Weekly Investment News -
Aurum Wealth Management Group

Weekly investment news from Aurum Wealth Management Group.

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?

According to the Financial Times, the Texas Municipal Retirement System placed PIMCO on its "watch list", as the firm managed $2 billion in bonds. One of the largest investment consulting firms, Mercer, downgraded the fund to "B" on its A, B, C ranking. Morningstar put all funds managed by PIMCO under review and moved PIMCO Total Return from a gold rating to bronze (skipping silver).

What are you going to do?

The first question to ask is out of all of the intermediate core fixed income funds available, "Why do I own this fund in the first place?" There was clearly turmoil over the last year with the co-Chief Investment Officer and former manager to the Harvard Endowment, Mohamed El-Erian leaving rather abruptly. There were strange stories from inside the PIMCO halls and an odd presentation at the industry's biggest conference hosted by Morningstar a few months ago. Little gets mentioned about Paul McCulley, one of the top lieutenants at PIMCO until he left in 2010 and was a strong voice on the investment committee (only to return a bit too late in 2014).

The most glaring though was recent performance. Did Bill Gross leave before the assets actually did? The all-important (to most researchers) 3 and 5-year trailing return numbers were set to be below par for awhile due to performance below the peer median for three of the last four calendar years. In both 2011 and 2013, the interest rate bet on the portfolio was positioned incorrectly relative to the market and peers.

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The fund's strong past track record (pre-2011) and that it is the biggest bond fund were major determinants of its consideration as an investment menu option. Everyone knows past performance is not a guarantee of future results, and chasing performance is a road to ruins, but even 'professional investors' do it – as written about in our note a few weeks ago, Picking Fund Winners without Using Returns. Of course, the investment consultants or advisors will not tell you so. There was plenty of due diligence done, perhaps at the offices in Newport Beach, and hard hitting questions asked of the portfolio managers. The structural sources of outperformance were pointed out in a white paper from early September, but the validity of the factors should be questioned on a go forward basis considering the underperformance since 2011.

Portfolio managers change, it is part of the business. If your consultant or advisor does not have a bench of options in place for such a contingency, I would seriously question their current due diligence process. If a consultant or advisor reacted to the Bill Gross news by simply pushing the sell button, I would be very uncomfortable with the investment decision making process of that firm or individual.

I apologize for the saber-rattling tone, but the lack of thoughtful research in the industry by my peers gives us all a bad name, although it does make it easier to stick out among the crowd.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Must Watch Bond Charts

Aurum Weekly Access - 9/25/14

By Michael McKeown, CFA, CPA - Director of Research

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.

092414 cccrateddebt

The recovery in bond prices over the last year has seen investors warm back up to anything with a yield, including REITs and MLPs. Flows are climbing back, but still negative on the year. Rather than worry about the next price swoon, as investors may try to get out of the door all at once, see it as an opportunity to buy undervalued assets.

092414 flows

Our takeaways:
• There is more risk in short bonds than investors appreciate.
• High yield bonds are priced to perfection, beware of where they could be hiding in your "Income funds" reaching for yield.
• Keep an eye on areas where flows are negative, as these can present opportunities.

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

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.

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Source: EBRI

According to the EBRI, "The grey bars represent the average annualized performance of terminated managers in the three years prior to, and three years subsequent to, their termination. The white bars represent the performance of replacement managers in the same years. Clearly, institutions are hiring managers with exceptional historical track records over trailing three-year periods, and firing managers with poor track records. The joke is on the institutions, however, since on average the fired managers go on to outperform the hired managers over the subsequent first-, second- and third-year periods."

Whether it is a 401(k) plan sponsor lineup or the average broker managed portfolio, the same mutual funds seem to turn up on the quarterly statements for prospective clients. This happens for two reasons; the funds had solid returns in the past and have a ton of assets, and thus have been vetted by lots of other pros. The latter is a result of the former but is an unspoken 'peer validation.' Aurum sees this often from who we describe as 'financial reporters' in the investment consulting and advisory space that fall into this lackadaisical phase. They seem to, knowingly or not, follow John Maynard Keynes words, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." While never outwardly admitting so, and under the guise of phrases like 'best of breed,' these experts get lazy with manager selection.

