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  1. 1. Posts Tagged ‗Retail Investors‘―Street Smarts‖ (Saut)Tuesday, March 6th, 2012―Street Smarts‖by Jeffrey Saut, Chief Investment Strategist, Raymond JamesMarch 5, 2012Some people can have a lot of experience and still have good judgment. Others can pull a greatdeal of value out of much less experience. That’s why some people have street smarts and othersdon’t. A person with street smarts is someone able to take strong action based on good judgmentdrawn from hard experience. For example, a novice trader once asked an old Wall Street prowhy he had such good judgment. ―Well,‖ said the pro, ―Good judgment comes from experi-ence.‖ ―Then where does experience come from?‖ asked the novice. ―Experience comes frombad judgment,‖ was the pro’s answer. So you can say that good judgment comes from experi-ence that comes from bad judgment!. . . Adapted from ―Confessions of a Street Smart Manager‖ by David MahoneyYears ago I read a book that a Wall Street professional told me would give me good stock marketjudgment by benefitting from the bad experience of others who had suffered various hard hits.The name of the book was ―One Way Pockets.‖ It was first published in 1917. The author usedthe non de plume ―Don Guyon‖ because he was associated with a brokerage firm having sizablebusiness with wealthy retail investors and he had conducted analytical studies of orders executedfor those investors. The results were illuminating enough to afford corroborative evidence ofgeneral investing faults that persist to this day. The study detected ―bad buying‖ and ―bad sell-ing,‖ especially among the active and speculative public. It documented that the public tends to―sell too soon,‖ and subsequently repurchase stocks at higher prices by buying more stocks afterthe stock market has turned down, and finally liquidate all positions near the bottom; a sequencetrue in ALL similar periods.For instance, the book shows that when a bull market started the accounts under analysis wouldbuy for value reasons; and buy well, albeit small. The stocks were originally bought for the long-term, rather than for trading purposes, but as prices moved higher on the first bull-leg of the rallyinvestors were so scared by memories of the previous bear market, and so worried they wouldlose their profits, they sold their stocks. At this stage the accounts showed multiple completedtransactions yielding small profits liberally interspersed with big losses.In the second phase of the rally, when accounts were convinced the bull market was for real, anda higher market level was established, stocks were repurchased at higher prices than they had
  2. 2. previously been sold. At this stage larger profits were the rule. At this point the advance hadbecome so extensive that attempts were being made to find the ―top‖ of the market move suchthat the public was executing short-sales, which almost always ended badly.Finally, in the mature stage of the bull market, the recently active and speculative accountswould tend not to over-trade or try to pick ―tops‖ using short-sales, but would resolve to buy andhold. So many times previously they had sold only to see their stocks dance higher, leaving themfrustrated and angry. The customer who months ago had been eager to take a few points profit on100 shares of stock would, at this stage, not take a 30-point profit on 1,000 shares of the samestock now that it had doubled in price. In fact, when the stock market finally broke down, evenbelow where the accounts bought their original stock positions, they would actually buy moreshares. They would not sell;, rather the tendency at this mature stage of the bull market and thepublic‘s mindset was to buy the breakdowns and look for bargains in stocks.The book‘s author concluded that the public‘s investing methods had undergone a pronounced,and obvious, unintentional change with the progression of the bull market from one stage toanother; a psychological phenomena that causes the great majority of investors to do the exactopposite of what they should do! As stated in the book, ―The collective operations of the activespeculative accounts must be wrong in principal [such that] the method that would prove prof-itable in the long run must be reversed of that followed by the consistently unsuccessful.‖Not much has changed from 1917 and 2012, just the players, not the emotions of fear, hope, andgreed; or, supply versus demand, as we potentially near the maturing stage of this current bullmarket. Of course stocks can still travel higher in a maturing bull market, but at this stage weshould keep Don Guyon‘s insight about maturing ―bulls‖ in mind. Verily, this week celebratesthe third year of the Bull Run, which began on March 9, 2009 and we were bullish. With theS&P 500 (SPX/1369.63) up more than 100% since the March 2009 ―lows‖ it makes this one ofthe longest bull markets ever. As the invaluable Bespoke Investment Group writes:―Going all the way back to 1928, the current bull market ranks as the ninth longest ever. Evenmore impressive is the fact that of the nine bull markets that lasted longer, none saw a gain of100% during their first three years. Based on the history of prior bulls that have hit the three-yearmark, year four has also been positive.‖Now, recall those negative nabobs that told us late last year the first half of 2012 would be reallybad? W-R-O-N-G, for the SPX is off to its ninth best start of the year, while the NASDAQ(COMPQ/2976.19) is off to its best start ever! In seven out of the past ten ―best starts,‖ the SPXwas higher at year-end, which is why I keep chanting, ―You can be cautious, but don‘t get bear-ish.‖ Accompanying the rally has been improving economic statistics and last week was noexception. Indeed, of the 20 economic reports released last week, 15 were better than estimated.Meanwhile, earnings reports for 4Q11 have come in better than expected, causing the ratio of netearnings revisions for the S&P 1500 to improve. Then too, the employment situation reports con-tinued to improve. Of course, such an environment has led to increased consumer confidencepunctuated by the February‘s Consumer Confidence report that was reported ahead of estimatesat 70.8, versus 63.0, for its best reading in a year. And that optimism makes me nervous.
  3. 3. Nervous indeed, because the SPX has now had 42 trading sessions year-to-date without so muchas a 1% Downside Day. Since 1928 the SPX has only had six other occasions where the SPXstarted the year with 42, or more, trading sessions without a 1% Downside Day. Worth noting,however, is that in every one of those skeins the index closed higher by year‘s end. Still, in addi-tion to the often mentioned upside non-confirmations from the D-J Transportation Average(TRAN/5160.13) and the Russell 2000 (RUT/802.42), seven of the SPX‘s ten macro sectors arecurrently overbought but the NYSE McClellan Oscillator is now oversold, Lowry‘s Short Termtrading Index has fallen 12 points since peaking on January 25th (which interestingly is the daybefore the Buying Stampede ended), the Operating Company Only Advance/Decline Index(OCO) has nearly 1,000 fewer issues than where it was on February 1st, suggesting the rally isnarrowing, the number of New Highs confirms the OCO (last April the index had similar read-ings right before a correction), and sticking with the April 2011 comparison shows a strikingsimilarity to the December 2010 – February 2011 trading pattern for the SPX and we all remem-ber how that ended (see chart on page 3). And then there‘s this from my friend Jim Kennedy ofAtlanta-based Divergence Analysis, whose proprietary algorithms I use on a daily basis:―The currently developing negative divergence pattern by our Risk Indicator is a model eventthat historically leads to a correction phase. This correction ‗is not in play‘ now, as the Risk indi-cator (historically) turns up again to show the final surge of the rally. Once Risk reverts downafter that, the correction phase is ‗in play‘. For your review a picture of the 2007 Risk negativedivergence pattern and resulting correction.In 2007 this negative development led first into asmaller, trading range correction, a new higher top (with Risk diverging), and then the largerprice correction of approximately 150 S&P points.This one may play out differently, but wehave a nice guide to show the way.‖The call for this week: I am at the Raymond James 33rd Annual Institutional Conference thisweek and suggest you exercise ―street smarts‖ in my absence. While I remain cautious (not bear-ish) there are still things to do. For example, I continue to like the strategy of looking at compa-nies whose share price has collapsed for a one-off event. Recall, this was the case with AcmePacket (APKT/$30.26/Strong Buy) back in January, where in our analyst‘s view the stock swoonhad taken a lot of the price risk out of the equation. A similar sequence occurred last week withVocus (VOCS/$13.52/Strong Buy), where our fundamental analyst maintains his positive view.For further information on either of these companies please see our fundamental analysts‘ recentreports. I will speak with everyone next week.Déjà vu?
