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Weekend with the G20

VIX - The Enforcer

SPDJI Teleconference on U.S. Housing Set for February 25th @ 10am EST

Silver Anchors and Pains

Signs of Softness in Housing

Weekend with the G20

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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The weekend meeting of 20 major global economies representing 85% of world GDP called for adding half a percentage point of growth each year to 2018 through renewed and aggressive stimulus.  So far this is talk, but there is a chance for action.  The G20 will convene again in November to show what they’ve done.  Policy shifts and the move to stimulus will be focused on the developed countries – emerging markets will focus on debt and currency issues. Stimulus programs will differ from one country to another. Europe is likely to see renewed calls for more easing from the ECB and more open labor markets.

US picture is different: The Fed is firmly on course to taper QE3 and gradually move to tighter monetary policy, especially after the FOMC mentioned raising interest rates.  As a result the focus will shift to fiscal policy.  This fits with the Administration’s goals to talk about taxes and income distribution and to increase spending in anticipation of the fall mid-term Congressional elections.  With the debt ceiling set aside until March 2015, there is a chance for a fiscal policy discussion that isn’t driven by fears of the deficit.

Stimulus — both domestic and international – should be a plus for the stock market, but probably not a big enough plus to give us a repeat of 2013’s market results.  For fixed income, stimulus and tighter Fed policy mean higher interest rates.

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

VIX - The Enforcer

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Reid Steadman

Managing Director, Global Head of ESG

S&P Dow Jones Indices

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Your portfolio is like a hockey team.  You don’t think so?  It is.  And VIX plays a key role.  Stay with me while I explain.

Equities are your guys playing at center and on the wings.  You expect production from them.  Your team largely lives and dies by how consistently they score.  Bonds are your defensemen.  They come forward to create some additional offense at times, but their key responsibility is minimizing downside risk.  The goalie?  Perhaps not a perfect analogy, but let’s liken him to cash.  Your last line of defense.

Where does the CBOE Volatility Index (VIX) fit in all this?  Yes, if VIX were a hockey player, it would likely be on defense.  But VIX is a special type of defensive player.  In hockey parlance, VIX is an enforcer.

Someone took the time to write up a great description of what a hockey enforcer is.  “An enforcer’s job is to deter and respond to dirty or violent play. . .the enforcer is expected to respond aggressively. . .”  Further, “Enforcers are typically among the lowest scoring players on the team and receive a smaller share of ice time.”  In other words, most of the time you can’t expect much from an enforcer and you may not want to have him on the ice much.  But when it’s time for the enforcer to come to the rescue and protect the team, he does it in a big way — aggressively.

In your portfolio, VIX is your enforcer.  Maintaining a VIX position can be painful.  You would want to be selective as to when to allocate to VIX. But when things get really rough, you want to have VIX in the mix so it can aggressively defend your portfolio’s value, when every other asset class slinks away.

Below is a chart showing the performance of major indices during the last half of 2008, when the equivalent of a major hockey brawl broke out.  You remember it – broken teeth and blood on the ice everywhere.  VIX came to the rescue.  Those who allocated even a small portion of their portfolio to VIX linked instruments got some serious protection.

VIX graph

The 2008 crisis wasn’t the only time VIX stepped up.  Time after time, VIX and the instruments linked to them have responded quickly and in a pronounced way to violent market moves.

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We are still in turbulent times.  If you feel under threat, you may want to hire an enforcer.

 

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

SPDJI Teleconference on U.S. Housing Set for February 25th @ 10am EST

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Dave Guarino

Director, Global Index Communications

S&P Dow Jones Indices

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Join us for a live teleconference on the US housing market on February 25th @ 10am EST. Featured speakers to include Professor Robert Shiller, Professor of Economics at Yale University and David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. Instructions to access the teleconference are as follows:

Net Enhanced and Audio Streaming Info:

https://www.mymeetings.com/nc/join.php?i=PG4463870&p=INDICES&t=c

Or follow manual steps below:

URL: https://www.mymeetings.com/nc/join/
Conference number: PG4463870; Audience passcode: INDICES

Audio Streaming: (Audio Only)

http://event.on24.com/r.htm?e=754248&s=1&k=F4FA5732F644E1C30EAE3504F39A8375

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

Silver Anchors and Pains

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Psychologists have studied feelings of Olympic medalists  for decades to find: “If you set aside the happy people who win gold and look only at the people who come in second and third, it’s the men and women with bronze medals who invariably look happier than the athletes who won silver.”

