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Tracking Activist Hedge Fund Activities

Probability of Fed Rate Hike in September Rises

Asia Fixed Income: Weakening Ringgit Triggered Bond Outflow

Timing Gold Is A Fool’s Errand

Is There A Doctor (Copper) In The House?

Tracking Activist Hedge Fund Activities

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Todd Rosenbluth

Director of ETF and Mutual Fund Research

S&P Capital IQ Equity Research

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As my S&P Capital IQ colleagues recently noted we have reached a golden age of investor activism. In the past five full years, activist engagements increased fourfold. The success of investor activism has helped these firms both attract more capital and deliver greater returns as their principals now regularly make news and headline events.

The S&P U.S. Activist Interest Index is designed to measure the performance of companies within the S&P U.S. BMI that have been targeted by an activist investor, as defined by S&P Capital IQ, within the last 24 months. The activist must have at least a 5% equity stake, determined through SEC Form 13D filings and the target company must have a minimum three-month average daily value traded of $20 million.

The index launched in April 2015 and as of July 2015 had 67 constituents. The index had 32% in consumer discretionary and 17% in industrials. Some consumer discretionary constituents included Interpublic Companies (IPG) and Crocs (CROX). 

S&P Capital IQ does a quarterly review of the activities of the top-10 hedge funds that collectively manage $200 billion in assets. During the second quarter, the consumer discretionary sector experienced the second most buying activity. The $2.4 billion for the sector was behind only the $7.2 billion for the health care sector.

According to my S&P Capital IQ colleague Pavle Sabic, who published the Hedge Fund Tracker research, among the top 10 top purchases, four companies were in the consumer discretionary sector. They were JD.com (JD), Netflix (NFLX), Amazon.com (AMZN) and Starwood Hotels & Resorts Worldwide (HOT). Meanwhile Rolls Royce (RYCEY) was the lone industrials sector constituent in the top 10.

There are a few ETFs that seek to replicate the holdings of hedge funds.

Please follow me @ToddSPCAPIQ to keep up with the latest ETF Trends

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

Probability of Fed Rate Hike in September Rises

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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The FOMC released the minutes of its July 28-29 meeting earlier today.  While there was no discussion of raising the Fed funds target at the July meeting, all agreed that economic conditions are improving and that the labor market is getting stronger. The inflation rate is below the Fed’s 2% target and will be watched closely.  Most members felt that pressures keeping inflation where it is or pushing it lower are abating. No one expected a further sharp drop in oil and energy prices.   Comparing the members’ comments about the economy as it was when they met to more recent releases on GDP, industrial production and housing starts reveal an improving economy.  There appears to be a growing consensus for a move towards raising the fed funds rate.  One member of the committee noted that further increases after the initial move should gradual.

However, all the data aren’t in yet.  The next FOMC meeting is on September 17th. Before then we will see another employment report, another personal income and spending release with the Fed’s preferred inflation indicator, the personal consumption deflator and several other data releases.  FOMC decisions will depend on the upcoming data.

The economy is improving, inflation isn’t falling, the Fed wants to begin normalizing monetary conditions and the policy tools are all in place.  It looks more and more like September will see the first move up 2006.

Those expecting the Fed to delay any move because of the rising US dollar, Greek debts or Chinese stocks were disappointed by the minutes – there were some comments but no suggestion that foreign developments would get top billing and sway Fed policy.

As the chart shows, Its been a long time…

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

Asia Fixed Income: Weakening Ringgit Triggered Bond Outflow

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Michele Leung

Director, Fixed Income Indices

S&P Dow Jones Indices

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Malaysian ringgit continued the plunge and hit a 17-year low.  The offshore holding of Malaysia local government debt also fell with the heightening FX volatility and declining FX reserves.  The S&P Malaysia Bond Index dropped 1.27% in August, bringing year-to-date (YTD) total return to 1.66%. Its broader benchmark, S&P Pan Asia Bond Index, aggregates the returns from 10 countries in Pan Asia and calculated in USD, dropped -0.56% YTD.

Nevertheless, Malaysia has better fundamentals comparing with other Asian countries.  Malaysia has been assigned solid credit ratings of A-/A3/A- . It also released better-than-expected 2Q15 real GDP growth at 4.9% y-o-y.

In fact, the Malaysian bond market almost doubled its size from 2007 to currently MYR 423 billion. Similar to other Asian bond markets, the corporate bond market expanded rapidly from a merely 5% to 15% of the overall market.   Among the corporates, over 90% of exposure belongs to financials sector, with popular names like Malayan Bank, CIMB Bank, Public Bank and RHB Bank.

Looking at the yield performance, the yield-to-maturity tracked by the S&P Malaysia Bond Index has widened 17bps YTD to 4.14%, as of August 18, 2015. The yields of the S&P Malaysia Government Bond Index and S&P Malaysia Corporate Bond Index currently stand at 4.02% and 4.78%, respectively.

Exhibit 1: Market Value

Source: S&P Dow Jones Indices LLC. Data as of August 13, 2015. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance.
Source: S&P Dow Jones Indices LLC. Data as of August 13, 2015. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance.

