Tag Archives: investment advice

A Wicked Wind Will Blow In 2016

money mazeMy Comments: Are you wondering about your investments going forward?

This will give you pause.

Dec. 4, 2015 by Bret Jensen

The market had a huge rally to end the week and clawed back Thursday’s large losses. The trigger for the rise was a better than expected November Jobs Report that also had an upward revision for October, which brought that number up to almost 300,000 jobs created in the first month of the fourth quarter. This brought certainty that the Federal Reserve will raised rates in less than two weeks for the first time since 2006. Investors, at least for Friday, seemed to be okay with this upcoming action.

SPY 2015

It would be nice to end what has been a challenging 2015 for investors with a nice Santa Claus rally. It would also give me a nice little rise to achieve my goal of a 30% cash allocation in my portfolio by the end of the year. I think the chance of a significant correction is higher in 2016 than it has been in many years. The obvious reason for this is the liquidity provided by the Federal Reserve over the past half dozen years has been a key driver of the market rally since 2009, how much of the rally it has been responsible for is anyone’s guess. As you can see from the chart above, the S&P 500 has done basically nothing since the central bank completed QE3 in October of 2014. There are three key reasons why I have this pessimistic outlook.

Lack Of Earnings:
2015 will go down as the first year since 2009 that profits within the S&P 500 will have declined year-over-year. The key factors to the lack of earnings growth are tepid global demand, the collapse of profits from the commodity & energy sectors and the strong dollar. With Japan back in recession, Europe muddling along while trying to deal with the largest migration wave since WWII, real problems in the emerging markets like Brazil, and with China growing much slower than it has in 25 years, it is hard to see worldwide demand being much more than it was in 2015, which were the lowest levels since 2009.

The dollar is up ~12% against the euro in the last year. It is up against other major currencies this year as well. This has severely crimped revenues and earnings for American multinationals. Given our central bank is just starting to tighten as European and Japanese central banks are still providing abnormal amounts of liquidity to their economies; this strength should continue into 2016.

It is also hard to see commodity and energy prices recovering with tepid global demand, a glut in capacity and a strengthening dollar. 2016 should be another year where the best case scenario sees earnings growth in the low to mid-single digits with the possibility that earnings will be flat or down slightly again next year. Given stocks are selling above historical valuations, this could make the market vulnerable to a significant pullback in 2016.

Key Signs Of A Top:
M&A activity by dollar volume has set a record in 2015. This is a classic sign of a market top. Peak previous levels of M&A activity occurred in 1999 and 2007, right before major breaks in the market. This level of M&A activity says companies do not have the confidence to use these funds to expand operations, build new capacity or are not finding good organic growth opportunities. Companies bought back almost $4 billion a day of their own stock in the third quarter. Stock buyback activity is also near record levels, another traditional sign of a market top.

In addition, TrimTabs recently came out with a report on insider selling in November, which saw some $8 billion in insider sales. This is $2 billion more than September and October combined. It also is the highest level since May of 2011, just before an almost 10% slide in the market over the next three months. Watching insiders engage in massive selling while their companies are buying back stock in record amounts does not strike me as a positive sign for the overall market or economy.

Collapse In Energy and Commodity Markets:
As my real-time followers that get my daily instablog know, my biggest worry for 2016 is the continuing collapse in energy and commodity complexes and their impacts on the credit markets. S&P put out a recent report noting that in November “Plummeting oil and gas prices pushed the percentage of junk bonds trading at distressed levels to the highest since the markets were recovering from the financial crisis”.

Further “The ratings firm’s so-called distress ratio increased to 20.1 percent in November, up from 19.1 percent in October and the most since September 2009, when it hit 23.5 percent. The ratio is calculated by dividing the number of distressed securities by the total amount of speculative-grade debt outstanding.”

Oil is struggling to hold $40 a barrel level. It is hard to overstate how ugly it is getting in commodity markets. Iron prices are at 10-year lows. The falloff in demand from China (steel production is down this year which one would not expect if its economy was truly growing at the “official” seven percent GDP figure) is the primary factor along with new capacity coming on line. Copper is also at multi-year lows.

