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Singer Meghan Trainor Knows, It’s All About That Central Bank Stimulus

Just how powerful is the combination of quantitative easing (QE), zero percent rate policy and even negative percent rate policy? Omnipotent. With the recent revelation from the ECB, and the predictable reaction of market participants, is it time to amplify your risk taking? Quite possibly. On the other hand, there are at least two reasons to exercise some restraint. Nearly one-third of S&P 500 corporations have reported earnings and revenue from the third quarter. With 147 companies chiming in, profits are down -0.6% and sales are down -2.7% from a year earlier. One might have thought that several quarters of contraction in earnings and revenue (a.k.a. an “earnings recession” and a “revenue recession”) might have weakened stocks. After all, if robust sales and hearty profits are the primary drivers behind price appreciation for companies in the Dow and the S&P 500, shouldn’t diminishing sales and dwindling profits lead to price drops for the Dow and S&P 500? Welcome to the mixed-up world of centralized bank planning. For example, at a news conference today (10/22/2015), the president of the European Central Bank (ECB) underscored the downside risks to the euro-zone economy. Mario Draghi emphasized everything from the impact of China’s slowdown to the rapid-fire fall in commodity demand. His prescription? More central bank stimulus up-and-above the ECB’s existing bond-buying program and negative interest rate policy. On the news, developed world benchmarks (e.g., Dow, S&P 500, Stoxx Europe 600) surged by more than 1% across the board. Did it matter that Caterpillar (NYSE: CAT ) discussed its expectation for 2016 revenue to collapse by 5% across all of its segments (i.e., transportation, construction, resources)? Nope. Did investors fret 3M’s (NYSE: MMM ) intention to reduce its global workforce by 1500 positions on dismal earnings? Hardly. Investors have come to expect huge rewards for taking risk when central planners engage in extraordinary levels of borrowing cost manipulation. Perhaps ironically, weakness in multinational earnings and revenue simply confirms weakness in the global economy. Indeed, the weaker the results, the greater the likelihood that the ECB will step up its stimulus measures and the greater the probability that the U.S. Federal Reserve will leave 0% lending rates intact. Bad news is good news yet again. Just how powerful is the combination of quantitative easing (QE), zero percent rate policy and even negative percent rate policy? Omnipotent. Take a look at the performance of the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) as it relates to the creation of electronic dollar credits for the purpose of buying debt, or QE. Specifically, in mid-December of 2012, the U.S. Federal Reserve upped its QE3 program to $85 billion per month in the acquisition of U.S. treasuries and mortgage-backed securities. The program began winding down in 2014 during the “Great Taper,” though the final day of the last asset purchase actually occurred in mid-December of 2014. The 2-year performance for VTI? Approximately 52%. Now take a look what happened from the removal of the stimulus “punch bowl” through October 21st of this year. The gains have been so paltry, an all-cash position provided a better risk-adjusted return. With the recent revelation from the ECB, and the predictable reaction of market participants, is it time to amplify your risk taking? Quite possibly. On the other hand, there are at least two reasons to exercise some restraint. First, extreme stock valuations challenge the notion that you should always follow the central banks (e.g., Federal Reserve, European Central Bank, Bank of Japan, Bank of England, etc.). Warren Buffett’s favorite measure of stock valuation, total-market-cap-to-GDP, sits at 117.7%. That is the second highest in history and it is higher than the 2007 peak of 110.7%. Market-cap-to-GDP fell to 62.2% at the 2009 March bottom. In addition to clear concerns regarding fundamental valuation, the most widely regarded technical indicator still points to a long-term downtrend. The S&P 500 has yet to reclaim its 200-day moving average since falling below the level in mid-August. (Note: That might change by the time this article hits the Internet!) Prior to the start of the mid-August correction, our tactical asset allocation moved moderate clients from a 65%-70% equity stake (e.g., domestic, foreign, large, small, etc.) to a 50%-55% equity stake (mostly large-cap domestic). Similarly, we shifted the 30%-35% income allocation (e.g., short, long, investment grade, higher yielding, etc.) to something akin to 20%-25% income (mostly investment grade). The aim? Reduce exposure to riskier assets and raise cash equivalents to roughly 25% for a future move back into risk assets. Granted, valuations represent a significant concern over the longer-term . This bull market in stocks is unlikely to carry on indefinitely regardless of central bank rate manipulation and monetary stimulus. That said, trendlines and other market internals give us the best indication of near-term risk preferences. It follows that a break above 200-day trendline resistance coupled by continued improvement in credit spreads and advance-decline lines would be a reason to put some capital back to work. Where might I add some risk? At present, our equity holdings include funds like the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), the Vanguard Mid-Cap Value ETF (NYSEARCA: VOE ) and the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). Certain sector funds that have already reestablished respective uptrends – The Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) and the Vanguard REIT Index ETF (NYSEARCA: VNQ ) – are funds on my radar screen. By the same token, investors may wish to hedge against a longer-term bearish turn of events. The ECB’s comments this morning did not just create demand for “risk-on” assets; that is, “risk-off” assets are holding their own. German bunds catapulted higher on Draghi’s comments. The U.S. dollar via the PowerShares DB USD Bullish ETF (NYSEARCA: UUP ) skyrocketed. And risk-off treasuries at the long-end of the curve also gained ground. In fact, a second-half-of-the-year comparison between the FTSE Multi-Asset Stock Hedge Index (a.k.a. “MASH”) and the S&P 500 shows the value of multi-asset stock hedging. Components of “MASH” include zero-coupons, TIPS, munis, long-dated treasury bonds, gold, German bunds, Japanese government bonds, the yen, the dollar and the Swiss franc. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Dovish Fed, Rising Oil And Falling USD Set Stage For GLD Rally