  4. 4. Click here to enlargePrint-Or-Panic: TrimTabs On The MarketsMeltupFriday, January 20th, 2012As retail investors continue to appear significantly pessimistic in their fund outflows ($7.1bnfrom US equity mutual funds in w/e January 4th — the largest since the meltdown in earlyAugust) or simply stuff their mattresses, David Santschi of TrimTabs asks the question, who ispumping up stock prices? His answer is noteworthy as a large number of indicators suggestinstitutional investors are more optimistic than at any time since the waterfall decline inthe summer of 2011. Citing short interest declines, options-based gauges, hedge fund and globalasset allocator sentiment surveys, and the huge variation between intraday cash and overnightfutures market gains (the latter responsible for far more of the gains), the bespectacled Bay-Areabeliever strongly suggests the institutional bias is based on huge expectations that the Fed willannounce another round of money printing (to stave off the panic possibilities in an electionyear). The ability to maintain the rampfest that risk assets in general have been on (and the cash-for-trash short squeeze that has been so evident) must be questioned given his concludingremarks.While we fully expect QE to come, we cant help but question the willingness to meet marketexpectations so head on (remember when the Fed used to like to surprise) but with ever blunter(and seemingly weaker) tools, what more can they do — leaving a market (and note here we did
  5. 5. not say economy as that is clearly not benefiting) that needs exponentially more juice (EUR10tnLTRO?) just to keep from the post-medicinal crash.Jeffrey Saut: "Terminator 3: Rise of theMachines"Tuesday, August 16th, 2011Terminator 3: Rise of the Machinesby Jeffrey Saut, Chief Investment Strategist, Raymond JamesAugust 15, 2011I was in Chicago last week seeing portfolio managers (PMs), doing media ―hits,‖ and presentingat seminars for our retail investors. The most ubiquitous question I received was, ―Who is sellingall this stock?‖ Clearly that‘s a valid question since the parade of PMs on CNBC insisted they arenot selling stocks, statistics show hedge fund managers are already pretty ―light‖ on stocks, theinternational institutions I talk to are so underweight U.S. equities it is doubtful they are selling,and order flows show retail investors aren‘t really selling individual stocks either (they are, how-ever, liquidating mutual funds). So who‘s selling? I think it is the ―machines,‖ driven by high-frequency trading (HFT) and Exchange Traded Funds (ETFs). As defined by Wikipedia:―In high-frequency trading, programs analyze market data to capture trading opportunities thatmay open up for only a fraction of a second to several hours. High-frequency trading uses com-puter programs and sometimes specialized hardware to hold short-term positions in equities,options, futures, ETFs, currencies, and other financial instruments that possess electronic tradingcapability.‖Exacerbating the situation are ETFs that are leveraged 2:1, or even 3:1, which if bought on mar-gin implies 4 to 6 times leverage. Moreover, when ETFs buy or sell, they do so across the spec-trum of stocks within their universe with NO regard for the fundamentals of any individual stock.So yeah, I think it is the ―Rise of the Machines‖ that has compounded the ―selling stampede‖ thatbegan on July 8th, and hopefully ended on August 9th with what a technical analyst would terma long-tailed ―bullish hammer‖ candlestick chart formation. If correct, that would make the stam-pede 23 sessions long. Recall, stampedes typically last 17 – 25 sessions, with only 1 – 3 sessionpauses/corrections, before they exhaust themselves. It just seems to be the rhythm of the ―thing‖in that it takes that long to get participants either bullish, or bearish, enough to act. Obviously, inthis case, it would be bearish enough. Consistent with this thought, it is worth noting that in Julyretail investors liquidated $23 billion worth of U.S. stock mutual funds for the largest liquidationsince October 2008‘s $27 billion. My sense is even more liquidation is taking place this month.
  6. 6. Yet, it is not just mutual fund liquidation indicating the selling skein is over. Corporate insidersare buying shares at the highest rate since the March 2009 bottom; at last week‘s lows the divi-dend yield on the S&P 500 (SPX/1178.81) exceeded the 10-year T‘note‘s yield (read: historicallybullish for stocks); and if you believe 2012‘s consensus earnings estimates, last Monday the SPXwas trading at a PE under 10x with an Earnings Yield of ~10%, leaving the Equity Risk Premiumaround 8%. Ladies and gentlemen, those are valuation metrics not seen in years. To that valuepoint, since the first Dow Theory ―sell signal‖ of September 1999, I have opined the equity mar-kets were likely going into a wide-swinging trading range akin to the 1966 – 1982 affair wherean index fund made you no money for 16 years. In December 1974 the D-J Industrial Average(INDU/11269.02) made its ―nominal‖ price low of 577.60, but its ―valuation‖ low (the cheapestthe INDU would get on a PE, book value and dividend basis) didn‘t occur until the summer of1982. Fast forward, I have argued the ―nominal‖ price low for this 11-year range-bound markettook place in March 2009 and have added, ―I don‘t know when the ‗valuation‘ low will come.‖But maybe, just maybe, if next year‘s estimates are right, and we don‘t go into a recession, wemay have made the ―valuation‖ low over the past few weeks.Whether that ―valuation low‖ thought is correct or not, I am fairly confident the selling squallhas compressed stocks so much a short-/intermediate-term bottom has been, or is being, made.To wit, over the past week I have repeatedly stated the equity markets were epically ―oversold.‖To be sure, finding a session as bad as last Monday‘s, when less than 2% of all the stocks tradedclosed ―up‖ on the day, one has to go back to May 1940. At that time, the markets believed theworld was ending when the Germans punched a ~60 mile wide hole in the Maginot Line andpoured into France. Another way to look at last Monday is to measure how far the SPX is belowits 50-day moving average. While not as massively compressed as in the 1987 Crash‘s 5.5 stan-dard deviation, at 4.3 the SPX is very oversold as can be seen in Figure 2 on page 3 from ourbrainy friends at Bespoke Investment Group. Additionally, the astute Lowry‘s organizationwrites:―This week will go down in the record book as one of the most manic of all time, with four alter-nating negative and positive 90% Days, each generating changes in the DJIA of more than 400 to600 points. There is nothing even close to this frenzy in the 78 year history of the Lowry Analy-sis. The causes of the week‘s mass confusion will be debated for years to come, but the immedi-ate question is, what should investors do now?‖Lowry‘s concludes:―As of Friday‘s market close, all of the requirements of Buying Control No. 1 were completed,calling for a 25% invested position. The 2nd stage of the buying program will be completed ifBuying Power rises ten points to 391 or higher, confirmed with a ten point drop in Selling Pres-sure to 358 or lower.‖While we agree with Lowry‘s, and have recommended the cash raised last February/March grad-ually be recommitted to stocks, we think there will be a bottoming process over the comingweeks. In all my talks last week, I likened the current decline to those of October 1978 and Octo-ber 1979 (Figure 1 on page 3). Both of those ―stampedes‖ came out of the blue with no funda-mental reasons. Following the initial selling-climax low, there was a sharp rally that peaked with
  7. 7. a subsequent retest of those ―climax lows.‖ The 1978 bottoming process took seven weeks tocomplete, while in 1979 it took only four weeks. Still, while the stock market‘s bottomingprocess should take weeks, many individual stocks have probably already bottomed. That sensewas reinforced last week with our fundamental analysts‘ comments on names like: Linn Energy(LINE/37.86/Strong Buy), EV Energy Partners (EVEP/$66.21/Strong Buy), Healthcare REIT(HCN/$45.88/Outperform), First Potomac Realty (FPO/$12.99/Strong Buy), CenturyLink(CTL/$34.61/Strong Buy) to name but a few.What a (Cash) Drag: Institutional Investorsand ETF Cash EquitizationThursday, July 28th, 2011By Kevin Feldman, CFP, iShares How institutional investors handle “cash drag”- and how youcan, too.I recently blogged about a report from Greenwich Associates that showed institutional ETF usageis on the rise. One of the primary ETF strategies in that space? Cash equitization, an approachthat‘s little-used (and perhaps even little-known) in the individual investor realm. Readingthrough the report and all the subsequent media coverage got me thinking – why aren‘t moreretail investors using ETFs to equitize their cash?At first glance, cash equitization using an ETF is pretty straightforward. As opposed to carryinga significant cash position, an investor simply selects an ETF that closely approximates their tar-get risk and asset class exposure to remain invested in the market. Typically institutionalinvestors will implement a cash equitization strategy when cash is on the sidelines and waiting tobe put to work. For example, at times large institutional clients are transitioning between man-agers or doing a search for a new manager in a particular asset class. Rather than risking under-performance through ―cash drag‖ (deviation of returns from a benchmark‘s returns due to cash
  8. 8. holdings), the institution will invest in an ETF with similar asset class exposure as an interimsolution.Institutions have been using ETFs for cash equitization since, well, the beginning. In fact, whenETFs first came on the scene, they were mostly perceived as institutional products – and some ofthose institutions were getting their feet wet with the products by using them for cash equitiza-tion. The largest and most liquid ETFs lend themselves to this practice because there‘s now awide variety to choose from, total costs are generally very low for short holding periods, and typ-ically they‘re easily traded throughout the day.So why do institutions want to avoid cash drag, and how does their reasoning apply to individualinvestors? Likely one of the biggest reasons an institution would choose equitization over hold-ing cash is that they believe market returns will be positive over time (that‘s why we invest,right?). Both equities and bonds have experienced strong performance as of late (the S&P 500Index was up 30% over the past year as of 6/30/2011). Conversely, interest rates on many cashvehicles are near 0% at the moment, so portfolio cash may actually be earning negative realreturns after inflation is taken into account. And although cash holdings can reduce risk in theform of portfolio volatility, they can ―drag‖ on returns in up markets.In addition, the case for cash equitization can be even stronger in an institutional bond portfoliothan in its equity counterpart. For one thing, income from bond holdings naturally increases cashlevels more than in an equity portfolio, making the portfolio more susceptible to cash drag. Andsince a key component of a fixed income portfolio is often to invest in income-generating securi-ties, the low yields on cash can work against that strategy. When an institutional bond fundwishes to reduce its cash holdings and employ a cash equitization strategy, ETFs offer a com-pelling solution with an assortment of criteria to choose from such as yield, maturity, credit qual-ity, and sector in order to match specific investment objectives and risk tolerance levels.How does this apply to individual investors? Well, they might have a certain amount in cash thatthey already know is eventually destined for the market, but that they just haven‘t gotten aroundto investing yet (this is obviously much different than cash that‘s been earmarked for savings orexpenditures). The ―institutional approach‖ might be to consider using an ETF to get that cashoff the sidelines and out of its zero– or near-zero-yielding account and into the market (if that‘swhere it‘s headed eventually) to manage your own personal cash drag. Keep in mind that invest-ing in an ETF has much higher risks associated with it than investing in cash, so investors shouldconsider their own risk tolerance and return objectives before entering the market. Additionally,investors should work with their financial advisor and tax planner to determine if the costs ofmoving in and out of an ETF position and possible tax consequences outweigh the overall cashdrag on their portfolio.Past performance does not guarantee future results.Buying and selling shares of ETFs will result in brokerage commissions. There can be no assur-ance that an active trading market for shares of an ETF will develop or be maintained.Bonds and bond funds will decrease in value as interest rates rise.
