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  • Can We Take A Summer Vacation From The Euro Crisis This Year?

     

    Can we take a summer vacation from the euro crisis this year?

     

    Ah, summer. The best time for backyard barbeques, outdoor fun … and a European banking crisis.

    In what has seemingly become an annual ritual, the eurozone crisis is back in the headlines spooking investors. This time, the trouble is emanating from Portugal, where bond yields have jumped on concerns over the financial system.

    The parent company of Banco Espírito Santo (BES), one of Portugal's largest banks, this week said it has delayed the payments on some of its debt.

    "The tumult is a stark reminder that investors - despite recent optimism about Europe - are still worried about the overall health of the region's financial system," the New York Times reports.

    Recent weakness in European financial stocks had hinted that something could be amiss.

    The iShares MSCI Europe Financial ETF (EUFN) has broken a key support level from a so-called rising wedge pattern, which could signal a reversal. Chart below from Kimble Charting Solutions:

    (click to enlarge)

    Markets appear to have settled down after Thursday's initial shock, which was noteworthy because markets have been so calm lately.

    For investors, the flare-up in Portugal has triggered a "eurozone crisis flashback," writes Dean Popplewell for Forbes.

    "The knock-on effect began a global equity and periphery bond rout and a mini-break from risk trading that saw markets pivot from euphoria to 'Europhobia,'" he wrote. "Anything affecting one eurozone periphery member basically affects all nowadays - the yields on other peripheral members sovereign bonds also blew out, reminding all of the darkest days of the euro debt crisis."

    This week's bout of volatility has "at least woken the market up from its deep slumber," Popplewell added.

    Like summer movie blockbusters, it's the season for the European debt concerns to heat up.

    But hopefully this year we can take a vacation from the euro crisis.

    "Large money managers don't expect the worries over one of Portugal's largest lenders to have a lasting impact on global financial markets depite a rout in Europe's markets Thursday," reports WSJ.com's MoneyBeat blog.

    "This particular incident seems fairly isolated to the Portuguese bank as opposed to a return to the eurozone crisis of a few years ago," said Eric Stein, global fixed income portfolio manager at Boston-based Eaton Vance.

    Try Covestor's services with a free trial account. Or you can contact our Client Advisers at 1.866.825.3005.

    DISCLAIMER: The investments discussed are held in client accounts as of June 30, 2014. These investments may or may not be currently held in client accounts. Foreign investments may be volatile and involve additional expenses and special risks including currency fluctuations, foreign taxes and political and economic uncertainties. Past performance is no guarantee of future results.

    Jul 11 3:26 PM | Link | Comment!
  • Good Riddance: The Death Of The ‘Risk On, Risk Off' Market

     

    Good riddance: The death of the 'Risk on, risk off' market

     

    One of the most frustrating byproducts of the financial crisis for investors and portfolio managers is the so-called Risk on, risk off phenomenon. Yet there are signs we may finally be moving back to a more "normal" market as the Federal Reserve winds down its stimulus program.

    "Risk on, risk off" is a pattern in which commodities, stocks, currencies and bonds "move very tightly in predictable ways and which has been the dominant trade in the post-financial-crisis landscape," according toReuters.

    In financial-speak, this means that correlations have been very high in the wake of the credit crisis. Correlation measures the tendency of securities or asset classes to move together.

    During risk-off bouts in recent years, riskier assets like stocks would fall, and investors would buy traditional safe havens such as U.S. Treasury bonds and the Japanese yen, for example.

    'A surprising and hopeful story'

    Why are high correlations a bad thing for portfolio managers and investors?

    For portfolio managers, it makes it harder to outperform the market through stock-picking when everything is moving together.

    And for investors, higher correlations make it more difficult to diversify. The whole point of diversification is to reduce risk by spreading money around into several different asset classes. It doesn't work as well when they're moving in unison.

    However, there are signs that individual asset classes and stocks are starting to go their own way, rather than running as a pack.

    "Our monthly look at the price action for a range of asset classes and industry groups tells a surprising - and hopeful - story. Correlations have fallen to new post-financial crisis lows," ConvergEx Group analysts said in a note Thursday.

    Here are some of the highlights:

    • The average 30-day historical correlation of the 10 industry sectors in the S&P 500 to the index as a whole is down to 68.7%, lower than last month (70.6%), the old lows (August 2013 at 69.9%), and far from the highs (+95% through parts of 2011).
    • Currency correlations to U.S. stocks are near zero in the case of the Aussie dollar and euro, but still relatively high (40%) for the yen.
    • Foreign stocks were similarly disconnected from domestic equities last month - down to 46% correlation to U.S. stocks, from 83% last month, and Emerging Markets at 36% from 46% last month.

    Back to the fundamentals

    Falling correlations are good news for active managers whose mission is to generate excess returns or "alpha" by picking winning stocks and sectors.

    "We've had years of 'Risk on, risk off' market swings where everything seemed to rise and fall like rubber duckies in a kid's bathtub," ConvergEx said. "Are markets finally back to pricing assets based on fundamentals rather than gaming the next round of central bank monetary policy?"

