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Thursday, February 26, 2015

Germany Euro Hedged ETFs Deserve More Love"

Above is the headline from an article about currency hedged German stock ETFs an  ETF I have written about in addition to the more well known and larger (in assets) Euro Zone hedged ETF (ticker HEDJ)

The article includes this graph of EWG, the unhedged German stock ETF and 3 hedged Germany ETFs: HEWG, DXGE and DBGR. HEWG has $845 million in assets while DXGE has $63 milllion and DBGR has $75 million meanin HEWG is  far more liquid

Israel Enters the “Currency Wars”

On February 23 the Bank of Israel surprised the financial markets by cutting its base interest (equivalent to US Fed funds) rate to an all-time low of .1% and even indicated it would consider further "easy money" policies  through “quantitative easing. Thus it has joined the group of nations in a monetary easing phase while the Federal Reserve has ended quantitative easing and is expected –at some time in the near future—to raise rates. Such policies almost always have the effect of weakening a currency against those with a lower interest rate…as we have seen in the $/Euro rate. Hence the countries in the monetary easing mode are seen by many as in a “currency war” of currency depreciation vs. the US dollar to boost exports

The market reaction would not surprise anyone who has watched as central bankers around the world have cut interest rates. The Tel Aviv stock index hit a record high --after Germany, Japan and the total World Stock Index did so during the last couple weeks-- and bond prices jumped putting the yield on the ten year government bond down to 1.75%. The Israeli shekel (NIS) weakened immediately against the dollar and at the end of local trading on the 24th was at 3.9520 /$ vs. 3.8580 the previous day (based on the Bank of Israel data).

While the market movements: central bank easing, higher stocks, higher bonds/lower yields and weaker currency have been mirrored across the world, the Bank of Israel action has a significant difference. Most interest rate cuts have been primarily in response to recessionary conditions.  The recent economic growth numbers in Israel have been very positive.  Israeli GDP growth is strong at 7.2% (annualized) in most recent data   although the 2.9% GDP growth of the last year—a period that included the Gaza war and a massive drop in tourism-- was the weakest since 2009.The January inflation rate (CPI) declined by .9% but the central bank does not forecast future number to show deflation—although it is a concern.

What sets the Bank of Israel policy apart from the rest of the world’s central banks is the explicit mention of targeting a weaker currency. Certainly the Euro has weakened due to easing policies by the European Central Bank (ECB) and the same is the case for the Bank of Japan and the Yen. But neither of those central banks has officially acknowledged that a weaker currency—which helps exporters—is a goal of policy. It is impossible to target both interest rates and exchange rates: money flows to the higher yielding currency. Hence a weaker Euro and Yen in response to central bank easing designed primarily to stimulate local economic activity whether or not it has been identified as a major policy goal.

The Bank of Israel on the other hand seems to be doing the opposite targeting the exchange rate through lowering rates even without a need to stimulate local economic activity. This is understandable given the small domestic economy and the export intensive economy. The Bank of Israel has made clear that even a short term period of dollar weakness /NIS strength is a not only a concern it is a major rationale behind the rate cut and could lead to “unconventional methods” in future monetary policy.

From the Bank of Israel press release giving the rationales for cutting interest rates:
This month, the shekel continued its appreciation, strengthening by 2.6 percent against the dollar, and by 3.3 percent in terms of the nominal effective exchange rate. After a depreciation of 10.4 percent between August and December in the effective exchange rate, there has been an appreciation of 7.6 percent since December, so that the cumulative depreciation since August has only been 2 percent. Continued appreciation is liable to weigh on growth in the tradable industries—exports and import substitutes.

And later in the press release:
The Monetary Committee is of the opinion that in view of the increased rate of appreciation, and its possible effects on activity and inflation, reducing the interest rate to 0.1 percent is the most appropriate step at this time in order to support achieving the policy targets.