  9. 9. Commodities in Portfolio Construction (Lee)Tuesday, March 29th, 2011Commodities in Portfolio Constructionby Alfred Lee, CFA, DMSVice President & Investment StrategistBMO ETFs & Global Structured InvestmentsBMO Asset Management Inc.alfred.lee[at]bmo.comMonthly Strategy Report March 2011Over the last decade, commodity and commodity-related investments have gained significantpopularity with both institutional and retail investors. Given their sizable returns over the last tenyears, historical low correlation to traditional asset classes and emerging markets soaking upmuch of the supply, it should not come as much of a surprise. Coming out of the credit crisis,major central banks around the globe, most notably the U.S. Federal Reserve (Fed), were focusedon reflating the global economy.The co-ordinated easy monetary policies, government stimulus measures along with quantitativeeasing were largely a positive for broad commodities which tend to be used as a hedge againstdeclining currency values and particularly a falling U.S. dollar. Essentially, investors benefitedfrom merely having exposure to a broad basket of commodity and commodity relatedinvestments.With global stimulus and the second instalment of quantitative easing1 (QE2) moving furtherinto the rear-view, the reflation trade should be less of a driver in global commodity prices goingforward, especially considering the Fed is anticipated by some to remove QE2 stimulus this sum-mer. Independent supply and demand fundamentals as a result should play a more important rolein driving commodity prices going forward. In addition, with political turmoil in the Middle Eastand now the unfortunate tsunami in Japan, these issues will have different macro factors on thevarying commodity sub-groups.Commodity DifferentiationWith that in mind, investors may want to consider commodity differentiation at this point in theirportfolio construction process. As global economic fundamentals slowly improve, correlationbetween assets and within assets such as commodities should naturally decrease (as detailed inthe correlation matrices on the following page) in an economic thawing process. Moreover, aspreviously mentioned, the negative headlines will have varying impacts and ramifications oneach of the commodity groups. Investors should therefore focus on commodities that have thebest risk-adjusted returns and those which will further optimize their overall portfolio.
  10. 10. As many investors are aware, the proliferation of exchange traded funds (ETFs) and exchangetraded products (ETPs)2 have allowed investors to efficiently implement commodity exposure totheir portfolios in a number of different ways. Through ETFs and ETPs, investors can accesscommodity futures, commodity related companies and in some cases, spot prices. Investorsshould however first be cognisant that different commodity sub-groups react differently tomacro-economic events and each also has its own fundamental and technical trading patterns.Secondly, how each ETF or ETP structure reacts to these same macro-events can also be differentbased on how it is accessing the specific underlying commodity (ie through spot, futures orequities).
  11. 11. For further information on the advantages and disadvantages of each commodity ETF/ETP struc-ture, please see the ―Gaining Commodity Exposure Through ETFs‖ on our website. In the fol-lowing pages, we will outline our fundamental and technical outlook on four major commoditysubgroups: agriculture, base metals, energy and precious metals.
  12. 12. • Agriculture. As we mentioned at the beginning of the year in our BMO ETF 2011 OutlookReport, food price inflation will be a topic du jour this year, with global population anticipated tohit seven billion and the rising wealth in the emerging nations continuing to place upward pres-sure on soft commodity prices. Furthermore, extreme weather patterns over the last year in Aus-tralia and Latin America will lead to tighter supplies. Already this year, we have seen thefuture contracts of a number of soft commodities such as wheat hit its limit up3 in trading.Now with a number of agriculture commodity contracts such as wheat, corn and soybeans cur-rently trading in backwardation4 or in mild contango5, we prefer attaining soft-commodity expo-sure through futures based ETFs/ETPs. Some agriculture related companies may experienceexpansion at the middle portion of their income statements should they not be able to pass fullgrain cost appreciation to consumers. As a result, futures may provide a more pure exposure tohigher agriculture prices considering the current characteristics of the commodity curve. Wewould caution however, that with the strong run up in many of the agriculture contracts, wewould look at technical indicators such as RSI6 and MACD7 for entry points.Potential Investment Opportunities:• BMO Agriculture Commodity Index ETF (ZCA)– on pullbacks.
  13. 13. • Base metals. Base metals as a group saw very sizable returns in 2009 with the S&P/GSCIIndustrial Metals Spot Index gaining 91.2%. As copper, zinc and nickel are largely tied to indus-trial production, prices in these metals are rather sensitive to economic expansion. In additionbase metal prices are highly correlated to stock market sentiment, given equity values on a wholeare also a leading macro-economic indicator. In 2010, volatility in equity market sentiment withinvestors switching frequently between the ―risk-on‖ and ―risk-off‖ trade, led base metals as agroup to lag other commodity groups. We are the least favourable on base metals when lookingfor assets to best optimize a portfolio‘s risk/return characteristics because of the high correlationbetween copper, zinc and other industrial metals to equity prices.Moreover, as we see equity market volatility shocks to be a common theme this year, base metalfuture trades should be utilized more for higher-beta momentum trades based on timing thanportfolio construction building blocks. For investors looking for base metal exposure, we dohowever currently favour futures based ETPs over equity-based ETFs as base-metal related com-panies have run significantly against the S&P/GSCI Industrial Metals Spot Index. The futurescurve characteristics for base metals are mixed with a number of contracts recently moving to asteeper backwardation. Nevertheless, products incorporating a ―smart-roll‖ feature that look toreduce roll effects should be considered by those desiring exposure in this area.
  14. 14. Potential Investment Opportunities:• BMO Base-Metals Commodity Index ETF (ZCA)– for momentum based trades.• Energy. Energy prices remain one of the wildcards in the revival of the global economy.Should Brent crude prices and, to a lesser extent, West Texas Intermediate (WTI) defy gravity fora sustained period of time, it could potentially put the brakes on the global recovery as higher oilprices would increase everything from costs of production inputs to transportation. However,much of the recent rise in crude prices is also a result of the markets pricing in a risk premiumand an emotional element, seen through a widening gap between implied and realized volatilityon crude.Investors with an extremely short-term horizon may want to consider futures-based energy ETPs.Though we wouldn‘t be surprised to see the price of Brent crude and WTI rise further, it comes at
  15. 15. a higher risk/reward trade-off given the sizable amount of emotion that is currently priced intooil. Last month, when rumours that Libyan leader Muammar Gaddafi was shot broke out, theemotional premium in oil prices quickly dissipated before rapidly recovering after the news wasdeclaredfalse. This demonstrated the excessive level of political premium currently built into crudeprices. An investment in crude through futures is therefore an indirect bet that turmoil in theMiddle East will continue. Additionally as we had forecasted back in January, higher crudeprices would come at higher volatility levels this year. As such, we believe oil related companieshave a better risk/reward trade-off at this point, even if they have lagged crude prices as theyshow a more stable trend and have exhibited lower volatility levels.Potential Investment Opportunities:• BMO Energy Commodity Index ETF (ZCE)– Shorter-term investors• BMO Junior Oil Index ETF (ZJO)– Longer-term investors• Precious Metals. Of the four commodity groups mentioned, precious metals have shown to bethe least correlated to broad based equities. The non-correlation to both the S&P 500 CompositeIndex and the S&P/TSX Composite Index is largely the affect of the market‘s utilization of pre-cious metals, such as gold, as a multi-purpose hedge. Last year, the sovereign debt crisis andconcerns of a global currency war led to the use of precious metals as a hedge against fiat curren-cies. This year, with food and commodity prices rising, money is slowly transitioning out of theformer trade as an alternative currency and into a hedge against inflation concerns.On a technical level, gold prices have recently shown strength particularly against the equitymarket and base metals. Within the precious metals sector, small-cap gold companies, which wewere extremely bullish on throughout 2010, have recently been gaining relative strength against
  16. 16. large-cap gold companies. Investors looking for portfolio diversification may want to considerbullion or ETPs that track gold through bullion or futures, whereas investors looking for ways togenerate portfolio alpha should consider junior gold companies.Potential Investment Opportunities:• BMO Precious Metals Commodity Index ETF (ZCP)– Investors looking for portfolio diversification• BMO Junior Gold Index ETF (ZJO) – Investors lookingto generate portfolio alphaIn conclusion, we believe commodity exposure will remain an instrumental building block forboth institutional and retail portfolios. However, with correlations between commodity sub-groups on the decline, investors should first consider the sub-group of commodities that will bestoptimize their investment strategy and then determine the investment structure that is best suitedto execute their objectives. With the possibility of the removal of QE2 stimulus by the Fedquickly approaching, investors will also need to consider individual supply and demand funda-mentals of each commodity since the reflation trade will be less prevalent in keeping all com-modities afloat.Footnotes1 Quantitative easing: An unconventional monetary policy used by some central banks when tra-ditional measures have not produced the desired effect. Money supply is typically increased in aneffort to promote increased lending and liquidity.