If oil & commodity prices stay at these levels, we will see significant bankruptcies in small and mid-tier energy producers. Mining concerns could be become a graveyard given their high debt levels. Commodity based emerging markets like Argentina, Brazil and Russia will also come under additional distress and increasing default concerns. Any turmoil in the credit markets tends to impact the equity markets and this is my “black swan” for the New Year.

Always Think About Inflation

profit-loss-riskMy Thoughts About This: Inflation is one of those existential threats I always talk about with clients. But it’s like watching a car rust. You simply don’t notice it on a daily or monthly basis.

But the Oh MY God inflation that happened to the Weimer Republic in 1921-24 or perhaps more recently in Argentina, is enough to make you pay attention. However, I recall an understanding from college economics that some inflation is a good thing. It validates the idea behind the need for an economy to grow, as opposed to one that shrinks.

Meanwhile, in Russia, with the world watching Putin play strongman in Syria and with Turkey, the Russian economy is shrinking rapidly. It’s down about 4% so far this year and inflation right now is about 15% annually. It’s probably going to get worse.

Nov 20, 2015 By Rusty Vanneman

Inflation — and how to outpace it — should always be a top concern for investors. Over the last several years though, it really hasn’t.

Inflation, as defined by the Consumer Price Index, has been falling for about four years and has now essentially flat-lined, with 0% year-over-year changes. Other inflation measures, such as the Producer Price Index and import prices, have recently had negative year-over-year changes, and the Personal Consumption Expenditures Price Index (PCE) has lagged Federal Reserve targets for more than three years. No wonder investors aren’t all that worried.

Nonetheless, advisers and investors should remain vigilant. Investing really isn’t about beating benchmarks so much as meeting long-term objectives and liabilities. For long-term investing to be successful, long-term returns need to outpace inflation. For example, what good is getting a 4% return when inflation is 5% (which would be a -1% real return)? It’s better to have a 3% return when inflation is 1% (for a real return of +2%).

Inflation may be finally starting to return. Some measures of inflation are starting to perk up and there are indications of more inflationary upticks moving forward. Take the CPI. If we strip out food and energy (otherwise known as Core CPI), we see closer to 2% year-over-year growth — and the latest data is starting to move higher. In addition, the economy is witnessing rising house prices and wage growth. These are important clues.

Higher housing prices flow through not only to higher housing costs for homeowners, of course, but also eventually to non-homeowners as rents will start to increase. And as for wage growth, which does have a chicken and an egg relationship with inflation, it is definitely on an upswing.
How can investors fight inflation? There are several traditional ways.

One is to emphasize real assets, which derive their value from physical or tangible assets. They include commodities, natural resource stocks and real estate. These types of holdings typically perform better during inflationary periods. Another attractive feature of real assets is that they typically have low correlation with stocks and bonds.

EMERGING MARKET STOCKS
In addition, another asset class that has tended to do well in inflationary environments is emerging market stocks. Given their traditional production/consumption of commodities, this connection has historically made sense.
Examples of emerging market ETFs:
• Emerging Markets:
o Vanguard FTSE Emerging Markets (VWO)
o Wisdom Tree Emerging Markets Equity Income (DEM)
o iShares Core Emerging Markets (IEMG)

What about fixed-income investing? Historically, when inflation is rising, so are interest rates. The best thing investors can do is shorten duration (i.e., decrease interest-rate sensitivity by emphasizing shorter-term bonds over longer-term bonds) and be tactical by emphasizing certain fixed-income sectors such as high-yield corporate bonds (since it’s easier for companies to pay back debt with inflated prices) and inflation-linked bonds (which are linked to actual inflation and should outperform nominal bonds).

