Wednesday, 24 April 2019 14:45

My Comments on LinkedIn during December meltdown.

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Check my opinion on the LinkedIn site during the December market meltdown.

Tuesday, 16 April 2019 15:53

Adding Alternative Investments to Your Portfolio

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Adding Alternative Investments to Your Portfolio (US NEW Article)

By Ellen Chang, Contributor April 15, 2019, at 2:08 p.m.

ALTERNATIVE INVESTMENTS are often used by investors to hedge against volatility and add diversification to their portfolio. Investments other than traditional ones, such as stocks and bonds, are known as alternative investments. These types of investments can include commodities, precious metals, real estate, startups, options, hedge funds, private equity, venture capital, and cryptocurrency.

The principal differences between traditional and alternative investments are liquidity and return rates, says Sreeni Meka, a portfolio manager at Interactive Advisors, a Boston online investing company. The most significant benefit for adding alternative investments is diversification since these assets provide hedges against inflation and have a low correlation to the stock market. "We would recommend some exposure to alternative investments such as real estate than other alternatives like precious metals to attain the diversification in the portfolio," he says. "The amount of real estate exposure always depends on how much a client can bear the volatility of their portfolio and the stage of life."

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Tuesday, 26 March 2019 21:09

Yield curve inversion, Next what?

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Recent inversion of the US yield curve spooked many and got a lot of media attention. When long-term interest rates fall below short-term rates (3 month) it is known as yield inversion. Financial institutions borrow at the short end of the yield curve and lend based on10 year bond yield. During the inverted yield curve times financial institutions have less incentive to lend funds. However, short term interest rates in the Euro region are below zero, financial institutions in the US can easily borrow funds from Europe and continue the lending process.

In this highly integrated world yield curve inversion in the US has relatively less impact due to steep yield curve at other major global economies.

The Spread between 2 year and 10-year government bonds in Germany is 54.3 basis points, in the UK it is 34.4 basis points, in Italy it is 200 basis points, 55 basis points in Russia, 77.7 basis points in India and 44.5 basis points in China. It is a clear sign that the global economy is still humming.

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Yield inversion means not the end of the economic expansion, but a clear warning sign the US is heading for contraction in a year or so. After a decade of the expansion, it is natural to assume the economy may take a breather for a few months in the future. How soon? Probably not in the very near term.

The unemployment rate is historically low, consumption is at the highest level, and wage growth is higher than average due to the shortage of labor. Lower corporate taxes and private capital investments are still fueling the growth.

However prolonged government shutdown, the pace of interest rate raised by Fed in 2018, and tariff war with China have slowed the pace of the growth. Change in the Feds outlook on interest rates and bipartisan support for infrastructure spending are a couple of positive signs to support the future slow-paced economic expansion.

 

Yield curve inversion is the harbinger of the recession?

Not necessarily. There are many other economic indicators along with yield curve predict the future of the economy including the unemployment insurance claims, weekly hours in the manufacturing, manufacturing new orders, private house building permits, and consumer confidence.

There is no significant change in the new housing permits; recent weekly unemployment claims were at 221,000 that is 9,000 below the estimate. Average weekly manufacturing is stable, and consumer confidence is slightly negative in March.

Conference Board leading economic indicators combines multiple forward-looking indicators including the yield curve and reports the aggregate index. Historically, leading economic index starts dropping ahead of the recession gives a clear warning on how the future economy is going to be. As per the recent Conference Board report, LEI continued to expand despite the government shutdown and nasty snow storms. Leading economic indicators are pointing high at most of the global economies including China, Europe, Brazil, Australia, and India.

The exception to the rule is both UK and Japan. Understandably, uncertainty over Brexit making the capital outflow from the UK. US-China trade war, political uncertainty in Europe due to Brexit affecting export-oriented Japanese economy.

Overall, the global economy is moving forward at a nice pace at China, India, and Brazil and slower pace in Europe and healthier pace in the US.  2019 is the third year of the Presidential term. Historically the third year of the presidential term is always good for the market. (https://www.linkedin.com/pulse/18-percent-solution-sreeni-meka/). Looking at the big picture like infrastructure spending and possible US-China trade concessions, the markets in 2019 may leap forward despite the fears of the yield curve inversion. In the meantime stay invested in the market.

