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Sector ETFs To Benefit From Global Negative Interest Rates

The world is heading toward negative interest rates policies (NIRP) to stimulate sagging growth and prevent deflationary pressure. Most central banks, including the ones in Japan, Sweden, Switzerland, Denmark and Europe have adopted this policy. The central bank of Denmark was the first and foremost to set a negative tone for rates in mid 2012. It lowered its certificates of deposit ( CD ) rates to minus 0.20% from 0.05% in order to protect the krone’s peg to euro. Then the Danish central bank underwent a series of rate cuts in January and February 2015 going deeper into -0.75%. However, in January 2016, the bank raised the interest rates for the first time in almost two years by 10 bps to -0.65% (read: 5 Best Performing Country ETFs of 2015 ). The European Central Bank (ECB) joined the group in June 2014 by slashing the deposit rate from zero percent to -0.1%. The ECB then pushed the rates further to -0.3% in December 2015 and deeper to -0.4% on March 10, 2016. Switzerland introduced negative interest rates in December 2014, when the Swiss National Bank said it would charge banks 0.25% interest on bank deposits in an effort to curb its strengthening currency. The Swiss bank pushed the rates further into the negative territory to -0.75% in January 2015. Swedish Riksbank implemented negative rates in February 2015 when it cut repo rate to minus 0.1% from zero. The bank reduced the rates three times since then with the latest cut by 15 bps in February 11, 2016 to -0.50%. Last but not the least, Japan was the latest country to join the league in late January 2016 as the Bank of Japan set its benchmark interest rate at -0.1% (read: Japan ETFs to Buy on Negative Interest Rates ). NIRP: A Good or Bad? Though the negative rates policy has raised worries over the health of the banks and increased chances of default, it is actually a good for the economy and the stock markets. This is because the strategy would make lending cheaper and encourage spending, thereby leading to greater economic growth. In addition, it would make borrowing attractive for both consumers and business, driving demand for loans. As such, it will give a huge boost to sectors like real estate, housing and utilities. Further, NIRP would lead to capital outflows leading to depreciation of the currency, which will encourage exports and manufacturing. Investors should note that the NIRP policy has not been tested before and so, does not have any history. Given this, many investors want to reposition their portfolio to the sector ETFs that will benefit from NIRP. Below we have highlighted some of them: Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) This fund offers a broad exposure across international REIT equity markets by tracking the S&P Global ex-U.S. Property Index. Holding 663 stocks in its basket, the fund is well spread out across components with none holding more than 3.3% share. European firms account for 26% of assets, while Japan makes up for 24% share, and Sweden and Switzerland getting 2% each. The product has AUM of $3.1 billion and average daily volume of 316,000 shares. It charges 18 bps in fees per year from investors and has lost 0.22% so far this year. WisdomTree Japan Hedged Real Estate Fund (NYSEARCA: DXJR ) This fund seeks to provide exposure to the Japanese real estate sector while at the same time offers hedge against any fall in the yen relative to the U.S. dollar. This is easily done by tracking the WisdomTree Japan Hedged Real Estate Index. In total, the fund holds 93 stocks with each holding less than 8.5% share. Expense ratio came in at 0.48%. The product has accumulated $145.8 million in its asset base and trades in a moderate volume of 63,000 shares a day on average. DXJR is down 4.8% in the year-to-date timeframe and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. iShares FTSE EPRS/NAREIT Europe Index ETF (NASDAQ: IFEU ) This product targets 96 companies engaged in the ownership and development of the developed European real estate market. It tracks the FTSE EPRA/NAREIT Developed Europe Index, charging investors’ 0.48% in expense ratio. The fund is less popular and less liquid in the European space with $64.3 million in AUM and average daily volume of around 23,000 shares. IFEU has lost 6.2% in the year-to-date timeframe. WisdomTree Global ex-U.S. Utilities Fund (NYSEARCA: DBU ) This fund follows the WisdomTree Global ex-US Utilities Index, which measures the performance of the dividend-paying companies in the utilities sector of the developed and emerging equity markets, excluding U.S. European firms account for 54% of the portfolio while Japan takes 5% share. With AUM of $14.4 million, the fund is diversified across 97 securities with none holding more than 2.5% share. It charges investors’ 58 bps in annual fees and trades in a paltry volume of 4,000 shares a day. The ETF has shed 0.5% so far this year. Link to the original article on Zacks.com

