Seeking Alpha

Russ Koesterich's  Instablog

Russ Koesterich
Send Message
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
My blog:
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
View Russ Koesterich's Instablogs on:
  • Middle East Impact on Oil
    Taken from iSharesblog.com

    What does unrest in the Middle East and North Africa mean for oil prices?  Suddenly, quite a bit.

    Just a few weeks ago, in early January, with oil at $92/barrel, it appeared that, while the long-term bullish case for oil looked strong, the price of West Texas Intermediate crude (one of the main oil benchmarks) looked overdone in the near term.  And when unrest began a few weeks ago in Tunisia and Egypt, it had only a short-lived impact on the price of oil, because the two countries are relatively small oil producers, and there was no disruption to supply through a closing of the Suez canal.

    However, with unrest spreading to Libya and other more significant oil producing countries, further pull backs in crude are not likely in the near-term. Here are key points for investors to consider:

    1) The situation in Libya is deteriorating quickly. Libya produces 1.8m barrels a day and has 41b barrels of proven reserves, three percent of global supplies.

    2) Unlike Egypt, where a strong, established, and respected military can provide near-term stability and the potential for a peaceful transitional government, it is not clear what the exit strategy would be in Libya should the regime fall.  Oil production would certainly be at risk.

    3) In addition, further contagion appears to be intensifying in Bahrain, Yemen, and most importantly Iran.

    In short, political instability in the Middle East has now reached a point where it is likely to add to the risk premium for crude (it is already impacting Brent Oil, the European benchmark).  The broader impact of higher oil prices will be a marginally higher headline CPI in the near term, a negative environment for stocks (particularly consumer discretionary, but obviously not energy stocks), and a positive for volatility.

    Source: Bloomberg

     

    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 7:45 PM | Link | Comment!
  • Weekly Market Intelligence | 2.22.2011
    Taken from iSharesblog.com

    As we head into this short week after the holiday, there are a couple main themes I think investors should be paying attention to.  First, US equity investors are starting to look a bit complacent, providing the opportunity to take advantage of low implied volatility.  Second, the recent changes in municipal bond flows suggest some stabilization in that market.

    Early last week, the VIX Index (which measures implied volatility on the US large cap S&P 500 Index) reached its lowest level in 9 months.  When the VIX is low, it suggests that investors don’t expect much in the way of future volatility – in other words investors are fairly complacent about downside risk.

    Historically at about 20, implied volatility in the US traded between 15 and 16 last week.  This seems unusually low.  While the market is clearly on the mend and valuations still look reasonable, it’s hard to justify below average volatility when you consider all the headwinds still facing equity markets – sovereign debt issues, high US unemployment, a fragile consumer sector, and potential unrest in the Middle East. In particular, when you look at the factors that typically drive market expectations of volatility – credit and economic conditions – you would expect the VIX to be trading around 20 to 25 rather than 15 to 20.

    Second topic – back in mid-November we made the call that municipal bond yields were starting to look attractive, even though supply issues were likely to keep pressure on munis over the near term. Since then, municipals sold off sharply in December and January but appear to be stabilizing.  First, yields on general obligation municipals are now at a significant premium to taxable Treasuries. Second, supply is coming down from the heightened levels we witnessed back in the fall. And finally, flows out of the sector appear to be bottoming out.

    While municipal bond mutual funds just experienced a 14th straight week of outflows, we’re starting to see positive flows into the iShares S&P National AMT-Free Municipal Bond Fund (MUB), suggesting that the ETF market may be leading on the recognition of value. For long-term investors looking for yield, the US municipal market now looks to be offering good value. In terms of implementation, given our expectations for rising yields, we would favor a short muni strategy, such as the iShares S&P Short Term National AMT-Free Municipal Bond Fund (SUB), to help minimize duration risk.

    Source: Bloomberg

    Bonds and bond funds will decrease in value as interest rates rise. A portion of the Fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax.

     

    The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Standard & Poor’s, nor does this company 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 company 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 22 8:54 PM | Link | Comment!
  • Weekly Market Intelligence

    Taken from iSharesblog.com

    As we head into the week, investors can take comfort from a number of economic releases that paint a picture of a recovering global economy in the developing world.  This recent data continues to support one of our central investment themes for 2011: overweight equities vs. bonds and developed markets vs. emerging markets.

    Starting in Europe – last week witnessed the release of a number of economic statistics, the vast majority of which were better than expected, including manufacturing surveys in France, Germany, and the UK. In particular, we continue to see strength in the German economy where the IFO Business Climate Index recently climbed to 110, eclipsing the 2006 high.

    Even in Japan there are signs of stabilization. Last month Industrial Production rose by 3.1% month over month – best reading in 11 months.

    In the United States we had two very strong numbers from the ISM Institute.  The Manufacturing Survey hit its highest level since 2004 while the Services component reached its best level since 2006.

    Finally, while Friday’s US Non-Farm Payroll print was much weaker than expected, it is worth remembering that the number was likely distorted by the fact that January witnessed a number of brutal winter storms in the Northeast that dumped over 3 feet of snow in the region. Taking a longer term perspective on the US labor market, it is an anemic recovery but conditions are slowly improving. Non-Farm Payrolls are up ¾ of a percent year-over-year, and while still uninspiring this is the fastest pace of job growth since December 2007.

    Now, the good news in the economy was decidedly bad news for US Treasuries which continue to trade lower. The yield on the 10 year Treasury closed last week at 3.65%, its highest level since last spring.  US long term yields are still low on an inflation-adjusted basis, and government deficits guarantee a steady supply of new bonds throughout the year. While I don’t see a ‘94 style bond market meltdown over the next 6-12 months, I do think rates will continue to grind higher.

    The bottom line: at least from an economic perspective the world is becoming a bit less scary. Cyclical conditions in most developed markets are improving. The risk of a double dip is receding, and most developed market central banks are unlikely to tighten soon.  All in all, an environment that should favor global equities over bonds and in particular segments of the equity market that benefit from an improving economy, such as value, technology, industrials, and energy.  The one asset class that is unambiguously pressured by improving conditions is likely to be US Treasuries.

     

    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 08 2:39 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Most Commented
  1. Too Much Volatility (1 Comment)
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.