Highlights of the Prior Week
Last week markets had to digest a debt scare in Portugal (more on that below) and a visible end to quantitative easing under the Yellen-led Fed. The S&P 500 fell by 0.9%, that after bouncing Thursday on a big down-open in the face of the Portuguese news. More noteworthy was the 4% decline in the Russell 2000 Index.
We have been tracking the relative underperformance of the small cap stocks versus large cap stocks for the last few months as a possible leading indicator for the future of the bull market. Year to date the Russell is down 32 basis points compared to a gain of 6.45% for the S&P 500.
The minutes for the June FOMC meeting indicated that the Fed will end its asset purchase program, known commonly as Quantitative Easing, in October but it will continue to roll forward proceeds from matured holdings. Also revealed in the minutes is that the Fed is unlikely to start raising rates before mid-2015.
While this is the roadmap they have laid out for themselves, deterioration in conditions could result in an extension of QE just as a marked improvement in economic data could accelerate the timetable for rate increase. The Wall Street Journal though, covered the issue that the actual mechanics for raising rates has changed because of the asset purchases that have swelled the Fed's balance sheet to over $4 trillion.
Portugal took center stage this week when conglomerate Espirito Santo International missed an interest payment on bonds outstanding. This caused concerns about what impact this might have on subsidiary (it's more complicated than that) Banco Espirito Financial whose shares trade publicly in Portugal. Portugal Telecom, the Ma Bell of Portugal, may also have been impacted by the missed payment.
To give some context to the news, the Global FTSE Portugal 20 ETF (NYSEARCA: PGAL) fell 8.9% on the week. This also brought down the rest of Europe; the iShares MSCI EMU ETF (NYSEARCA:EZU) fell over 4% on the week despite having less than 1% of its assets in Portuguese companies.
Portfolio manager Laif Meidell wrote an excellent recap of the event for Alpha Baskets which included the following passage;
The financial market's reaction was reminiscent of 2011, when worries grew and stock markets declined over the financial crisis in Greece, a country that is slightly larger by population than Portugal.
However, worries over Portugal do not stem from sovereign debt problems as they did during the Greek crisis.
Instead, it was news that shares of Espirito Santo Financial Group and shares of Banco Espirito Santo had both been suspended from trading by market regulators that sent the world's markets into a tailspin.
ETF News & Data
There were three new ETFs launched last week; a global REIT fund, a currency hedged European Equity ETF and a liquid alternative multi-strategy fund.
Broad market proxies dominated the leaderboard for creations last week while sector and industry funds headlined the redemptions list. Funds tracking the S&P 500 (three funds in all) added $3.6 billion in assets, the PowerShares QQQ (NASDAQ: QQQ) attracted $1.1 billion and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM) and the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO) combined to bring in $700 million.
The top spot for redemptions went to the iShares Russell 2000 ETF (NYSEARCA:IWM) which fell almost 4% on the week with outflows of $1.3 billion. Three different funds tracking industrial stocks bled a combined $990 million which is logical to the extent that the industrial sector tends to get hit very hard in market downturns and the Portugal event last week did spark some concern of triggering a global correction.
Esquire had a lengthy feature on Lance Armstrong titled Lance in Purgatory: The After-Life. Armstrong's story is very complicated. On the one hand is possibly the greatest cheater of all time who lied, coerced and intimidated countless people in his quest for greatness on the bike. On the other hand is the roughly half of a billion dollars his foundation raised for cancer research and the amount of time he spends reaching out with words of encouragement to people fighting cancer. We have no conclusions to offer, only an acknowledgement of how complicated his story has become.
It's turning out to be The Summer of Cleveland. First the Browns drafted Johnny Manziel, then the Cavaliers drafted Andrew Wiggins and of course the biggest news is that LeBron James has announced that we will be returning to his hometown team deciding not to re-sign with the Miami Heat. Also making news as of this writing is that Kevin Love may be interested in playing in Cleveland but they might have to trade Wiggins to make it happen. The city is still waiting for Indians' manager Terry (Tito) Francona to turn that team around.
Roger Nusbaum, AdvisorShares ETF StrategistSources:Google Finance, ETF.com, Barron's, Yahoo Finance, Wall Street Journal, Esquire, XTF.com, CNBC.com
Weekly ETF Flows
For July 7, 2014 to July 11, 2014
Shares outstanding include totals as of current day NAV.S&P Sector Analysis
As for the sectors of the S&P 500, four outperformed the broad benchmark - Telecom, Utilities, Staples and Technology. The remaining six - Discretionary, Materials, Healthcare, Industrials, Financials and Energy- each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 3.49% this week, with Telecom outperforming all, and Energy coming in last.
For July 7, 2014 to July 11, 2014
Sector performances, as measured by the S&P 500 sector indices were:
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.