For a manager to outperform, the portfolio must be different than the benchmark. It sounds obvious, but over time more and more funds have become 'index huggers' rather than stock pickers. It is a result of the instutionalization of money management. A paper from the Yale School of Management entitled "How Active is Your Fund Manager? A New Measure That Predicts Performance," showed that the level of active share (difference among the benchmark index), directly correlated to the excess returns for managers.

091214 ActiveShare

Of course, it is not enough to be different. One must also be right in the stock picking... but being just a little different is not a way to produce excess return. One category of fund products we analyze for our 401(k) practice are Target Date Funds (i.e., funds with 2020, 2030, etc. in the name). The majority of the Target Date funds fall into the middle quintile of active share. Here in the 40-60% active share range, on average, fund managers underperform. At best it's a coin flip. The best way to outperform is to be very different, i.e., above 80% active share, yet in our research, only one fund family can boast such a high active share.

What gives motivation for being much different than peers or a benchmark? Being a small, owner-operated firm, with proper incentive structure increases the 'skin in the game.' This aligns the portfolio managers' interests better with the investors' interests. In addition, small and boutique managers often are more motivated since the business is small, relative to the larger brethren. We would argue there is a little more 'fire in their belly' to produce strong results for investors. A study by Beachhead Capital examined the 3,000 hedge funds in the Long/Short category. It split the group into half, for small firms that manage $50 to $500 million and big, firms that manage over $500 million. The study adjusted databases for backfill bias and portfolio risk factors. It found small firms outperformed big by 2.54% and 2.20% over five and ten years, respectively.

091214 smallbig

Source: BeachHead Capital

There are factors when looking at hedge funds that may not apply to other categories such as opportunity set and capacity, but the idea of owner-operated firms producing above average excess returns still holds. 

While we titled this note without looking at returns, we do need some quantitative data to help improve the likelihood of outperformance. Of course, this is not always easily attainable on a fund website. Requesting the right information from managers like attribution analysis helps to understand the return sources of a portfolio better. It is the breakdown of what added and detracted to performance. Key within this is that the manager's decisions were additive, hopefully through stock selection, indicating analysts have skill rather than a large portion from sector allocation (say merely underweighting financials in 2008, which could be a strategic position due to avoidance of that area of the market). Even better is looking at all of a manager's trades over time and seeing how many wins and losses there were. We like to look at this on an absolute basis (Did the stock go up or down?) and on a relative basis (Were we better off just owning an index than buying/selling a particular stock name?).

There is a better way to complete due diligence and it goes far beyond 'checking the right boxes' by investment managers, pulling up a Morningstar report, or just looking at 3-year and 5-year returns data. It takes empirically validated factors such as active share, boutique firm characteristics, along with excess return diversity and integrating these into an investment process that is consistently applied.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Europe Joins the Party

Aurum Weekly Access - 9/5/14

By Michael McKeown, CFA, CPA - Director of Research

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 

Compared to the world, the Euro area, including Germany and Greece, shows varying degrees of contraction in bank lending. This is not a healthy situation.

 090514 2a

With little lending going on, it is tough for businesses to invest and in turn hire pepole. Unemployment rates across the Eurozone are elevated, especially Spain and Greece.

 090514 3a

With Japan implementing QE for the first time in 1997, we turn the yields back 17 years for the U.S. and Germany. Doing so puts the correlation of Germany's 10-year yield with Japan's yields at 0.9 and 0.7 for the U.S. Avoiding a deflationary trap should be the number one priority for Euro policy makers.