Summary Central banks in Japan and Europe continued to ease monetary policy, and Fed had just revealed its dovish side as two governors stood out to oppose the rate hike this year. GLD had formed a double bottom since August and reformed the uptrend on October 1 as oil got stronger and USD weakened. This sets the stage for stronger inflation, and GLD is about to get more valuable in its role as an inflation hedge. In this article, I am going to express my views on gold as seen on the SPDR Gold Trust ETF (NYSEARCA: GLD ). Basically, I am bullish on gold and see the current weakness as a mere retracement for the serious gold investor to build their gold stockpile at slightly lower prices. Gold serves as an inflation hedge throughout time. The current situation is making it easy for inflation to burst above the 2% inflation target suddenly and on a prolonged basis. This is because major central banks are all engaged in monetary easing, and there are no concrete signs that they are going to stop anytime soon. Japan & Europe To Continue on Easing Bias The Bank of Japan (BOJ) renewed its commitment to increase its monetary base by $80 trillion yen per year on its latest monetary policy statement on 7 October, 2015 . This is despite a moderately growing Japanese economy as inflation was still below its 2% target at 0.2% for August 2015. In Europe, inflation continued to be weak. Eurostat reported that inflation was negative 0.1% for the month of September 2015. This is one reason that the ECB continued to keep main refinancing interest rates at 0.05% and deposit facility interest rates at -0.20% . In addition to negative inflation, Europe is facing more risk to its growth as seen in the recent speech by ECB President Mario Draghi to the International Monetary and Finance Committee on 9 October, 2015 : “However, developments surrounding the slower growth in emerging market economies are posing renewed risks to the euro area outlook. Our monetary policy measures have supported, and continue to support, domestic demand, contributing to the euro area recovery and to a gradual improvement in the inflation outlook.” Hence it is clear that the ECB would not be changing its monetary easing stance soon and would continue to purchase $60 billion per month of public and private securities. Fed Steps Away For 2015 Rate Hike Most crucially, the Federal Reserve had just made it clear that it is doubtful over the lack of inflation in the US. The first hint came when the Fed failed to raise interest rates in its September 2015 meeting as widely anticipated. Next, the September meeting’s minutes were released, and it showed that the Fed officials were more worried about the lack of inflation despite the steady growth in the US. It was mainly blamed on low oil prices and the strong USD. After the minutes were released, Chair Janet Yellen and FOMC Vice Chair William Dudley stepped forward and made speeches to keep the hopes of a hike rate alive in this year, presumably in December 2015. However, recently, we have heard that two Fed governors had stepped out in opposition of a rate hike this year. It is rare to hear from Fed Governors Lael Brainard and Daniel Tarullo . Brainard made the case that he wanted to see a more robust recovery and Tarullo wanted to see a more robust inflation recovery. The Bureau of Labor Statistics reported that the most recent consumer price index declined 0.2% for September 2015. Fed governors have a permanent vote on the FOMC, and it should be noted that both immediate past Chairman Ben Bernanke and current Chair Janet Yellen had to go through the appointment of Fed governor before their supreme appointment. Hence the fact that both Fed governors bothered to appear on record to make their stance is a highly noteworthy event. With such opposition, it would be very difficult for Chair Yellen to hike rates this year even if she felt that it was necessary to do so to get ahead of the curve. Externally, this dovish position is supported by the IMF. Therefore, it should not come as a surprise that a Reuters survey showed that 55% of the polled economists expect a rate hike in December, and this is down from 60% in the previous month. Bullish GLD Formation Aided By Strengthening Oil & Weakening USD As we can see on the chart below, GLD had been on the rise since August and has since formed a double bottom. (click to enlarge) Source: StockCharts The Fed had overlooked the recent recovery of oil prices and has provided the ideal environment for inflation to grow. (click to enlarge) Source: StockCharts The other factor that would encourage inflation would the continued weakening of the USD, as seen in the chart below: (click to enlarge) Source: StockCharts Both effects require time to appear on the official reports which often come up with two months of delay. In the meantime, the market is actively pricing in higher inflation as gold prices have been on the uptrend since 1 October, 2015, in its latest wave up. Conclusion Gold prices are on the verge of a breakthrough as indulgent central banks around the world continue to either ease monetary policy or at the best stick to a neutral stance. The action of the Fed to signal clearly that it is unlikely to hike rate this year is a game changer. Don’t be too affected by the minor weakness on October 16. This is due to a strong consumer confidence report and this only provides a needed profit-taking opportunity. Gold should continue its uptrend after the retracement as fundamentals are in its favor.