Examples of ETFs in fixed income that should help performance in an inflationary environment:
• Short maturity:
o PIMCO Enhanced Short Maturity (MINT)
o iShares Floating Rate Bond (FLOT)
o Powershares Senior Loan Portfolio (BKLN)
• High yield:
o PIMCO 0-5 Year High Yield Corporate (HYS)
o iShares iBoxx High Yield Corporate (HYG)
• Inflation-linked Bonds:
o PIMCO 1-5 Year U.S. TIPS Index (STPZ)
o iShares TIPS Bond ETF (TIP)

In the end, long-term investors need to remain concerned about real returns. Preserving the ability to pay future inflation-adjusted liabilities remains tantamount to achieving long-term financial success.

Rusty Vanneman is chief investment officer at CLS Investments.

Investors Avoiding Both Stocks And Bonds

080519_USEconomy1My Thoughts: Many of us are concerned about our investments. We don’t want our money under the mattress; we don’t want it all in money markets; we know bonds are going to get hammered when the Fed decides to start raising interest rates; and we know that over the past three months, the stock market has gyrated wildly, with a mostly downward trend.

Unfortunately, this background article won’t help you very much. But it’s not too long.

By Conrad de Aenlle on Nov 5, 2015

What do fund flows tell us about investor behavior before, during and after the third-quarter dive in stocks and the direction of markets from here? Even though raw numbers on money moving in and out of funds should be reassuringly concrete, they leave a lot to interpretation.

The trepidation displayed by the stock market may have begun in mid-August and reached a crescendo soon after, but Louise Yamada, a highly regarded technical analyst who heads Louise Yamada Technical Research Advisors, contends that distress had been building throughout the third quarter. In the September edition of her monthly newsletter, Technical Perspectives, she pointed to data from the Investment Company Institute, a fund industry group, showing that owners of stock and bond mutual funds alike made net withdrawals in July and the first three weeks of August.

“Their observation is that usually stock withdrawals move into bond funds,” Yamada wrote, “but withdrawals from both [are] a sign of nervous investors. This pattern has not been seen since the fall of 2008, a statistic worth noting.”

But a lot has changed in the business since then. Mutual funds are no longer the only game in town, or at least the one that the great majority of investors play. Exchange-traded funds get a far bigger piece of the action today than just a few years ago, and Todd Rosenbluth, director of fund research at S&P Capital IQ, noted in a recent report that as money was leaving mutual funds of all sorts in and around the August swoon, it was being soaked up by ETFs.

During the two weeks through Sept. 2, a period that included the worst of the stock market’s decline and a big rebound, about $1.1 billion more was yanked from diversified domestic stock mutual funds than was put in, Rosenbluth said, citing Lipper data.

ETF flows tracked market action more closely. During the first of those two weeks, a net $5 billion came out of diversified stock ETFs, and the following week a net $7.8 billion was added to them. As for bond funds, mutual funds saw net outflows of about $2.5 billion during the two weeks, while ETFs had twice as much in inflows.

There probably wasn’t much overlap between the buyers and sellers of mutual funds and of ETFs during the market upheaval. In a conversation about his report, Rosenbluth said that mom-and-pop investors were probably doing the bulk of mutual fund dealing, while institutions were the main force behind the ETF flows.

The net effect, in his view, is an acceleration of the longstanding trend away from mutual funds and toward ETFs, as the market decline emphasized an edge — namely lower costs and correspondingly higher returns — that ETFs have over mutual funds, just when investors were looking for any edge they could get.

“I think we have seen an ongoing shift to passive products that the correction has amplified,” he said. “People don’t want to pay up to lose money.”

That may explain the preference for ETFs, but a look at fund flows through August and September suggests that the trend that Yamada inferred from mutual-fund flows and found worrisome — the shunning of both stocks and bonds before the plunge — may be lingering. Perhaps more ominous, the tendency exists even when ETFs are added into the mix.

Flows into domestic stock ETFs in September, about $7 billion, were just enough to negate the outflows from stock mutual funds, according to Morningstar, although outflows from stock mutual funds in August were double the flows into ETFs. As for bond portfolios, it was no contest. Over the two months, three times as much money departed mutual funds as entered ETFs.

Morningstar found six months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined and from bond funds, too, with August being the sixth. Two of the other five, August 2013 and June 2006, coincided with minor blips in long bull markets.

