Just about everything is up five percent this month» Read More
Doubleline's Jeff Gundlach has entered the ETF business. His DoubleLine Total Return Tactical ETF had a respectable debut Tuesday, trading 600,000 shares, and is also trading respectably today.
This is an active managed bond ETF, with bonds picked by Gundlach's team. It will consist mostly of investment grade debt like U.S Treasurys and various flavors of mortgage-backed securities, but it could also include corporate high yield debt, and even some emerging market debt. This is active management...so Gundlach and his team can change the investment mix.
As for competitors...there aren't many, since active management is very small part of the ETF business. The big kahuna is Pimco's Total Return Bond ETF, with $2.5 billion under management.
At a the recent ETF.com conference in Hollywood, Fla., I asked Gundlach why he wanted to get into the ETF business. Here's what he said: "There's an argument, which I am agnostic on—whether its right or not—that ETFs will ultimately surpass mutual funds. If that's true, I want to be involved, certainly, and not left behind—so it seems like a reasonable category to be getting involved in."
I have many doubts about whether active management will be successful with ETFs, but the man has a point. With the hedge fund model of "2 and 20" (2 percent fee, 20 percent of the profits) under attack, Gundlach is hedging his bets. In general, why should a hedge fund manager who has a successful track record take grief from a few thousand hedge fund clients that you're charging, say, 2 and 20, when you can get 0.55 percent from (potentially) a few hundred thousand investors, or more?
That's the fee: 0.55 percent a year. Is that worth it? It depends on how you feel about Gundlach in particular and active management in general. You can get into Vanguard Total Bond Market ETF and own the whole bond market for 0.08 percent, but the argument is Gundlach has a history of outperforming.
I would also note that this is using a different strategy than Gundlach's Doubline Total Return fund. TOTL has a broader fixed income mandate. They can go to more places, like high yield, emerging market, even bank loans. They think the broader mandate will enable them to generate alpha.
It was widely noted yesterday that the NASDAQ has been up 10 days in a row, but several other indicators seem a bit stretched as well.
By "stretched" I mean many big indices are far above their 50-day moving averages. Typically, when these indices get too far from that average, there is a reversion to the mean, and the index corrects or at the very least stops rising.
For example, the NASDAQ 100 ETF, at 109, is well above its 50-day moving average of roughly 103.
The Russell 2000 ETF has hit new highs seven days in a row. At nearly 123, it is several points above its 50-day moving average of 118.6, historically stretched.
Several sectors are also stretched and arguably overbought, particularly technology. For example, the Technology Select ETF, a proxy for the technology sector of the S&P 500, is also up 10 days in a row. It's gone from 39 to 43 this month and is well above its 50-day moving average of 41.
The CBOE Volatility Index hit another low for the year.
The key sentence in Janet Yellen's written testimony before the Senate this morning is here: "The FOMC's assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings."
When will they raise rates? Providing the job market keeps improving, only when the Fed is "reasonably confident that inflation will move back over the medium term toward our 2 percent objective."
But Yellen has used this "next couple meetings" line before. In December, when the Fed changed its line that it would keep rates low for a "considerable time" to simply assuring everyone they would be "patient" as to when rates might rise, Yellen made a point of saying that this did not represent a change in policy, and then said, "In particular, the committee considers it unlikely to begin the normalization process for at least the next couple of meetings."
That was December. At that time, everyone said that meant no hike at the January or March meeting, but there could be in April.
Now there is no rate hike in March or April, but there could be one in June.
Say what you will about the Fed being behind the curve, Yellen has mastered the art of managing expectations. Her goal seems to be to be: go slow, very slow, and no surprises.
She has come a long way from her debut in March of last year, when at her first press conference, she said the Fed would start raising short-term rates about six months after they end their stimulus program.
You're not hearing those kinds of time-specific comments any more.
The Fed is not just agonizing over whether they should raise rates; they are agonizing over when they should remove the word "patient."
Art Cashin noted that Yellen has hewed careful to the Hippocratic Oath: first, do no harm. He is referring to doing no harm to markets.
If that is indeed her goal, she is accomplishing that.
The major powers seem to be giving positive signals to the Greek package of economic reforms submitted last night. Greek bond yields are down for a fifth consecutive day, and the Greek stock market is up 8 percent to its highest level since early December.
With Janet Yellen testifying in the Senate at 10 a.m. EDT, the market is obsessed with gauging her intent on raising rates this year. My own feeling is Yellen will do very little to show her hand, and will instead reiterate that the Fed remains "data dependent."
All indications are that Yellen learned her lesson about making future predictions with the now-famous "six months" comment she made during her first press conference in March of last year, when she said the Fed would start raising short-term rates about six months after they end their stimulus program.
More than likely any fireworks will come from Chairman Richard Shelby's well-known dislike of the Fed, quantitative easing, and even Yellen herself (he voted against her), as well as those supporting the current version of the "audit the Fed" bill.
Speaking of QE, it certainly seems to be helping the stock markets of those countries where central banks are employing it.
