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ETF Strategy: Bullish On UDN, GDX, GLD After Weak Jobs Numbers; Bearish On SPY, IBB

The much anticipated labor market data was released at the time of writing this article. The report indicates that the U.S. economy is not out of the woods yet. The economy added just 160,000 jobs in the month of April, well below the consensus forecast of 202,000 job additions. While markets have slipped on the disappointing job numbers, it is possibly due to the fact that it creates uncertainty over the pace of rate hikes. Conflicting Signals From the Fed The Federal Reserve hiked benchmark interest rates for the first time in almost a decade in December last year. At the time the Fed had anticipated four more rate hikes in 2016. But extreme volatility in global markets seen at the start of this year has forced the Fed to change its stance. The Fed now expects two further rate hikes. Markets anticipate just one. With today’s disappointing job numbers, even a solitary rate hike now looks unlikely. I Am Bullish on UDN, GDX and GLD The Fed has reiterated time and again that it will be cautious with future rate hikes. Today’s weak job numbers give the central bank a strong reason to remain on the sidelines. This is good news for gold bulls. This week, gold prices crossed $1,300 an ounce. After being written off at the end of last year, the precious metal has made a strong comeback since the start of this year. The rally at the start of the year was sparked due to volatility in risk assets, which boosted gold’s safe haven appeal. But with the Fed factor back, expect further strengthening in gold prices. I am bullish on the SPDR Gold Trust (ETF) (NYSEARCA: GLD ), which is now up more than 21% for the year. The chart below shows GLD has broken through some key resistance levels. Click to enlarge Stockcharts.com. Importantly, GLD is seeing significant inflows. On Monday, GLD had net inflows $860 million, highlighting the bullish sentiment on gold. The table below from ETF.com shows GLD is at the top when it comes to fund inflows into ETF. This trend is likely to continue following today’s weak jobs report. Recently I covered Market Vectors Gold Miners (ETF) (NYSEARCA: GDX ), which is now up more than 84% for the year. I had noted in the article that the excellent run in GDX will continue based on the outlook for gold. That thesis has been strengthened further following the weak April jobs report. As I had highlighted in my GDX article, the ETF substantially underperforms gold when gold prices drop and vice versa. GDX’s gains have been four times those of GLD this year. Therefore, if prices continue to strengthen expect significant further upside in GDX. I am also bullish on Powershares DB US Dollar Index Bearish Fund (NYSEARCA: UDN ). The greenback strengthened significantly from mid-2014 onwards as it became clear that the Fed would start to tighten its monetary policy. The story has been different this year. Click to enlarge Google Finance. UDN has gained almost 5% this year but with a rate hike unlikely this year, I expect further gains. Bearish on SPY and IBB Finally, what does today’s weak jobs report mean for the SPDR S&P 500 ETF (NYSEARCA: SPY ). The S&P 500 has edged lower today but a weak jobs report, which leads to a delay in rate hike, is a positive for risk assets such as equities. But the weak earnings season suggests that the S&P 500 will remain under pressure, which is why I am bearish on the index. SPY, as the table below from ETF.com shows, has seen the highest redemption among ETFs. This trend could continue following the weak earnings. According to data from FactSet, the blended earnings decline for the S&P 500 in the ongoing earnings season (as on April 29, 2016) was 7.6%. While the Energy sector is to a great extent responsible for this steep drop, even after excluding the sector, the FactSet data shows 2.4% decline. I must add though that a weaker dollar will help Corporate America. However, the impact will not be felt in the near-term. The iShares NASDAQ Biotechnology Index (ETF) (NASDAQ: IBB ) has had another rough week. The fund dropped more than 5% for the week. IBB is in fact heading into bear market territory. Since April 25, it has fallen 13%. I discussed some of the factors in my article late last month that will keep pressure on IBB. One of the factors that I had mentioned was difficulty obtaining funding. In April, multiple biotech IPOs were withdrawn. This week we saw one more instance which highlights the fact that biotech companies are struggling to gain access to capital markets. Relypsa (NASDAQ: RLYP ), which has an approved product, obtained $150 million in debt financing. RLYP will be paying 11.50% in interest. Debt funding at such a high interest rate for a biotech company in early stages of commercialization is not good news. I expect difficult times ahead for the sector. 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.