Exhibit 2: Yield-to-Maturity

Source: S&P Dow Jones Indices. Data as of August 13, 2015. Charts are provided for illustrative purposes. This chart may reflect hypothetical historical performance. The S&P Malaysia Bond Index and country subindices (the “Index”) were launched on March, 12, 2014. All information presented prior to the launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past Performance is no guarantee of future results. Complete index methodology details are available at www.spdji.com.
Source: S&P Dow Jones Indices. Data as of August 13, 2015. Charts are provided for illustrative purposes. This chart may reflect hypothetical historical performance. The S&P Malaysia Bond Index and country subindices (the “Index”) were launched on March, 12, 2014. All information presented prior to the launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past Performance is no guarantee of future results. Complete index methodology details are available at www.spdji.com.

 

 

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

Timing Gold Is A Fool’s Errand

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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“I don’t agree with you Jodie…..Gold is in a bear market….too early to put some money in the yellow metal….” is a comment from the article recently posted by the Economic Times asking the question, “Where do you see the gold prices making a bottom as every fundamental turns unfavorable for gold?” 

We love your comments expressing your opinions about where the market is and where it’s going, just as much as we love to share the history lessons told through our indices.

Let’s pretend today is sometime in the middle of 1981. President Reagan just established the Gold Commission that rejected returning the U.S. to a gold standard. The Fed raised rates to 20% and inflation fell. But that created a recession. Gold investors lost about half their asset values. They wondered, “Had gold reached its bottom?”

1981 Gold

To understand the answer to this question, investors might consider the underpinnings of the prior bull run of over 400% that started when Nixon took the dollar off the gold standard in 1973. Inflation tripled, the dollar crashed, and after years of erratic monetary policy, investors piled into gold as a safe haven. The perfect environment for gold ended and investors wondered about the future of gold without these supports.

For the next 20 years, gold lived through mostly expansionary periods. Even as investors abandoned gold for stocks, gold didn’t fall much further.

2001 Gold

Not until Sep. 11, 2001, did fear ripple through the market, triggering the flight to safety into gold again. The drivers of inflation and a weak dollar that supported gold through the 1970’s bull run were back. These factors plus the global financial crisis and worries about government reform led gold to a record high. Such forces in addition to the growing popularity of the gold ETF as a new way for investors to access gold sent gold soaring more than 600% over the next ten years, until Aug. 2011.

As worries eased, investors fled gold once again. However, many in this selloff have no memory of the 65% drop that happened in 1981-82. Currently, gold has only lost 45% since its peak four years ago, but the majority of the loss happened in 2013 when gold dropped 28%, the most since 1981.

Source: S&P Dow Jones Indices
Source: S&P Dow Jones Indices

It is difficult to predict where the bottom is but the last time gold dropped this much it took over 25 years to recover. It certainly diminishes the importance of identifying the bottom even if the bottom has been reached.

Gold would need to drop another 40% from current levels in order to match the 1981-82 drawdown, so it wouldn’t be surprising to see gold fall further. Investors need to look to underpinning fundamentals again to understand gold. Poor economic data from China, inflation under control, low interest rates plus gold’s diminished status of a safe haven are not promising. Investors continue to flee as evidenced by recent record outflows. If interest rates rise again that may help gold futures since the collateral return increases but there may be outflows in lieu of income producing securities.

Since most single factors like inflation, interest rates, jewelry demand, oil prices, geopolitics and U.S. dollar strength don’t alone move gold, they are unreliable indicators of gold’s prices. However, one statistic that is pretty solid through time is that gold is uncorrelated to the stock market. On average, the 12- month correlation is zero but even on short intervals of rolling 90 days the correlation doesn’t ever exceed 0.6.

Gold 500 Correl

Once again, timing gold doesn’t necessarily matter. Gold is not always owned for high returns but instead serves to protect against a drop in other assets like stocks. It has held up in times of inflation and may hedge against other risks like geopolitical risk that hurts stocks. Investors looking for diversification and capital preservation may use gold in a portfolio framework at any time.  Now is as good of a time as any to invest in gold given its recent drawdown and the strong stock market performance over the past several years.

Again, we’d love to hear your thoughts. Do you think now is the right time to buy gold? Or do you agree with the comment above that it’s too early to buy gold?

 

 

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

Is There A Doctor (Copper) In The House?

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Copper, the most important commodity in the world, has earned the title of “Dr. Copper” for predicting economic health. Today, TD Ameritrade ran an article claiming Dr. Copper Is In, questioning whether copper hinted last year at the current slowing global growth. While prior research shows Dr. Copper is not so smart, copper is still important and has some areas of specialties like inflation hedging.

Below is a recent Q&A with TD Ameritrade on Dr. Copper to drill into its role as the most important metal:

Why is copper such an important industrial metal? What are some of its uses world-wide?
Copper is the biggest metal in commodity indices with a greater world production and liquidity than any other metal. It comprises about 10.5% of the Dow Jones Commodity Index (DJCI) and just over 3% of the S&P GSCI. One-third of the DJCI is metals where the individual metals are weighted by average liquidity over 5 years. Inside the DJCI, copper is slightly bigger than gold and more than twice as large as the next biggest industrial metal, aluminum. The S&P GSCI is world production weighted where copper is about 1.5 times bigger than both gold and aluminum.