The other three — June 2015, August 2011 and October 2008, the latter period being the one Yamada alluded to — occurred just before or in the middle of corrections or bear markets. Anyone who saw fund investors’ none-of-the-above attitude as a contrarian “buy” signal for stocks turned out to have jumped in too early.

Buyers who jumped into stocks at the start of October enjoyed an excellent month that could be the start of a long rally. But if the history of those three months repeats, it could turn out to be the calm between two storms.

China’s Currency Conundrum

china-currencyMy Comments: Our standard of living, yours and mine, used to be a function of how well we built our house and how well we managed to feed and clothe ourselves. That was perhaps 250 years ago, a single blip in the passage of time.

A blip later it’s a little more complicated. Among the forces at work today is the ability of a few billion people, living on the other side of the planet, to build their houses, feed themselves, and influence their government.

It wasn’t easy a blip ago, and it’s not easy now, just different.

October 23, 2015 Commentary by Scott Minerd

There is a striking discontinuity of thinking about the greatest economic headwind facing the world today: the slowdown in China. Investors seem to universally agree that China will continue to weigh on the global economy until it devalues its currency, yet few think such an adjustment is likely anytime soon. Passive Chinese policymaking can provide a more benign environment for risk assets in the short-term, but ultimately, it holds back the world’s second largest economy and, consequently, global growth.

The bottom line is that China cannot remain competitive if it does not significantly devalue the renminbi (RMB). Consider that Japan, China’s fourth largest trading partner, has seen its currency weaken by 35 percent against the RMB since late 2012, just before Prime Minister Shinzo Abe came to power. For China, the optimal approach would be a long glide path of currency depreciation that would ultimately act as a catalyst for stronger economic growth in China and in emerging markets. For many reasons, a dramatic adjustment of the RMB is untenable for Chinese policymakers. A sudden Chinese devaluation would pose serious financial stability risks in China and around the world. If this were to happen it could push U.S. 10-year Treasury yields below 1 percent as capital rushes to find a safe haven. To this effect, Chinese policymakers are expected to announce a 2020 deadline for dismantling currency controls as part of the country’s 13th Five-Year Plan. The current proposal, to be debated at the Chinese Communist Party’s upcoming plenum, reportedly includes an open-ended commitment to speed up these reforms. Still, China is unlikely to take any dramatic action in the near term, which is consistent with the 50-basis-point reduction in the reserve requirement ratio overnight. Expect more of the same.

In the meantime, the impact of China’s slowdown is having a marked effect on Japan, Europe, and the United States. I do not believe the situation in China will derail the U.S. economic expansion, but it poses a serious threat to Europe and Asia and puts pressure on their central banks to act. At this juncture, however, it does not much matter how they respond. If benchmark interest rates were 4 percent, for example, and quantitative easing pushed rates to 2 percent, it would have a meaningful effect on economic activity. But with 10-year government yields at 0.50 percent in Germany and 0.30 percent in Japan, further quantitative easing seems unlikely to do a whole lot in terms of stimulating economic activity, though it can boost risk assets in the near-term. Case in point is the bounce that followed European Central Bank Chief Mario Draghi’s recent comments alluding to the possibility of more stimulus in December.

In the United States, I am becoming less convinced that monetary policy will lift off this year. My base case is now that there is only a 50/50 chance that the Fed moves in December. William Dudley, President of Federal Reserve Bank of New York and Vice Chairman of the Federal Open Market Committee, recently said he believed it would be appropriate to raise rates in 2015, but later said there was no urgency, especially if data did not support the move. This tells us how ambivalent the Fed is at this point about the specific date of the first rate hike after seven long years at zero percent. I see no reason to raise rates right now: The risks associated with tightening too soon are greater than the risks of delaying liftoff until next year.