World Stock Markets YTD:
Probably not a coincidence that both the European Central Bank and the Bank of Japan are engaged in QE programs, while the U.S. has wound down its program.
President Barack Obama announced that he is directing the Department of Labor to draft new rules to rein in potential conflicts of interest among Wall Street brokers who provide financial advice.
The change does not sound very big, but it is. It would require brokers to follow a "fiduciary" standard when brokers giving investment advice to clients.
What's that mean? It means brokers have to place their clients' interest over their own interests.
Don't they have to do that now? Well, no, not exactly.
Right now the requirement is that advisors place their clients in investments that are "suitable." That's all well and good, but that's a very wide term that allows investors to potentially overcharge for services.
For example, suppose a broker wants to put a client into, say, midcap stocks. Suppose he has three potential midcap funds he could use...two are actively managed midcap funds with substantially the same performance, and the third is an ETF that is indexed to a midcap index. In the former case, the broker collects a commission from the mutual fund (paid by the client); in the latter, he also collects a commission which is half of the first fund, and in the case of an ETF would not get paid at all.
Which fund does he choose? Under the "suitability" requirement that currently prevails, he can put them in any of the three, because they are all "suitable" even though one is clearly less expensive and will save the investor money over time.
However, under a "fiduciary" standard, the broker would have some obligation to consider the cost of the fund and to advise the client it may be better to use the cheaper fund.
Mind you, it does not require that the cheapest fund is the one that should always prevail, only that a fiduciary would naturally have to consider that.
This sounds perfectly reasonable: do what a prudent investor would do.
So why does the industry oppose this? There are two reasons:
1) They can be sued more easily. They don't want clients coming to them and saying, "Tell me why you have me in a 2 percent fund when I could be in a 1 percent fund with the same performance?"
2) They don't want to see their profits (and margins) compressed. They phrase this differently: they don't want to see advice get more watered down. In a sense, there is something to this. You do get what you pay for. The less worthwhile it is for firms to pay attention to you, the less they will pay attention. It will force the business to move more toward the kind of "robo-advisors" that have been springing up.
But that's no reason to oppose a fiduciary standard. There will be more robo-advice, and you will pay more for hand-holding, as well you should. But you should have a fiduciary standard attached to any advice that is given.
In its heart, the industry knows this. That's why many brokers have now moved away from commissions and toward flat fees, usually called "wrap" fees, of, say, 1 percent, where there are no conflicts.
These are brokers, by the way. Registered investment advisors (RIAs) already have a fiduciary obligation. They get paid a flat fee by the client.
The Labor Department tried to pass a similar rule several years ago, but opposition from the financial industry and some lawmakers effectively killed it. They're trying again.
The proposal will be published some time in the next several months, during which there will be a comment period.
Bottom line: commission based, non-fiduciary standards are a dying breed. The sooner it goes away, the better.
The markets are waiting for signs later this week from the Federal Reserve on when it will raise interest rates, but in the meantime, the S&P 500, Dow Industrials, S&P Midcap, Russell 2000 and Wilshire 5000 hit all-time highs on Friday.
83 stocks in the S&P 500 hit 52-week highs on Friday, according to Credit Suisse.
The only thing missing is the Dow Transports, which has not yet confirmed the new highs the Dow Industrials hit.
While everyone is hopeful Janet Yellen will provide some guidance for the pace of rate hikes during her Congressional testimony this week, the stock market isn't acting like it's nervous. The CBOE Volatility Index closed Friday its lowest level of the year. Volatility in Treasury yields has been more volatile, however.
U.S. crude oil is below $50, with energy stocks down again. I'm sure the U.S. refinery strike is not helping.
Piper Jaffray has an interesting report out this morning on the effects of the port slowdown in Los Angeles. While much of the discussion has been about the impact on perishable goods, as the dispute drags on, it is now impacting apparel and footwear.
Piper's concern is that even if the dispute is resolved in the next week, it will take six to eight weeks to smooth out the supply chain. This means Easter deliveries will be disrupted, impacting first-half margins.
The firm notes the biggest risks are in furniture, branded footwear, apparel and toys.
Toy companies like Mattel and Hasbro and household and beauty products makers such as Newell Rubbermaid, Jarden, and Williams Sonoma could also get hit. Piper estimates 50 percent of all these inbound products go through the L.A. ports.
Some companies with large order commitments for Easter in early April and licensed movie goods are electing to use air freight, which will produce margin pressures. Coupled with foreign exchange headwinds, the expectation is that guidance will be coming in on the light side.
Not everyone is so exposed, however. PVH Group already ships from the East Coast and is thus more immune to the slowdown.
Some companies have been trying to react proactively. Piper notes that while Target is one of the most exposed retailers, the company "has been bringing in inventory early to help offset these potential slowdowns." As evidence, it notes that the inventory was up 7 percent on the company's last earnings call, well ahead of sales growth of 2 percent.
One potential beneficiary is close-out retailers, like Ross Stores. Piper notes that off-price retailers "are already starting to reduce first-season goods for 2H deliveries in anticipation that they will be the recipient of a lot of excess inventory when the product finally is discharged from the ports."
