What are the hot exchange trade fund investments for 2015? Here's what's got investment advisers talking at the annual Inside ETFs conference in Florida.» Read More
We are in rare territory indeed on the oil front. West Texas Intermediate has dropped more than 50 percent in the last six months.
According to our partners at Kensho, this has happened only five times since 1980: 1987, 1991, 1999, 2002, and 2009.
Six months after those events, the S&P 500 was up four of the five times, with an average gain of 3.7 percent. Perhaps more importantly, WTI was positive six months later all five times, and was up 52 percent on average.
Read that carefully: All five times this has happened, WTI has been up six months later. And up 52 percent on average.
That should give some comfort to those who have argued, as I have, that oil is more likely to be in the $50s or $60s in the second half of the year than it is to be in the $30s.
None of this answers the big questions: What's causing the drop?
I mean, nothing else is down 50 percent. This seems very specifically related to oil, not so much the global economy. The conventional explanation that this is a "supply issue"—with a small part of the drop due to lower global demand from a slower China and Europe—makes some sense on the surface.
Another day of LOWS: low oil, low euro, and low bond yields. German bund yields fell 15 percent to 0.44 percent! Wow!
Why take an 0.44 percent yield when you can get roughly two percent with the U.S. 10-year Treasury? And that's what happened. Investors flocked to U.S. bonds of all types, except short-term.
A large swath of the ETF bond universe is sitting at a 52 week high. This includes:
Intermediate-Term Treasuries (IEF)
Long-Term Treasuries: iShares 20+ Treasury Bonds (TLT)
Mortgage bonds: iShares GNMA (GNMA)
Investment-Grade Corporates: iShares Investment Grade Corporates (LQD)
Long-Term Corporates: Vanguard Long-Term Corporate (VCLT)
The iShares Muni Bond ETF (MUB), the largest of the municipal bond ETFs, is not far from a new high (it hit highs back in October).
The market has spoken: a large group of traders are of the opinion that long-term U.S. Treasury yields are not going to go anywhere fast. This means extend duration, and if you don't like Treasuries go into longer term corporates to pick up a little extra yield.
Even interest-rate sensitive equities rose: Utiltities, Telecom, and REITS all were up.
The laggard, of course, has been high yield, with the iShares High Yield Corporate ETF (HYG) down another 0.4 percent today.
The macro trend continues: Low oil, low euro/strong dollar, and low bond yields.
1) European debt yields keep dropping. I got in this morning and had to re-check my terminal: German 10-year bond yields down 15 percent to 0.44 percent? Huh? French yields down 10 percent to 0.72 percent? They have risen a bit since early in the morning, but still. If that's not a sign of deflation worries, I don't know what is. It seems to be driving money into U.S. Treasurys as well, with the U.S. 10-year yield down 7 basis points to 1.96 percent, an 18-month low.
2) With West Texas Intermediate crude trading in the $40s, and Brent threatening to break below $50, a lot of traders are nervously eyeing the stock markets for the major oil exporting countries. Keep an eye on the exchange-traded funds of countries such as Russia, Brazil, or Nigeria.
Any of the major oil exporting countries rely on oil reserves to pay for social programs. Oil this low could threaten social stability, and, of course, drive even more money into the U.S.
Europe is weaker, with the euro at nine-year lows against the dollar; particular weakness in the Greek stock market, down almost 5 percent, with Greek debt yields also rising, on reports over the weekend that Germany might permit a Greek exit from the euro. Peripheral countries like Spain and Italy are also down 1 to 2 percent.
Lots of interest in investing in Europe, not so much in the euro. That's why the WisdomTree Europe Hedged Equity ETF (HEDJ) is getting a lot of attention: it invests in European equities but hedges out the effect of the euro.
The Vanguard FTSE Europe ETF, which does not hedge out currency risk, is down almost 10 percent in the last year, but the HEDJ is up about 1 percent. That is a significant difference.