 090514 4a

It was good to see Mario Draghi acknowledge that monetary stimulus can only do so much to stimulate the economy and that fiscal measures will need to be taken (such as tax cuts), a nod to Germany's current austerity programs affecting the rest of the Eurozone. Just as Richard Koo, Chief Economist at Nomura, demonstrated in his book, The Holy Grail of Macroeconomics, quantitative easing (QE) is "the great monetary non-event," as it relates to the real economy (not necessarily financial assets) as he found in his study of Japan and the U.S. in the Great Depression. The European banking system at some point will need to recognize the game of musical chairs it has played with marking assets at higher values than they are worth, but then, that is kind of the point of the charade. 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

3 Reasons the 10-Year Yield is Falling

Aurum Weekly Access - 8/29/14

By Michael McKeown, CFA, CPA - Director of Research

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

Remember the episode of Seinfeld when George decided to do the opposite of what he would normally do in life? That pretty much sums up how the consensus should behave when it comes to the end of Quantitative Easing (QE) and the 10-year yield. Quite counterintuitively with the Fed stepping away from purchases, bond prices actually went up and yields down.

082914 2

This seems be due to the market demanding less inflation protection (in the form of higher yields) during periods when the Fed's balance sheet, shown here in the monetary base, expands.

2. Positioning

When everyone has already sold a position, it is hard for the price (or yield) to keep moving in that direction. Case in point, it is usually best to follow the big, commercial traders (aka "smart money") than small, non-commercial traders. In fact, most of the time, these traders are at odds with one another when it comes to trading the 10-year Treasury. The lines in the upper portion of the graph move together because we plot the inverted non-commercial traders on the right hand side (note that the top numbers are negative).

082914 3

Notice how at peaks in yields, the small traders are short and large traders are long. Until small traders get long the Treasury bond (and large traders short), yields tend to fall and do not find a trough.

3. Rest of the World Needs Lower Yields

It is not just the U.S. that is awash with debt, the rest of the developed world from Japan, to Germany, to the UK all become over-leveraged and misallocated capital over the last decade. The misallocation of capital leads to a deflationary outcome due to wasteful money spent chasing poor investments. The system adapts by lowering yields to palatable levels to maintain demand for debt across the globe.

082914 4

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

2 Big Changes for Money Market Funds

Aurum Weekly Access - 8/8/14

By Michael McKeown, CFA, CPA - Director of Research

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."

moneymarketchart

While money market funds have two years to comply with the new rules, we recently spoke with the head of money markets at Schwab Investment Management to better understand how our clients may be affected. As the situation continues to unfold, we will provide further updates. Please let us know if you have any questions in the interim.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

LeBron's Decision Parallels Investor's Decision

Aurum Weekly Access - 7/10/14

By Michael McKeown, CFA, CPA - Director of Research

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 outlfows occurred from equity mutual funds.

Chart6 071014 

Humans cannot help but revert to a protective mindset when their resources are threatened. The resources, namely financial assets consisting of stocks and bonds, decreasing in prices threatens future consumption. Wanting to minimize the likelihood of further losses, investors react to falling prices by selling. This is seen across asset classes, such as in bonds last year when interest rates rose, and across regions, as in the depth of the European crisis in 2010-12, investors pulled money out of the German, Greek, and Italian stock markets.

Having a plan for adding funds to stock and bond positions is a must for price weakness, along with selling contingencies as prices increase. This must occur before the event, to prevent irrational decision making. It is a dynamic and ongoing process of planning to achieve consistent investment results.

The Cavs have All-Star point guard Kyrie Irving and #1 overall pick Andrew Wiggins along with room to sign another free agent, though we are all hoping Plan A of signing LeBron goes as planned. Hopefully the other teams have to worry about Plans B & C.

 

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

What's the deal with GDP?

Aurum Weekly Access - 7/2/14

By Michael McKeown, CFA, CPA - Director of Research

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

The simple narrative blamed the weather for the slowdown in consumer spending (which comprises 70% of the economy). Yet slowing spending started in the fourth quarter of 2013, before the polar vortex in January and February. The consumer is running slower than originally estimated at 1% versus the previous estimate of 3%, but not at levels that would indicate recession. This is according to our chart for monthly spending on retail and food services, which adjusts for both population and inflation. Since this is a discretionary category, consumers can quickly cut back on their spending when times begin to toughen up as they did in 2001 and 2007, prior to the last two recessions.

Chart2 070214

The unemployment rate continues to trend down (at 6.3% currently), manufacturing durable goods are positive, and surveys such as the ISM (Institute of Supply Management) still show a positive trend. Part of the big detraction was due to inventory, so it seems companies do not want to be caught with an oversupply. We will see payroll data this week for June, but job growth has been steady at an average of just under 200,000 per month for the past two years.

