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Tennis Without a Net

Gold’s Crash Outshines the Need for Heat

Equity Auguries?

Special Report: US vs. European Banks CDS

Gold No Longer Worth Its Weight

Tennis Without a Net

Contributor Image
Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Indices existed well before the launch of indexed financial products. The Dow Jones Industrial Average, e.g., goes back to 1896; the first indexed institutional portfolios appeared in the 1970s, the first index mutual fund in 1976, and the first index-tracking exchange traded funds in the 1990s. In all these cases, the index provider was independent of the provider of the index-linked financial product.

We think that this independence is an under-appreciated aspect of the success and growth of indexed assets. There are three distinct steps that separate the investor from the product:

  • Data — price and volume data must first be created (on a securities exchange or otherwise) and aggregated
  • Index — using price data and other inputs, an index is created
  • Product — an investment product is created by linking to an index

Independent index providers (ourselves prominent among them) occupy only the middle stage of this process.

To see why this is important, consider what happens when the second step is combined with either the first or the third. For an example of why combining the first two steps (data generation and index creation) is undesirable, think of the word “LIBOR.” The LIBOR scandals of the last year were only possible because the same entities controlled both the data and the index. An independent provider would have had the ability to audit and challenge the raw inputs, helping to insure the integrity if the index creation process.

Combining steps two and three can be equally problematic, if less obviously so. When the same entity provides both index and product, how can the end user assess the performance of the index portfolio manager? And how can he know whether index construction decisions are being driven by the best interests of the client or by the commercial interests of the product provider?

Investing in an indexed product without an independent index provider is like playing tennis without a net. It may be good exercise, but it’s not the same game.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Gold’s Crash Outshines the Need for Heat

Contributor Image
Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Year-to-Date S&P GSCI is off 6.81%

  • S&P GSCI Gold had its biggest one day loss ever,-9.3%, on April 15, 2013, since its inception on Jan 6, 1978, and hit its lowest level since Feb 2, 2011. The decline was due to worries about central bank sales, especially from Cyprus, but also, from the Fed winding down bond purchases.  However, buying improved from India ahead of the Akshaya Tritiya, a gold buying festival, next month.  Also, the wedding season has started and will continue until June. The S&P GSCI Silver hit its lowest level on April 19, 2013 since Oct 4, 2010.  On April 15, 2013, the S&P GSCI Silver had its 6th biggest one-day drop, 11.3%,  since its inception on Jan 5, 1973.
  • Weak economic data including cooling factory activity and a rise in jobless claims drove the S&P GSCI Energy down 2.9% last week for a total loss in April of 8.8%.  The S&P GSCI Unleaded Gasoline lost 11.3% MTD after the U.S. Energy Information Administration reported gasoline demand was at a 16-year low. Despite the fall across the energy sector, the S&P GSCI Natural Gas added 4.1% last week bringing the MTD and YTD returns up to 9.2% and 26.7%, respectively. continues to rally from cold weather and high electric power sector demand, especially as stricter environmental rules make coal burning more expensive.
  • Cold weather also increased demand for warm drinks like hot cocoa and coffee as better-than-expected first-quarter North American cocoa grindings rose nearly 6%. Also, Brazil’s coffee areas have moved northwards, so the frost may not affect the crop as much as in past years as the frost-risk period approaches. To sweeten the softs, the harvest of cane and output of sugar was slowed by a very rainy start to April. The S&P GSCI Cocoa, Coffee, and Sugar, are up 6.7%, 2.6%, and 1.3%, respectively MTD.

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Index Performance through April, 19, 2013

 

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The posts on this blog are opinions, not advice. Please read our Disclaimers.

Equity Auguries?

Contributor Image
Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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The market for credit default swaps is typically not well-understood by equity investors (myself emphatically included).  This is unfortunate, since the price of insuring a company’s bonds (which is what a CDS measures) can sometimes provide insight into the same company’s equity securities.

For example, in September 2012, the S&P 500 financials sector began to open up a large performance advantage over the S&P 500, after running neck and neck with the 500 earlier in the year.  But the relative price of insuring financial sector debt began to cheapen dramatically in May, four months before the start of the equity rally, as shown at http://us.spindices.com/documents/research/iis-leading-indicator-or-confirming-evidence.pdf.