Goldman Sachs Serves Up Plain Talk On Smart Beta

By DailyAlts Staff What do most potential investors think about smart beta? In Goldman Sachs’ (NYSE: GS ) experience, they don’t – only a handful of investors have any idea what “smart beta” is, and most are confused by the distinction between “active” and “passive” investing. For this reason, Goldman Sachs thinks advisors need to serve up “plain talk” in explaining smart beta to their clients, and the firm shares ideas of how to accomplish this in the October 2015 edition of its Strategic Advisory Solutions white paper series. What Smart Beta Isn’t Goldman Sachs defines “smart beta” as referring to “rules-based investment strategies which seek to outperform a traditional market index or reduce risk versus that index,” but the firm admits that this definition is overly “technical” – and therein lies the challenge. Advisors are tempted to define smart beta by what it isn’t – i.e., cap-weighted. But in Goldman’s focus groups, a surprisingly low number of investors understood what “cap-weighted” even meant. Most were happy with their index ETFs, and when asked how ETFs could be improved, Goldman was generally met with silence. Thus, the “market-weight critique” – wherein advisors explain that cap-weighted indexes inevitably overweight overpriced stocks – is a “flawed” approach, in Goldman’s view. Plainer Talk Another popular way to describe smart beta to novices is to say it “blends” active and passive elements. Unfortunately, many of Goldman’s focus-group participants thought “active management” referred to frequent trading, and “passive management” meant “letting an advisor do the work for you.” Investors may be in desperate need of basic investment education, but in the meantime, advisors can address them with plainer talk – especially when discussing smart beta. Instead of defining it by what it’s not , or by talking about active versus passive management, Goldman recommends advisors explain the similarities between smart beta and traditional cap-weighted investing, while acknowledging the differences that can help smart beta outperform the broad market. Goldman’s Active Beta ETFs Goldman Sachs launched a pair of new active-beta ETFs itself last month. The first, the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEARCA: GSLC ), debuted on September 17; while the second, the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (NYSEARCA: GEM ), launched eight days later. The former quickly attracted more than $78 million assets under management (“AUM”), while the latter’s AUM tops $181 million. Both are based on ActiveBeta indexes that are designed to beat cap-weighted equivalents by weighing stocks according to four criteria: Value, Momentum, Quality, and Low volatility GSLC applies this methodology to U.S. large-cap equities. GEM does the same for stocks from emerging-market countries. Future Goldman ActiveBeta ETFs will apply the indexing strategy to European, international, Japanese, and U.S. small cap stocks. Smart Beta as Blank Slate The good news about widespread ignorance of smart beta is that advisors can approach clients with a blank slate. Goldman thinks advisors should explain that smart beta is like traditional index-fund investing, in that investments are selected by rules-based methodologies, but that smart-beta indexes are designed to outperform cap-weighted indexes by tilting towards favorable “factors” such as value or low volatility. Advisors shouldn’t try to get their clients to think about smart beta as something “radically different,” in Goldman’s view. Instead, smart beta should be considered a way to potentially outperform the broad market, while not paying a lot in fees. That’s the kind of “plain talk” everyday investors can appreciate. For more information, download a pdf copy of the white paper .