In a quiet week, one of the main topics of interest was the Dow Utilities' 4-percent drop in the last two trading days, following a huge rally in the middle of the month. It was still the best-performing of the major indices, up 28 percent for 2014. All this occurred without a bond market rally.
What's up? The drop in the last couple days can safely be chalked up to profit taking, but the huge run-up in 2014 is a little harder to explain. There has clearly been an expanded class of investors in utilities.
If you believe rates are going up in 2015, why would you buy utilities? Because you can still get EPS growth of 5 percent or more and consistent, low-risk yields of roughly 3 to 4 percent. Despite the huge price run-ups, the dividend yields remain attractive on a comparative basis.
Utility dividend yields:
Low natural gas and coal prices are also a help. Roughly 40 percent of power generation now comes from natural gas, up from 28 percent a few years ago.
In the last two weeks of the year, we see two phenomenon: 1) most of Wall Street takes off and 2) those that do not pay little attention to what is going on.
But someone is always trying to take advantage of someone else's inattention, and I see a couple signs of that happening in two groups: regional banks and commodity stocks, particularly steel and iron ore.
Regional banks are ending 2014 on an up note. For the most part, regional banks have under-performed the S&P 500 and even their larger brethren. No regional bank has performed better than Wells Fargo's 22-percent gain in 2014, or even Bank of America's 16.4-percent gain. Most would be happy to have JPMorgan's 8-percent gain, or even Citigroup's 5.2-percent gain.
The SPDR Regional Banking ETF, a basket of regional bank stocks, is little changed on the year, but has recently been showing signs of life. It is up 3.8 percent in December, well outperforming the S&P 500, which is up less than 1 percent for the month.
Regional Banks in December:
Are they getting pricey? Big regionals like PNC, KeyCorp, and BB&T are trading at roughly 13 times forward earnings—not cheap but also nowhere near overvalued.
What's going on? This seems to be a play on: 1) an improving economy in 2015 (we have already seen signs that commercial and industrial loans are picking up) and 2) a steepening yield curve, which would improve bank profits, though that has not happened yet.
One potential headwind is regulatory scrutiny of M&A. The proposed merger of M&T Bank and Hudson City Bancorp has been delayed again due to regulatory issues. It is now scheduled to close on April 30. If this deal would have been approved this year, regional banks would have likely performed better.
As for commodity stocks, no group has been more beaten up, and I am not just referring to oil stocks. Steel steel and iron ore stocks are down 20 to 40 percent or more. But in the last few weeks there are again signs of a bottom. The thinking is that the stocks are starting to get attractive even with greatly reduced earnings. Freeport McMoran, for example, is trading at roughly 11 times forward earnings.
Several other stocks in this group have shown signs of life in the past couple weeks. Just this week a small group are outperforming:
If you think the global economy will sink further in 2015, you should certainly stay away from this group. But at least a few are betting that even a bottoming in the global outlook will benefit this group.
I don't make predictions on where the S&P 500 will end up next year, but if you look at what usually powers gains in the stock market—corporate profits or multiple expansion—it seems more likely that any gains will come from increasing corporate profits. Increasing the multiple is possible, but there are many headwinds.
Let's talk about earnings growth. Until recently, most analysts were expecting earnings gains of roughly 9 percent for the S&P 500 in 2015—not far from this year's expected 7.5 percent gains—and low-single-digit revenue growth, according to S&P Capital IQ.
Unfortunately, thanks to the big drop in oil and its impact on energy stocks, there has been some disappointment on that front in the past couple weeks.
Just two weeks ago, 2015 earnings growth was estimated at 8.8 percent. As of Tuesday, it's down to 7.6 percent. Revenue is expected to grow an anemic 1.4 percent.
Most of this is due to an expected drop in oil company profits. A couple weeks ago growth in the S&P Energy sector was expected to be down 13.6 percent next year. Now it is expected to be down 21.3 percent.
That's a notable drop. Remember, Energy is roughly 9 percent of the S&P 500.