The potential for higher rates, along with the headwinds of declining export activity, the strengthening of the dollar, an ongoing inventory adjustment, and continued fallout from China, has many economists on edge. Consensus estimates for U.S. third-quarter GDP have been declining steadily and many expect 1-1.5 percent growth. I believe this is too pessimistic—consumption remains strong and a figure approaching 2 percent is more realistic. The U.S. economy is clearly bearing the brunt of the headwinds I described, but I believe the market has already discounted them. Investors are being well-compensated for risk at this point, and it is prudent to consider increasing beta exposure, especially in high-yield and bank loan portfolios. As positive seasonal factors come into play, our analysis indicates that U.S. equities may increase another 7–8 percent, and that the S&P could climb to around 2,175 in the coming months. When equity prices rise heading into the holiday retail season, consumer spending also tends to be higher. This suggests that the Christmas selling season will be a reason for investors to celebrate—especially as market participants come to realize that policymakers in China are beginning a glide path to reduce domestic policy rates, which ultimately reduce the exchange value of the RMB and improve the prospects for domestic Chinese economic activity.

The conclusion is that risk assets are back in vogue. As we have indicated in the past weeks, now is the time to increase beta by adding to equities and below-investment-grade debt.

How To Weather The Next Economic Downturn

moneyMy Comments: It’s again a question of WHEN and not IF. Despite the fact that most clients understand intellectually that markets go up and down, whenever there is a drawdown, emotion tends to overwhelm intellect. And it happens to me too.

For the past few months the markets have trended down. All the while, volatility, driven by both a slowdown in China and the uncertainty regarding interest rates and whether the Fed is going to finally make a move, creates an uncertain future for most of us.

The chart featured here suggests we are in for at least several more months of drawdown before a discernable upturn can be identified. Whether you can weather this economic downturn remains to be seen. While the comments reference institutional investors, there are parallels for you and I here as well.

Ben Carlson October 28, 2015

My colleague Josh Brown had an excellent piece in the most recent Fortune Magazine that asked a simple, yet loaded question:  Are You Ready for the Next Bear Market?

As we’ve seen from the seemingly never-ending market crash predictions over the past few years, no one really knows when the next bear market will hit. But we do know that bear markets are a natural outcome when you mix an uncertain future with human emotions that tend to take things to the extremes on the greed and fear spectrum.

Here are ten of the worst bear markets since 1926:

drawdownsI’m a huge proponent of thinking and acting for the long-term to be successful as an investor. But to be able to take advantage of the long-term you have to be able to make it through the short  to intermediate term.

As you can see from this chart, the time it takes to round-trip from some of the worst drawdowns, which can last for a number of years. On average, it has taken the stock market roughly 4-5 years to recover back to the prior peak. In my experience, these periods are where the majority of mistakes are made by investors.

One of my biggest realizations from working in in the institutional money management business during the financial crisis is that far too many organizations were unprepared for a severe market disruption. They didn’t understand what they owned.

It turned out that many of their portfolios were operationally inefficient. They didn’t have sufficient liquidity to survive or even take advantage of opportunities from the brutal bear market.

And the worst part is many organizations were forced to cut back their spending distributions from their portfolios. Many charitable organizations had to lay people off because of it.

One of the things I’m most excited about in my new role with Ritholtz Wealth Management is that I get to help institutions create investment plans that will give them a high probability for success during these situations. That means not only achieving their long-term goals, but also surviving severe market disruptions without compromising the organization’s mission.

Financial markets are a complex adaptive system, so the automatic response by the majority of institutional investors is a complex investment structure. These complex portfolios basically work until they don’t. And when they don’t work it’s usually at the most inopportune times.
With private securities, fund lock-ups and gates on investor redemptions there is no diversification benefit because you can’t rebalance to take advantage of market volatility. You become a forced seller elsewhere in your portfolio, which is a position you never want to find yourself as an investor.

My experience has been that the best risk controls an institution can implement to survive these serious market disruptions exist within a straightforward, transparent and sufficiently liquid portfolio. So what’s an investor to do with the knowledge that a bear market will hit some day, but we don’t know when?

In the words of Howard Marks, “You can’t predict. You can prepare.”