Chart3 070214

For now it pays to consider the weak growth from the first quarter as an aberration, however, there are warning clouds brewing. From mid-2012 to early 2014, inflation averaged 1.5%. Earlier this year it dropped to 1% before jumping to 2%. A further increase to 3-4% would be worrisome. Why? Because a small increase in inflation from 2% to say 4% is a doubling of the price level (recall 2011). In a consumption constrained economy, this would take money from discretionary consumer spending to non-discretionary items like gas or food, acting as a tax on the consumer. Many commentators believe that employment markets are tight and sowing the seeds for a cyclical rise in inflation.

Chart4 070214 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Sports & Markets with the U.K. & U.S.A.

Aurum Weekly Access - 6/20/14

By Michael McKeown, CFA, CPA - Director of Research

England is a country rich in soccer tradition and boasting the English Premiere League, the world's top club league. The U.S.A. is allegedly always one step away from 'soccer becoming huge,' but Major League Soccer does not get much domestic attention, in favor of the multi-billion dollar National Football League. However, Monday's World Cup win against Ghana for the U.S. had the most viewers ever for a match (11 million), so it is moving in the right direction. Just 100 years ago, boxing and horse racing were the most popular sports in the country. With concussions getting more attention which could result in major lawsuits from former NFL players and popularity higher than ever, maybe American football is at its peak?

What the U.S.A. does have in common with the UK are similar financial markets. Note how closely the stock markets tracked each other since 2000. In 2013, U.S. markets took a big step ahead.

UKUSA STOCK MARKET 

Both the UK and the US had housing bubbles over the last decade, except that the UK is back to new highs. The U.S. meanwhile has seen many areas of the country recover, yet it is still below the 2006 highs at an aggregate level.

Housing

Because of the hot housing market, the Bank of England signaled intentions to raise interest rates sooner in 2015. Expectations of a rate hike moved earlier from May to February 2015, resulting in the 2-year UK Gilt yield rising and the sharpest move since 2010.

 2-year

Even interest rates seem to move in tandem for the countries. The broad moves in 2-year yield followed each other closely, yet the difference between the two today is quite wide. Some consider the Bank of England to be a little ahead of the Federal Reserve, so our short-dated bonds yield could play catch up. In addition, the below chart shows the yield spread between the 10-year and 5-year bonds for each country. This tracked closely the last several years.

 Yield curve

If the 5-year bond yield would rise to meet the 10-year, the spread could continue to fall. While it is a ways off, if the spread were to fall to zero, it would signal a very high risk of recession, just as it provided a warning shot across the bow in 2000 prior to the 2001 recession, and in 2006, prior to the 2008-09 recession.

This has implications for short-term bond funds, and particularly holdings in the 2-5 year area of the interest rate curve which includes some intermediate municipal bonds. Given these strategies take anywhere from 2-5 years of duration risk, assuming a 1% rise in interest rates, all things equal, bond prices would fall 2-5%. Yields on these strategies range from only 0.5% to 2%, so this does not seem to compensate for the interest rate risk. Our managers are looking at barbell bond strategies, pairing longer dated bonds and very short duration positions (often floating), while keeping credit quality high. Examining yields on bond portfolios is important today, as it may not provide the ballast to the total portfolio as it has in the past.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Follow The Money

Aurum Weekly Access - 5/30/14

By Michael McKeown, CFA, CPA - Director of Research

Behavioral finance teaches that one factor influencing prices are emotional crowds and their compulsive need for social validation. Even though we humans are a social bunch, when it comes to investing, our need for acceptance must be left at the door. For by definition, portfolios must be different than the crowd to be above average. As Howard Marks, CEO of $83 billion firm Oaktree Capital said in his note last month, "If your portfolio looks like everyone else's you may do well, or you may do poorly, but you can't do different."

We discuss valuations quite a bit, as the price one pays is a key determinant of future returns and the chances of losing money. In addition, other investors influence the path of returns, as sentiment can pressure prices on the upside and downside.

