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Respect The Trends In These ‘Widowmaker’ Trades

“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” -Sir John Templeton There are a couple of trends out there in the markets right now that are becoming so-called “widowmakers.” Specifically, I’m referring to oil and long bonds. Oil has been crashing while long bonds have been soaring. Oil is way oversold and long bonds are way overbought. They should both probably retrace a bit of their recent moves simply because they’re both so overextended right now. However… See the massive inflows into the oil ETF in the chart above? That is not the sort of “pessimism” that forms a major bottom. Conversely, in bonds… Investors have been drastically underweight and heavily short bonds for over a year now. This is why I’ve been writing for some time that bonds may be more likely than stocks to see a ” blow off ” sort of move. Now traders are clearly trying to anticipate a trend change in both of these asset classes. They are getting heavily long oil and they remain heavily short long bonds. Now, to be clear, I think they may revert a bit if only to work off their overextendedness (if that’s even a word). But the big problem with these trades is that the trend is plain as day and traders shouldn’t forget, “the trend is your friend!” Oil is nowhere close to breaking out of its downtrend and long bonds are nowhere close to breaking down out of their uptrend. Trying to anticipate these trend changes must have been inordinately painful for these traders over the past few months. And the odds are neither of these trends will actually change until we see some real despair in oil and some true euphoria in long bonds, as witnessed in ETF flows or some other similar indicator. At least, that’s what I imagine the brilliant Sir John would have told us. How did this change your view of ? More Bullish More Bearish It Didn’t This impact ( ) More Bullish More Bearish Unchanged Thanks for sharing your thoughts. Submit & View Results Skip to results » Share this article with a colleague

Update: Brookfield Renewable Energy Partners To Acquire 488 MW Renewable Portfolio In Brazil

Brookfield Renewable Energy Partners entered into an agreement to acquire a 488 MW multi-technology renewable portfolio in Brazil from Energisa S.A. Confirms our opinion that BEP will continue to grow through M&A. Anticipated in original investment rationale. Brookfield Renewable Energy Partners (NYSE: BEP ) recently announced a $935 million acquisition of a 488 MW portfolio of renewable assets located in Brazil. The equity component is valued at $545 million with the remainder in assumed long-term non-recourse debt. The transaction is funded with institutional partners and expects to retain a 40% economic interest in the project. If the transaction meets regulatory approvals, it is projected to close in Q1 of 2015. As we noted in our previous write-up on Brookfield Renewable, the company is looking for growth through project developments and acquisitions. At the time, BEP was focused on completing its Safe Harbor acquisition, which is a 417 MW hydroelectric facility in Pennsylvania. With the Safe Harbor and Bord Gais Wind Energy transactions both closed, management has been able to refocus its attention on purchasing even more attractive assets with contract durations over 10 years. We view the current transaction favorably, especially since Brookfield Renewable’s management considers Brazil to be a strong growth area. In fact, the firm has a long history of operations in Brazil and announced, in Q4 of 2014, that they had commenced construction of a 25 MW hydro facility in the country. Overall, we have a positive outlook on units of BEP, which are currently yielding 4.9%, and feel that management is living up to its goal of increasing distributions by 5-9% per year. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

Smart-Beta, Small-Cap ETFs Could Outperform

Small caps have been underperforming large caps. New research paper suggests investors should compare like with like, and small caps would outperform when controlling for quality. Focus on alternative index-based small-cap ETFs. When picking out small-capitalization stock exposure, exchange-traded fund investors may be better of with funds based on alternative indices that weed out weaker companies. For instance, small-cap ETFs like the WisdomTree SmallCap Dividend Fund (NYSEARCA: DES ) , PowerShares Fundamental Pure Small Cap Core Portfolio (NYSEARCA: PXSC ) and First Trust Small Cap Core AlphaDEX Fund (NYSEARCA: FYX ) track alternative or smart-beta indices that don’t follow traditional market-capitalization weighted methodologies, as opposed to the widely monitored iShares Russell 2000 ETF (NYSEARCA: IWM ) , which is based of the Russell 2000 benchmark. According to a recent research note, ” Size matters, if You Control Your Junk ,” conducted by US hedge fund AQR, along with Tobias Moskowitz, a finance professor at Chicago Booth, small-cap stocks outperform large caps when quality of the companies is taken into account, reports James Mackintosh for Financial Times . “Controlling for quality/junk also explains interactions between size and other return characteristics such as value and momentum,” according to the research paper. Many small-cap stock investors have been disappointed by last year’s nine percentage point underperformance to large-cap stocks. However, the research paper explains that investors should compare like with like. For instance, small high-quality companies outperformed larger high-quality companies while small junk beat out large junk stocks. Consequently, funds and ETFs based off of benchmark indices like the Russell 2000 or the FTSE Small Cap, which carry more junky stocks at the bottom end of the market, would offset potential benefits of quality small-cap stocks. However, when controlling for quality, small caps have generated decent returns. For example, DES weights holdings based on the aggregate cash dividends that companies are projected to pay in the coming year. PXSC is based on a RAFI Fundamental Index, which selects components based on fundamental factors like sales, cash flow, dividends and book value. FYX ranks stocks from the S&P SmallCap 600 Index on growth factors including three, six and 12-month price appreciation, sales to price and one-year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets. Over the past year, DES has increased 7.3% and PXSC gained 8.4%. In contrast, IWM rose 2.8% over the past year. Nevertheless, over the short term, “beta