More recently, U.S. bank stocks performed much better than their European counterparts in the first quarter of 2013.  This seems appropriate in view of the continuing supply of Cypriot headlines, although it’s notable that until mid-February the Europeans were in the lead.  But the relative cost of insuring European bank debt began to increase in January – well before the equity markets adjusted.  In anthropomorphic terms, the equity and CDS markets temporarily “disagreed;” the disagreement was resolved in February and March when European bank stocks underperformed (by quite a lot).  (See http://us.spindices.com/documents/research/iis-european-bank-woes-reflected-across-asset-classes.pdf for more details.)

It appears, at least on the surface, that in these two cases movements in CDS prices foreshadowed later developments in the equity market.  Of course two anecdotes do not a summer make.  But the interconnections are none the less intriguing.  In a world of integrated capital markets, equity and fixed income markets probably can’t agree to disagree for long.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Special Report: US vs. European Banks CDS

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The S&P/ISDA CDS U.S. Financials Select 10 Index held steady widening by a diminutive amount [3bps] for the month of March. The same cannot be said for the S&P/ISDA CDS European Banks Select 15 Index whose spread widened by 35bps in tandem with the news of the banking crisis in Cyprus.

Cypriot banks remained closed fo r a week while the general public waited in long lines to withdrawal a maximum of €300 per person, per day, per bank. It has been reported that the Bank of Cyprus may impose a loss of as much as 60% on accounts above €100,000 in holdings. The country’s second largest bank, Cyprus Polular Bank will be split into a “good” and “bad” bank. The Cyprus government has a €l.L.j billion bond maturing in June [3.75% 6/3/2013] for which funds will be needed. European officials have been taking action to avoid any additional debt problems. To date there have been problems with Cyprus, Greece, Portugal, Ireland and Spain which have all required bailouts.

Constituents to the index such as Banca Monte dei Paschi di Siena and Banco Popolare widened by more than lOObps as their BBB- credit rating puts them right on the cusp of losing an investment grade rating. UniCredit bank paper rated ‘BBB+’ widened by an average of l.jlbps. Single ‘A’ rated and above issuer’s spreads also widened t hough not as dramatic as the ‘BBB’ rated issuers. On average the ‘double A’ and ‘single A’ members of the S&P/ISDA CDS European Banks Select 15 Index were 20bps wider and include some key European banking names such as: Bank of Scotland, Barclays Bank, BNP Pari bas, Commerzbank, Credit Agricole, Credit Suisse Group, Deutsche Bank, HSBC Bank, Lloyds TSB Bank, Royal Bank of Scotland, Societe Generale and UBS.

US_V_European_Banks_CDS_Rieger

SP_ISDA_CDS_EuroBanks_15_vs_US_Financials_10

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Gold No Longer Worth Its Weight

Contributor Image
Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Year-to-Date Dow Jones-UBS Commodity Index is off 5.41%

  • Gold, the commodity with the heaviest 2013 target weight in the DJ-UBS CI, no longer is the most heavily weighted commodity in the index, falling from 10.8% to 9.5% since the beginning of the year. The DJ-UBS CI Natural Gas Subindex, the best performer YTD, has now taken over as the most heavily weighted single commodity in the index, rising from a 2013 target weight of 10.4% to 14.7%.
  • Despite the fall across the energy sector, the DJ-UBS CI Natural Gas Subindex added 4.0% last week bringing the MTD and YTD returns up to 9.0% and 25.3%, respectively, as it continues to rally from cold weather and high electric power sector demand, especially as stricter environmental rules make coal burning more expensive. Given the relatively high weight of natural gas, the DJ-UBS CI Energy Subindex is up 4.0% YTD and is the only positive sector in the index.
  • The DJ-UBS CI Precious Metals Subindex, the worst performing sector lost 8.53% this week, causing MTD and YTD returns to be -14.20% and -18.89%, respectively.  DJ-UBS CI Gold Subindex had its biggest one day loss ever,-9.3%, on April 15, 2013 to hit its lowest level since Feb 2, 2011. The decline was due to worries about central bank sales, especially from Cyprus, but also, from the Fed winding down bond purchases.  However, buying improved from India ahead of the Akshaya Tritiya, a gold buying festival, next month.  Also, the wedding season has started and will continue until June. The DJ-UBS CI Silver Subindex hit its lowest level on April 19, 2013 since Oct 4, 2010.
  • To sweeten the softs, the harvest of cane and output of sugar was slowed by a very rainy start to April.  Also, Brazil’s coffee areas have moved northwards, so the frost may not affect the crop as much as in past years as the frost-risk period approaches. The DJ-UBS CI Coffee and Sugar are up 2.6%, and 1.3%, respectively MTD.

Index Performance through April 19, 2013

The posts on this blog are opinions, not advice. Please read our Disclaimers.