The American Association of Individual Investors (AAII) polls its members monthly on their current holdings. It goes back to 1988 and provides a range of stock, bond, and cash allocations held by the group. Today, stocks make up 67% of portfolios, above the long-term average of 60%. Each time it reached this point, it essentially stayed above average for some time in the late 1990s and mid-2000s. The current weight is below the peak in 2000 or 2007, but certainly closer to the top end of the range. Bonds now are right about at the long-term average after several years above average. Cash sits at the lows of 18%.

may30aaiisurvey

Where have investors been adding over the last year? According to Morningstar, the equity allocations were boosted by mutual fund flows to international equity, up $135 billion or 7% of total assets. Bond allocations fell due to the interest rate rise last year and selling thereafter.

may30broad flows

Looking under the hood, it gets more interesting to see where investors are going with new funds. The Europe Stock category is a small one with only $22 billion in total assets, but investors feel confident about the European recovery story today, increasing net assets by 29% to Europe funds, though there were net redemptions during the heights of the Euro Crisis in 2011 and 2012. While overseas investors are not buying emerging markets, U.S. mutual fund investors increased exposure by $24 billion or 8% of assets under management. US equity allocations grew due to appreciation, but only modestly due to net flows into funds. (It should be noted this does not include flows into domestic equity ETFs, which had net issuance of $86 billion in the last 1 year period, per ICI.)

 may30equityflows

Fixed income is particularly intriguing. Investors attempted to minimize exposure to interest rates over the last year, buying Bank Loans and Nontraditional bonds (also known as unconstrained funds). They shunned the intermediate-term category. Catching most investors off-guard was the fact that interest rates fell sharply through the first five months of 2014.

may30bondflows

The title of this note, Follow the Money, is not a literal direction for one's portfolio assets.  The purpose is to point out that following where the money flows is a great way to to see how the crowd is positioned – and for understanding where and why your portfolio should be different.

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

What's Your Style?

Aurum Weekly Access - 5/23/14

By Michael McKeown, CFA, CPA - Director of Research

According to University of Chicago professor and Nobel Prize winner Eugene Fama and Professor Kenneth French of Dartmouth, the explanation for the outperformance of certain stocks is due to two main factors, value (cheap beats expensive) and size (small beats large).

Intuitively this makes sense, cheap stocks with a low price to book ratio have a higher chance of reverting to an average valuation and making positive returns. In contrast, buying expensive stocks which revert to an average valuation results in below average returns. For small caps versus large caps, it is easier for a small cap company valued at $1 billion to double in value to $2 billion, than it is for a $100 billion company to double in value to $200 billion, since the absolute size of profits and growth necessary is so much less for the small cap firm.

The outperformance of value and small cap factors is not an every quarter or every year phenomenon, it goes in waves based on starting relative valuations, investor sentiment, and macroeconomic factors affecting profitability (among others).

Small caps did in fact beat out large caps the last 35 years. This ratio is about one standard deviation below average today.

largesmall May14

Small cap growth had a rough 35 years losing to small cap value, but performed quite well during the past market cycle. This is partially due to value indices containing a higher percentage of financial sector stocks, which were severly impaired during the financial crisis in 2008.

May14 scv scg

In a bit of an anomaly, the value factor did not hold for large caps over the last 35 years as growth trumped value. Value did begin outperforming when tech, media, and telecom industries reached the apex in 2000.

May14 lcv lcg

---
Turning to more recent performance in the next chart, over the last five years, small cap growth was the top performer. This was followed by large cap growth, small cap value, and lastly by large cap value.

May14 5yearperformance

So far in 2014, all of the roles reversed with small cap growth faltering badly, partly due to biotechnology and social media stocks. Large cap value held up the best with its more defensive oriented sectors such as consumer staples and utilities (and because growth has a higher consumer discretionary sector weight, which underperformed recently).