U.S. Hires More Than Expected In Feb.: ETFs And Stocks To Buy

The U.S. labor market continued its strength with solid hiring in February, easily dodging the global slowdown and a tumultuous stock market. The economy added 242,000 jobs in February, much above the market expectation of 190,000. The majority of the additions were seen in healthcare, retail, bars and restaurants, and construction that more than offset the decline in the mining sector. Unemployment remained unchanged at an eight-year low of 4.9% while job gains for December and January were revised upward by a combined 30,000. However, average hourly wages unexpectedly dipped 0.1% after a strong 0.5% increase in January. This reflects the first monthly drop since December 2014 and lowered the year-over-year wage increase to 2.2% from 2.5% for January. The robust data eased fears of a recession in the U.S. and infused further signs of confidence into the economy. Investors’ sentiment thus turned toward risk-on trade once again. While a solid hiring number is strong enough to support the Fed’s gradual interest rates hike this year, tepid wage growth remains a matter of concern. Market Impact The news extended the U.S. stock market’s three-week winning streak seen this year. In particular, the Dow Jones Industrial Average climbed to over 17,000 for the first time since January 5 while the S&P 500 surpassed 2,000 during the trading session but closed at a lower level. Yields on two-year and 10-year Treasury bonds soared to one-month high levels but fell at the close. On the other hand, U.S. dollar remained volatile given that the solid pace of hiring was tarnished by a drop in average hourly wages. Given this, we have highlighted three ETFs and stocks that will be the direct beneficiaries of job gains and see smooth trading in the days ahead. ETFs to Buy PowerShares DB USD Bull ETF (NYSEARCA: UUP ) A healing job market and the resultant improving economy will pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of the U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro and 25.5% collectively in the Japanese yen and British pound. The fund has so far managed an asset base of $830.6 million while sees an average daily volume of around 1.6 million shares. It charges 80 bps in total fees and expenses, and lost 0.3% on the day following the jobs report. The fund has a Zacks ETF Rank of 2 or “Buy” rating with a Medium risk outlook. SPDR Homebuilders ETF (NYSEARCA: XHB ) Solid labor market fundamentals along with affordable mortgage rates will continue to fuel growth in a recovering homebuilding sector, creating a buying opportunity in homebuilders and housing-related stocks. In addition, slower and gradual rate hikes will not impede the growth prospect of the sector, at least in the short term. The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. In total, the fund holds about 37 securities in its basket with none accounting for more than 5.21% share. The product focuses on mid-cap securities with 67% share, followed by 24% in small caps. The fund has amassed about $1.5 billion in its asset base and trades in heavy volume of more than 3.7 million shares. Expense ratio comes in at 0.35%. XHB added 0.2% on the day and has a Zacks ETF Rank of 2 with a High risk outlook. SPDR S&P Retail ETF (NYSEARCA: XRT ) Retail will also benefit from accelerating job growth though soft wage growth points to reduced spending power. XRT tracks the S&P Retail Select Industry Index, holding 100 securities in its basket. It is widely spread across each component as none of these holds more than 1.78% of total assets. Small-cap stocks dominate about three-fifths of the portfolio while the rest have been split between the other two market cap levels. XRT is the most popular and actively-traded ETF in the retail space with an AUM of about $617.2 million and average daily volume of around 4.4 million shares. It charges 35 bps in annual fees and gained 0.5% on the day. The product has a Zacks ETF Rank of 1 or “Strong Buy” rating with a Medium risk outlook. Stocks to Buy Though several sectors will benefit from healthy hiring, the direct beneficiary is the staffing industry. The industry bodes well at least for the near term given its superb Zacks Industry Rank (in the