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prescriptions, and other analysis. To find out more or subscribe to the ValuEngine Quarterly
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What's HOT--Checking in with TK Ng
"De-Coupling" and Megatrend Investing with ETFs
Former VE Analyst and Quant Guru T.K. Ng published the following on his Blog "Random Thoughts" recently. It has been edited
and re-published for our Weekly Newsletter. The original version can be found HERE.
In recent articles, I discussed using Exchange Traded Funds [ETFs] to ride on world
megatrends using easily-traded vehicles such as ETFs. One of my main interests is the long-
term decline of the US economy vs. the long-term growth prospects for the Asian
economies. In short, I believe that we will see more and more "de-coupling" between the US
and Asia, and that it will no longer be the case that "when the US sneezes, the rest of the
world catches a cold." I believe that we can put theory into praxis for this megatrend via the
iShares MSCI All-Asia Ex Japan ETF(AAXJ) and an ETF of the DJIA such as DIA--or its
inverse DOG.
Below, we have a chart illustrating my thinking vis-a-vis the US vs Asia megatrend. Here we
see clearly the de-coupling of AAXJ from the DIA, as well as the gradual decline of the US
Dollar-- as represented by the Powershares US Dollar Futures Index ETF (UUP.)*
*The chart shows percentage %, [not absolute price] and is semi-log scaled to have a more accurate visual representation
From this 1-year chart, you can see that when world markets hit a low in March 09, All Asia
Ex-Japan and the US were at the same level. As the months went by, through all the ups and
downs, Asia pulled ahead. This is represented by the Yellow area growing in size. To put it
succinctly, yes the US-- the world's largest economy-- has bounced back from near-death. But
Asia has staged an even more miraculous recovery. In the meantime, the US Dollar is slowly
but surely beginning what I believe will be a long-term decline-- as the US share of world GDP
falls and the Dollar loses its pre-eminent currency status in the years ahead.
Below, I present the results from a trade I have on to capture my sentiments. I started this
@ 30 days ago. It shows the profits from AAXJ and WIP, and a loss from betting that the DJIA
would go down--via DOG the popular inverse ETF of the DJIA.
Yesterday was another re-balancing day for our ValuEngine Forecast 22 Market Neutral
Strategy Newsletter. Our portfolio continues to beat the S&P 500 benchmark handily on its
long side, but the continued market rally has been wreaking havoc with our shorts. For the
latest re-balance period, our long side returned more than 9% vs the S&P's 5.5%, but our
short side losses of 12.6% resulted in an overall loss of 3.5%.
Nevertheless, for a market neutral strategy with significant volatility-reducing benefits, our
newsletter continues to perform remarkably well. In fact, this product has been so successful
it was recently selected by Forbes.com for inclusion into its stable of newsletter
products. Forbes.com believes that the VE Forecast 22 MNS Portfolio offers a sophisticated
newsletter for investors seeking access to hedge fund-type strategies without hefty
performance fees and onerous qualified investor requirements.
Over the past month, 17 of our 22 long selections made money and 10 of them provided
double-digit returns. Our biggest winners were IP, SWM, ANN, BEXP, BCRX, TER, and NVLS.
Our largest gain came via ANN (Ann Taylor Stores) at almost 36%. The Energy, Consumer
Services, Basic Industries, and Technology Sectors provided our largest average gains.
Capital Goods, Public Utilities, and Transportation were the real performance laggards this
month. Since inception in December 2008, our portfolio is up 18.31%.