  17. 17. 2 Exchange-traded products (ETPs): A broader categorization of exchange-traded funds that alsoinclude products that hold commodities, futures and other asset types.3 Limit up: The maximum amount by which the price of a commodity futures contract mayadvance in one trading day. Some markets close trading of these contracts when the limit up isreached; whereas others allow trading to resume if the price moves away from the day‘s limit. Ifthere is a major event affecting the market‘s sentiment toward a particular commodity, it maytake several trading days before the contract price fully reflects this change. On each trading day,the trading limit will be reached before the market‘s equilibrium contract price is met.4 Backwardation: When the futures price is below the expected future spot price. Consequently,the price will rise to the spot price before the delivery date.5 Contango: When the futures price is above the expected future spot price. Consequently, theprice will decline to the spot price before the delivery date.6 RSI: Relative Strength Index is a technical momentum indicator that compares the magnitudeof recent gains to recent losses in an attempt to determine overbought and oversold conditions ofan asset. A reading of 30 or less is generally considered oversold, whereas a reading of 70 ormore will be considered overbought.7 MACD: Moving Average Convergence Divergence: A trend-following momentum indicatorthat shows the relationship between two moving averages of prices. The MACD is calculated bysubtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-dayEMA of the MACD, called the ―signal line‖, is then plotted on top of the MACD, functioning as atrigger for buy and sell signals.For more information on BMO ETFs, please visit our website or contact yourfinancial advisor.To be added to the distribution list for our Monthly Strategy Report and Trade OpportunitiesReport, please visit our homepage at to subscribe or email alfred.lee@bmo.comwith title: ―Add to distribution list.‖Standard & Poor‘s®, S&P® and S&P GSCI® are registered trademarks of Standard & Poor‘sFinancial Services LLC (―S&P‖) and have been licensed for use by BMO Asset Management Inc.BMO Agriculture Commodity Index ETF, BMO Base Metals Commodity Index ETF, BMOEnergy Commodity Index ETF, BMO Precious Metals Commodity Index ETF are not sponsored,endorsed, sold or promoted by S&P or its Affiliates and S&P and its Affiliates make no repre-sentation, warranty or condition regarding the advisability of buying, selling or holding units ofthe ETFs.Commissions, management fees and expenses all may be associated with investments inexchange traded funds. Please read the prospectus before investing. The funds are not guaran-teed, their values change frequently and past performance may not be repeated.
  18. 18. This communication is intended for informational purposes only and is not, and should not beconstrued as, investment and/or tax advice to any individual. Particular investments and/or trad-ing strategies should be evaluated relative to each individual‘s circumstances. Individuals shouldseek the advice of professionals, as appropriate, regarding any particular investment.BMO ETFs are administered and managed by BMO Asset Management Inc., a portfolio managerand a separate legal entity from the Bank of Montréal.® Registered trade-marks of Bank of Montréal.The Big Secret Behind Golds $100 CollapseThursday, January 27th, 2011by Adam Hewison, CEO, Seasoned Trader, MarketClub/INO.comThe question many investors are asking themselves today is, just what happened to the priceof gold?Did the world change? Did the problems in Europe go away? Did all the states manage to findfunding to cover their deficits?No, none of that happened, but gold still dropped $100.Its all about market perception and timing, two things weve talked about many times before onthe Traders Blog. I dont know about you, but I remember when gold was over $1,400 an ounceand all I could see on TV where ads from gold companies extolling the virtues of buying gold asit is real money. Since the fall, I expect well see fewer of these advertisements on TV andin print.So what did happen to gold?Well, for starters there were some key technical levels broken. If youre a gold trader, but not atechnical trader, you really need to learn how to read charts and see what other traders are doing.Secondly, there did not appear to be any other news to drive this market higher. When that hap-pens, markets tend to fall under their own weight, and as many retail investors purchased gold,there was nobody on the other side of the market to support gold.So the question is, is the moveover in gold? Thats a tricky one. I want to show you in todays video exactly how were lookingat this very emotional market. Every time we have created a video indicating that there would besome pullback in gold, we were bombarded by the gold bugs saying that were crazy. When yousee a market pullback as much as gold has, you have to have some respect for the market itself.
  19. 19. If we look at the price of gold today at approximately $1,330, it pretty much equates to what hap-pened in the last 30 years when gold was trading at a high of $850 an ounce. If you factor ininflation over the last 30 years, gold is probably lower now than it was 30 years ago. So howgood an investment is gold? I think gold is more of a barometer of fear than anything else.Clearly there are other investments in the marketplace that have better returns.Lets get back to gold and what we think will happen. In this short video we analyze the marketusing our "Trade Triangles," the Williams%R, and the MACD indicator.Adam HewisonPresident of INO.comCo-founder of MarketClubGolds Mania Phase Still AheadWednesday, January 5th, 2011After a $325 rise in 2010, gold bullion yesterday suffered its steepest one-day loss since July –down by $34 at the U.S. close after an intra-day low of -$40. The chart below shows the sell-offplunging the gold price down to right on top of its 50-day moving average. Also, the ―triple top‖could point to more downside in the short term.Source: StockCharts.comDoes gold‘s decline mark the end of the ten-year bull market? Or was it just a question of heavyprofit-taking after performance gaming at the end of December?
  20. 20. BCA Research commented as follows: ―The gold bull market has been driven by the potentialinflationary implications of current large fiscal deficits and central banks that are prepared tostop at nothing to prevent deflation. It may be several years before developed-world real interestrates return to the norms of earlier decades, especially in the U.S. In this environment, gold willcontinue to be an excellent insurance policy and should continue to fare well when measuredagainst the major currencies.―In addition, it is hard to make the case that gold is currently a crowded trade. Many institutionaland retail investors agree with the gold bull case but have been slow to act, even as their faith inconventional stocks and bonds has ebbed. Indeed, based on investor meetings and anecdotal evi-dence, we estimate that the average portfolio allocation to gold is around 1%. This suggests thatthere is plenty of pent-up demand which could still flow into gold and related shares.―True, the gold bull market will proceed in instalments, not a straight line. It would not be a sur-prise to see gold suffer occasional selloffs of perhaps a few hundred dollars at a time during2011. We would broadly view these selloffs as opportunities to boost core holdings. The bottomline is that gold is a potential mania candidate and expect good returns in this metal in 2011.‖I couldn‘t have said it better myself.Source: BCA Research, January 4, 2011.Largest High Grade Bond Outflow OnRecordMonday, December 20th, 2010While it was no surprise to readers that equity mutual funds saw the 32nd consecutive outflowfrom domestic stock funds (for a total of $95 billion YTD), what was far more surprising is thatflows out of credit, and particularly high grade, surged. As Bank of America notes, "high grademutual funds saw outflows of $2.5 billion, the largest dollar amount on record and just the fourthoccurrence this year so far, according to data from EPFR." The question then becomes where did,and will, all this cash go: if now following such a massive outflow from the traditional flow safe-haven, no money still goes to equities, then it will be fairly simple to conclude that no matterwhat happens, that equities are now thoroughly embargoed by the vast majority of retailinvestors: those that, incidentally, account for just under 40% of market capitalization (a numberwhich curiously is almost comparable to the amount of stimulus notional, both fiscal and mone-tary, since the Lehman crash).From BofA:
  21. 21. High grade mutual funds saw outflows of $2.5 billion, the largest dollar amount on record andjust the fourth occurrence this year so far, according to data from EPFR. As we highlighted yes-terday, negative net flows in high grade funds tend to follow large sell offs in rates, which hasoccurred since the beginning of this month. In other asset classes, high yield mutual funds saw$222 million in net flows, the second consecutive weekly inflow, but lower than last week‘s fig-ure of $533 million. Factors pointed to a mild but positive number, as daily flow figures wereinconsistent, with two positive and two negative readings. CDX indices performed well early inthe week, but softened towards the end, also providing an inconclusive signal. Net flows frominstitutional and retail investors were largely split, with institutional investors reporting inflowsof $153 million or 0.2% of assets, and $120 million or 0.2% of assets from retail. Importantly,non-US domiciled funds saw their third consecutive weekly outflow, $28 million this week,compared to an inflow of $233 million from US domiciled funds. Finally, inflows to loansreached a record by dollar amount, according to AMG/Lipper data.
  22. 22. China Imports Five Times More GoldSaturday, December 4th, 2010 Just last week we highlighted how India andChina are driving global gold demand (Read: India and China Continue to Drive Global GoldDemand) but it appears demand from China is even stronger than we thought.