Crude Oil Supplies Are Enormous

oil productionMy Comments: If you pay for the gas you use in your car, these are good days. If your life depends on a job in the oil extraction industry, no so good. You can argue the merits, or lack of merits, of fracking, but as the worlds largest consumer of oil, we’re increasingly unaffected by the global supply chain. As we slowly move toward electric or natural gas transportation, this trend will continue. Invest wisely!

Oct. 26, 2015 Andrew Hecht


Summary

Crude oil continued lower this past week as the market rejected prices above the $50 level on active month NYMEX crude oil futures. With both WTI and Brent now comfortably below $50 and prospects for commodities looking shaky at this point, these markets could be in for more losses in the sessions ahead. Technical action points lower in crude, as momentum is certainly negative. Fundamentals are also negative from both a macro and micro economic perspective.

Huge inventories weigh on price

These days, the world is awash in crude oil. In the United States, the Energy Information Administration reported last week on October 21 that crude oil inventories rose by 8 million barrels for the week ending on October 16, bringing total stockpiles to 476.6 million barrels. The prior week inventories rose by 7.6 million barrels. These are the highest inventory levels since April 2015. The stockpiles of U.S. crude oil rose for the fourth consecutive week. Over recent weeks, there have been some massive builds in U.S. crude inventories.

Brent crude has also been weak as OPEC members continue to pump record amounts of the energy commodity. Last week markets received two signs of a continuation of the global economic weakness that weighs on the demand side of the fundamental equation. ECB President Mario Draghi said on Thursday that European interest rates are likely to move lower in December and signaled that quantitative easing could continue beyond the September 2016 deadline for the program. While lower interest rates are not necessarily bearish for commodity prices, including oil, economic lethargy is certainly a negative factor for demand.

On Friday, the Chinese government cut domestic interest rates for the sixth time in 2015. The government continues to combat stagnant growth in the Asian nation with a number of economic tools including monetary policy. It is likely that economic numbers due out in the near future will show continued pressure on the Chinese economy. Economic weakness in China is negative for crude oil demand as the Chinese are the world’s largest consumers of commodities by virtue of the size of their population. Recent data has pointed to China transitioning from a manufacturing-based economy to a consumer-based economy.

OPEC members and the Russians are continuing to pump and sell as much crude as possible onto the international market, which is yet another negative factor for price. Last week, the final approval of the deal with Iran that will ease sanctions just means more crude oil finding its way to the market.

Meanwhile, as inventories grow in the United States, there are signs that production will fall soon.

Brent-WTI moving back to historical norms

On Friday, October 23, Baker Hughes (NYSE:BHI) report that rig counts in the oil patch fell by another rig over the past week, bringing the total number in operation to 594. Last year at this time, the total rig count stood at 1,595. This means that U.S. production will eventually fall below the 9 million barrel per day level. The EIA said in September that the agency expects that daily U.S. production will fall to 8.8 million barrels per day in 2016. Falling rig counts is the reason. With OPEC production high and U.S. production falling, eventually, this could mean that the long-standing premium for Brent crude over West Texas Intermediate could soon become a thing of the past. In fact, prior to the Arab Spring in 2010 that took the Brent premium to over $20 above WTI, the latter traded at a premium to Brent for a majority of the time.

The Brent-WTI spread closed last Friday at $3.39 per barrel premium for the Brent on December futures. The spread closed at $3.20 on January futures contracts. Recently the spread traded down to around the $2.50 level, but increasing U.S. inventories over recent weeks has put additional pressure on WTI. However, the trend in this spread is certainly lower and given the continuing flow of oil out of the Middle East and Russia, we could soon see this spread return to a premium structure for the U.S. crude.

There is always a chance of big volatility in the Brent-WTI spread, as the political premium in crude tends to show up in the price of Brent. Brent is the benchmark pricing mechanism for Middle Eastern, African and European crudes. Meanwhile, as the price of crude oil moved lower last week, one aspect of market structure, processing spreads, showed some signs of life.

Signs of life in refining spreads

Crack spreads have been moving lower over recent weeks. We are in a limbo time of the year for oil demand as driving season ended with summer and heating oil season is still ahead. Refinery utilization stands at around 86% due to the slowdown in operations at the start of the fall maintenance season.

