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The New Fed! Yellen' About Commodities

What’s a Normal VIX Level?

The Power of Dividends: Preferred Stock

Beware the Snows of January

Treasury yields remain lower for the start of 2014

The New Fed! Yellen' About Commodities

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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As we all know by now, Ben Bernanke is gone. He was focused on not having a depression on his watch so he pulled out all kinds of never-before-tried policy tools. Consequently, Janet Yellen will have to cope with the unintended consequences of QE — namely big unrealized losses in the Fed’s bond portfolio. 

Recently, I had the privilege to sit down with Bluford Putnam, Managing Director and Chief Economist, of our partner, CME Group, to discuss how the Fed under Yellen will be different from Bernanke’s Fed.

Although Yellen is also a strong advocate for the traditional Fed culture, which balances inflation and employment goals, she is likely to move to a more “hawkish” position if inflation pressures were to rise unexpectedly, at least from her point of view. Given her specialty in the labor markets, she is likely to focus in much greater detail in all areas of the labor markets, not just headline unemployment but also duration of unemployment, turnover of jobs and part-time employment. She wants to see who got fired versus who left their job voluntarily since a voluntary move may reflect confidence to secure another job, possibly indicating greater market confidence.  By evaluating the numbers in greater depth than the prior Fed, Yellen will use her insight into the labor markets as the starting point to forecast inflation.  While she doesn’t want inflation more than anyone else, her way may be different of finding the indication.

Another key difference in the New Fed is the addition of the new Vice-Chair, Stanley Fischer. He is the former head of the Israeli Central Bank, a former MIT Professor (Bernanke studied under Fischer), and brings an international view that has been missing at the Fed since Robert Heller retired from the board 20 years ago.  The policy implications for the US dollar and other currencies and central banks may get some much needed attention that has been absent for decades.

When Bernanke adopted QE, he made the asset size of the Fed’s balance sheet huge so its importance to the economy and to politicians has increased dramatically.  Possibly as a result of that, the second confirmation vote in the Senate (2010) had more dissents than any previous vote.  That trend followed through to Yellen.  According to Putnam, The Fed Chair is going to be a very divisive appointment in Jan-2018 when Yellen terms is up.  On the way, as members of the Board of Governors leave their posts, each new appointment may face greater political scrutiny and polarization in the US Senate.

For more on the New Fed, my colleague, David Blitzer, also posted some of his New Fed insights earlier this year.

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

What’s a Normal VIX Level?

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Reid Steadman

Managing Director, Global Head of ESG

S&P Dow Jones Indices

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Someone asked me this last week: “What’s a normal or typical VIX level?”  That’s a good question.  Here is the answer: 20.2.

And 17.1.

And also 13.0.

Before I go into why it takes at least three numbers to answer this question, let me remind you that the history of the CBOE Volatility Index (VIX) looks like this:

VIX Daily Levels

Figuring out the normal VIX level is akin to figuring out how high Alaska, my home state, is above sea level.  A skilled topographer could determine an average for the whole state, but this statistic would be skewed by Mount McKinley and the other huge mountains in the Last Frontier.  But an average is still useful to know.  For VIX, the average daily closing value for the 10 years ending December 2013 was 20.2.

When people worry about outliers skewing the average, they often turn to the median.  This is the second number I introduced: 17.1.  If you were to order the 2,517 trading days over the last 10 years by their closing VIX value, 17.1 would be next to the 1,259th observation, the middle one.

Finally, you may want to know the mode.  The closing VIX value that showed up most – after rounding to the nearest whole number – was the last number I introduced, 13, followed by 12 and other levels just higher than those (see chart below).  This surprised me.  I would’ve guessed higher.

Closing VIX values - Jan 2004 - Dec 2013

To go back to the Alaska analogy, if you were to trek across that state, you would spend most of your time trudging through tundra, navigating lakes and rivers, and hiking small and medium sized mountains.  You would want to prepare mostly for this.  On rare occasions, though, you would come across a breathtaking mountain that would lodge itself in your memory and define your experience.

VIX works in a similar way.  Lots of the mundane, but then peaks you won’t soon forget.

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Related posts:
You’ve seen VIX. Now finally learn what it means
Turn VIX into information you can use
Where VIX comes from

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*By the way, the mean elevation of Alaska is 1,900 feet.  Mount McKinley is 20,320 feet.

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

The Power of Dividends: Preferred Stock

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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Similar to fixed income securities, the U.S. Preferred Stock market has started 2014 with positive performance. The S&P U.S. Preferred Stock Index  (Total Return) ended January 2014 up 2.68% .  A good start given the S&P 500 Index (Total Return) was down 3.46%.  As a fixed income comparison the S&P/BGCantor U.S. Treasury Bond  7-10 Year  Index was up 2.98% for the month.