  23. 23. Statistics released today by the Shanghai Gold Exchange show that China‘s gold imports havejumped over 460 percent in just the first ten months of this year. Through October, China‘s goldimports totaled 209 tons of gold, up from just 45 tons in 2009.And they‘re not done yet. Historically, the fourth quarter is when China imports the largestamount of gold so we could see much higher figures when all is said and done.The import figures were released as a part of a presentation from Shanghai Gold ExchangeChairman Shen Xiangrong. Chinese inflation worries have picked up steam as the year has pro-gressed and Shen said ―uncertainties in domestic and global economies, and increasing anticipa-tion of inflation [in China], have made gold as a hedging tool very popular‖ as investors look fora store of value, according to several news reports.Shen added that 70–80 percent of the imported gold has been transformed into mini gold barswhich the Financial Times describes as a ―classic product for retail investors.‖While the figures are astounding, we‘ve been discussing this developing trend for several years.Since 2000, the gross national income (GNI) per capita on a purchasing power parity basis hasjumped nearly 200 percent in China.Without a social safety net, efficient retirement savings vehicles and a limited number of invest-ment options, these wealthier citizens are turning to the metal that they began using as a currencymore than 4,000 years ago.We believe the figures released today reflect long-term gold demand and are not short-term innature.Horizons AlphaPro Launches Canada‘s FirstActively Managed Preferred Share ETFMonday, November 22nd, 2010Horizons AlphaPro Launches Canadas First Actively Managed Preferred Share ETF
  24. 24. Toronto, November 23, 2010 — AlphaPro Management Inc. ("AlphaPro"), manager of theHorizons AlphaPro exchange traded funds ("ETFs"), has launched Canadas first actively man-aged preferred share ETF, the Horizons AlphaPro Preferred Share ETF (the "Preferred ShareETF").The Preferred Share ETF will begin trading today on the Toronto Stock Exchange under the sym-bol HPR. The sub-advisor to the Preferred Share ETF is Natcan Investment Management Inc.("Natcan"), which currently manages more than $1 billion dollars in preferred share assets."Were very happy to be working with Natcan once again. Their fixed income team has done agreat job in managing the recently launched Horizons AlphaPro Corporate Bond ETF, Canadaslargest actively managed ETF. We expect more of the same with the Preferred Share ETF basedon our belief that an active strategy can overcome many of the limitations found in trying toreplicate a preferred share index," said Ken McCord, President of AlphaPro.The investment objective of the Preferred Share ETF is to provide dividend income while pre-serving capital by investing primarily in preferred shares of Canadian companies. The PreferredShare ETF may also invest in preferred shares of companies located in the United States, fixedincome securities of Canadian and U.S. issuers, including other income generating securities, aswell as Canadian equity securities and exchange traded funds that issue index participation units.The Preferred Share ETF will, to the best of its ability, seek to hedge its non– Canadian dollarcurrency exposure to the Canadian dollar at all times.Natcan anticipates yields on investment grade preferred shares will stay strong over the next twoyears and that the asset class will likely continue to see a growth in interest from income seekingretail investors, many of whom are looking to increase their income in retirement. This processcould be accelerated by the phase-out of many income trusts in 2011 and beyond."Preferred shares really hit a sweet spot for many Canadian investors," Mr. McCord said. "Theyoffer attractive, tax-efficient yields and are generally less volatile than common shares. Forinvestors with a need for income and an appropriate risk tolerance, preferred shares can be avery effective investment solution."Commissions, management fees and expenses all may be associated with an investment in thePreferred Share ETF. The Preferred Share ETF is not guaranteed, its value changes frequentlyand past performance may not be repeated. Please read the prospectus before investing.About Natcan Investment Management ( in 1990, Natcan Investment Management Inc. is a subsidiary of the National Bank ofCanada. Since the firms founding, Natcan has privileged shared ownership between the parentcompany and its key professionals. Recognized as a leading portfolio management firm inCanada, Natcan provides investment solutions to institutional clients, and acts as sub-advisor formutual funds and private wealth portfolios. With approximately $25 billion in assets under man-agement as of September 30, 2010, the firm has about 45 investment professionals across itsMontréal and Toronto offices.
  25. 25. About AlphaPro Management Inc. ( is an innovative financial services company specializing in actively managed exchangetraded funds with assets under management of approximately $435 million as of October 29,2010. AlphaPro is a subsidiary of BetaPro Management Inc. ("BetaPro"). BetaPro is Canadaslargest provider of leveraged, inverse leveraged and inverse ETFs. BetaPro manages approxi-mately $2.6 billion in assets as of October 29, 2010. BetaPro is a subsidiary of Jovian CapitalCorporation (JOV:TSX).For more information:Ken McCord, President, AlphaPro Management Inc., (416) 933-5746 or 1–866-641-5739Getco Churns Nearly Entire GM Float AsStock Closes At Lows Of Day, And $1 BelowBreak PriceThursday, November 18th, 2010The only clear winner from todays GM IPO? All those who got IPO shares and flipped them tothe sheep. And of course GETCO, which churned 452 million of GMs 478 million sharefloat: in other words 95% of the entire float was traded by computers! As for everyone else,you lost: with the stock closing at the lows of the day, all retail investors who bought in post thebreak, and on the way down ended up with losing positions.We eagerly await the telepromptersappearance at 4:15 pm eastern to spin this in the right way and convince people that a loss isreally a gain.
  26. 26. Tags: Appearance, Break, Computers, Getco, Gm, Ipo Shares, Lost, Lows, People, RetailInvestors, S 478, Sheep, Stock, TeleprompterPosted in Markets | Comments OffDont Believe The Rally?Tuesday, October 26th, 2010by Leo Kolivakis, via Pension Pulse
  27. 27. I wanted to follow-up on my pre-vious post where Leo de Bever articulated his fears on what will happen when the music stops.Joe Saluzzi, co-founder of Themis Trading, was interviewed on Yahoo Tech Ticker on Monday(see video below):Major averages are hovering near their highest levels since September 2008, but retail investorscontinue to flee the market.Domestic equity funds have suffered outflows for 24 consecutive weeks through Friday, andover $81 billion has come out of domestic equity mutual funds year to date, according toMorningstar.At the risk of stating the obvious, several factors explain why investors simply dont trustthe rally.Twice bitten, thrice shy: Having been burned by the bursting of the tech stock bubble in 2000,the housing bubble and the financial crisis of 2008, investors are understandably wary of gettingsucked in again. A "lost decade" for index investors hasnt helped either.Its the Economy Stupid: With the "real" unemployment rate near 17%, millions of Americanssimply have no money to put into the market; many are cashing out their 401(k) plans and other-wise raiding their nest eggs in an effort to stay afloat.Given the economic backdrop, its no surprise many investors see the rally as being detachedfrom reality and due only to the Feds easy money policies...and the promise of more!
  28. 28. "Were not seeing any sort of growth other than stimulus," says Joseph Saluzzi, co-founder ofThemis Trading. "That is a very disturbing thing — the constant stimulus that keeps on comingthat really does nothing other than barely keep you above [breakeven] on the GDP print."In addition, Saluzzi says investors are rightfully worried about a market dominated by "high-speed guys just chasing each other up and down the price ladder."Unsafe at High SpeedsAs has been widely reported, high-frequency trading routinely accounts for more than 50% ofdaily U.S. equity trading volume and regularly approaches 70%.Saluzzi isnt opposed to high-frequency trading per se, calling it a "byproduct of the marketstructure," as detailed in the accompanying video. But he believes that structure is broken, thanksto rules promoting computer-driven trading, most notably Reg NMS.As a result of regulatory changes and new technology, events like the May 6 ‗flash crash "willhappen again," he says. "Theres not a doubt in my mind."Many retail investors feel the same way, another reason for the mistrust of the rally and whyabout $65 billion of the equity fund outflows this year have occurred in the five months since the"flash crash".So are high frequency trading (HFT) platforms accounting for 70% of the daily trading volume?Im not sure if its that high but I have no doubt that todays stock market is primarily driven bymulti-million dollar computers developed by large hedge funds and big banks prop desks.But whats the best way to beat high frequency trading? Take a long-run view on a stock, a sec-tor, or an asset class. Youre never going to beat the computers day trading but you can makemoney in these markets by understanding the weakness of these HFT platforms. For example, ifyou hold shares of a solid company and the price plunges on high volume for no real valid rea-son, chances are some HFT is going on in that company. My advice is to add to your positions onthose dips and just hold on. If you get cute, placing tight stop losses, youre going get burned.Just like anything else, computers have advantages and disadvantages.[Note: Keep an eye on Citigroup ©, a favorite target of HFTs, and Research in Motion (RIMM).Both stocks are primed to break out from these levels. I prefer RIMM.]What worries me more is what Saluzzi says on how volatility is impacting the IPO market. Butthe facts dont back up his claims. In fact, according to Renaissance Capital, $23 billion wasraised in the global IPO market last week, making it the biggest week this year and signaling arevival in investor interest for this class of equities:The Hong Kong offering of AIA, a carveout of AIGs Asia Pacific life-insurance business, raised$17.8 billion, making it the fifth-largest IPO on record. Also Taiwans TPK Holdings has a $200million IPO; the firm is the supplier of the touch-screen technology behind Apples iPad.
