Aurum Access: King Dollar

By Michael McKeown, CFA, CPA – Director of Research

Over the last four months, the U.S. dollar increased against foreign currencies and put downward pressure on precious metals. While oil also fell, its correlation to the U.S. dollar index was actually positive, indicating the oversupply and capacity issues were the driver of its fall.

Gold, Gold Stocks, Oil vs. US Dollar

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Midterms & Stock Market Performance

Aurum Weekly Access - 11/3/14

By Michael McKeown, CFA, CPA - Director of Research

The midterm elections do not seem to be generating a lot of buzz. Perhaps it is me though, not watching the nauseating cable news channels or the general apathy of the nation towards politics, except for watching House of Cards.

The S&P 500 price index is up an average of 17% from Nov 1st to October 31st following midterm election years since 1966. Over the last twelve midterms, there have been zero subsequent down years for the equity market.

Midterms & Stock Market


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The Fund (Almost) Everyone Owns - PIMCO Total Return

Aurum Weekly Access - 10/3/14

By Michael McKeown, CFA, CPA - Director of Research

It is the most widely held bond fund in the world and likely shows up in your 401(k) plan, your brokerage account, or in the endowment of the investment committee you advise. At its peak, the fund held nearly $300 billion in assets and with separate account vehicles, the total strategy assets were reportedly over $500 billion. On Friday, September 26th, PIMCO's founder and Co-Chief Investment Officer Bill Gross resigned. He was the lead portfolio manager on the PIMCO Total Return fund since its inception in 1987 and often nicknamed the "Bond King".

Due to his departure, $23.2 billion of net assets left the fund in September. While the media loves the gossipy details of the story inside PIMCO, the consultants and advisors that recommended the fund are scrambling to save face. How could steady underperformance and an embarrassing discontent within the organization go unnoticed by the very people compensated to know these things?

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Must Watch Bond Charts

Okay, love may be a strong word to describe these colorful data points plotted below. But I do not think investors are paying these enough mind. Everyone has said interest rates will rise, usually generically referring to the 10-year bond. Investors crowded into short duration bonds to avoid a rise in interest rates. Interestingly from a year ago, what area actually had a tougher time? The short duration bonds (blue line, orange dots). Note that the 2-7 year area of the curve all rose relative to 1 year ago. The 10-year and 30-year yields are both lower. 092414yield curve This is a chart of bond prices for CCC-rated companies. These are companies having a tough time making payroll with 50% defaulting within five-years of issuance. Investors are so starved for yield that they are paying above par for the privilege of lending to these junk rated companies!  Since 1986 according to Standard & Poor's, the cumulative default rate over a 5-year period for this group is 50%, making this area of the corporate bond market a very risky proposition at today's prices.

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Picking Fund Winners without Using Returns

Aurum Weekly Access - 9/12/14

By Michael McKeown, CFA, CPA - Director of Research

When it comes to selecting mutual funds, looking at past performance is usually the easy and the wrong solution, as every piece of financial literature gives fair warning, "Past performance is not an indication of future results."

Historical returns are poor indicators for both choosing new funds and evaluating current holdings. A study from the Employee Benefit Research Institute of professional pension managers found that pension funds hire managers after they had great returns and fired their own managers after poor results. It is classic rearview mirror driving.

091214 EBRI

Source: EBRI

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Europe Joins the Party

The European Central Bank (ECB) shocked capital markets yesterday by lowering its overnight rate, marginal lending facility, and deposit facility on Thursday. This led to a steep decline in the Euro against the U.S. dollar of 2%, a huge move for currency markets. ECB president Mario Draghi announced the ECB would begin purchases of asset-backed securities and Euro-denominated bonds, also known as a form of QE (Quantitative Easing), finally joining the likes of the U.S., U.K., and Japan. Let's check in on some data to see how Europe is doing since it dominated headlines in 2011-12. The risk of QE causing an inflation breakout is low, considering Euro Area inflation is below 1%.