May14 ytdperformance

Differences in performance bring differences in valuation. Using a simple price/book ratio as a proxy for value, we see large cap value and small cap value stocks being near the average of the last ten years. Large cap growth and small cap growth indices are both above one standard deviation rich to the average of the past ten years.

may14 price to book all

Next, we examine another valuation metric, the 5-year normalized price/earnings ratio. Rather than taking one year of earnings and looking back, we take the average of the past five years to account for fluctuations in the business cycle. The middle chart below shows this ratio is near its peak of the last 40 years and above two standard deviations to the average, thus very expensive.

may14 smallpe2

The top part of the graph shows the forward 5-year returns, lagged by five years. In this way, we can see what the normalized P/E ratio historically returned at different starting points. Note in the past when the ratio was one standard deviation rich (between the top horizontal red and green lines), returns on a forward 5-year basis were around zero. Buying when this ratio is cheap resulted in outsized positive returns. The bottom graph shows that earnings are usually falling when stocks get to a cheap valuation level.

Short-term market movements are difficult to predict, but buying assets that underperformed on long-term time frames and are cheaper than alternatives is one of the factors the Fama & French theory is built upon. In addition, mean reversion is a powerful force in financial markets. With a switch among style and size performance in the first part of 2014 and stark differences among valuations today, considering what style you want in your portfolio is important as ever.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

U.S. Economic Round-Up

Aurum Weekly Access - 3/28/2014

By Michael McKeown, CFA, CPA - Director of Research

The stat collectors released many data points over the past week. This note walks through a few charts we found interesting.

The graphic below breaks up the five components of the U.S. Gross Domestic Product (blue line) to show the contribution made by each sector. Fourth quarter GDP came in at 2.6%, slightly below expectations and down from 4.1% in the third quarter. Personal consumption was solid while the inventory build in the third quarter predictably had companies pulling back in the fourth. Economic growth remains on track, though lackluster.

contribution to GDP

Since the sectoral financial balances simply account for whether each sector ran a surplus or deficit, by definition, it must sum to zero. The government deficit declined dramatically (see the increase in the blue line) over the past three years. The rest of the world runs a much lower surplus today, especially compared to the early to mid-2000s. Because not every country can be a net exporter, the lack of surplus is a byproduct of slowing growth in many emerging markets. The household sector continues to run a high surplus, especially compared to the previous decade.

sectoral balances

Residential housing detracted from growth for the first time since 2010 during the fourth quarter. Higher mortgage rates relative to a year ago held back mortgage applications and investment in the sector. This occurred with the average 30-year conventional mortgage rate at 4.5%. It is hard to believe 14 years ago, mortgage rates were double at nearly 9% yet so was the mortgage application index level. Today the index is at its lowest levels since 1996 with the peak in 2006 during the housing bubble.

mtgappsmtgrates

Finally, initial jobless claims improved again this week, hopefully foreshadowing a solid monthly jobs report for March (which comes out . One of our managers noted the increasing importance of the weekly claims data now that the Federal Reserve removed the Unemployment rate as a key metric at last week's Fed meeting. The inverse of the series is plotted below, which neatly tends to follow the S&P 500 price index over long periods.

joblessclaims

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Emerging Markets Flow Show

Aurum Weekly Access - 3/21/2014

By Michael McKeown, CFA, CPA - Director of Research

Much is going in the world of geopolitics with effects on financial markets. From China allowing its currency to float in a wider band and of course daily news out of Russia, opportunity and risk are ever present. This note touches on an interesting development around investor behavior related to the broader emerging markets region.

According to EPFR Global, investors sold $100 billion of emerging market equity funds over the last 12 months. This amounts to approximately 10% of assets under management, compared to 2008 when 15% of assets were pulled (during the 60% peak-to-trough drawdown in only six months). The recent streak marks 21 straight weeks of outflows, a record in the last 15 years, after the 22% price drawdown over the past three years.

Emerging markets moved essentially sideways (top of the below graphic in gold) since late 2009.

SPXEM 2008 2014

Up until the beginning of 2012, U.S. stocks and emerging markets largely traded together over the previous five years. To start 2013, the S&P 500 traded with a Price/Earnings multiple of 13, compared to 10 for emerging markets. Today, the S&P 500 trades at 15.4 while emerging markets became cheaper with a P/E of 9.5.

The underperformance over the last two years seems to be the mean reversion for the emerging markets outperformance over the last 15 years. In hindsight, the outperformance seems obvious, but in 1999, U.S. stocks were flying high with large cap growth and technology going up 30%+ per year, while emerging markets were just one year removed from the Asian currency crisis in 1998.