    In the U.S., this week's release of the minutes of the latest Federal Reserve meeting showed the central bank may end its quantitative easing or QE program in October. The Fed has been buying huge amounts of bonds in an effort to keep interest rates low and stimulate the economy after the financial crisis.

    The latest correlation data show "we can put a wooden stake in the heart of 'Risk on, risk off' and officially declare that blood (and soul)-sucking market theme dead and buried," according to CovergEx.

    Still 'suspicious'

    Yet interestingly, the analysts note that falling correlations are not necessarily a bullish sign for the market.

    "The best thing you can say is that owners of capital should be reassured by this price action, since lower correlations allow for better diversification … But after more than half a decade of turmoil and living with 'Risk on, risk off' it is easy to be suspicious," they wrote.

    "If correlations can remain low, it will show that investors are not relying on the Federal Reserve to bail them out again. And that will be something worth celebrating, regardless of where the S&P 500 happens to close," the analysts concluded.

    Try Covestor's services with a free trial account. Or you can contact our Client Advisers at 1.866.825.3005.

    DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results

    Tags: SPY, DIA, risk on, risk off
    Jul 10 4:20 PM | Link | Comment!
  • Investing In Gold For Insurance And An Inflation Hedge: Portfolio Manager

    Investing in gold for insurance and an inflation hedge: portfolio manager

    Eric Steiman is a manager at Clearbrook Capital Advisors, which is the investment manager of the Undervalued Opportunities portfolio. Clearbrook is known for implementing a fairly aggressive trading style and the portfolio is one of the most popular among the Covestor community on our investment marketplace.

    He describes Clearbrook's investing philosophy as a mix of fundamental and technical analysis. In other words, the investment decisions are driven by a combination of research on economic conditions (fundamentals), as well as supply and demand trends based on chart patterns, trading volume and sentiment (technicals).

    We caught up with Clearbrook's Steiman to discuss the recent purchase of SPDR Gold Shares (GLD) in Undervalued Opportunities portfolio, and his outlook for precious metals.

    He said a big reason Clearbrook bought gold in the portfolio has to do with the technical picture.

    "Looking at the longer-term chart, there could be an inverse head-and-shoulders pattern in gold, which is a potentially bullish pattern," Steiman said. "And we saw heavy trading volume during that gold breakout last week."

    SPDR Gold Shares

    GLD Chart

    GLD data by YCharts

    Clearbrook is also using gold as a hedge as U.S. stocks continue to climb to new record highs.

    "It has obviously been tough for short sellers betting against stocks," Steiman said. "We're adding gold rather than shorting stocks here. If stocks fall, gold typically rallies - that's our thought process."

    The S&P 500 has posted a total return of about 7% so far this year, while the gold ETF has gained roughly 9%.

    U.S. stocks continue to grind higher and the market withstood a report this week that first-quarter GDP was revised lower as the economy contracted at a 2.9% annual rate. Many economists are blaming the decline on the cold weather during the first three months of the year.

    And stock investors don't seem too concerned either. Trading volume typically falls off during the summer but the market has been almost eerily quiet lately. In fact, it has been nearly 50 trading days since the S&P 500 has experienced a 1% daily move - the longest streak in over two decades.

    "As for volatility - well, Elvis has clearly left the building on that one," said ConvergEx Group analysts in a note Thursday.

    CBOE Volatility Index

    ^VIX Chart

    ^VIX data by YCharts

    "The VIX is very low, the market could be overstretched and we have some potential macro events that could potentially get in the way of stocks. Things like further developments in Iraq and other geopolitical concerns. Gold may do well in that case," said Steiman.

    "On the U.S. stock market, we're being cautious up here. We're not really bearish or bullish, just being cautious. It's not psychologically easy to buy at all-time highs," he added.

    That's why Steiman views the gold ETF as a hedge for the stock holdings of the Undervalued Opportunities portfolio.

    Finally, gold could get going if inflation finally starts to heat up due to ongoing easy monetary policies from central banks. Consumer prices in the U.S. climbed more than 2% in May from a year earlier.

    "The latest CPI reading came in hot. Prices are rising and that could help gold. You certainly see food prices rising, which may hurt some businesses," Steiman said. "Gold could end up mirroring some of the price increases we have seen lately."

    For more on Covestor's services, visit Covestor.com or try a free trial.

    DISCLAIMER: The information contained in this article is general in nature and not intended as specific advice. The investments discussed are held in client accounts as of June 25th, 2013. These investments may or may not be currently held in client accounts. You should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions made by portfolio managers in the future will be profitable. Past performance does not guarantee future results. Covestor Limited ("Covestor") is an SEC registered investment adviser. Information pertaining to the registration status of Covestor can be found at www.adviserinfo.sec.gov, or may be received from Covestor upon request.

    Tags: GLD, UVXY, gold, vix
    Jul 10 11:14 AM | Link | Comment!
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