top 11%) at the time of writing. Investors seeking to ride out the optimism could look at a few top-ranked stocks handpicked by us using our Zacks Stock Screener . These stocks have a Zacks Rank #1 (Strong Buy) or #2 (Buy), a Growth or Value Style Score of B or better, and an above-average industry earnings growth of 13.7%. Cross Country Healthcare, Inc. (NASDAQ: CCRN ) Based in Boca Raton, Florida, Cross Country is a leading healthcare staffing services’ company which primarily focuses on providing nurse and allied, and physician staffing services and workforce solutions. The stock is expected to deliver year-over-year earnings growth of 26.9% in fiscal 2016. It shed 1.2% in Friday’s trading session and currently has a Zacks Rank #2 with a Growth Style Score of “A”. TrueBlue, Inc. (NYSE: TBI ) Based in Tacoma, Washington, TrueBlue is a leading provider of staffing, recruitment process outsourcing, and managed services in the United States, Canada and Puerto Rico. The company’s earnings are expected to growth 48.4% year over year in fiscal 2016. TBI gained 0.7% on the day and has a Zacks Rank #1 with a Value Style Score of “B”. Insperity, Inc. (NYSE: NSP ) Based in Kingwood, Texas, Insperity provides an array of human resources and business solutions to enhance the performance of small- and medium-sized businesses in the United States. The company has an incredible earnings growth projection of 53.8% for fiscal 2016. The stock was down 0.2% in Friday’s session and has a Zacks Rank #1 with Growth and Value Style Scores of “A” each. Original post

Lessons From Muddy Waters Research And Other Short-Sellers In Avoiding Potential Value Traps

I recently read this book “The Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions” written by Richard Teitelbaum where he profiles 10 high-profile short-sellers including Bill Ackman, Jim Chanos and David Einhorn among others. In particular, the chapter on Carson Block of Muddy Waters Research caught my attention. Carson Block of Muddy Waters Research is best known for his firm’s short-seller reports on Chinese companies. Carson Block embarked on this journey as an activist short-seller with a visit to NYSE-listed Orient Paper (NYSEMKT: ONP ) in January 2010, at the request of his father William Block who operated an investment research firm called WAB Capital which was compensated by listed companies for publishing research reports. During the visit, Carson Block spotted a couple of red flags, including the inconsistency between the actual raw materials (20-foot pile of used paper which was used as feedstock) sighted and its accounting value on the company’s books, the condition of the fixed assets (“the rolling machinery was antiquated”), and the fact that management was apparently unable to answer questions relating to operational metrics during the meeting. He published a negative report on Orient Paper and distributed it via email in June 2010; the stock is currently trading at a fraction of its share price prior to the report. In the next few years, Carson Block started Muddy Waters Research and went on to publish more reports on companies such as Sino-Forest and Rino International. On Muddy Waters Research’s website, the firm highlights its track record , where it claims its nine “Strong Sell” Reports have led to four de-listings, four resignations of auditors/CFO/board members and more than six formal investigations by regulators into covered companies. Lessons From Muddy Waters In September 2014, Carson Block of Muddy Waters Research gave a presentation to accounting students at Baruch College, the presentation slides are available for download here . Carson Block highlighted a couple of red flags that investors should take note of: High Days Sales Outstanding Few tangible assets on balance sheet Highly acquisitive / high capex Outsized gross margins inconsistent with the value-add they are providing to customers Unique in reliance on intermediary counterparties Often (successfully) entering new businesses High revenue or expense concentrations with counterparties Unexplained cash in the Variable Interest Entity Business models that don’t make sense Opaque business model Tax preferences / rates that don’t hold up Obfuscating answers on conference calls Changing Key Performance Indicators Initiatives disappearing without mention Heavy insider selling Losing customers as evidenced by changing names of top 10 customers Significant customer and/or supplier is a related party Inventory turnover inconsistent with industry peers I will elaborate on some of these red flags in greater detail below with actual case studies. Highly acquisitive In 