SPXEM 1999 2014

Back in mid-2001, when the emerging markets index and S&P 500 began to diverge, the Forward Price/Earnings ratio was at 22X for the S&P 500 while the emerging markets stood at 10X.

The point being, the divergence has gotten much greater in the past, as investors reallocate to what has performed the best, namely US stocks. And as we know, decades of behavioral research shows that it's in our human DNA to chase returns. With the S&P 500 making new all-time highs, the current Forward Price/Earnings premium could increase versus emerging markets. As investors surrender assets at discount prices due to the thought of losing more money, our portfolios will be methodically rebalancing to those undervalued assets.

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

[1] Garner, Jonathan. "Asia/GEMS Equity Strategy."Morgan Stanley Research. March 21, 2014

Tax-Free Income Comeback

Aurum Weekly Access - 3/5/2014

By Michael McKeown, CFA, CPA - Director of Research

"The market's not a very accommodating machine; it won't provide high returns just because you need them." - Peter Bernstein

The low yield environment has investors scrambling for return opportunities, from social media stocks to junk bonds. One area where the baby was thrown out with the bath water is municipal bonds. As interest rates rose, bond prices fell. Investors bailed from any form of yield instrument, including municipal bonds.

Arguably though, with above average valuations for equities and high spreads to corporate bonds, municipal bonds seem like a compelling destination for capital. This is especially true considering today's highest effective marginal tax rate of 44.3%, which is the sum of the 39.6% Federal income tax, 3.8% net investment tax, and 0.9% Medicare surtax.

Taxableequivyields

Source: Barclays

The Barclays High Yield Municipal index yields approximately 7%, which results in a taxable equivalent yield above 12%. Relative to corporate high yields this seems quite attractive. In addition, Moody's found the cumulative default rate from 1970 – 2012 for below investment grade municipals (which makes up the high yield index) was 2.56% versus corporate high yield at 13.87%. So that means there is a higher return expectation and lower default risk with municipal high yield versus corporate high yield.

Outflows in 2013 were a record with investors withdrawing $58 billion from tax-free bond funds. This even beat out the $44 billion withdrawn in late 2010 and early 2011, after Meredith Whitney made her foolish municipal market call on 60 Minutes regarding defaults.

CumulativeMuniFlows

Source: Investment Company Institute, Aurum

Investors found plenty of reasons to sell but it seems a reprieve from redemptions is finally here. A few headlines are here to stay and some may be transitory. Typically cited risks for municipal allocations include:
• End of Quantitative Easing and thus an interest rate rise
• Possibility of tax law changing status of tax-exempt municipal income
• Increasing credit risk due to pension liabilities and high profile distressed issuers such as Detroit and Puerto Rico

The Fed ending Large Scale Asset Purchases (also referred to as Quantitative Easing, QE) and resulting in a rise of interest rates is a risk across fixed income. Since the 'taper' was officially announced in December though, interest rates fell across the curve. Municipal yield spikes in the past have been bought relatively quickly. The white line below explains 80% of the municipal yield changes over the last 25 years. While interest rates could continue the ascent as inflation pressure builds, some of this seems to be in the price.

bondbuyerGOindex

Source: St. Louis Fed, Aurum

The political risk of taxing municipal income is heating up, especially with the swelling income inequality discussion and members of Congress looking at tax code changes. However, the political strategists we follow do not believe Congress would actually go through with changing such as an important aspect of the code after the last overhaul.

Finally, while credit risk is always a threat, municipals historically have much lower default rates across the credit spectrum versus corporate bonds.

A closer look at tax-free income is worth the time today given the paltry yield environment in fixed income.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Icy Weather, Lazy Narrative

Aurum Weekly Access - 2/21/14

By Michael McKeown, CFA, CPA - Director of Research

Its been the coldest winter in decades thanks to the 'polar vortex,' a term the average American resident can now define better than most junior weather forecasters.