We've seen a notable breakout, but still no signs of profit taking. It's been one heck of a month for equities. Not only do we have historic highs in the S&P 500, S&P Midcap, and Russell 2000, but every major index is up 5 percent or so.
Major Indices in February:
Not surprisingly, market breadth has been improving as well.
Given these moves up, I kept waiting Tuesday for some modest correction to materialize, particularly given the conflicting headlines on Greece. But nothing happened, and we eked out modest gains again.
Volume wasn't strong, so buying interest wasn't particularly heavy, either.
But the lack of any profit taking is notable. There doesn't appear to be any major concern that: 1) markets are overvalued, or 2) the situations in Greece and Ukraine are any imminent threat to stocks.
This certainly would argue that the trend remains to the upside.
It's been a strange day. There has been little reaction in Europe or the U.S. on word the Eurogroup failed to reach an agreement with Greece. At the same time, there was only a modest reaction midday following a Dow Jones headline, citing an unnamed "official" reporting Greece intends to ask for a bailout extension on Wednesday. Italian and Spanish bond yields are also barely moving.
Why such muted reactions? Because there is an assumption that a deal will be struck and that the politicians will figure a way out.
Alternatively, a surprisingly large proportion of the trading community does not care and do not think it will make a difference if Greece leaves or stays in the euro.
Why assume a deal will be struck? Because the outlines of a deal are so obvious. What the Greeks want most is some kind of relief from austerity. What the Germans want most is not to write off any of the debt, because they can't sell that to the German taxpayers.
The deal is to offer some austerity, lower the coupons and extend the maturities of the debt—to infinity and beyond. A permanent, or at least continuously rolling, bailout.
Simple, right? It's either that or leave the euro.
And that's what worries me: everyone has convinced themselves that a Greece exit is no big deal.
Partly, it's just because the idea of Greece leaving has lost its shock value. he whole world has had four years to think about this, and the shock of an extreme move is a lot more tolerable when we have had four or five years to get used to it. The violent, knock on effects have been fixed, to a certain extent. By that, I mean the banks that owned the debt originally have successfully transferred much of the risk...to governments and taxpayers.
More troublesome is the idea that a lot of people have discounted the domino theory: that Greece leaving will not create a systemic crisis in the eurozone because Greece is not the same as Portugal, Ireland, or Spain.
The other countries are different, traders say. Ireland is a banking problem. Italy is about inflation and bureaucracy.
And the analogy between Greece and Lehman, that was so potent a few years ago? It all sounds a bit, well, stale. Stop worrying, traders argue: there's a counterparty. The ECB is willing to supply almost infinite liquidity should there be any shocks to the system.
Never mind we heard these same arguments in 2008. And the one thing all of us learned then is that stuff is connected in ways none of us ever thought about.
Look, I get it. The argument is that when countries grow at dramatically unequal rates, as Greece and Germany have done, something needs to be done to relieve that pressure. The Greeks are demonstrating that one method—austerity—is not going to work much longer, and the Germans are trying to keep a straightjacket on them.
So the best option, the thinking goes, may be an exit.
Finally, an additional factor working in favor of a Greek exit may be the twisted world of European politics.
Over the weekend, some traders noted media reports that Span's Prime Minister, Mariano Rajoy, was opposed to having Greece get cuts in its debt obligations. The thinking is that if Syriza wins concessions, that will strengthen the opposition parties in Spain, and weaken Rajoy's grip on power. The failure of Syriza in Greece would help Rajoy's conservative party.
And you thought it was hard to understand U.S. politics.
Trend followers are happy, despite plenty of problems.
Lousy weather in the Midwest and Northeast, a port slowdown in California, a cease-fire that never was in Ukraine and protracted negotiating difficulties between Greece and the European Union.
You'd never think it, but despite these problems we are at new highs on big caps (S&P 500), midcaps (S&P Midcap) and small caps (Russell 2000). Even the broadest measure of the market—the Wilshire 5000—set a record on Friday.
Following relative strength is a time-honored tradition on Wall Street, but as the fundamentals have gotten more confusing since the financial crisis many more have turned to technical analysis to try to figure out when to get in and out of the market.
Piper Jaffray wrote, "The wait for a directional move seems to be over," noting not just new highs in the major indexes but also the recent improvement in breadth.
Even Europe is looking better. The Europe STOXX 600, a basket of the 600 largest stocks traded on the major exchanges of 18 European countries, is sitting near its highest levels since 2007.
I have no problem with trend following, as long as there is something fundamental behind it. But I have been troubled by the trend in earnings for several months, and it is spilling over into Q1 2015 from Q4 2014.
Many hedge funds sold down or exited positions in eight of the 10 most popular stocks, including Apple, Google and Exxon.
Ultra-easy central bank policies are about to bite the economy, Gross said in his latest letter to investors.
The Blackstone Group's CEO paid its CEO a bounty that made him stand out from Wall Street's big money pack.