Stockpiles of gasoline and distillates have moved lower according to the latest data. Gasoline stocks were down for the first week in six weeks as demand strength was stronger than a rise in imports and production. Analysts expected a 1.5 million decrease in stocks and the number came in at a 2.26 million barrel fall. Distillate (heating oil and diesel) stocks also fell by 1.52 million barrels beating estimates for a 600,000 barrel draw. Despite the draw in stocks, inventories of gasoline and distillates remain well supplied at 7.6% and 18.5% above last year’s levels respectively at this time.

The better-than-expected news led December NYMEX cracks spreads to recover from very low levels.

In January 2015, crack spreads started moving higher, which eventually led to a bounce in the price of raw crude oil in March. It is too early to tell if the current rally in processing spreads is for real, but action late last week is certainly not overly bearish for the near term. Meanwhile, recent action in term structure is bearish.

Term structure and the dollar says the upside is limited

One of the best tools for monitoring the real-time impact of supply and demand in the world of commodities is term structure or the forward curve. Last week, crude oil term structure told us that prices may fall for oversupply reasons as the contango widened.

The December 2015-December 2016 NYMEX crude oil spread closed the week at $6.06 on Friday, October 23. This amounts to a contango of 13.6% – up from $3.85 or 7.7% on October 8 when crude oil was on its way to just over $50. The Brent December 2015-December 2016 spread closed on Friday at $6.94 or a contango of 14.46%.

The Brent contango is higher than the NYMEX contango because of expectations of increases of output from Iran, however, both spreads have widened as inventories grow around the world. This is clearly a negative signal for price right now.

While the purpose of interest rate cuts around the world is to stimulate economies, the result of those actions was an explosion in the value of the U.S. dollar late last week.

The U.S. currency has moved 3.6% higher since October 15, which is a huge move for a currency. The dollar is the reserve currency of the world and the pricing mechanism for commodities. There is a strong negative correlation between commodity prices and the dollar. The rise in the dollar is an offset to the effort to stimulate economies, and the currency looks like it is breaking out to the upside on a technical basis. This could mean more pressure ahead for commodity prices in general, including for crude oil.

December 4 is the target date

At this juncture, the price of crude oil looks like it has more room on the downside given the current state of market structure and momentum. However, the one bright spot last week was a shift in product inventories and a rise in crack spreads from low levels.

The truth about crude oil prices is that while fundamentals and technicals still favor downside price action, all that can change as we come closer to the December 4 biannual meeting of OPEC, the oil cartel. Last year OPEC said to the world, let it fall. The powerful producers in the cartel stated that they did not care if the price of oil fell; in fact, they welcomed a price that would curtail U.S. production from shale and build future market share for themselves.

Now, one year later, the cartel will meet again with many of its members suffering economic hardship and widespread cheating going on as members sell above the quota levels. The cartel has looked the other way as the production ceiling of 30 million barrels per day has been ignored and current production is running over 1.5 million barrels higher. That number is likely to increase now that sanctions on Iran have eased.

As one of the most political commodities in the world, any one of a number of events can turn the price of crude oil on a dime. I expect increased volatility as we get closer to the OPEC meeting. The high odds play is that the cartel will not change policy and that they will remain on the same path in an effort to hand out more pain in the U.S. oil patch. That opens up the potential of a real price spike if they surprise the market with a production cut. While crude oil is likely to continue to drift lower, uncertainty surrounding the December 4 get together will prevent it from making new lows below $37.75 per barrel basis the active month NYMEX futures contract.

Keep your eyes on crude oil market structure, particularly processing spreads and the forward curve in the weeks ahead. These spreads could yield important clues as to short- and medium-term direction for the energy commodity. For a handle on the longer-term prospects, we will have to wait for the word from OPEC. I have prepared a video on my website Commodix.com, which augments this article and provides a more in-depth, detailed analysis on the current state of markets to illustrate and highlight the real value implications and opportunities available.

WHEN You Retire Makes a Difference

rolling-diceMy Comments: If you accept that life is finite, then luck and a roll of the dice has a lot to do with how your life will play out financially.