The exchange-traded fund winners this year were biotech and mainland China. It was a home run for biotech across the three largest ETFs.
SPDR Biotech, an equal-weighted index of U.S. biotech stocks, is up 43.5 percent for the year.
First Trust Biotech ETF, another equal-weighted index, has also been a big performer, up 49.5 percent.
Finally, the iShares Nasdaq Biotech ETF, which is weighted by market capitalization, also had a great year, up 35 percent, but not as strong as the two equal-weighted indexes. That's because some very small names in biotech had a phenomenal year, and when that happens equal weighted indexes tend to do better.
Elsewhere, the relatively small group of ETFs that invest in mainland China had a big year, thanks to a surge in interest in trading mainland China shares after that country made it easier for foreigners to invest in November (which I previously noted in Trader Talk).
Mainland China ETFs 2014:
Two problems here: these funds are all very small, and more importantly, China growth has slowed down this year. That has been reflected in the performance of the Hong Kong Hang Seng Index, which is often used as a proxy for mainland China growth and was up only 2 percent.
It's looking like a good, not great year for holiday sales.
The National Retail Federation estimates holiday sales will be up 4.1 percent this year, compared with a 3.1-percent increase last year.
Ken Perkins at RetailMetrics told me Super Saturday looked strong and noted a growing trend: buy online and pick up in store.
Piper Jaffray also highlighted this trend, urging investors to focus on stocks with high e-commerce penetration and particularly those with buy online, pick up in store capabilities. It specifically mentioned Nordstrom, Kohl's, and Williams Sonoma.
The investment bank is also a bit more optimistic about sales; 20 percent of respondents plan to spend more this year, according to a survey it conducted.
My 2015 predictions: I'll try not to bore you.
Let's face it, everyone on the planet has become a pundit and a prognosticator. What hasn't changed are the odds of being right: most people are terrible at predicting the future. Even professionals.
Given this fact, when asked to make a few guesses for the following year, I try not to be boring. I'd rather swing for the fences than make you yawn.
So here's three predictions for 2015:
First: Russia defaults on its debt.
The Russian ruble has hit an all-time low versus the dollar. Oil has dropped 40 percent; crude oil and petroleum products are half of Russian export revenues. How will they pay for imports? They will default.
I know, it's not 1998, when the Russians last defaulted. Russia is different now. It has more reserves. It is a different country.
Really? I still see the same dependency on oil and other commodities. The big drop in oil and metals was a precipitating factor in the 1998 default.
Second: European stocks will outperform U.S. stocks.
There will be no recession next year in core Europe. The eurozone is stuck in a long-term, slow-and-no-growth environment, but the core countries will not sink into a recession. The euro will remain weak, boosting trade. After a year when expectations were consistently revised downward, European corporate earnings will begin turning around. Deflation will remain an issue.
Third: Google buys Paypal.
Paypal is scheduled to be spun off from eBay sometime in 2015. Won't happen. Google will buy Paypal and combine it with Google Wallet to ward off Apple Pay.
And now... my 2014 predictions: NOT!
Like I said, I go for bold and interesting over safe. That means a high strike-out rate, which I achieved for my predictions in 2014:
1) Forget the Goldilocks recovery. The Fed will INCREASE its bond-buying program in 2014 after its initial attempt at tapering falters. (NOT)
2) Dallas Fed President Richard Fisher resigns from his post mid-year, saying that the Fed is acting irresponsibly by refusing to accelerate the tapering of its bond-buying program (NOPE).
3) Microsoft buys Yahoo and names Marissa Mayer as its new CEO (Very NOT!)
Just trying to have a little fun, folks. Can you do better?
Banks no longer are the center of the market universe, Meredith Whitney said at a conference Wednesday.
Investments by academic institutions did well in 2014, boosting long-term performance records hit during the financial crisis.
Raj Malhotra was a former star trader on Wall Street. So how's he betting on this year's Super Bowl between the Seahawks and the Patriots?