  29. 29. In early November, Coal India IPO is set to raise more than $3 billion in what may be thecountrys largest-ever initial public offering.In the U.S., handbag-maker Vera Bradley (VRA), Chinese education provider TAL Education(XRS) and Italian restaurant chain Bravo Brio (BBRG) raised a combined $440 million, while inSouth America, oil and gas provider HRT Participações sold $1.4 billion in new stock onThursday.Norway‘s Statoil Fuel & Retail raised $800 million after pricing at the top of the range Thurs-day. Andthe worlds largest online betting exchange, London-based Betfair, made its publicdebut by raising $540 million.The average 2010 IPO has returned 6.3% from its first day close to date, outpacing the 4.8%year-to-date return of the MSCI World Index (IWRD), says Renaissance.―Heavy, deal flow, positive returns and a swelling IPO pipeline suggest an active close to analready active year, and an IPO market that has finally returned to more normalized issuance lev-els,‖ the company said in an online blog.As for the economy, dont just focus on the US. CPB Netherlands Bureau for Economic PolicyAnalysis released its world trade report on Monday, showing world trade up 1.5% month-on-month in August and world industrial production up 0.2%:Compared to its long run average, production momentum remains high in July, particularly in theUnited States, the Euro Area, and emerging Asia.There is a lot of slack in the US economy, but things are slowly shifting. As for the rally, there isplenty of liquidity to propel shares much higher. While I understand asset managers who areskeptical, I fear they will be left in the dust when the markets start going parabolic. And whetheror not you believe in the rally, its irrelevant. What is relevant is how long can you afford tounderperform the markets before you lose your job?Emerging Markets Diary (August 30, 2010)Friday, August 27th, 2010Emerging Markets Diary (August 30, 2010)Strengths Thailand‘s GDP expanded by a higher-than-expected 9.1 percent in the second quarter from a year earlier, as surging exports helped offset the impact of political turmoil. Second-quarter GDP rose 7.9 percent year over year in The Philippines, exceeding con- sensus estimates. Growth was driven by higher fixed-asset investment, especially in con- struction, and government spending.
  30. 30. GDP and consumption levels in dollar terms place Russia on par with Brazil and India, according to Troika Dialog research. Data from the Brookings Institution imply that Russia actually has the largest middle- class consumption among the BRIC nations, which supports the consumer sector invest- ment theme. The Brazilian corporate and retail investors still continue to borrow—the data from July show 18 percent growth of outstanding loans year over year. •The unemployment rate in Brazil in July declined to 6.9 percent from 7 percent in June. With the latest inflation data at 4.4 percent, below the official target of 4.5 percent, the market expectations are that the current interest rates of 10.75 percent are unlikely to change by year-end Investors continue to be attracted by the prospects of Brazil. Shell and Cosan set up a joint venture to produce sugar and ethanol and to consolidate the fuel distribution in the country. The combined entity will have an 18 percent market share in the fuel distribu- tion, behind Petrobras (34 percent) and Ultrapar (21 percent) Retail sales in the greater Santiago area in July increased by 25 percent year over year. The Central Bank of Chile updated a previously forecast GDP growth of 4 percent to 5 percent, saying it is more likely to reach 6.5 percentWeaknesses Hong Kong‘s July exports increased by a slower-than-expected 23.3 percent year over year, while imports grew a less-than-estimated 24.9 percent year over year, reflecting a slowdown in China. According to WINDS database, out of 90 Chinese property developers listed in Shanghai and Shenzhen that have reported first-half results, close to two-thirds show negative oper- ating cash flows. A similar ratio was last seen in the middle of 2008. Russia‘s ministry of economy estimated that the drought will shave off at least 0.4 per- cent to 0.5 percent from GDP growth this year. According to Reuters, potential total effect on the economy could be 0.7 percent to 0.8 percent being slashed from GDP growth. An appreciating Chilean peso (up 3.3 percent against the U.S. dollar last month) is caus- ing strain for many Chilean exporters. The Central Bank rejected an intervention call at this stage, saying the currency strength is a reflection of the strength of the Chilean economy
  31. 31. Opportunities The 60-mile traffic jam in Northern China since August 14 is attributable to coal trans- portation to meet higher demand for power generation because of unusually hot weather. The provinces of Inner Mongolia, Shanxi and Shaanxi account for half of China‘s coal production. Truck transportation to coastal regions has added tremendous pressure on highway infrastructure. These bottlenecks highlight the longer-term need for more infra- structure construction in the hinterlands and shorter-term opportunity for higher coal prices. Russian car deliveries increased 9 percent in the first seven months of the year and jumped 48 percent in July, compared to first-half year sales growth of 0.6 percent in the rest of Europe. The Venezuelan government will cancel $200 million in outstanding debt of Colombian exporters. Although the two countries represent very divergent political systems, their trade relations remain strong HSBC is reported to be bidding for a controlling stake in Nedbank, the fourth-largest bank in South Africa. It remains to be seen whether the South African authorities will autho- rize such a transaction after holding ICBC (of China) to a 20-percent stake in Stan- dard Bank
  32. 32. Time Warner bought a stake in Chilevision, the local free-to-air TV network, for around $150 million. It remains to be seen how Time Warner, which already operates in Chile through CNN, will reposition its strategy in the countryThreats Deteriorating U.S. economic data, including housing sales and unemployment, might weigh on investor sentiment toward Asian countries that have largely relied on exports for the current recovery. The constitutional referendum on September 12 could limit potential upside in Turkish equities until the outcome is known. Historically, market performance was hindered by the prospect of a coalition government. Mexico continues to battle to restore stability while conducting its war on drugs.India to Open Equity Markets to ForeignRetail InvestorsTuesday, August 24th, 2010This article is a guest contribution by American Century Investments.Over the past few years, India has moved forward with market-oriented economic reforms suchas reductions in tariffs and other trade barriers, the modernization of its financial sector, majoradjustments in government monetary and fiscal policies, and more safeguards for intellectualproperty rights. In a move to reform its economy and boost double-digit growth, India—Asia‘sthird largest economy—is now planning to open equity markets to foreign retail investors.The Financial Times reported last week (―India Eyes Foreign Retail Share Investors,‖ August 9,2010) that a panel set up by the government to explore ways of bolstering foreign capital inflowshad recommended making it easier for foreigners—particularly wealthy foreign nationals ofIndian origin—to buy shares on the Indian exchanges.In the article, Ashvin Parekh, a partner at Ernst & Young in Mumbai, who has also been workingwith the finance ministry on the project, said that ―the finance ministry has accepted the recom-mendations in principle as it wants to capitalize on India‘s incredible growth by attracting moreforeign investors.‖ The move to open up the country‘s equity market to retail investors abroadhad been passed on to India‘s market regulator and central bank, which would have to create aframework to protect investors‘ interests.About 18 years ago, foreign institutional investors were first allowed to invest in India. Now,foreign-owned brokers are common and trade directly on the country‘s exchanges, while individ-ual investors are prohibited from such practices. The plan to open up equity markets to foreign
  33. 33. markets comes as India‘s exchanges are upgrading technology in a bid to lure high-speed,computer-driven trading that accounts for a large proportion of activity on U.S. and Europeanstock exchanges.India‘s government is also reportedly seeking to raise about $5 billion by selling minority stakesin state-owned groups, including Oil India and Coal India, and as investors eye India for higherfinancial returns. Over the past six months, India‘s equity market has drawn much foreign insti-tutional investor cash. In addition, the economy has grown 8.5% on the back of strong domesticdemand and abundant liquidity, thus outperforming large emerging market rivals.In the first seven months of 2010, foreign institutional investors have poured approximately $11billion into Indian equities (see chart below), compared with about $7.5 billion during the sameperiod last year. Analysts expect inflows for this year to top the $17 billion record hit in 2007.Source: The Financial TimesMore Growth Potential for InvestorsWhile opening up its equity market to foreign retail investors will likely benefit India andincrease capital inflows in that country, there is also more growth potential for investors who areprepared to accept the risks and invest for the long term.Over the past decade, the economies of emerging market countries like India have been moredynamic and faster growing than the developed world. Maintaining growth and stability is cer-tainly a top priority for emerging market countries like India. Compared to when emerging mar-kets funds were first listed some 20 years ago, the asset class is also better regulated and offersmore transparency due to improvements in the legal and financial systems. Many economiessuch as India have also built up their foreign exchange reserves, which allows them withstandmarket turbulence from developed economies. Moreover, sound macro fundamentals and stimu-lus measures helped the country weather the recent global financial crisis.
  34. 34. Over the next five years, we also believe that India and emerging market economies will be dri-ven not only by export demand from the rest of the world, but by growth in domestic consump-tion, including health care, technology, infrastructure, and finance, among others. Accordingly,we think that this will create huge opportunities for investors and companies doing business inthese sectors.Investment return and principal value will fluctuate, and it is possible to lose money by investing.International investing involves special risks, such as political instability and currency fluctuations. Investing inemerging markets may accentuate these risks.The opinions expressed are those of American Century Investments and are no guarantee of the future performanceof any American Century Investments portfolio. This information is not intended to serve as investment advice; it isfor educational purposes only.You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. Thefund’s prospectus or summary prospectus, contains this and other information about the fund, and should be readcarefully before investing. Investments are subject to market risk.The Art of Outperformance (Jensen)Sunday, July 4th, 2010This article is a guest contribution of Neils Jensen, Absolute Return Partners.