DOL Opens The Door To SRI Investing In Retirement Plans

Sustainable, responsible, and impact (SRI) investing is a growing part of the investment landscape. Assets under management using SRI strategies now total $6.57 trillion, or $1 out of every $6 under professional management in the U.S., and these numbers are growing. 1 Between 2012 and 2014, SRI investing grew by more than 76%. 1 A recent survey indicates that the majority of millennials believe business can do more to address society’s challenges in the areas of climate change and resource scarcity. 2 This year Morningstar launched environmental, social, and governance (ESG) scores for global mutual and exchange-traded funds. 3 Despite the growing interest in SRI strategies, most retirement plans such as 401(k) plans were slow to incorporate ESG factors in the investment evaluation process. That may be about to change. Last fall the U.S. Department of Labor (DOL) published guidance that seems to open the door to greater use of SRI strategies in retirement plans. This guidance, in the form of an interpretive bulletin, steps back from prior DOL guidance that appeared to require plan fiduciaries to give economically targeted investments (ETIs) special scrutiny not required of other types of plan investments. While it is too early to tell whether the DOL bulletin will lead to increased adoption of SRI strategies by retirement plans, if you have clients or prospective retirement plan clients who have expressed an interest in SRI strategies, the new guidance provides an excellent vehicle for reexamining this issue. SRIs Defined A variety of terms in addition to “SRI” are used to describe an investment strategy that takes ESG factors into consideration to select investments that will have both competitive financial returns and a positive societal impact (e.g., socially responsible investing, sustainable investing). The DOL uses the term “economically targeted investments” (ETIs), which it defines as investments chosen because of “the economic benefits they create apart from their investment return to the employee benefit plan.” 4 Common types of investments include affordable housing, small business development, community services (child care, health care, education), job creation, expansion of existing businesses, and support of sustainable development initiatives. ETIs appear in a variety of forms including stocks, mutual funds, private equity, real estate, and fixed income. The “All Things Being Equal” Test The first formal position the DOL took on SRI investing, referred to by the DOL as ETIs, was in Interpretive Bulletin (IB) 94-1. In that bulletin, the DOL established the “all things being equal” test. This test had three prongs. A plan fiduciary can never subordinate the interests of plan participants and beneficiaries to a social purpose. The ETI must have an expected rate of return commensurate to rates of return of alternate investments “with similar risks available to the plan.” The ETI must otherwise be an appropriate investment considering the diversification of plan investments and the plan’s investment policy. As long as plan interests were not subordinated and the ETI could be expected to return a comparable rate of return as investments with similar risks, a plan fiduciary could offer ETI as an investment option. In effect, plan fiduciaries could use ESG factors to break a tie with an equivalent non-SRI option. Special Scrutiny Requirement Added in 2008 IB 94-1 remained the DOL’s principal guidance on the topic until it was replaced in 2008 by Interpretive Bulletin 2008-1. The 2008 pronouncement put SRI strategies in a much less favorable light as compared to the 1994 guidance. In the 2008 bulletin, the DOL said that consideration of non-economic, ESG factors Should be rare, and When an ETI is considered, the decision to invest should be documented in a manner that demonstrates compliance with ERISA’s rigorous standards. The 2008 bulletin seemed to require plan fiduciaries to give a level of attention and circumspection to SRIs not required for other plan investments. DOL Restores & Enhances the “All Things Being Equal” Test Recently, the DOL expressed its view that the 2008 bulletin was unduly discouraging plan fiduciaries from investing in ETIs or considering ESG factors, even when the investments were economically equivalent.5 To address these concerns, the DOL withdrew the 2008 bulletin and replaced it with IB 2015-01, guidance more aligned with the position it had communicated in 1994. In its Fact Sheet released with the 2015 bulletin, the DOL said that the “IB also acknowledges that in some cases ESG factors may have a direct relationship to the economic and financial value of the plan’s investment.” 5 The DOL went on to say that, “in such instances, the ESG issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” 5 The effect of the DOL’s 2015 bulletin is significant. The three-prong test of IB 94-1 is restored. Plan fiduciaries do not have a “higher level” obligation to scrutinize and document ETIs than they do for other plan investments. ESG factors can be taken into account in determining the economic benefit of investments and to find superior investments. Challenges & Opportunities If you have retirement plan clients or prospective clients who are interested in SRI strategies, IB 2015-01 provides an excellent vehicle for discussing whether SRI strategies are a good fit for their retirement plan’s investment portfolio. Following are some possible discussion points to include in your SRI discussions. Discuss whether your client wants to incorporate ESG factors in their investment evaluation process . Do members of the plan’s investment committee believe that ESG factors will materially impact the financial performance of the plan’s investments? Are there demographic and diversity factors at play that will affect the decision to provide ESG-driven funds such as a high concentration of Millennials? Do members of the committee need additional education regarding SRI investing? Evaluate