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Bonds turning negative. Real Estate closely watched.

By Posted on In Trend Updates, Uncategorized

During our last trend update, we wrote about trends starting to change in bonds. While US bonds have not maintained a clear direction for the past few months, we were pleased with the performance of emerging market debt and many actively managed funds. In a rather sudden series of events, many of the trends changed direction and turned negative resulting in several funds being sold off early last week.

We attribute this turnaround to a few factors:

1) Rising US Treasury yields.

2) Speculation that the Fed will reduce bond purchases.

3) Fed indications that it will raise rates if the economy continues to improve.

Real Estate has experienced a strong pullback over the last few weeks. Looking over the course of the last 10 months, it is still a positive trend. But this trend could be changing soon, like bonds have.

 

Trend Updates: May 2013

By Posted on In Trend Updates, Uncategorized

The Active Asset Allocation Portfolio utilizes a trend following strategy by buying and selling securities based on established price trends in each asset class. Below is a snapshot of the current trends we are following:

US Equities:

The trends in US Equities have continued a positive trajectory and have strengthened even further. Kiplinger believes that “the underlying fundamentals are sound” but admit that the“pace of gains is bound to slow” and “a correction is due”. The trend will most likely not continue at this pace, although we expect this trend to be positive for the rest of year..

We are watching a few opportunities develop within certain sectors. Specifically, we have recently added to the technology sector of our existing holdings.

Foreign Equities:

This asset class is starting to show signs of a positive trend developing throughout the asset class. We recently wrote (LINK) about a divergence in the performance between emerging markets and developed markets – where emerging markets were declining while developed markets improved. But for the last month or so, these two markets have at least been moving in the same direction, bucking the unusual trend we have seen develop at the end of 2012.

If the trend in emerging markets continue to strengthen, we would likely add a small position.

Bonds:

The trend continues to remain flat, which we noted at the end of the 1st quarter (LINK) and last month (LINK). While the threat of rising interest rates looms over us, it probably won’t happen this year. But If interest rates were to rise, we see bonds responding in different ways.

1) The value of the existing bonds would decline and, given how the markets have been performing, interest rates will likely go up rather than stay put (they can’t get much lower, either).

2) Municipal bonds could offer more protection and can provide tax benefits, although their value could go down quickly.

3) GNMA securities, mortgage pools guaranteed by the government, could be a better option compared to the previous two.

4) Corporate bonds, including “junk” bonds have performed the best over the past few years, although it tends to correlate with the stock market.

5) Emerging market debt continues to be an attractive option as it diversifies our bond holdings. We’ll be touching upon this more next week.

Bottom line, there are a lot of moving parts..

The indexes and ETFs we track have been bumping around the 200 day moving average. Many of our specific holdings in the portfolio have held up well, showing less volatility than the passive indexes due in part to their diverse nature and active management. We are fully invested in this asset class at this time.

Real Estate:

One of our longest held positions continues to perform very well. This asset class has had a few bumps in an otherwise positive trend that has existed for a few years.

Recently, this positive trend has even outpaced that of the overall market.

Commodities:

Our holdings at this time are minimal. Most commodities have been in a negative trend for a few months. We have recently sold out of our positions in gold.

This trend has continued to weaken due in part to the improving U.S. economy. Investors are not fleeing to the safety of precious metals like they have for the past few years. Rather, they are pulling out of gold and other precious metals to go into equities.

Finding a Trend in Emerging Market Equities

By Posted on In Politics & the Economy, Trend Updates, Uncategorized

In reviewing asset class trends for The Active Asset Allocation Portfolio, I saw a divergence of two asset classes – emerging markets and developed markets. I wanted to explore why this is happening.

We find this to be a rather unique situation, as emerging markets tend to be the more volatile cousin of the developed markets. Emerging market highs are higher than developed markets and their lows are lower. But this time is different. Emerging markets had a brief period where their trends were positive compared to the 200-day moving average but struggle to stay above the moving average for a sustained period of time, while the developed markets continue to their positive trend. They’re not moving together, an unusual occurrence. What’s causing the emerging markets to act the way they are is tough to pinpoint, but below are a few obstacles that could be contributing to their sluggish performance.

Obstacles facing emerging markets:

– The United States is re-gaining a competitive advantage by leveraging technology in manufacturing. This is forcing businesses to reevaluate the cost effectiveness of manufacturing in China and other countries that once had a low-cost connotation associated with them. (Source) and (Source)

– The unintended consequences of currency devaluations are effects that can spill over into other countries. In this case, emerging markets are affected by the currency devaluation happening in developed countries, leading to increased wages and possibly increasing inflation. If the Japanese Yen loses value then its exports become cheaper and more attractive than goods from emerging markets. (Source)

– Exports continue to lag as demand remains low. Developed economies have seen growth in health care, industrials, consumer discretionary and consumer staples, none of which are especially strong industries in the emerging markets. (Source)

Advantages for emerging markets:

– The obstacles mentioned above could be be affecting emerging markets on the short term. Many of the sources listed above remain bullish on this asset class for the long term. Maybe this is a buying opportunity?

– If you look at some of the largest emerging market ETFs, you’ll see about 40% of their holdings are in companies located in China, Brazil and Taiwan. Finding a more diversified security or one that minimizes volatility may be an option to consider, such as a low volatility ETF.

Currently, we see no confirmed trend in the Emerging Markets. The BRIC’s, the largest and most commonly thought of Emerging Markets, have not been performing well for reasons mentioned above. But these are not the only emerging markets in the world. There are plenty of others and some of those may be worthy investments either now and in the near future.

Trend Updates

By Posted on In Trend Updates, Uncategorized

The Active Asset Allocation Portfolio utilizes a trend following strategy by buying and selling securities based on established price trends in each asset class, which is determined by comparing the current price with the 200 day simple moving average.  Below is a snapshot of the current trends we are following:

 

US Equities:

We have been fully invested in this asset class since August. Trends have remained positive.

Foreign Equities:

If we were to slice this asset class into emerging markets and developed markets, we would see two different stories unfold (see other post) or this simple chart from Financial Times.  We are watching some emerging market trends break down and hit the moving average.  These positive trends were not very convincing in the first place and our holdings in this area are limited. Time will tell if the negative trends continue or if they will bounce off the 200-day moving average.  Developed markets have a slightly better story although their trends remain flat to slightly positive. It should be noted, that these comments are generalizations. There are countries that are bucking the trends – we are looking at this asset class on a country by country basis. (Link to Finding a trend in Emerging Market Equities)

Bonds:

The trend continues to remain flat for the most part, which we noted at the end of the 1st quarter.  The only exception are some securities that invest in emerging market debt which have been flat for several months, resulting in the moving average catching up to the current price.  The trend is not conclusive, but it is a sign that it could turn negative.

Real Estate:

One of our longest held positions continues to perform very well.  This asset class has had a few bumps in an otherwise positive trend that has existed for a few years.

Commodities:

Up until last week, many of the trends were flat to slightly negative. Then during last week, the price of gold and silver dropped. This had ramifications throughout the commodity market. Most of the securities we are tracking in this asset class are now below their average. Our positions at the time were minimal given most trends were already negative.