  35. 35. ―When data contradicts theory in a discipline like physics, there is excitement amongst scientists[…]. When data contradicts theory in finance, there is dismissal.‖Robert ArnottActive management in the equity field is a notoriously difficult art. In fact so difficult that moreand more investors give up and go passive instead. If you can‘t beat them, join them. In the USalone, retail investors have withdrawn about $350 billion from active equity managers in the pasttwo years and instead pumped $500 billion into passive investment vehicles (mostly ETFs).Retail investors are not alone. Sovereign wealth funds, endowments and pension funds are allallocating ever larger amounts to passive instruments. By one estimate, some $4 trillion worth ofactively managed assets will switch to passive management over the next 5 years(1).Behind this flight to armchair investing lies a growing realisation that the majority of active man-agers will never consistently beat the index. Newly published research from Standard & Poors(2)suggests that for the five year period ending 31 December, 2009, only 39% of active large capmanagers outperformed the S&P500. In mid– and small-cap, the problem was even more pro-nounced with only 23% and 33% outperforming the respective benchmarks.It all began with Harry Markowitz, Eugene Fama and the efficient market hypothesis, developedback in the 1950s. A decade later, when William Sharpe published his work on the capital assetpricing model (CAPM) on the basis of Markowitz‘s and Fama‘s earlier work, it gradually becameaccepted that it is near impossible for most mortals to outperform the market (Warren Buffett isobviously not a mere mortal). Hence the foundation for passive investing, index funds and ETFswas laid.The irony of all of this of course is that ultimately the growth of passive investments will createanomalies and inefficiencies. Stock prices will be driven more by inclusion/exclusion in theindices than by the intrinsic value. For stock pickers, such an environment is likely to createenormous opportunities. But we are not there yet. For the time being, in the equity arena, indexproducts are likely to continue to outperform the majority of active managers.So why do most active equity managers underperform? Many a research paper has been writtenon this subject, and I am not particularly keen to add to an already long list. I think it is far moreinteresting to look for solutions, so I shall answer the question only superficially. The most obvi-ous reason is cost. Between management fees, performance fees (sometimes), trading costs, cus-tody and admin fees, active managers often start the year being behind by 2% or more. Not easy.However, cost alone does not explain the difference between active and passive managers; if itdid, active managers would consistently underperform and that is not the case. ‗Herding‘ isanother reason. We are all prone to it. Herding manifests itself in a number of different ways. Forexample, investors tend to fall in love with the same investment ideas, which can drive valua-tions up in the short to medium term but cause over-crowding longer term and ultimately lead toa collapse in valuations (think dotcom). In the survey conducted by CREATE Research, assetmanagers from all over the world were asked which markets would be expected to grow thefastest and which would offer the best opportunities for alpha going forward.
  36. 36. Chart 1: CREATE Research Survey on Market OpportunitiesThe response, which is shown in chart 1 above, speaks for itself. Not surprisingly, most of ushave fallen in love with Asia. It is hard to disagree that Asia looks likely to deliver higher growththan both Europe and North America in the years to come; however, to conclude on that basisthat Asia will also offer the best opportunities for alpha may be a step too far. This is an examplewhere unrestricted affection for a particular market may have clouded the minds of investors – aclassic example of herding.
  37. 37. The Fear Premium of GoldFriday, May 14th, 2010Email this article | Print this articleGold prices were hitting record highs as golds appeal as a safe haven asset exploded. June goldwas down 1.1% to settle at $1,229.20 an ounce on Thursday after hitting a record high of $1,250in previous session.The metal‘s surge was driven primarily by concern that an almost $1 trillion loan package inEurope will slow the region‘s growth and debase its currency. Adjusted for inflation, gold is nearits highest since April 1981, based on data at Bloomberg.Record Investment Boosted by ETFsGlobal investors, led by the US, last year bought a record 228.5 tons of gold in the form of bul-lion coins, up from 77.4 tons in 2000, according to GFMS, the London-based precious metalsconsultancy.Exchange-traded funds (ETFs) also have made it convenient for retail investors to get in on gold.Holdings in physically backed gold exchange traded funds are at record highs after some ETFslast week experienced their biggest inflows in over a year.The largest gold ETF–the SPDR Gold Trust (GLD)–recorded its highest daily inflow since early2009 last week with total holdings hitting a record 1,185.78 tons.Pattern Change – Gold & StocksGold tends to rise when investors are uneasy about risky investments, so gold often gains asstocks fall. However, stocks continued to recover from last weeks big drop, while gold alsobroke new highs. (Chart 1)Meanwhile, the euro broke through the 14-month low reached against the dollar last week touch-ing $1.2516. Some analysts say a test of the euros 2008 low of $1.2330 looks likely in comingsessions. These are clear signals that investors anxiety is with the euro.
  38. 38. Pattern Change – Gold, Dollar & EuroFurthermore, gold prices usually go down when the dollar strengthens. But that inverse relation-ship gold previously has with the dollar has now been switched to the euro since late last yeardue to the sovereign debt crisis in Greece and Europe (Chart 1).The lack of faith in the sustainability of the euro has been driving investors to flee the euro andgo into gold, stocks and the U.S. dollar. Nevertheless, this is not indicative of any fundamentalstrength in the U.S. currency. Rather, its ―relatively stronger‖ against the embattled euro.Similar to Crude — Gold Has a High ―P/E Ratio‖Now, many analysts expect gold prices to fall back near $800 an ounce over the next ten ortwelve months, according to Jon Nadler at Kitco Bullion Dealers. Nadler thinks the economicfundamentals for gold are "completely upside down." Demand from jewelry has been weak, andthat much of golds recent strength has been speculative in nature.However, similar to crude oil, gold also has become an asset class in itself and trades beyondmarket fundamentals. Gold has long been a safe haven when world markets are gripped by fear.Those fear factors—outlined below–if prolonged, will most likely drive investors to gold andsend gold‘s P/E ratio soaring far beyond the demand/supply fundamentals.Fear Factor #1 – InflationAnalysts say there‘s a lot of fear on the part of the Europeans that moves to mitigate debt crisiswill only lead to more problems. reported that traders and coin dealers said buying wasexceptionally strong from German and Swiss investors.The spike appears to reflect concerns in Germany about the potential inflationary impact of theEuropean Central Bank‘s decision to buy up euro zone government bonds in the wake of theGreek debt crisis. Outside the euro zone, dealers said that demand was also strong in NorthAmerica.Fear Factor #2 — Fiat Currencies Debase
  39. 39. The potential for other countries to be overwhelmed by debt also has investors rethinking papercurrencies in general. Gold is vastly appealing as it has become the only reserve currency notbacked by debt.It is this fear that has fueled the price of gold rising against every major currency, not just thethrashed euro. (Chart 2)Fear Factor #3 – Mountainous Sovereign DebtThe European Monetary Union (EMU) collectively is facing €965 billion of debt redemption thisyear. Among them, three of the most heavily indebted PIIGS countries, Spain has to redeem €81billion of debt this year, Italy at €267 billion, and Portugal with €19 billion. (Chart 3)The Greek contagion may seem to be partially contained at the moment, but investors are stillconcerned widespread fiscal tightening could derail the already weak European economic recov-ery. Continued fears over the stability of the euro zone should further depress the euro and buoygold prices.The sheer scale of fiscal deficits facing numerous countries, including the United States, willlikely prompt further diversification from fiat currencies and could ultimately propel gold tofresh highs.
  40. 40. Dissimilar to Crude – Not a Real CommodityAs noted earlier, gold is similar to crude oil with a built-in premium due to psychological factors.However, unlike crude oil, which is an essential energy source that the world cannot functionwithout, gold has no real fundamental demand except for the use in jewelry.Indeed, much of golds recent run-up has been driven by speculators, which means thecorrection(s) could be just as ferocious as the climb-up once investors fear subsides.Short to Medium Term — Hinges on The EuroGold has risen 40% since the beginning of 2009, which suggests the market could be due for acorrection. A dip in gold prices within the next 10 to 20 months is certainly possible as Europeanand U.S. markets stabilize.For now, the general trend over short term basis is still to the upside. But at this juncture, goldlooks over-priced from a risk/reward standpoint. Retail/individual investors looking to invest ingold are best to stay on the sideline until a significant pullback, possibly at round $1,130. (Chart4)In the mean time, the 1,000-point drop in the Dow on May 6, although still under investigation,is a grim reminder that markets will likely be volatile going forward. Volatility breeds chaos andfear, and gold certainly has a proven record of thriving on both.Off
  41. 41. A Magic Bullet for Inflation and Deflation?Wednesday, February 3rd, 2010During the better part of the last 18 months, since the financial crisis erupted, the debate overwhether we are in store for inflation or deflation has dominated the investment decision makingthoughts of all market participants, from retail investors to hedge fund managers.The burning question – "Are we heading for inflation or deflation?" – is the toughest one to hur-dle. Since there is no way of knowing, you have to make a decision based on what you knowabout each, then, make a decision about how to invest, based on your decision. Its precarious atbest. Many investors, however, unable to settle on an outlook, will choose the option thatrequires the least amount of thought – cash, GICs, and short term bonds – and wait for things tobe clarified.Thats why something hedge fund manager David Einhorn, of Greenlight Capital wrote last yearhas got my attention again.Which Way Now? Hard Assets orGovernment Bonds?Sunday, January 31st, 2010The debate in the market between inflationists (majority) and deflationists (minority) continuesto complicate investors ability to make decisions about where to deploy funds.During the course of the year, inflationists benefited from the tailwind provided by the decliningvalue of the dollar. The rally in risk assets came thanks to Bernankes deflation-busting policy,and, ironically, therefore, as long as the news remained dire on GDP growth and unemployment,we could count on interest rates to remain around zero percent, and the dollar to continue loweras faithless investors ditched it.For nine months, the dollar declined as the market put risk back "on." At the very beginning ofthe rally, in March 2009, the markets mood was very dark. The genesis of the rally was the shortcovering of bank stocks and financials, and the full scale launch of the dollar funded carry trade,mostly taking place in institutional and hedge fund trading rooms. Except for the wiliest, it mostcertainly was not driven by retail investors. The retail investor is usually late to the party oncefear of missing opportunities sets in.