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References:

Building Permits: https://www.census.gov/construction/nrc/pdf/newresconst.pdf

Unemployment claims: https://www.dol.gov/ui/data.pdf

Average weekly hours of manufacturing: https://fred.stlouisfed.org/series/AWHMAN

Consumer Confidence: https://www.conference-board.org/data/consumerconfidence.cfm

Leading Indicators: https://www.conference-board.org/pdf_free/press/US%20LEI%20-%20press%20release%20MARCH%202019.pdf

Yield Curves: http://www.worldgovernmentbonds.com/

 

Sunday, 09 December 2018 23:32

Irrational Markets

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Markets are irrational, often run by greed and fear. Now fear is dominating the market; some are dumping the stocks at the wrong time. All economic indicators are pointing positive trend, and there is no recession visible on the horizon. When it rains, it pours. For the past three weeks, markets are sliding downwards. Bear markets never start without recessionary symptoms just like storms never come without the dark clouds.

 

The recent dip has made many nervous, knowing the difference between short-term market jittery and a bear market might help calm the worries. A bear market is a prolonged, fundamentally driven, broad market decline of negative 20% or greater—while a correction is a short, sharp, sentiment-driven drop exceeding negative10%. The difference in the cause is critical. Bear markets have fundamental drivers can be identified as they materialize. Corrections are functions of mass sentiment or psychology. As such, it may make sense to reduce stock exposure if you see significant negative surprise others miss and believe a bear market is underway. Reacting to corrections—however tempting when fear swells—can wreak havoc on long-term returns.

Anytime you hear about the recession, keep in mind a few facts. A drop in average weekly hours, a spike in unemployment claims, a sudden drop in manufacturers' new orders, the narrower gap between the 10-year treasury bond and fed funds. None of these indicators showing signs of caution. Right before the recession yield curve inverts that is short-term rates go higher than 10-year rate. For the past year, the gap has been narrowing between the 10-year bond and fed rate. However, the 10-year rate is also going up along with the fed rate. 

Stronger third-quarter earnings but poor market reaction:

As per the FactSet, to date, 48% of the companies in the S&P 500 have reported actual results for Q3. Companies are outperforming recent averages on the earnings side and performing in line with current norms on the revenue side. Regarding earnings, the percentage of companies reporting actual EPS above estimates (77%) is above the 5-year average. In aggregate, companies are reporting earnings that are 6.5% above the forecast, which is also above the 5-year average. Regarding sales, the percentage of companies reporting sales above estimates (59%) is equal to the 5-year average. In aggregate, companies are reporting sales that are 0.8% above estimates, which is slightly above the 5-year average.

Though emotionally difficult, short-term market volatility is a normal and healthy part of bull markets. The best course of action for investors is to remain disciplined and avoid making knee-jerk decisions that often result in investment errors. Current fears—trade wars, slowing earnings growth, interest rates are old, re-hashed, or misguided and lack material surprise power for stocks. In our opinion,the bull market should continue as still robust fundamentals, gridlocked governments, and far-from-euphoric investor sentiment push future stock prices higher. 

Published on: October 30, 2018

 

Sunday, 09 December 2018 23:20

The 18 percent solution

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Historically the third year of the presidential term has always been good for the markets; even better if it is the first presidential term. Officially the campaign for the presidential election kick starts right after the midterm elections. With the hung congress, and positive economic momentum with reduced corporate taxes current administration has every incentive to kick-start the trade negotiations with our trade partners and start making market-friendly decisions.

Since 1950, the average third-year presidential term returned 16% market returns and 18% from the November of the election year to the middle of the third year of the presidential term. With GDP growth above three percent, we have more momentum to our economy may yield even higher returns.

If we consider only first term third presidential year the average S&P 500 returns were even sweeter, the average returns were 20.37% and median returns were 20 %. Since 1950, the third year returns in the first term presidential year were never a negative one but averaged 20% and the eight months return from November to mid third year was 19%.

In our opinion, given the state of our economy and the growth prospects and business-friendly policies and recent market correction, we believe the probability of getting good market returns are higher than usual.

Written on:November 7th, 2018