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Russ Koesterich, CFA
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Russ Koesterich, CFA, Managing Director, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a founding member of the Blackrock Investment Institute, delivering BlackRock's insights on global investment issues. Mr. Koesterich's service with the... More
My company:
BlackRock
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The Blog
My book:
The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now: How Deficit Economics Will Change our Global Financial Climate
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  • iShares Bi-Weekly Strategy Update Part 1 | 3.7.2011
    Taken from iSharesblog.com

    Learning to love hundred dollar oil?

    Higher oil, at least at current levels, is unlikely to derail the economic recovery, but it is an additional headwind for a still struggling consumer. Higher oil prices will add to headline inflation, lowering real-wages, and eat into discretionary purchases.

    Despite the fact that the US benchmark crude oil closed last week above the $100 threshold for the first time since late 2008, equity markets have resumed their rally after a brief pause. Meanwhile political unrest in the Middle East triggered a sharp one-day sell-off on March 1st, but stocks quickly recovered and pushed back towards the February high by March 3rd.

    The overall economy is demonstrating impressive resiliency to higher oil prices – as evidenced by the recent strength in the ISM manufacturing and services surveys –  but investors should not be too complacent when it comes to the consumer sector. Even though labor markets are staging a slow-motion recovery, the US consumer still faces multiple headwinds, including anemic wage growth, too much debt, and a still fragile housing market. Oil crossing the $100 threshold will not help.

    Some of these concerns have recently been reflected in the performance of those stocks most sensitive to consumer spending: retailers. While investors remain sanguine on the overall market, they are playing to script as it comes to the retail sector. Crude oil bottomed at $87 a barrel on February 15th.  Since then prices have rallied nearly 20%.  Stocks have generally withstood the spike in crude and are flat over that time period, but US retail stocks have lost roughly 2.0%. As a rule of thumb, for every 1% increase in crude, retailers have typically trailed the market by approximately 0.15%. This puts their recent underperformance right in line with the historic averages.

    In recent days, we have heard the argument that the retailer sell-off is over done. The argument is that because energy represents a declining portion of consumption, the hit to retailers is not justified. From our perspective, the data does not support this argument.

    It is true that over the very long term, energy-related spending as a percentage of overall consumption has dropped. However, if you focus on gasoline sales the story looks very different. Today the percentage of overall consumption currently going to gasoline is close to its 2008 peak.  As of late January, spending at gas stations represented more than 10% of overall retail sales, well above the long-term average of 8.2% and the highest percentage since October 2008 (see chart below). Unless you attribute the recent rise in spending to a lot of people loading up on snacks, this months spike in oil prices should drive the ratio back towards the 2008 high. More importantly, to the extent individuals are spending more on gasoline, they are likely to spend less on discretionary purchases. If oil prices remain high, look for retailers to come under additional pressure.

    US Retail Sales at Gas Stations vs. Overall Retail Sales

     

    Source: Bloomberg, U.S. Census Bureau 1/31/11

    Conclusion

    Our overall investment thesis centered on a recovering global economy remains intact. That said, higher oil prices and growing political tension in the Middle East do have implications. At the very least recent events raise the likelihood of a slow down in the market’s recent gains, a pickup in headline inflation, and a more cautious US consumer.  Investors should continue to overweight developed markets, US mega-caps, energy stocks, corporate bonds, and industrial commodities.

    Source: Bloomberg

    Certain sectors and markets perform exceptionally well based on current market conditions. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.

    Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737), or by clicking the Prospectuses link. Read the prospectus carefully before investing.

    Investing involves risk, including possible loss of principal.

    The iShares Funds (“Funds”) are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. The iShares Blog contributors are affiliated with BlackRock Fund Distribution Company (“BFDC”), which assists in the marketing of the Funds. BFA and BFDC are affiliates of BlackRock Institutional Trust Company, N.A. (“BlackRock”), none of which is affiliated with SEI.

    The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.

    The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.

    Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.


     

     

    Mar 08 2:22 PM | Link | Comment!
  • Weekly Market Intelligence | 2.28.2011
    Taken from iSharesblog.com

    This week political issues in two different parts of the world hold investors’ attention as we keep an eye on rising oil prices and wait for a solution to Europe’s sovereign debt problems.

    First, the energy markets: crude oil hit a 2 ½ year high last week.  Given that political unrest in the Middle East is unlikely to dissipate quickly, one would expect crude prices to remain elevated.  Crude is also likely to have a larger than normal geopolitical risk premium built in during the coming weeks, making it trade above where it would otherwise trade based on spare capacity and inventories.

    Libya plays a significant role.  First, Libya’s crude production is 1.8M barrels per day (BPD) – 3X the amount that Egypt produces.  Second, Libya contains 40M barrels of proven reserves, about 3% of global supply.  And third, unlike Egypt where a strong military appears capable of safeguarding both production and transit (in the Suez Canal), Libya is descending into a civil war, where production has already been impacted (down 500K to 1M BPD as major oil companies pull out).

