Tag Archives: outlook

The Sweet Spot Of Zero Leverage Equity?

Global economic momentum is modest at best, equities and bonds are overvalued, and while allocating your funds entirely to gold, cash and shorts is enticing, it isn’t possible for the majority of money managers. What are investors to do then? The ranking of creditors and equity in the capital structure suggest that high-grade corporate bonds – and sovereigns – is the optimal allocation. When the going gets tough, the equity is wiped out, but as creditor, you are at least assured a recovery on your investment – even if it may be a slim one. This time could be different, however. As an alternative, I propose equities with zero leverage. There aren’t many around, and those that do remain unlevered are looked upon with suspicion by the market. After all, if the CFO hasn’t jumped on the bandwagon and issued debt to finance dividends and buybacks, she must be an idiot. But if you believe – as I do – that corporate bonds is the new bubble, being overweight equities with no leverage isn’t a bad idea. These securities won’t be immune to a crisis, but they offer two key advantages. Firstly, they likely will decline less than their overlevered brethren, and the risk of a bankruptcy is smaller. If a repeat of 2008 really beckons, capital preservation may turn out to be the key metric of survival, no matter the drawdown. Secondly, buying equities with zero, or very low, leverage is also a free option. If we are wrong, and the debt finance buyback and dividend party goes on, a portfolio of equities with zero leverage eventually will join the party too. In all likelihood, that means excess returns for your stocks. Once leverage has increased, you can sell and go looking for another batch of firms with no leverage, primed to lever their balance sheet to hand out money to shareholders. We concede that this latter rationale partly is a contradiction. But we would rather buy firms with a clean balance sheet than the alternative of buying equities that have already maxed out their potential for debt-financed shareholder gifts. Confusing charts; no directional clarity Meanwhile, looking at the macro, strategy and technical charts has left me confused – a bit like Macro Man , I suppose. Macroeconomic leading indicators have stabilised based on the most recent data. The year-over-year rate in the U.S. and EZ headline indices have climbed marginally, and have risen strongly in China. In Japan, however, the message from the headline index is grim. Global money supply growth has turned up further, helped by the U.S. and China. It is particularly encouraging to see that M1 growth has accelerated slightly in the U.S. On the contrary, my short-term charts of the market are sending a very unclear message. In the U.S. put-call ratios point to further upside despite the recent rally, while the advance-decline ratio continues to roll over. My equity valuation scores point to a slow grind higher in coming months, before a sell-off takes over towards the end of the summer. On sovereign bonds I remain bearish.

Confused About Market Trend? Buy These Balanced Funds

A portfolio that offers a mix of both equity and fixed-income investments may be ideal for those who are confused about the market trend in the near future. With the first-quarter earnings season nearing its end and uncertainty over rate hike taking the front seat, investing in balanced mutual funds may prove profitable. Balanced mutual funds that invest 30-50% of their assets in equity securities have registered an average return of 2.2% in the year-to-date frame, the highest among the allocation mutual fund categories, according to Morningstar. Also, this was the best-performing segment among the allocation mutual fund categories over the past one month. So, favorably ranked mutual funds form the above-mentioned category may be lucrative investment propositions. June Hike in the Cards The minutes from the Fed’s policy meeting in April that released yesterday showed several Fed officials’ verdict of a hike next month if the U.S. economy continues to show signs of improvement. The minutes stated: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor markets continued to strengthen, and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June.” Separately, San Francisco Fed President John Williams recently said that following continued moderate growth, two to three rate hikes this year “makes sense.” “The data” he added, “are lining up to make a good case for rate increases in the next few meetings, not just June.” Also, Atlanta Fed President Dennis Lockhart said that the recent “encouraging” inflation data showed a growth in U.S. economy. High-quality global journalism requires investment. He added that “if the data continue to be encouraging” he would “certainly entertain some policy move in June.” Though some of the Fed officials showed concerns over sluggish first-quarter growth and weak global growth conditions, most of pointed to “the steady improvement in the labor market as an indicator that the underlying pace of economic activity had likely not deteriorated.” The significant rise in possibilities of a raise in June led investors to doubt market movement. Oil Price Fluctuations Persist As the first-quarter earnings season is almost over, oil price movement and economic data are likely to set the market trend in coming days. Despite the recent rally, oil prices continued to witness fluctuations as major oil-producing nations failed to reach an agreement on production freeze. Russia’s Energy Minister Alexander Novak’s discouraging comments weighed down on oil prices. Novak recently said that as the global crude surplus remained at 1.5 million barrels per day (bpd), “(the outlook that the market won’t balance until the first half of 2017) is an optimistic forecast as oversupply persists.” However, the recent positive outlook from Goldman Sachs Group, Inc. gave a boost to oil prices. Goldman Sachs said that oil market encountered a deficit in crude output following production disruptions in Nigeria and Canada. Goldman also said that “the oil market has gone from nearing storage saturation to being in deficit much earlier than” it expected. The firm also projected that WTI crude may reach $50 per barrel in the second half of this year and register modest increases in 2017. Thus, uncertainty regarding crude price movement in the coming months also raised doubts over market movement in near future. 4 Balanced Funds to Buy In this scenario, we have highlighted four Balanced Mutual Funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) and allocate between 30% and 50% of their assets in equity securities. We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Moreover, these funds have encouraging year-to-date, three-year and five-year annualized returns. The minimum initial investment is within $5,000. Also, these funds have a low expense ratio and carry no sales load. Vanguard Wellesley Income Fund Inv (MUTF: VWINX ) invests 60-65% of its assets in investment-grade debt securities issued by corporate, U.S. Treasury, and government agencies. The fund allocates the rest of its assets in common stocks of companies with a solid track record of dividend payments. VWINX has year-to-date, three-year and five-year annualized returns of 4.7%, 5.5% and 7.4%, respectively. Annual expense ratio of 0.23% is significantly lower than the category average of 0.80%. Berwyn Income Fund Inv (MUTF: BERIX ) invests in both equity and fixed-income securities. While the fund invests in fixed-income securities including debt securities of both the U.S. government and corporate entities, and mortgage-backed securities, it also invests in undervalued common stocks of companies that pay dividends. BERIX has year-to-date, three-year and five-year annualized returns of 3.6%, 3.6% and 5.2%, respectively. Annual expense ratio of 0.64% is significantly lower than the category average of 0.80%. American Century One Choice Portfolio Conservative Inv (MUTF: AOCIX ) allocates 45%, 49% and 6% in underlying funds, which in turn invest in stocks, bonds and cash equivalents, respectively. AOCIX has year-to-date, three-year and five-year annualized returns of 2.5%, 3.9% and 5.4%, respectively. Annual expense ratio is 0% compared to the category average of 0.80%. T. Rowe Price Retirement Balanced Fund Adv (MUTF: PARIX ) invests in both stock and bond funds of T. Rowe Price. PARIX created a diversified portfolio by investing 60% in underlying bond funds and the rest of the assets in underlying stock funds. The proportion of asset allocations is considered ideal for investors’ retirement years, according to T. Rowe Price. PARIX has year-to-date, three-year and five-year annualized returns of 2.5%, 2.7% and 4.2%, respectively. Annual expense ratio is 0.25% compared to the category average of 0.80%. 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For Investment Success, Keep It Simple