The Deputy Central bank governor was even more explicit
 Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg said while the central bank was "relatively comfortable" with its 2015 growth forecast of 3.2 percent "we needed to ensure that no further (dollar-shekel) depreciation takes place."
"We had concern that looking forward, without the extra push, we would not necessarily maintain our growth estimate," Baudot-Trajtenberg said in an interview with Reuters 

NIS/$ (mm/day year format)
 Looking at the graph above (dates are in European format day/month/year) of the NIS/$ rate one can see how sensitive to the exchange rate changes the central bank is. Despite the large depreciation of the shekel since August, the slight retracement of the exchange rate was enough to concern the bank
As the Israeli newspaper Haaretz reports 
. Against the dollar, the shekel ILS= weakened by 15 percent between July and late January but reversed course and gained 2.6 percent in the month since the prior rates decision. More important to the central bank, the shekel's effective exchange rate had depreciated 10.4 percent between August and December but appreciated 7.6 percent since then.

Below is the NISl/Euro exchange rate where one can see that the aggressive easing policy by the European Central Bank has caused a sharp fall in the Euro/Shekel exchange rate hitting record highs for the NIS vs, the Euro.. With the European Union Israel’s largest export market it is clear that the Bank of Israel would have an interest in slowing the Shekel’s rise against the Euro, That will be a more difficult task as the Euro has been in a period of currency weakness due to its aggressive policy of monetary easing one that is expected to continue in the foreseeable future. 

NIS/Euro Exchange Rate (dates in mm/dd/year format)

Interest rate differentials are often a key determinant of exchange rates. This has often been true for the NIS $ exchange rate. during the period of aggressive easing by the Fed  the NIS was far stronger than current rates. As the Federal reserve lowered rates and the interest rate differential moved in favor of the NIS money flowed in from around the world into the shekel as it became one of the favorites of traders/investors interested in the “carry trade” moving money to higher interest rate currencies Previous Bank of Israel Governor (and now US Fed Governor ) Stanley Fisher followed a policy of central bank intervention  against a stronger shekel attempting to keep the exchange rate at a 3.40 to 3.80 range level.

With the latest rate cut to .1%  and ten year government bond yield of 1.75%, there is little room for a “carry trade” to profit from an interest rate differential vs the US $. Thus one factor that would lead to a stronger NIS no longer exist. There will be next to no likelihood of any speculative capital inflows into the shekel driven by interest rate differentials.

In fact the opposite is likely to be the case. Israel seems to be on the easing side of monetary policy alongside the European central bank and has even indicated it might engage in “quantitative easing” at some point. The next move by the Federal Reserve will be to raise interest rates with many analysts looking for that to happen as early as June. There is a large inflow of $ into shekels related to development of natural gas fields and this would accelerate when/if exports begin. But the central bank has been selling $ into the market to offset these inflows for a considerable amount of time already.

The combination of an easing monetary policy in Israel, a move to raise rates by the US and the Bank of Israel;s expressed desire to keep the shekel weak would argue for the Shekel to trade at current levels or weaker in the foreseeable future. The rate has seldom held much above the NIS 4.00 rate and many analysts see a move above that as unlikely citing “resistance”. But exchange rates are notoriously difficult to forecast. They often have a strong momentum factor. And rates seen by the market as “resistance” often cause strong market reaction in the same direction of the momentum when those “resistance “levels are broken

Has Israel entered the currency wars?  Here are the views of two analysts 

From  Bloomberg

The rate cut comes amid “a global currency war in which Israel cannot allow itself to lose its global competitiveness,” Shlomo Maoz , chief economist at S.M. Tel Aviv Investments Ltd., one of the three economists who predicted a rate cut, said by phone after the decision. It “signals to the market that the Bank of Israel will not allow an appreciation of the shekel” until the world economy rebalances, he said.

Tamir Fishman CEO Eldad Tamir writes, "The global currency war entails substantial steps to preserve a reasonable level of growth in Israeli exports, which are the cornerstone of the Israeli economy. In our view, if the figures don't improve, there could be a further interest rate cut, and we could even see the start of a quantitative easing program."