2011, it was reported that Olympus ( OTCPK:OCPNY ), a Japanese manufacturer of cameras and other electronics, utilized acquisition payments and associated fees to hide the fact that it had made severe losses on its investments. The writing was on the wall, for those who bothered to do due diligence, as the company was a serial acquirer buying companies at inflated valuations, only to write down some of these acquisitions in a short period of time. Furthermore, most of these acquired companies were in industries unrelated to Olympus’ core business and were loss-making. Outsized Gross Margins Longtop Financial, a software company with banks and other financial institutions in China as its clients, was the subject of a negative report by Citron Research in April 2011. One of the red flags highlighted by Citron Research was that Longtop reported outsized gross margins of 69% in FY2010, compared with gross margins between 15% and 50% for its peers. According to Citron Research, management’s explanation for the higher gross margin was that “they have more standardized software sales then peers and standardized software has very high gross margins of around 90%. The company claims that these solutions and modules can be deployed to new customers with fewer man-hours and expenses.” In May 2011, Longtop’s auditor resigned; and the company’s shares were suspended from trading in August 2011 by NYSE. Opaque Business Model Charlie Munger has this particular quote which I like a lot: Where you have complexity, by nature you can have fraud and mistakes. You’ll have more of that than in a company that shovels sand from a river and sells it. This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world. Certain industries and businesses are inherently more complex and opaque, making it difficult for investors and even auditors to understand and do decent work on them. It is telling that several vegetable farming/processing companies in China have been the target of short-sellers at any one point in time or another; see the reports published here and here . On e key risk factor with investing in companies operating in the Chinese agricultural industry is that both sales (to distributors) and purchases (from farmers) are usually transacted in cash without supporting documents such as receipts. Inventory turnover inconsistent with industry peers China Biotics, a manufacturer and distributor of probiotics products, reported inventory turnover ratios of 33 and 29 times in FY2009 and FY2010 respectively, while a March 2011 report published by China Economic Review mentioned that “During our visit to Shanghai Shining Biotechnology’s facility, we saw no evidence of inventory leaving the premises or clients coming for inquiries.” In June 2011, both the auditor and CFO of China Biotics resigned. Closing Thoughts I am a long-only investor and I do not engage in any short-selling. Munger’s quote below echoes my view: It would be one of the most irritating experiences in the world to do a lot of work to uncover a fraud and then watch it go from X to 3X and watch the crooks happily partying with your money while you’re meeting margin calls. Why would you want to go within hailing distance of that? Nevertheless, investing in value traps, particularly those that are or will be the target of short-sellers, is the single easiest way to lose money with stocks. Therefore, investors should actively learn from short-sellers and draw on their knowledge and experience to minimize the possibility of total capital impairment with any single one of their positions. As a special bonus for my subscribers, they will get access to a list of close to 100 Asian and U.S. stocks with large positive accruals (divergence between earnings and cash flow) and high Beneish M-Scores (these two are good indicators of fraud risks) in a separate bonus watchlist article. For readers interested in further exploring this topic, I have also previously written two articles on value traps, namely “How To Avoid Potential Value Traps With Net-Nets And Other Deep Value Stocks” and “Drawing Inspiration From Short-Sellers In Avoiding Potential Value Traps” published here and here respectively. Note: I flag potential value traps with corporate governance issues, financial statement manipulation risks and other red flags as part of my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service. My subscribers get access to the list of value traps for both deep value & wide moat stocks, in addition to monthly top ideas, potential investment candidate profiles and potential investment candidate watchlists. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.