  42. 42. The rally in the dollar as of late November has confused the inflationist view as the tailwindsappear to have reversed. This has been, and remains a difficult time to make risk-based invest-ment decisions.Bill Gross Investing in Long-DatedTreasuriesTuesday, September 29th, 2009Bloomberg reports that PIMCOs Bill Gross is exchanging his corporate bonds for longer-datedgovernment securities out of concern for deflation. This is a theme that we have written exten-sively about during the course of the year.Bill Gross, who runs the world‘s biggest bond fund at Pacific Investment Management Co., saidhe‘s been buying longer maturity Treasuries in recent weeks amid a re-emergence of deflationconcern.―We‘ve exchanged our mortgages for the government‘s check‖ as the Federal Reserve windsdown purchases of agency debt, Gross said in an interview from Newport Beach, California,with Bloomberg Radio.Gross boosted the $177.5 billion Total Return Fund‘s investment in government-related bonds to44 percent of assets, the most since August 2004, from 25 percent in July, according datareleased earlier this month on Pimco‘s Web site. The fund cut mortgage debt to 38 percent from47 percent.This is very interesting if youve been following Bill Gross calls during the course of the year.Late last year and early this year, Gross was a huge investor in corporate debt, particular the debtof financials that received support from the government in the form of guarantees. Gross mainthesis was and continues to be "Shake hands with the Government." By the way, corporate debthas outperformed its equity peers during the course of the year, and was considered by manylarge investors as the superior bet given the option to invest in equities. The strategy of buyingcorporate debt (which was regarded as a lower risk than equities earlier this year) is one thateluded most retail investors because the credit market is generally perceived as out of reach orsophisticated.Much of the "easy" money has already been made in corporate debt, and its likely now thatinvestors, who are still for the most part sitting in record levels of cash, may stay there, or belured into the equity market by the powerful rally seen the last two quarters.If, on the other hand if youre in the same camp as Gross, that deflation is still something toworry about, then longer dated governments may be the way to go. In Gross "New Normal" de-
  43. 43. leveraging, de-globalization, and re-regulation are three dominant themes that flatten out theyield curve, which remains steep, and a flattening yield curve means short term rates rise whilelong term rates fall. The short term rates will be a little while in rising as it may be a little prema-ture for the Fed to touch them, but the long term rates will come down as the market continuesdown the deleveraging path Gross and a few others are counting on, as assets get substituted forcash on institutional balance sheets. For the large institutions who continue to target their balancesheets, this recovered equity market is a perfect opportunity to sell some reflated assets, and thatmeans that a large amount of cash will be used to retire debt and/or refinance Option ARM mort-gages for that matter.Long term rates are likely to fall on this development.Boom and Burst: Dont be fooled by falsesigns of economic recovery. Its just the lullbefore the stormMonday, August 24th, 2009Andy Xie is a former Morgan Stanley economist now living in China; The following is from theSouth China Morning Post:The A-share market is collapsing again, like many times before. It takes numerous governmentpolicies and ―expert‖ opinions to entice ignorant retail investors into the market but just a fewdays to send them packing. As greed has the upper hand in Chinese society, the same storyrepeats itself time and again.A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and,hence, net losses. The redistribution of the remainder, moreover, isn‘t entirely random. The gov-ernment, of course, always wins. It pockets stamp duty revenue and the proceeds of initial publicofferings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.The truly random part for the redistribution among speculators is probably 50 cents on the dollar.The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chi-nese people poorer. The system takes advantage of their opportunism and credulity to collectmoney for the government and to enrich the few.I am not sure this bubble that began six months ago is truly over. The trigger for the current sell-ing was the tightening of lending policy. Bank lending grew marginally in July. On the ground,
  44. 44. loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, gov-ernment officials will speak to boost market sentiment. They might influence government-relatedfunds to buy. ―Experts‖ will offer opinions to fool the people again. Their actions might revivethe market temporarily next month, but the rebound won‘t reclaim the high of August 4.This bubble will truly burst in the fourth quarter when the economy shows signs of slowingagain. Land prices will start to decline, which is of more concern than the collapse of the stockmarket, as local governments depend on land sales for revenue. The present economic ―recov-ery‖ began in February as inventories were restocked and was pushed up by the spillover fromthe asset market revival. These two factors cannot be sustained beyond the third quarter. Whenthe market sees the second dip looming, panic will be more intense and thorough.The US will enter this second dip in the first quarter of next year. Its economic recovery in thesecond half of this year is being driven by inventory restocking and fiscal stimulus.However, US households have lost their love for borrow-and-spend for good. American house-hold demand won‘t pick up when the temporary growth factors run out of steam. By the middleof the second quarter next year, most of the world will have entered the second dip. But, by then,financial markets will have collapsed.China‘s A-share market leads all the other markets in this cycle. Even though central banksaround the world have kept interest rates low, the financial crisis has kept most banks from lend-ing. Only Chinese banks have lent massively. That liquidity inflated the mainland stock marketfirst, then commodity markets and property market last. Stock markets around the world are nowfollowing the A-share market down.By next spring, another stimulus story, involving even bigger sums, will surface. ―Experts‖ willoffer opinions again on its potency. After a month or two, people will be at it again. Such marketmovements are bear-market bounces. Every bounce will peak lower than the previous one. Thereason that such bear-market bounces repeat is the US Federal Reserve‘s low interest rate.The final crash will come when the Fed raises the interest rate to 5 per cent or more. Most thinkthat when the Fed does this, the global economy will be strong and, hence, exports would do welland bring in money to keep up asset markets. Unfortunately, this is not how our story will endthis time. The growth model of the past two decades — Americans borrow and spend; Chineselend and export — is broken for good. Policymakers have been busy stimulating, rather thanreforming, in desperate attempts to bring growth back. The massive increase in money suppliesaround the world will spur inflation through commodity-market speculation and inflation expec-tations in wage setting. We are not in the midst of a new boom. We are at the last stage of theGreenspan bubble. It ends with stagflation.Hong Kong‘s asset markets are most sensitive to the Fed‘s policy due to the currency peg to theUS dollar. But, in every cycle, stories abound about mysterious mainlanders arriving with bags ofcash. Today, Hong Kong‘s property agents are known to spirit mainland-looking men, with smallleather bags tucked under their arms, to West Kowloon to view flats. Such stories in the past ofmainlanders paying ridiculous prices for Hong Kong flats usually involved buyers from the
  45. 45. northeast. In this round, Hunan people have surfaced as the highest bidders. The reason is, Ithink, that Hunan people sound even more mysterious. But, despite all this talk, the driving forcefor Hong Kong‘s property market is the Fed‘s interest rate policy.Punters in Hong Kong view the short-term interest rate as the cost of capital. It is currently closeto zero. When the cost of capital is zero, asset prices are infinite in theory. At least in this envi-ronment, asset prices are about story-telling. This is why, even though Hong Kong‘s economyhas contracted substantially, its property prices have surged. Of course, the short-term interestrate isn‘t the cost of capital; the long-term interest rate is. Its absence turns Hong Kong into afutile ground for speculation, where asset prices increase more on the way up and decrease moreon the way down.When the Fed raises the interest rate, probably next year, Hong Kong‘s property market will col-lapse. When the Fed‘s policy rate reaches 5 per cent, probably in 2011, Hong Kong‘s propertyprices will be 50 per cent lower.Andy Xie is an independent economist.Wise WordsA man who won‘t die for something is not fit to live. — Martin Luther King Jr. View our PAST ISSUESPodcast: WSJ Whats News Twice Daily Updated Twice Daily - Click to ListenStay on top of the latest headlines from the Wall Street Journal Online.WSJs Whats News Late Edition Fri, March 23, 2012 by The Wall Street Journal23 Mar 2012 at 10:03pmSEC probes whether rapid-fire trading firms are getting an unfair advantage over the averagetrading Joe; President Obama nominates an expert on health issues to head up the World Bank;Fresh evidence that the housing...Jeff Saut‘s Daily Audio Comment is recorded every weekday, except Wednesday, at 9 a.m. ET.It is made available to the public on this Web page at approximately 1 p.m. ET.
  46. 46. Crude Oil WTI Crude Oil $106.75 ▼0.12 0.11% 7:41 AM EDT - 2012.03.25FeedbackCloseRead more: