for the third week in a row. The Bloomberg World Iron/Steel Index was up 1.82 percent and U.S. Steel, which reported impressive quarterly results this week, closed up 8.45 percent.

Weaknesses

  • Precious metals stocks significantly underperformed this week, with gold and silver stocks declining substantially after the announcement from the Federal Reserve. The NYSE Arca Gold Miners Index and the Global X Silver Miners ETF were down 14.37 percent and 14.31 percent, respectively.
  • Industrial metals stocks continue to underperform amid a slower global growth environment. The S&P/TSX Capped Diversified Metals and Mining Index declined 1.74 percent this week.
  • As oil prices continue to decline, WTI crude dipped below $80 per barrel during the week, eventually closing at $80.57 per barrel. The continued depression of oil prices, led by perceptions of weak global demand and ample supply, continue to create headwinds in the commodities space.

Opportunities

  • One of the largest potential benefits to oil prices continues to stem from the OPEC meeting taking place at the end of November. As depressed prices weigh on revenue, any action the cartel takes to limit supply would send oil higher.
  • While sentiment remains mixed, certain analysts are projecting future oil prices to rebound. With refineries in the United States absorbing crude inventories, WTI could rise to as much as $90 per barrel by the end of 2014. On a relatively longer timeline, Barclays forecasts that Brent prices could be back over $100 per barrel by the end of 2015.

Threats

  • Expanded stimulus in Japan and newly implemented stimulus in the eurozone serve to weaken both the yen and euro, which will cause the dollar to rally further. While it seemed as if the dollar had reached an upper limit, there is still the possibility that the currency could inflate even further. On a positive note, however, the long-term benefits of the stimulus policies (if effective) could spur global growth, which would boost commodity demand and prices.
  • Global growth fears and the deflationary environment have yet to dissipate. Commodities will remain depressed if market sentiment does not shift.

 

 

Emerging Markets

Strengths

  • Two of the best-performing countries this week were Russia and Brazil. Both increased key rates in order to address their struggling economies and currencies. In Russia, the central bank raised the key rate to 9.5 percent, above analyst estimates. Brazil’s central bank policy makers voted five to three to raise the benchmark lending rate by 25 basis points to 11.25 percent. The MICEX Index closed up 7.83 percent this week, while the Ibovespa Brasil Sao Paulo Stock Exchange Index rose 5.17 percent this week.
  • China was one of the best-performing countries in Asia this week, as its central government stressed policy support for consumption and property, as President Xi Jinping hinted on potential expansion of free trade zones to other parts of the country beyond Shanghai.
  • Turkish stocks continued to rally this week as falling oil prices and synchronized global stimulus boosted the country’s economic outlook. The Borsa Istanbul 100 Index rallied 1.46 percent, making this the third-straight weekly increase.

Weaknesses

  • Greek stocks suffered this week after the Minister of Administrative Reform, Kyriakos Mitsotakis, said there will be a climate of uncertainty until February’s elections. Yields on Greek 10-year bonds jumped 73 basis points to over 8 percent this week. The Athens Stock Exchange closed down 7.62 percent.
  • The South Korean won was among the worst-performing currencies in Asia this week, after the U.S. Federal Reserve officially ended its quantitative easing (QE) program and the Bank of Japan unexpectedly decided to accelerate the expansion of its monetary base to mitigate the impact of higher sales taxes to reflate the economy.
  • Depressed commodity prices, particularly oil and industrial metals, have led investors to maintain a sour outlook on commodity-sensitive emerging markets. Slowing growth in China and Europe has led to significant outflows from exporting emerging markets and their currencies for the past few weeks.  

Opportunities

  • Brazil’s recent rate hike creates a significant opportunity in one of the world’s largest emerging markets. The country’s economy, currently in recession, has been dealing with a depreciating currency and inflation pressures. Tighter monetary policy should help strengthen the real and subdue inflation, providing a boost to Brazil’s future growth.
  • Upcoming third-quarter earnings reports for China’s Internet and e-commerce bellwethers, along with the peak online shopping season, should refocus investor attention to the secular growth potential of mobile Internet in China enabled by a lifestyle change with rising smartphone penetration.  China already represents 35 percent of global e-commerce sales as of 2013, and rising adoption by small businesses and the rural population could bring China’s share to 50 percent by 2018, according to Morgan Stanley.

China's Mobile Internet Lifestyle to Continue to Grow
click to enlarge

  • Lower oil prices, while detrimental to exporting emerging markets, has been a tailwind for oil-consuming emerging markets. With oil prices continuing on a downward trend, it appears this tailwind will still be in effect in the near future.

Threats

  • A direct contrast to the situation in Brazil, the rate hike in Russia will likely harm the country’s economy. This is the fourth time this year that Russia has raised rates in order to defend the crumbling ruble. Despite positive reactions in the equities market, the currencies market was less understanding. The ruble slid to record lows this week in spite of the rate increase. Therefore, the policy move seems to be rather ineffective for the time being. Furthermore, current borrowing costs in Russia are unsustainably high and are strangling economic growth. The economic environment in Russia is only becoming more concerning.

The Ruble Falls as Central Bank Raises Rates
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  • The recent push from the Chinese government to promote breastfeeding, through educational programs and initiatives, has added more lactation rooms in public buildings. This move could dampen investor sentiment toward infant formula makers.
  • The implementation and expansion of monetary stimulus in the eurozone and Japan will likely push up the U.S. dollar, which climbed to new highs on Friday. A further rise in the dollar will continue to be a threat to emerging markets.

© US Global Investors

www.usfunds.net

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Investors can be forgiven if they felt like Halloween arrived a little early this year.

Volatility has returned to the equity markets with a vengeance of late. Investors fear that the pronounced economic malaise that currently holds Europe and Asia in its grasp may spread to the U.S. As of October 13, the small-cap Russell 2000 Index was down 12.9% from its 2014 high on July 3.

While there have been a number of mild pullbacks in recent years, the small-cap market had not seen a double-digit correction for more than three years prior to this most recent decline. Interestingly, the third quarter of 2014 also saw the first negative quarter for the small-cap index in the last nine.

A closer look at the correction-to-date and the just-completed third quarter reveals some compelling developments that began with a down month in July in which the Russell 2000 lost 6.1%. Federal Reserve Chair Janet Yellen's comments about "stretched" valuations within small-cap, specifically biotech and the social media end of technology, made an already anxious small-cap market even more uneasy.

Most of our Featured Funds were also down during the month, though most outperformed their respective benchmarks. In August, the Russell 2000 rebounded with a 5.0% gain, and in this strong positive month most of these same portfolios trailed their benchmarks—again, as we would typically expect.

September, however, was an unusual month that dispensed with history's more familiar script. The pace of global economic growth was questioned while here in the U.S. Fed tapering continued to wind down.

What, then, made September, and ultimately the third quarter, so unusual and far more of a trick than a treat for most equity investors?

It was not the 6.1% decline for the Russell 2000 in September. September was unusual because it did not matter where you were on the quality spectrum, which often provides down market protection. What mattered in this unpredictable period was one's sector exposure.

Our sector exposure varies, but for the most part our Featured Fund portfolios have been overweight most recently in economically sensitive sectors, including Consumer Discretionary, Energy, Industrials, Information Technology, and Materials, and underweight in more defensive areas such as Health Care and Utilities.

During September, mounting concerns about the slowing pace of global growth disproportionally hit economically sensitive areas of the market, resulting in steep net losses within the Russell 2000 for Consumer Discretionary (-5.3%), Energy (-15.4%), Industrials (-7.4%), and Materials (-8.6%).

Two unwanted tricks were handed out with these declines: First, the sell-offs have tended to be highly indiscriminate, taking little account of small-cap companies with the kind of strong fundamentals that we seek, such as strong balance sheets, positive cash flows, and high returns on invested capital.

Second, the violent swings of high volatility have lasted well into October. As of October 23, the Halloween month was positive for small-caps but negative for most large-cap indexes as well as most non-U.S. indexes, regardless of cap size.

Corrections are of course a normal part of the equity landscape. From our perspective, the market dislocations of September and October seem to be driven, at least for the moment, by a clear sentiment shift in global growth expectations.

We have always thought that having a long-term investment horizon is of paramount importance. This is especially true in a transitional phase from Fed-driven liquidity to a more exclusively growth-driven market.

Uncertainty might abound right now to the point where many investors may feel like they're lost in a haunted house, but our approach remains consistent and we have stayed calm.

The indiscriminate selling has allowed us to re-enter some of our favorite names at absolute valuations with which we are very comfortable. And finding what we think are excellent businesses at attractively discounted prices is our favorite kind of treat—at Halloween or any other time of year.

Royce Featured Funds Average Annual Total Returns as of Quarter-End 9/30/14 (%)

 Average Annual Total ReturnsAnnual Expenses
FUNDQTR1YTD1ONE-
YEAR
THREE-
YEAR
FIVE-
YEAR
10-
YEAR
15-
YEAR
SINCE
INCEPTION
DATEGROSS
OPERATING
EXPENSES
NET
OPERATING
EXPENSES
Pennsylvania Mutual -7.58 -5.70 3.29 18.32 12.56 8.45 10.78 16.002 1/1/1900 0.93 0.93
Premier -8.55 -1.85 5.86 16.13 12.55 10.05 11.88 12.13 12/31/1991 1.09 1.09
Micro-Cap -10.03 -9.11 -2.78 9.31 7.71 7.30 10.63 11.76 12/31/1991 1.56 1.56
Low-Priced Stock -9.83 -1.69