how an SRI strategy would impact the existing fund lineup . How many investment options are currently provided to participants? Where in the fund lineup would it make sense to add an SRI strategy? Consider how to integrate SRI beliefs and expectations into the existing investment policy statement (IPS) and investment due diligence process . Does the IPS need to be adjusted to incorporate ESG considerations? Will there need to be any changes in the process for selecting and monitoring the plan’s investment menu? Does the documentation retained by the investment committee need to be modified or expanded? These basic inquiries will be a good starting point for discussing SRI strategies with plan sponsors. As with all investment decisions, you play a critical role in helping your plan sponsor clients define and pursue investment objectives that are right for their plans. Clients that elect to adopt an SRI strategy will need your support to Define their investment objectives Develop or amend the IPS that sets out clear rules and metrics for evaluating investment return and risk equivalencies Identify and evaluate investment opportunities Review and evaluate SRI fund prospectuses Document the SRI decision-making process, as they do with other plan investments Educate plan participants about SRIs Footnotes US SIF Foundation, Report on US Sustainable, Responsible, and Impact Investing Trends 2014 Deloitte, The Deloitte Millennial Survey , January 2014 Morningstar, Inc. Press Release, “Morningstar Introduces Industry’s First Sustainability Rating for 20,000 Funds Globally, Giving Investors New Way to Evaluate Investments Based on Environmental, Social, and Governance (ESG) Factors,” March 1, 2016 Department of Labor, Interpretive Bulletin 2015-01, October 26, 2015 Department of Labor, Fact Sheet: “Economically Targeted Investments (ETIs) and Investment Strategies that Consider Environmental, Social and Governance (ESG) Factors,” October 22, 2015 FOR INVESTMENT PROFESSIONAL, BROKER-DEALER AND INSTITUTIONAL USE ONLY. NOT FOR USE BY OR DISTRIBUTION TO THE GENERAL PUBLIC. This material is for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Neuberger Berman does not accept any responsibility to update any opinions or other information contained in this document. Any views or opinions expressed may not reflect those of the firm or the firm as a whole. This material is informational and educational in nature, is not individualized and is not intended to serve as the primary or sole basis for any investment or tax-planning decision. Investing entails risks, including possible loss of principal. The material includes copyrighted information of Integrated Retirement. ©2016 Integrated Retirement. Published by permission. All rights reserved. Neuberger Berman LLC is a registered Investment Advisor and Broker Dealer. Member FINRA/SIPC. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. All rights reserved. © 2009-2016 Neuberger Berman LLC. | All rights reserved) from the feed, and any images/charts as they appear on the original blog article

Seeking The Asian Sanborn Map

Buffett’s Investment In Sanborn Map Warren Buffett wrote at length about his investment in Sanborn Map, a publisher of maps of U.S. cities and towns, in the Buffett Partnership’s 1961 letter . Sanborn Map represented 25% and 35% of assets for the Buffett Partnership in 1958 and 1959 respectively. Sanborn Map was referred to as a company which “published minutely detailed maps of power lines, water mains, driveways, building engineering, roof composition, and emergency stairwells for all the cities of the United States, maps that were mainly bought by insurance companies,” in Alice Schroeder’s The Snowball. According to Roger Lowenstein’s book “Buffett: The Making of an American Capitalist,” Buffett earned “roughly a 50 percent profit” on the investment in Sanborn Map. Going back to the Buffett Partnership’s 1961 letter, Warren Buffett shared how he exited the investment at a profit by exercising influence by virtue of his significant shareholdings: Our holdings (including associates) were increased through open market purchases to about 24,000 shares and the total represented by the three groups increased to 46,000 shares. We hoped to separate the two businesses, realize the fair value of the investment portfolio and work to re-establish the earning power of the map business…There was considerable opposition on the Board to change of any type, particularly when initiated by an outsider, although management was in complete accord with our plan and a similar plan had been recommended by Booz, Allen & Hamilton (Management Experts). To avoid a proxy fight (which very probably would not have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large portion of Sanborn’s money tied up in blue-chip stocks which I didn’t care for at current prices, a plan was evolved taking out all stockholders at fair value who wanted out. The SEC ruled favorably on the fairness of the plan. About 72% of the Sanborn stock, involving 50% of the 1,600 stockholders, was exchanged for portfolio securities at fair value. The map business was left with over $l,25 million in government and municipal bonds as a reserve fund, and a potential corporate capital gains tax of over $1 million was eliminated. The remaining stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an increased dividend rate. Sanborn still exists today and has transformed itself into a provider of “a full suite of photogrammetric mapping and geographic information system (NYSE: GIS ) services,” according to its corporate website . Sanborn Map ‘s Deep Value And Wide Moat In many ways, Sanborn Map represented a classic deep value cigar-butt investment that Benjamin Graham would have been proud of, although the company had elements of a wide moat (albeit diminishing) investment as well. In 1958, when Buffett first initiated a position in Sanborn Map, the stock was trading for $45 per share, compared with the company’s investment portfolio of stocks and bonds valued at $65 per share. This implied that the market was valuing Sanborn Map’s map publishing business at -$20 per share, suggesting that investors vested at current prices were getting the map business for free. I have written extensively about deep value bargains net of cash and investments in my articles “How Benjamin Graham Will Possibly Invest In A World Without Net-Nets,” “Seeking Value In Sum-Of-The-Parts Discounts” and “A Case Study On Large-Cap Value Investing” published here , here and here . Sanborn Map was also a wide-moat company in various aspects. Firstly, Sanborn Map dominated its market, as evidenced by Buffett’s choice of words in his letter “For seventy-five years the business operated in a more or less monopolistic manner.” Secondly, Sanborn Map enjoyed a high degree of recurring revenues. Maps required annual revisions (via pasteovers), for which Sanborn Map will charge its customer around $100 every year. Thirdly, customer demand was fairly predictable (insurance companies needed maps to assess risk and underwrite policies) and Sanborn Map did not need to invest heavily in marketing to retain its customers. Sanborn Map’s moat eventually narrowed as its key clients, the insurance companies merged, which meant less business and more powerful customers. Furthermore, “a competitive method of under-writing known as “carding” made inroads on Sanborn’s business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930’s to under $100,000 in 1958 and 1959″ according to Buffett. Asia’s Sanborn Map Japan-listed OYO Corporation (9755 JP) is potentially Asia’s Sanborn Map. OYO Corporation call itself the “Doctor to the Earth” and its corporate profile on the Japan Infrastructure Development Institute website reads as follows: OYO Corporation was founded in 1957 as a general consultant firm specializing in study of the earth by Dr. Fukuda and Dr. Suyama. OYO brings together geology, geophysics and geotechnical engineering to provide a wide range of services in the four fields of construction, resources, disaster prevention and environment. In addition to these technical services, OYO is continually expanding its development of measuring instruments based on our own abundant experience in the field.To date OYO has grown up to the largest specialist organization in Japan in geotechnical field. OYO has about 1,100 staffs, more than two-thirds of them are university graduates in engineering and scientific fields. Besides some 60 numbers of domestic branch offices, we have overseas branches and subsidiary companies in U.S.A., U.K.,and J.V. in France. OYO has devoted itself to research and development in an effort toward “The Creation of Geoengineering.” Our greatest desire is to apply our achievements and to provide services of higher quality to our clients and customers throughout the world. OYO operates in three key business segments: Engineering, Consultation and Instruments. The Engineering business provides ground structure information for the major motorway constructions in Japan; assists with post-disaster management by conducting investigations to recommend relevant repair work; conducts air, land and sea-born investigations for natural resource explorations; and does site investigation for pollution remediation projects. OYO’s Consultation segment involves itself in the site assessment and determination process of nearly all of Japan’s power plants; provides earthquake damage estimation to city planners; and conducts geotechnical investigations and subsidence forecasts for airports built on water. Its Instruments business develops measuring & monitoring instruments used for a wide range of purposes including monitoring the condition and movement of polluted underground water, seismographs for exploration of natural resources under the sea bottom, and geotechnical investigations from: shallow soft soil to deep hard rock structures on the ground and in the sea. OYO’s net cash and short-term investments of JPY 24.0 billion as of December 2015 currently represents approximately 77% of OYO’s current market capitalization, which values the company’s operating business at a mere 3 times trailing EV/EBIT. While OYO is not exactly as great a bargain as Sanborn Map, the stock is still the cheapest of listed companies providing surveying and mapping services. As a bonus for my subscribers of my premium research service , they will get access to: 1) a list of publicly-traded companies providing surveying and mapping services; and 2) a list of stocks with short-term investments exceeding their market capitalizations. Asia/U.S. Deep-Value Wide-Moat Stocks Premium Research Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of deep-value & wide moat investment candidates and value traps, including “Magic Formula” stocks, wide moat compounders, hidden champions, high quality businesses, net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts. The potential investment candidates I profiled for my subscribers in May 2016 include: (1) a U.S.-listed market leader in a niche consumer lifestyle space which is trading at 0.80 times P/NCAV and 0.70 times P/B, but remains debt-free and profitable; (2) a U.S.-listed Net Operating Losses-rich deep value play valued by the market at 2.6 times EV/EBITDA net of the present value of its NOLs; (3) an Asian-listed manufacturer of wireless communication products which is the market leader in its home market and the first to export such products to the U.S.; it is a net-net trading at 0.75 times P/NCAV with net cash equivalent to its market capitalization; (4) a U.S.-listed Magic Formula stock trading at 3 times trailing EV/EBIT and Acquirer’s Multiple, sporting a 10% dividend yield net of withholding tax; (5) a U.S.-listed Munger Cannibal trading at 7 times trailing EV/EBIT and Acquirer’s Multiple; (6) an Asian-listed company which is a global leader in a certain medical device niche trading at 3.5 times trailing EV/EBIT and 3.5 times Acquirer’s Multiple, versus a trailing ROIC of 27%. 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.