Saving and investing for retirement over many years is a prudent strategy. Time is mostly on your side and the compounding of returns can help to potentially increase your nest egg.

The Return on Investment (ROI) on stocks, bonds and cash vary from year-to-year, sometimes greatly. You’ll see long and short periods where the ROI is mostly positive or mostly negative. But over time returns tend to average out, regardless of the order in which they appear. By saving regularly and staying invested through up and down markets during your working years, you shouldn’t be overly concerned about the return you’re getting right now.

The problem is that once you stop saving and start taking income from your retirement nest egg, the return your portfolio generates is now very important and can be the subject of great concern. If you take yearly 5% withdrawals from a portfolio that is appreciating each year at a rate higher than 5%, the withdrawal will have little effect on the remaining balance. Conversely, if you take 5% withdrawals from a portfolio that is depreciating in value the results might be devastating.

The experts call this “Sequence of Returns Risk” and it means that the order in which poor and good market returns occur after the accumulation stage ends and the distribution stage from your portfolio begins will have a significant impact on how long your retirement assets will last.

Here is a hypothetical example using historical returns that illustrates how sequence of returns risk could impact two identical retirement portfolios (See the table and chart below).

Mr. Smith retired in 1969 with $100,000 and Ms. Jones retired in 1979 with the same amount. Both invested in a mix of stocks and bonds, taking 5% per year initially, then increasing the percentage withdrawn each year to keep up with inflation. The ten year difference in their dates of retirement had a significant impact.

Mr. Smith experienced negative returns in four of the first ten years, as well as elevated inflation rates. Although his rate of return was higher, the combination of lower returns and high inflation caused the inflation adjusted exhaustion of his portfolio after just 15 years.

Ms. Jones on the other hand experienced negative returns in only two of the first ten years in retirement. Although she also experienced periods of higher inflation, timely positive market performance helped to grow her assets in the early years, and a strong bull market helped the assets continue to grow as she took income from the portfolio.

The main difference between these retirements was that Mr. Smith had the misfortune to retire at the wrong time. Notice the average rate of return or ROR for Mr. Smith was greater than that for Ms. Jones.
Sequence of Returns2The data is based on two 31-year periods ending on December 31, 1998 and 2008, respectively. Each portfolio assumes a first-year 5% withdrawal that was subsequently adjusted for actual inflation. Each portfolio also assumes a 60% stock/40%bond allocation, rebalanced annually. Stocks are represented by the S&P 500. The Standard & Poor?s 500 Index (S&P 500) is an unmanaged group of large company stocks. It is not possible to invest directly in an index. Bonds are represented by the annualized yields of long-term Treasuries (10+ years maturity). Inflation is represented by changes to the historical CPI. Past performance does not guarantee future results. This illustration does not account for any taxes or fees, and is not indicatives of any GIFL portfolio.

It is important to note that in these hypothetical examples, although one investor was more successful than the other, neither had a guaranteed income from their portfolio, and instead had to rely on the overall return of the market. Unlike with Social Security or a traditional pension, personal retirement savings in a 401(k) plan or an IRA account don’t automatically have a guaranteed income feature.

It is possible to continue to invest in the market and establish a guaranteed income stream using a variable annuity. The guarantee is backed by the claims-paying ability of the issuer, and does not apply to the investment performance or safety of the underlying portfolios. This approach allows you to establish and maintain the level of income necessary for required living expenses and allows you the opportunity to continue to grow your asset base when the market performs well.

When considering an annuity for use in an IRA or other tax-qualified retirement plan (i.e., 401(k), 403(b), 457), it is important to note that there is no additional tax deferral benefit, since these plans are already afforded tax-deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if some of the other features of the annuity are of value, such as access to specific portfolio choices, the ability to have guaranteed payments for life and other guaranteed benefits, and you are willing to incur any additional costs associated with the annuity to receive such benefits.

However, and this is a big however, only an insurance company can guarantee a lifetime income, and they are the only source of annuities. Understand first how you want to deal with risk, and then act accordingly.