Copper has desirable characteristics as an industrial metal since it is malleable, a good conductor of heat and electricity, and is resistant to corrosion. This makes copper highly demanded for wiring and plumbing in construction, heating and cooling systems, electronic products and in automobiles. Further, it is an important metal in alloys such as brass, tin and with nickel. It improves malleability and acoustics for musical instruments plus does not corrode so is beneficial for shipbuilding.

Why does copper have a nickname: “Dr. Copper?” What is behind the idea that copper is an important predictive indicator for global economic activity?
Copper is reputed to have earned a Ph.D. in economics because of its ability to predict turning points in the global economy. This is since copper is so broadly used across industries from building construction, machinery, power generation and transmission, electronic product manufacturing and in transportation vehicles. The thought is as the demand for copper rises, its price likely increases and suggests a growing global economy. Conversely, declining copper prices may indicate sluggish demand and an imminent economic slowdown.

Who are the world’s top copper consumers?
China has the highest demand for refined copper that is about double Europe’s and roughly 4 times more than the US. The total global refined copper demand in 2014 was just over 20,000 MT with about half coming from China.
Source: http://www.businessinsider.com/copper-demand-by-region-2015-1

Who produces copper?
It’s estimated that Chile produced about 5.80 million tonnes or roughly 1/3 of the world’s copper in 2014. China, Peru, US, Congo and Australia are other big copper producers with 1.62, 1.40, 1.37, 1.10 and 1.00 million tonnes estimated in 2014.
Source: http://minerals.usgs.gov/minerals/pubs/mcs/2015/mcs2015.pdf

Copper prices have fallen significantly recently —what has been pressuring the copper market?
Many influences have been pressuring copper on the downside recently. There is uncertainty over China’s demand even though the numbers showed a 7% growth versus a 6.9% consensus. The fall in the Chinese stock market may also potentially hinder growth. This combined with the Greek crisis and increasing U.S. CPI (Consumer Price Index) has added strength to the U.S. dollar that is another headwind for copper, making it more expensive for buyers holding other currencies.

What if anything does the recent softness in copper prices reflect about global economic activity?
The stronger U.S. dollar exacerbates the softness in copper in addition to weak economic activity. Copper prices may reflect more weakness in the housing and construction industries and to a lesser degree the automobile sector, but it may not reflect as much about other areas of the economy. Also, the fall in oil prices in the past year has cut GDP growth for many of the oil producing countries that may slow the demand for copper as emerging countries take longer to develop. Finally, the supply side matters as adjustments may be made according to inventories and demand.

How important is Chinese economic growth to the copper market?
Considering China is the biggest copper consumer, Chinese economic growth is important to copper. However, on a per capita basis, Chinese consumption of copper is still only about half of North American consumption. This makes copper particularly likely to increase with increases in Chinese demand. Other factors on the supply side that may be seasonal, regulatory, or financial also influence the copper market.

What is the current supply/demand balance for the copper market? Is it a market out of balance?
Copper inventories been building, reaching short term highs. However, over the longer term, the 5-year LME Copper Stocks are still relatively low. The roll yield turned negative just this month indicating excess inventories; though on average for the year the roll yield is positive that measures shortages.

In Q1 2015, ICSG (International Copper Study Group) reported usage declining around 3% with a 4% drop coming from China. World mine production increased around 1.5%. In total, the world refined copper balance in Q1 adjusted for the change in Chinese bonded stocks indicates a production surplus of around 182,000 mt, compared with a deficit of around 70,000 mt in the same period of 2014, the ICSG said.

Does copper have a strong correlation to global GDP? Or does it have a strong correlation to any other economic trend or market?
S&P DJI research finds that Dr. Copper is not so smart. The supply side of copper is extremely important in its price formation so we find the historical correlation of copper to world GDP growth of only about 0.4. Further, it seems copper holds up well during weak recessions, up about 7% on average in weak recessionary years, but it only falls dramatically, about 30% on average in periods of strong recessions.

Copper returns are positively correlated to both expected and unexpected inflation, though the correlation to unexpected inflation is more significant. The sensitivity of copper to expected and unexpected inflation is relatively high with betas (or slopes of the regression) of 24.5 for expected inflation and 38.6 for unexpected inflation.

Please see more on our research at:
https://www.indexologyblog.com/2014/03/09/how-smart-is-dr-copper/#sthash.BtQwVI0f.dpuf
http://www.spindices.com/documents/research/research-taking-a-shine-to-copper-20120731.pdf

For stock traders, what information could that glean from watching the copper market?
Despite a ten-year annualized total return that is very similar as measured by the S&P GSCI Copper, up 8.4%, and S&P 500, up 7.9%, there is very little relationship between the two. The volatility of copper is about twice that of the stock market and the ten year correlation between copper and the stock market is only 0.196 and longer term back to 1977 is .0304. If anything, copper diversifies stock market exposure.

To learn more about commodities today and to hear more expert opinions on copper, please register for our annual commodities seminar coming on Sep. 17, 2015.

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