By Carl Delfeld Investing can seem incredibly complicated and intimidating, especially for the novice. There are thousands of stocks and almost as many funds to choose from, not to mention stock markets that always seem volatile and uncertain. Even tougher is deciding when and how to sell a stock or fund to lock in gains or limit losses. It helps to follow a simple strategy to help make these decisions pretty much automatically. Here are four principles that will help you get started. #1: Build a Diversified Core Portfolio Leonardo da Vinci was right when he said, “Simplicity is the ultimate sophistication.” And legendary global investor Sir John Templeton really nailed it with his sage advice, “Diversify. In stocks and bonds, as in much else, there is safety in numbers.” For your core portfolio, I suggest going with low-cost, tax-efficient exchange-traded funds (ETFs) as building blocks. As I describe in my book, Think Global, Grow Rich , this core portfolio has capital preservation as its primary goal and capital appreciation as a secondary goal. It’s a well-diversified portfolio with allocations to fixed income, broad U.S. equity markets, exposure to high-quality international markets, income- and dividend-oriented ETFs, gold, and even some exposure to other strong currencies – in case the dollar falls off its perch. #2: Set Aside Ample Cash After setting up a core portfolio, you should set aside a comfortable cash position of at least six months’ worth of living expenses. This is where I differ from many other advisors who want their clients to always be fully invested. Another reason to keep a lot of cash in your brokerage account is to be able to take advantage of markets and stocks when they’re on sale. You want to have the ability to move quickly and not have to figure out which stocks to sell in a hurry. #3: Seek Capital Gains With Your Explore Portfolio. Any capital you have left can go to your “explore” portfolio with the full recognition that seeking capital appreciation means higher risk and volatility. You still need some diversification in this portfolio, but you should also feel free to look at aggressive asset classes like emerging markets, commodities, sector ETFs, and individual stock ideas. One great way to gain exposure to international markets is through country-specific ETFs. With a click of the mouse, you can invest in 32 countries, such as Singapore, Switzerland, or Mexico, through the iShares MSCI Singapore ETF (NYSEARCA: EWS ), the iShares MSCI Switzerland ETF (NYSEARCA: EWL ), and the iShares MSCI Mexico Capped ETF (NYSEARCA: EWW ), respectively. Using country ETFs also gives you a hedge on the U.S. dollar weakening since. For example, when you buy the Switzerland ETF, you also gain exposure to the Swiss franc. Pick countries that are out of favor, and with time, you’ll enjoy solid gains. For individual stocks, stick to investing only in companies you understand. Invest only in what you know. Don’t just accept someone else’s opinion, do some independent homework on your own. And try to avoid complicated stories, because managing these companies is difficult and there are just too many things that can go wrong. #4: Capture Gains and Limit Losses We’ve all been there. Nothing is more painful than picking a great stock and watching it peak and then fall back to earth. Don’t ride the roller coaster with your investments. If you’re fortunate enough to have a stock or fund double in value, immediately sell half of your position to protect profits. And whenever you buy a stock, it’s smart to put in place a 20% trailing stop loss. This means you have an automatic exit if your stock falls 20% from its high. This is important, because it takes emotion out of the equation and protects your hard-earned gains, or limits your losses, so you can fight another day. It’s not a perfect approach, and sometimes that darn stock will rebound just after your stop loss strategy tells you to sell it. This is irritating, but much less painful than watching all your gains evaporate day after day, right before your eyes. Follow these four simple rules, and you’ll be way ahead of the crowd. Original Post