Looking back over a longer period the price return (excluding dividends) of the index declined 5.42% for the twelve months ending January 31st.  The dividend yield of the S&P U.S. Preferred  Stock Index ended January at slightly over 6.9%.   The net result was a positive return of 1.23% during that twelve month period.  Simply put, the dividend income helped keep the returns in positive territory.

The 12 month total returns of both indices are charted below.

12 Month Returns Ending January 2013: S&P U.S. Preferred Index & S&P 500 (Total Return)
12 Month Returns Ending January 2014: S&P U.S. Preferred Index & S&P 500 (Total Return).  Data as of January 31, 2014. Source: S&P Dow Jones Indices.

Over the five year period ending January 31, 2014, the S&P U.S. Preferred Stock Index had a five year annualized return of over 17.6% while the S&P 500 returned over 19.1%.  The five year total return values for both indices are charted below.

Five Year Returns Ending January 2014 of the S&P U.S. Preferred Stock Index and the S&P 500 Index (Total Returns)
Five Year Returns Ending January 2014 of the S&P U.S. Preferred Stock Index and the S&P 500 Index (Total Returns).  Data as of January 31, 2014.  Source: S&P Dow Jones Indices.

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

Beware the Snows of January

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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The equity markets are getting nervous with the S&P 500 almost 6% off its high, foreign equity markets down at least that much or more and emerging market currencies slipping and sliding.  Normally in such moments there are two opinions: the correction is here versus the economy is solid so don’t worry.  Were the weather warm and sunny, the don’t worry advice would probably rule the day.

The problem is that this winter in much of the US it is unseasonably cold, wet and snowy and that will chill the economy.  Auto sales for January were down from December and below analysts’ forecasts. The ISM Manufacturing Index was down from 56.0 to 51.3 while the ISM Prices Paid series popped up to 60.5 from 54.0.  All negative news for the markets.  Economic releases often seem to follow the herd – if a few indicators are weak early in the monthly cycle, the rest of that month’s reports are as bad or worse. There are a couple of explanations for this pattern. First, on a month to month basis, the weather really does matter.  Shopping days lost to snow and rain means excess inventories which mean reduced orders.  Further, most of the data series are a mixture of hard numbers and estimates in the initial release; after a month or two there are revisions.  The next few economic reports may be no better.  Add to this the Fed’s continuing roll back of QE3 and it looks like the economy won’t do anything good for the markets.

There may be one reprieve on the horizon: Friday’s employment report for January including payroll growth, the unemployment rate and annual revisions to the payroll survey.  December was a weak report and many argued that it was far weaker than reality, so we could see a bounce back in this release.  The annual revisions are likely to boost the numbers for 2013 as well. The unemployment rate is less followed than the growth in payrolls and for now that may be just as well.  The unemployment rate has been dropping not because people are getting jobs, but because they are leaving the labor force.  In any event, the predictions seem to be around 185,000 to 190,000 for payrolls and little change in the unemployment rate.

As to whether the market is correcting or just suffering from the January snows, only time – and hopefully a warmer February – will tell.

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

Treasury yields remain lower for the start of 2014

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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  • Counter to the thinking that tapering would drive yields higher; Treasury yields have remained lower for the start of 2014.  Additional collateral needs to meet regulatory requirements; risk-off trading and economic uncertainty in emerging market countries such as Turkey have temporarily kept rates lower than the start of the year.  It remains to be seen how long this trend will last as this morning’s Treasury yields are even lower as the ISM Manufacturing number is a 51.3, lower than the forecasted 56.
  • Looking ahead at more of this week’s economic numbers is Tuesday’s December Factory Orders (-1.8% expected) and Wednesday’s MBA Mortgage Applications (-0.2% prior), along with the ADP Employment Change (190k expected, 238k prior).  Thursday’s Initial Jobless Claims (335k expected) will lead into Friday’s Unemployment Rate which is expected to remain unchanged at 6.7%.  These numbers will either solidify the view of an improving economy or could compound doubts about the strength of the economic recovery.
  • The yield on the S&P/BGCantor Current 10 Year U.S. Treasury Bond Index closed at 2.65% for last week as the index returned 0.68% on the week and closed the first month of 2014 at a 3.54%.  The 10-years yield is a much lower level than where it began the year (3.03%).
  • The S&P U.S. Issued Investment Grade Corporate Bond Index closed last week with a return of 0.33% and finished the month returning 1.92%.  The positive performance was spread out amongst the varying issuers of this broad index as investors sought value in the higher credits.
  • High Yield as measured by the S&P U.S. Issued High Yield Corporate Bond Index ended the week down -0.03%, returning only 0.76% for January.  The S&P/LSTA U.S. Leveraged Loan 100 Index experienced similar performance closing the week -0.08% and the month at 0.62%.  In addition to general selling, energy issuer TXU’s performance negatively impacted both the high yield and loan indices.
    2014Jan 10yr Treasury YTW

 Source: S&P Dow Jones Indices, Jan. 31, 2014

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