    Bottom line – the loss of all or part of Libya’s production coupled with an increased risk premium will likely keep oil prices elevated.

    Moving on to Europe, domestic politics in Germany and Ireland will complicate and delay a more permanent resolution to Europe’s sovereign debt problems, which could represent a marginal negative for European regional banks.

    On March 17th – one week before the European summit – German parliament is likely to pass proposals that would rule out the European Stabilization Mechanism (ESM) and European Financial Stability Facility (EFSF) – the mechanisms established to deal with European sovereign debt issues by buying government bonds directly or issuing loans to help governments buy back their own debt.  This move is designed to harden German negotiating positions ahead of the EU summit and will make a permanent compromise solution to Europe’s debt problems more difficult.

    Adding to the political friction, in Ireland the Fine Gael party is poised to unseat the ruling Fianna Fail party at the February 25th election.  Fine Gael is almost guaranteed to push back on the previously agreed-upon deal between Ireland and the IMF/EU.  In effect, the party will argue for a lower interest rate on the bailout package and a haircut for bondholders – who are largely European banks.

    Essentially, Europe’s creditor – Germany – and one of Europe’s biggest debtors – Ireland – are both hardening their negotiating positions.  While unlikely to blow up (a muddle-through compromise is expected at the summit), European sovereign debt issues will linger and the risk of a haircut for bondholders is a bit higher.

     

    Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737), or by clicking the Prospectuses link. Read the prospectus carefully before investing.

    Investing involves risk, including possible loss of principal.

    The iShares Funds (“Funds”) are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. The iShares Blog contributors are affiliated with BlackRock Fund Distribution Company (“BFDC”), which assists in the marketing of the Funds. BFA and BFDC are affiliates of BlackRock Institutional Trust Company, N.A. (“BlackRock”), none of which is affiliated with SEI.

    The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.

    The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.

    Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

    Feb 28 8:17 PM | Link | Comment!
  • China‚Äôs Balancing Act
    Taken from iSharesblog.com

    After several decades of export-led growth and an economy tilted toward fixed-capital investing, China is embarking on a long-term path to rebalance its economy in favor of more domestic consumption.  Given the sheer size of China’s population and growing economic clout, this development will not only change investing in China, but also investing in global consumer stocks.

    For investors, this provides an opportunity to watch valuations and time their entries.  The example of the United States over the past half century is instructive – there was a long lag between the financial deregulation of the 1980s and the housing and consumer boom of the mid-to-late 1990s.  In assessing where China is in its own developmental timeline, pay attention to two factors in particular: Chinese real income growth and the savings rate.  The latter should drop as the country develops a more modern safety net and consumers are exposed to more financial products.

    As China makes progress toward these milestones, investors have a number of options for gaining exposure to the Chinese consumer.  For example, Chinese small caps offer a more consumer-focused play than a portfolio of larger, more export-driven companies.  The iShares MSCI China Small Cap Fund (NYSEARCA:ECNS) contains 313 companies, of which 86 are in the consumer discretionary or consumer staples sectors (about 28% of the index).  Over the recent past, this ETF has broadly tracked the performance of the Chinese consumer index.

    Another investment approach is to recognize that the rise of the Chinese consumer will be felt globally, not just locally.  Both the iShares MSCI ACWI ex-US Consumer Discretionary Fund (NYSEARCA:AXDI) and the iShares DJ U.S. Consumer Goods Sector Fund (NYSEARCA:IYK) represent broader portfolios of global consumer discretionary and consumer staples firms.  The obvious downside of investing in these funds is the unintended exposure to non-China names; however, the repercussions are mitigated by the fact that consumer sector correlations across countries tend to be high.

    A third option is to focus on firms in the business of selling luxury goods, for which the Chinese are likely to prove growing consumers.  Demand for luxury goods and travel from Greater China is expected to account for 44% of global sales by 2020, up from 15% today.  With an estimated annual growth rate of 23%, China will become the world’s largest domestic market for luxury goods.  The iShares ADXI fund mentioned above offers a reasonable play on the luxury goods sector.  Of the 177 securities in AXDI, 12 are in the apparel, accessories and luxury good GICS subsector, representing 10% of the fund NAV.

    Read the full February Market Perspectives by Russ Koesterich here.

    Source: BlackRock

    Fund holdings as of 02/11 and are subject to change.

    In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country, investments in smaller companies and narrowly focused investments may be subject to higher volatility.

     

    The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Dow Jones & Company, Inc. or MSCI Inc.  Neither of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above.

    Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737), or by clicking the Prospectuses link. Read the prospectus carefully before investing.

    Investing involves risk, including possible loss of principal.

    The iShares Funds (“Funds”) are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. The iShares Blog contributors are affiliated with BlackRock Fund Distribution Company (“BFDC”), which assists in the marketing of the Funds. BFA and BFDC are affiliates of BlackRock Institutional Trust Company, N.A. (“BlackRock”), none of which is affiliated with SEI.

    The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.

    The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.

    Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

    Feb 24 7:58 PM | Link | Comment!
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