Tag Archives: investing
How I Learned To Stop Worrying And Love The Bond
Source: beralinka / Shutterstock U.S. Treasuries are not cheap. At roughly 2%, nominal yields are less than a third of the 60-year average of 6%, according to Bloomberg data. Although they are not as egregiously expensive as 10-year Swiss government bonds-currently trading at a yield of negative 0.25%-U.S. bonds are offering a relatively paltry real return, even after adjusting for low inflation. Moreover, government bonds are potentially more volatile. For now, that volatility is being suppressed by the lethargic pace of the Federal Reserve’s (Fed’s) tightening cycle. But there is plenty of risk embedded in traditionally safe government bonds. Low coupon rates mean that investors get almost all of their cash flow at maturity. This pushes up a bond’s duration or rate sensitivity. In practice, a 10-year bond yielding 2% is more rate sensitive than a 10-year bond yielding 6%. If rates start to rise, bond volatility will be exacerbated by higher durations. Another way of looking at this: With a 2% coupon, a relatively small rate move will wipe out a year’s worth of interest. But despite high prices and the potential for more volatility, there is still a very good reason to continue to own government bonds: diversification. Use bonds as a hedge While government bonds currently produce little in the way of income, U.S. Treasuries have been providing a hedge against equity risk. Since the financial crisis, but really since the bursting of the tech bubble, bonds have been more likely to move in the opposite direction to stocks. This trend has only intensified since the financial crisis. Why should this be the case and is it likely to continue? Looking back over the past 25 years, a period of low and stable inflation, stock/bond correlation has generally moved in tandem with monetary policy, as measured by the effective federal funds rate. In the 1990s, when investors were more worried about inflation and an aggressive Fed, the correlation between stocks and bonds tended to be positive. However, as the Fed has increasingly pushed the boundary of monetary accommodation correlations have fallen. What history tells us Over the past quarter century the level of the fed funds rate has explained nearly 50% of the variation in stock/bond correlations, according to Bloomberg data. Take a look at the chart below. During this period, when the policy rate was above 2%, the average correlation was close to zero. In periods when the fed funds rate has been below 2%, as has been the case since late ’08, the average correlation has been roughly -0.25. (A correlation of 1 means two asset classes move in lockstep. A negative correlation means they move in opposite directions. A zero correlation means their movements are unrelated.) As long as the Fed remains reluctant to raise rates, history would suggest that the correlation between stocks and bonds is likely to remain negative. Click to enlarge A negative stock/bond correlation is important for managing portfolio volatility. Portfolio risk is not simply the sum of the volatility of the individual assets; it is also influenced by the correlation between those assets. To the extent that longer-term government bonds provide diversification-a scenario more likely in an environment in which the policy rate is low-bonds have a role to play in a portfolio, even if they are expensive and more volatile. Russ Koesterich , CFA, is Head of Asset Allocation for BlackRock’s Global Allocation Fund and is a regular contributor to The Blog . ‘This post originally appeared on the BlackRock Blog’.
Burst Of Earnings Surprises Fails To Drive Transport ETFs
The transportation sector is shaping up well this earnings season with total earnings from 97.8% of the sector’s total market capitalization that has reported so far climbing 3.1% and 92.3% beating estimates. However, revenues slipped 0.7% with a revenue beat ratio of 38.5%. While the earnings growth rate and revenue beat ratio are worse than Q4 for the same period, earnings surprises and revenue growth rate are encouraging given the most conservative earnings estimates. Additionally, the slump in oil prices and a depreciating dollar helped transporters to improve their year-over-year revenue growth picture (read: Sector ETFs to Buy if Crude Slump Persists ). For a better understanding, let’s dig into the earnings results of some well-known industry players: Transportation Earnings in Focus The world’s largest package delivery company – United Parcel Service (NYSE: UPS ) – beat our earnings estimate by a nickel but revenues of $14.42 billion fell shy of our estimated $14.58 billion. For the current fiscal 2016, the company expects earnings per share in the range of $5.70-$5.90, representing 5-9% growth year over year. The Zacks Consensus Estimate at the time of earnings release was pegged at $5.76. Union Pacific (NYSE: UNP ) , the largest U.S. railroad, reported earnings of $1.16 per share beating the Zacks Consensus Estimate by 7 cents but revenues of $4.83 billion fell short of our estimate of $4.9 billion. The major railroads like Norfolk Southern Corp (NYSE: NSC ) and Kansas City Southern (NYSE: KSU ) also topped our earnings estimates by 32 cents and 6 cents, respectively. While revenues at Norfolk Southern outpaced the Zacks Consensus Estimate by $23 million, Kansas City Southern lagged revenues by just $2 million. Ryder Systems (NYSE: R ) , the leader in supply chain management and fleet management services, surpassed both our top- and bottom-lines estimates. Earnings per share of $1.12 came above the Zacks Consensus Estimate of $1.05 while revenues of $1.63 billion were slightly ahead of our estimate of $1.60 billion. The two largest U.S. airlines – Delta Air Lines (NYSE: DAL ) and United Continental (NYSE: UAL ) – beat on earnings while missed on revenues. Delta and United Continental outpaced our earnings estimate by 3 cents and 6 cents, respectively. At DAL, revenues lagged the Zacks Consensus Estimate by $34 million while at UAL revenues missed by $44 million. Last but not the least, earnings for the leading trucking carrier – J.B. Hunt (NASDAQ: JBHT ) – came in above the Zacks Consensus Estimate by 3 cents and revenues were $21 million below our estimate. ETFs in Focus Given the slew of earnings beat, stocks in the transportation sector have been performing well, gaining an average 2.4% (average price difference between a day before and after the earnings announcement of a stock), per the Zacks Earnings Trend . However, the remarkable performance failed to gather momentum in the iShares Dow Jones Transportation Average Fund (NYSEARCA: IYT ) and the SPDR S&P Transportation ETF (NYSEARCA: XTN ) . Both IYT and XTN are down 0.9% and 2%, respectively, over the past 10 days and have a Zacks ETF Rank of 4 or Sell rating with a High risk outlook. IYT The fund tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of 20 securities. The fund has a certain tilt toward large cap stocks at 51% while mid and small caps account for 29% and 20% share, respectively, in the basket. Though the product is heavily concentrated on the top firm – FedEx (NYSE: FDX ) – at 13%, the in-focus eight firms collectively make up for 48% of the portfolio. From a sector perspective, air freight & logistics takes the top spot with 29.7% of the portfolio while railroads, airlines and trucking round off to the next three spots with double-digit exposure each. The fund has accumulated nearly $571.7 million in AUM while sees solid trading volume of nearly 350,000 shares a day. It charges 45 bps in annual fees. XTN This fund tracks the S&P Transportation Select Industry Index, holding 46 stocks in its basket. It is skewed toward small caps at 55% while the rest is evenly split between mid and large caps. As a result, the in-focus firms account for at least 2% share each. Further, about 30% of the portfolio is dominated by trucking, while airlines takes another one-fourth share. Airfreight & logistics, and railroads also make up for a double-digit allocation each. With AUM of $203.9 million, the fund charges 35 bps in fees per year from investors and trades in a moderate volume of more than 64,000 shares a day. Link to the original post on Zacks.com