Wednesday, February 25, 2015

Update on HYLD

Update on HYLD
Hyld will be paying its February dividend on the 27th of $.28 after $.20 in January.  I calculate that as a bit under a 7% yield the twelve month trailing yield is 9.64%.   The price has recovered (currently at around 42) but not nearly enough to recoup the losses from last year’s 12.8% fall calculated based on total return: price change +dividend). The total return is -3%   for the last 2 years and +3.3% year to date. Below is a one year total return (measured as growth of $100,000) over 12 months

The oil price has stabilized for now and it seems the “market consensus “fickle as it is has turned more favorable to high yield bonds.
From Bloomberg 

The message from the junk bond market is that the world’s biggest economy is picking up.
The securities have returned 1.7 percent in February, headed for the biggest monthly gain in a year, Bank of America Merrill Lynch index data show. Treasuries are plunging as investors dump the haven assets they turn to in times of turmoil. U.S. government securities have fallen 2.1 percent this month, the biggest decline since 2009, according to the indexes.
JPMorgan Asset Management is recommending high-yield bonds as an alternative to the slim payments investors get from sovereign debt…..
Companies that were once investment-grade rated and have since plunged into junk territory are offering some of the best returns in U.S. credit markets.
The fallen angel securities have returned about 8 percent in the past 12 months, and 3.2 percent in 2015 alone, the Bank of America data show.
Junk bonds are high-risk, high-yield securities are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.
They have an effective yield of 6.13 percent, versus 1.43 percent for Treasuries and 0.17 percent for German bunds, based on the Bank of America data.

  With the “weak hands” including many individual investors having sold their positions through ETFs and funds…the professionals are picking through the beaten down bonds to find the good values. HYLD is actively managed so they should benefit vs. an index. I don’t believe in active management in general but high yield at this point should give room for an active manager to do well.
Savvy professional longer term investors like private equity firms have been buying beaten down assets in the energy area. Blackstone group (BX) just set up a second fund to invest in this area.
My longer term expectation has been that short term high yield with its yield spread over investment grade bonds and treasury bonds and short duration should outperform the bond index over the near future and even perform well compared to relative to a highly values US stock market. Obviously that was not the case last year.
Things look better this year but certainly it is too early to say the worst is over. Oil is still a wild card risk and no one can rule out a further decline in oil prices.
Here are recent total returns
                            YTD    One year
Total US Bond    1.2          5.8
Total US stock    3.3          15.4
Hyld                     3.3         -12.8

Tuesday, February 24, 2015

Remember That "It's a Stock Pickers Market" Argument

Active managers apparently have a new excuse why their active management isnt't working...blame it on the market. I also fail to understand why performing poorly under difficult circumstances is a good excuse for a money manager.

from bloomberg

Best Stock Pickers Say Easy Money Has Made Their Job Harder

Managers say they haven’t changed, the market has. The easy money climate of near-zero interest rates engineered by the Federal Reserve has artificially inflated prices of lower-quality U.S. stocks, they say, punishing those who focus on businesses with the best fundamentals. At the same time, the relentless climb of prices across equity markets has left them with few chances to sniff out bargains or show what they can do in more-volatile times.
“In straight-up markets you don’t need active managers,” D’Alelio said in a telephone interview. “If the next five years are the same, there won’t be any active managers left.”
Twenty percent of mutual funds that pick U.S. stocks beat their main benchmarks in 2014, and 21 percent topped the indexes in the five years ended Dec. 31, according to data from Chicago-based Morningstar Inc. Over 10 and 15 years, the winners rise to 34 percent and 58 percent, respectively.

Of course hope springs eternal: 

, Brian Belski, chief investment strategist at BMO Capital Markets, wrote in the firm’s 2015 outlook published in December.
“From our lens, this means a prolonged period of active investing is upon us, thereby overtaking the macro or index biased ways that have engulfed investing the past 15 years,” Belski wrote.