090514 1a

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Three Reasons the 10-Year Yield is Falling

Coming into 2014, Bloomberg's survey of 67 economists showed that 97% believed that the 10-year Treasury yield would end the year higher. It started off at 3.02% and most expected it to rise into the 3.25% - 3.50% range by year-end, and with forecasts as high as 4%. Today, the yield sits at 2.33% and the 30-year Bond is closer to their prediction! The 30-year Treasury fell from 3.92% at the start of the year to 3.07% today. Why were all of these economists so wrong? We have three reasons. 1. The end of QE and the George Costanza Opposite Theory

082914 1

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Two Big Changes for Money Market Funds

Money market funds used to be an afterthought. An investment vehicle that paid nice interest, (remember 5% back in 2007?), with funds available on demand, and mostly used in place of savings accounts. Fast forward to September 2008, the collapse of Lehman Brothers resulted in a default on its debt. One money market fund, the Reserve Fund, which had just over 1% of assets invested in short-term debt issued by Lehman Brothers, 'broke the buck' and went under the $1 net asset value money markets trade, in turn causing a run of redemptions at it and other funds. The SEC sought to prevent this modern day bank run from happening again, implementing a series of temporary fund guarantees that lapsed over the last few years in addition to restricting the securities money market funds could purchase. But just passed last week by a 3-2 vote, was a rule affecting prime institutional money funds. Prime money funds invest in securities issued by U.S. and foreign entities ranging from corporations, financial institutions, the U.S. government, and government sponsored entities. Now, prime institutional money market funds:

  1. Are required to have a floating net asset value (NAV)
  2. Will give fund boards the option to impose liquidity fees and redemption gates if the funds "weekly liquid assets" fall below a threshold.

From our conversations with portfolio managers of money market funds, the legislation was designed to not harm individual investors, hence money market funds held by "natural persons" will not likely be subject to the rules, depending on interpretation by the fund companies (which is ongoing). There could be future changes to the rules and retail funds, so the initial rule adoptions are important to follow, not only to better understand the rules around what investors own, but also for the shortcomings of the rules themselves. SEC Commissioner Kara Stein noted in her statement what could happen if part two of the final rule is instituted (such as 1% to 2% redemption fees and restrictions on redemptions):

"...after careful study, I am concerned that gates are the wrong tool to address this risk. As the chance that a gate will be imposed increases, investors will have a strong incentive to rush to redeem ahead of others to avoid the uncertainty of losing access to their capital. More importantly, a run in one fund could incite a system-wide run because investors in other funds likely will fear that they also will impose gates. I share the concerns of many commenters and economists that while a gate may be good for one fund because it stops a run in that fund, it could be very damaging to the financial system as a whole."


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LeBron's Decision Parallels Investor's Decision

The anticipation in Cleveland is at a fevered pitch. Every basketball fan is refreshing twitter, listening to sports talk radio, and tuning into ESPN to find out the latest scoop. Akron's prodigal son, LeBron James, opted out of his contract with Miami and is deciding on whether he should return to the Cleveland Cavaliers where he started his career. It is not every day that a top 10 all-time player changes team, but coming home to the Akron-Cleveland area would be redemption for leaving four years ago. Billions of dollars hang in the balance for the players, organizations, sponsors, and fans. Many other players are free agents and waiting along with the teams to see who will go where, but only after LeBron decides. Do you think these teams have a backup plan if things do not go as planned? Of course they do. There is too much at stake not to have a Plan A, Plan B, or Plan C if one free agent goes to Houston and another goes to Chicago. Billion dollar organizations do not 'wing it,' nor do the top investors.

It is clear that some investors do not have a plan if the stock market falls or interest rates rise causing bond prices to fall. Why? Because weak prices beget more selling as it did with the stock market's 50% drop in 2000-2002 and in 2008. The times when the biggest cash inflows should have taken place for rational decision makers was actually when the biggest outflows occurred from equity mutual funds.

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What's the Deal with GDP?

By: Michael McKeown, CFA, CPA Last week the Bureau of Economic Analysis released the final report for first quarter Gross Domestic Product (GDP), which measures the market value of all final goods and services produced. The result was an annualized negative 2.9% growth rate for the U.S. economy. This was the worst quarterly performance since the first quarter of 2009. Consumption was the only positive contributor with small detractions from fixed investment and government spending. The large detractors were inventory and net trade.

Chart1 070214

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