To investors who have studied behavioral finance, it is no surprise that the silver winners feel like gold losers. In economics, we call this framework loss aversion and it implies that one will feel more pain from a loss than happiness from a gain.

Whether a transaction is framed as a loss or as a gain is very important. For example, would you rather get a $5 discount, or avoid a $5 surcharge?  The same change in price framed differently has a significant effect on consumer behavior. Though traditional economists consider this “endowment effect” and all other effects of loss aversion to be completely irrational, that is why it is so important to the fields of marketing and behavioral finance.

The concept of loss aversion was first demonstrated by Amos Tversky and Daniel Kahneman. Later, in a publication by John Dawes, (Price changes and defection levels in a subscription-type market: can an estimation model really predict defection levels ?” Journal of Services Marketing Vol 18 No. 1 2004.), the effect of loss aversion in a marketing setting was demonstrated in a study of consumer reaction to price changes to insurance policies. The study found price increases had twice the effect on customer switching, compared to price decreases.

Silver’s performance, up 14.5% MTD and 13.0% YTD through Feb 18, 2014, may be causing the same feelings of anxiety, depending on how it’s framed. Suppose an investor picked silver as the commodity of choice in February, it seems like a winning choice.  However, it is only the second best performing commodity in the S&P GSCI, behind coffee, which gained a whopping 21.7% this month. The chance this investor is happy to have picked the second best commodity might not be so high since the mind frame may be a loss of 7.2%.

Another irrational behavior in finance is called anchoring. Anchoring which was also described by Tversky and Kahneman, occurs when people make estimates by starting from an initial value.  For example, in the Olympics, if two athletes competed in the 2010 games and one won a gold and the other won a bronze, then they both won silvers in 2014, the athlete who dropped from gold to silver might be more unhappy than the athlete who improved from bronze to silver.

Notice in the the chart below, there may be different feelings about holding or selling silver today based upon the price of purchase.  However, the irrational behavior is that it shouldn’t matter what the purchase price was considering the decision going forward to buy, hold or sell should be based on today’s price in relation to the future and not the past. An investor that bought silver in Oct 2008 may be feeling regret that s/he did not sell at the high in April 2011, and rather than being happy over a 125% gain is feeling upset over a 55% loss.  On the other hand, if an investor bought at the beginning of 2014 and has gained 13%, s/he may be feeling elated, and that of course is only if s/he is not sorry to have missed out on coffee.

Source: S&P Dow Jones Indices and/or its affiliates. Data from Jan 1973 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance.
Source: S&P Dow Jones Indices and/or its affiliates. Data from Jan 1973 to Feb 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance.

 

 

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

Signs of Softness in Housing

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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The National Association of Home Builders sentiment index for February, reported yesterday dropped sharply to 46 from 56 in January and an average of 51 for 2013.  A reading above 50 means more builders view the market as favorably than as unfavorable.  Housing permits and starts for January were reported this morning and are also disappointing.  Permits were down 5.4% from December overall and down 1.3% for single family homes. Total permits are up compared to January 2013 but single family units are flat.  Housing starts were weaker than permits with total starts down 16% from the previous month and off 2% from a year earlier. For single family units, the monthly drop was 15.9% and the year earlier decline was 6.7%.  The Mortgage Bankers Association index of mortgages for purchase is down 27% from its peak last May and down 16% from its recent peak on January 10th.

Housing is not about to collapse into another bust, but it is due for a pause after a strong rebound since the first half of 2012. A small portion of the softness may be due to extremely cold and snowy weather in the eastern half of the country. However, some of the weakness is more fundamental.  Having led the economy into recovery, albeit later than we would have liked, housing must now depend on gains in income and employment for its next upward leg.

housing

Further indications of housing can be seen in the past stock market performance of the S&P Home Builders Index (the red line) compared to the S&P 500 (the blue line).

More data will be forthcoming this week and next including existing and new home sales and the S&P/Case-Shiller Indices for December next Tuesday morning, February 25th.

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