NASA polarvortex

Source: Wired.com, NASA image showing the polar vortex in January

The good news, for what it's worth, is the Climate Prediction Center is pointing to El Niño returning in winter 2015, which would bring warmer temperatures and dryer conditions for the Northeast and Midwest.

All of the bad weather is affecting the data capital markets eye closely. Pundits blame the cold and snow for people not spending money at the store and the falloff in home sales. Sounds simple enough. Still, this does not seem much different than the last couple of years and how the seasonal cooling and warmer temperatures led the actual change in the Citi Economic Surprise Index.  We can see the correlation between economic data surprising on the upside and the temperature changing, and vice versa.

CESITEMPS 

Either the economists need to go outside more to actually change their data forecasts with the weather or seasonal adjustments to the data need reworked.

Yet even before the cold streak began in January, data came in soft. The jobs report for December added only 75,000 people to the payrolls, well below consensus estimates. According to Retuers, Wal-Mart and Amazon (which is unaffected by shopping foot traffic) both reported disappointing results for the fourth quarter.

Below is the yearly change in retail sales that goes into the consumption portion of GDP (roughly 70%). It excludes buidling materials, auto sales, and gas stations. January came in at the lowest level of the recovery at 2.3% and slowing simliar to the last cycle. Did the weather really matter just last month or is this a continuation of the trend?

RETAILSALES

The rise of interest rates clearly had a negative impact on mortgage applications, as the spike last summer made the change in applications flip from positive to negative.Mortgageratesandapps

It seems the rush to paint all of the disappointing data with a broad weather stroke may be hasty. Is this the start of continued sluggish growth or will the warmer temperatures into spring outperform the lowered economic expectations like previous years? We are open to both possibilities and rarely find broad and 'easy to tell' narratives to be entirely accurate.

[1] http://www.wired.com/wiredscience/2014/02/noaa-polar-vortex/

[2] http://www.reuters.com/article/2014/01/31/us-walmart-outlook-idUSBREA0U0YK20140131

Important Disclosures

This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

 

 

The Presidential Stock Market Cycle

Aurum Weekly Access - 1/31/14
By Michael McKeown, CFA, CPA - Director of Research
 

One of the more fascinating patterns in markets is the tendency for outsized returns in the third and fourth year of the presidential cycle relative to the first and second.   

Read more: The Presidential Stock Market Cycle

Heat Maps & Mean Reversion

Aurum Weekly Access - 1/24/14
By Michael McKeown, CFA, CPA - Director of Research
 

There are few, if any, variables that provide solid evidence of predicting short-term asset prices.  One powerful force over the long-term that investors should consider when rebalancing portfolios is mean reversion.

Read more: Heat Maps & Mean Reversion

The Psychology of Rebalancing

Aurum Weekly Access - 1/17/14

By Michael McKeown, CFA, CPA - Director of Research
 

The father of Modern Portfolio Theory in 1951 did not actually stick to his breakthrough theory with his own money, which is kind of odd considering all of his accolades.  Instead, Harry Markowitz preferred to minimize his future regret bias and split his personal portfolio 50% stocks and 50% bonds.

Read more: The Psychology of Rebalancing

Taper Talk to Interest Rate Hike Hearsay

Aurum Weekly Access - 12/19/13
By Michael McKeown, CFA, CPA - Director of Research
 

If your ear drums have not blown out from the overuse of the word 'taper' in financial media, then you will be happy to know the Fed announced it will be slowing its asset purchases by $10 billion next month.  We mentioned this back in May in our piece "Closer to the Q-End?", highlighting the Fed's putting markets on notice and before interest rates spiked.   Lately many folks guessed whether taper will come this month, in three months, or six months, we began to think about when and how an interest rate hiking cycle could come about.

Read more: Taper Talk to Interest Rate Hike Hearsay

Looking in the Bond Direction

Aurum Weekly Access - 12/12/13
By Michael McKeown, CFA, CPA - Director of Research

For the dear readers of our (semi) weekly missive will know that our penchant for bonds fleeted over the last few years.  We do not have anything against fixed income securities per se, it is just that the value for today's price is less than historical averages.  In our view, there is no such thing as a bad asset, just a bad price to acquire that asset.

 

Read more: Looking in the Bond Direction

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