Regardless of whether the trend is turning, Jeff Tjornehoj, an analyst with Denver-based fund tracker Lipper, doesn’t buy the idea that certain types of markets are tougher on stock pickers.
“It sounds like a team complaining about the rain when everyone has to play under the same weather,” Tjornehoj said in a phone interview.
Jim Rowley, a senior analyst at Vanguard Group Inc., is also dubious of high stock correlation as an explanation. In each of the last eight years, at least 70 percent of the stocks in the broad Russell 3000 Index either beat or underperformed that benchmark by 10 percentage points or more, according to Rowley, whose firm is known for championing index funds.
“That would suggest there has been ample opportunity to pick winners and losers,” Rowley said in a phone interview.

But despite all the data on active fund manager underperformance don't worry:

This is setting up as an ideal environment for stock pickers,” said Neuberger’s D’Alelio.

Monday, February 23, 2015

Another One Joins The Bandwagon...

Now that European and Japanese stocks are near all time highs the research gurus at Goldman Sachs weigh in. Via Bloomberg

Goldman Sees Value Outside of ‘Stretched’ U.S. Equities

Goldman suggests investors look abroad.

“Stocks with attractive valuation are rare in the current environment of stretched share prices,” Goldman’s chief U.S. equity strategist David Kostin and colleagues wrote in a Feb. 20 report, citing the ratio of price to estimates of future profit and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization. “The only time during the past 40 years that the index traded at a higher multiple was during the 1997-2000 Tech Bubble.”...

Investors looking for more attractive valuations need to go outside the U.S., according to Kostin’s team, provided they use currency hedges. (That seems to be a popular trade du jour, given the surging popularity of the WisdomTree Europe Hedged Equity Fund.) Goldman is forecasting 12-month, local-currency returns of 19 percent for Japan’s Topix Index, 17 percent for the Stoxx Europe 600 Index, where central bank easing is about to heat up big time, and 15 percent for an index tracking Asian nations besides Japan.

WSJ on Foreign Stock Exposure

An interesting article including many good reasons for allocating to non US stocks. But a bit of performance chasing here. I wonder if the author would have written the same article during the period shown in the graph below included in the article.

Those that have consistently held international stocks are now benefiting as the performance chasers now find the arguments for holding foreign stocks persuasive and buy those stocks. The disciplined investors will be selling some of their international stocks to rebalance at some point while the performance chasers are still buying.

Four Reasons to Boost Your Foreign-Stock Exposure

Wednesday, February 18, 2015

More on Europe

An interesting chart from Bloomberg

 The Stoxx Europe 600 Index recorded a 10 percent gain through yesterday, while the Standard & Poor’s 500 Index only rose about 2 percent. The European indicator trailed the S&P 500 in four of the last five years.
Investors are focusing on the euro area, according to Michael Hartnett, Merrill’s chief investment strategist. Fifty-five percent of the respondents said the region carried more weight in their stock holdings than in their benchmarks. The proportion was the highest since May 2007.
Another article on the Euro hedged ETFs which I have written about numerous times appears in the WSJ moneybeat blog  today

Investors Piling in to Currency-Hedged ETFs

Investors are hedging their bets against more wild currency moves.
Nearly half of all inflows into U.S.-listed exchange-traded funds this year have been invested in currency-hedged products, according to A total of $10 billion has entered 35 currency-hedged funds in 2015, amounting to 49% of the $20.4 billion that all ETFs had gathered as of Friday, the firm said.
Such funds have been available for several years, but have become increasingly popular as of late as the U.S. dollar appreciates. In the first six weeks of 2015, the funds have collected nearly 30% of their total asset base.
Matt Hougan, president of analytics and publications at, expects currency-hedging to be a defining theme of 2015. It’s the number one topic of discussions at conferences and among advisers, he says.