Below, you can see our long-side results:
Entry Exit
Ticker Company Name Change %Change Sector
Price Price
BASIC
IP INTERNATIONAL PAPER CO $20.81 $25.12 4.31 20.71
INDUSTRIES
BASIC
AAUKY ANGLO AMERICAN PLC $15.95 $17.60 1.65 10.34
INDUSTRIES
AMSC AMERICAN SUPERCONDUCTOR CORP $33.26 $35.20 1.94 5.83 CAPITAL GOODS
SSD SIMPSON MANUFACTURING CO $28.63 $27.28 -1.35 -4.72 CAPITAL GOODS
CONSUMER
TRW TRW AUTOMOTIVE HOLDINGS CORP $18.23 $19.37 1.14 6.25
DURABLES
CONSUMER
TEN TENNECO INC $15.95 $15.90 -0.05 -0.31
DURABLES
CONSUMER
SWM SCHWEITZER-MAUDUIT INTL $46.93 $56.24 9.31 19.84
NON_DURABLES
CONSUMER
CQB CHIQUITA BRANDS INT'L $15.86 $16.28 0.42 2.65
NON_DURABLES
CONSUMER
ANN ANNTAYLOR STORES CORP $12.70 $17.24 4.54 35.75
SERVICES
CONSUMER
SMRT STEIN MART INC $11.94 $13.24 1.3 10.89
SERVICES
BEXP BRIGHAM EXPLORATION COMPANY $7.54 $9.94 2.4 31.83 ENERGY
SM ST MARY LAND & EXPLORATION CO $28.75 $33.30 4.55 15.83 ENERGY
WTFC WINTRUST FINL CP $27.35 $29.00 1.65 6.03 FINANCE
WRE WASHINGTON REAL EST INV TR $26.61 $28.95 2.34 8.79 FINANCE
BCRX BIOCRYST PHARMACEUTICALS, INC. $9.66 $10.84 1.18 12.22 HEALTH CARE
CMED CHINA MEDICAL TECHNOLOGIES INC $16.03 $15.25 -0.78 -4.87 HEALTH CARE
PUBLIC
CSIQ CANADIAN SOLAR INC $16.93 $17.35 0.42 2.48
UTILITIES
PUBLIC
ENI ENERSIS $18.56 $18.17 -0.39 -2.10
UTILITIES
TER TERADYNE INC $8.08 $9.18 1.1 13.61 TECHNOLOGY
NVLS NOVELLUS SYSTEMS $17.95 $20.53 2.58 14.37 TECHNOLOGY
HTZ HERTZ GLOBAL HOLDINGS INC $11.02 $11.30 0.28 2.54 TRANSPORT
CNW CON-WAY INC $47.37 $44.25 -3.12 -6.59 TRANSPORT
LONG PORTFOLIO 9.15
GSPC S&P500 1012.73 1068.76 56.03 5.53
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Suttmeier Says
--Commentary and Analysis from Chief Market Strategist Richard Suttmeier
The FDIC recently announced that it has made a deal to sell $1.3
billion in toxic mortgages from the former Franklin Bank of Houston,
Texas--Franklin failed last November. In this deal a private investor gets
to speculate on toxic mortgages on the back of tax payer money.
This deal is a 50 / 50 risk-sharing arrangement between the FDIC and Residential Credit
Solutions of Fort Worth, Texas-- who will put up $64 million to manage the $1.3 billion
mortgages from Franklin Bank. In round numbers, the deal prices these toxic loans at 70
cents on the dollar. This price is more than private equity and hedge funds have been willing
to pay for similar assets, yet below what solvent banks are willing to accept for their toxic
mortgage loans.
Had tax payer money not been put on the line the clearing bid for the Franklin portfolio would
be 20 cents on the dollar. Once more we see that the US Government is privatizing profits
and socializing losses. Whatever happened to "moral hazard?" How does this help
struggling homeowners on Main Street?
On the other hand, this asset sale should help establish a market for toxic assets since we
will have some "mark-to-market" activity here applicable to bank balance sheets when mark-
to-market accounting becomes the FASB rule again in 2010. The FDIC hopes the program
will spur the purchases of whole mortgages for both residential and commercial real estate,
which is a key to the smooth closure of my estimated 500 to 800 bank failures that will occur
through 2011.
Statistics on New Home Sales and Housing Starts
Housing Starts for single-family homes declined in August to an annual rate of 479,000 units,
ending a five-month winning streak. A third of all new sales in the past few months were done
to take advantage of the first time home buyer tax credit of $8,000. This was the cause for the
slight up-tick in home builder confidence.
Housing starts and confidence are still quite low by historic standards so the expiration of the
$8,000 credit will have the same negative effect on the housing market as ending the cash-
for- clunkers plan for autos.
Mortgage rates at just above 5% have helped the housing market, but a 4.25% to 4.5% rate
would help the housing market back to recovery. My “Mortgage Mulligan” rate would be 100
basis points over the 10-year yield-- which is just below 3.4%. We need to eliminate Fannie
and Freddie as the housing middlemen.
The Federal Reserve will stop buying GSE debt and mortgage securities at the end of the
year, and this will likely widen spreads and cause mortgage rates to rise.
Comments by Paul Volcker
Paul Volcker has become President Obama’s key financial expert, and he is not that upbeat
on economic growth. He says that there’s a “long way to go” before the economy returns to
pre-recession levels. He indicated that an economic recovery will be a long slog-- a matter of
years with risks of relapses along the way. Volcker indicated that it is way too soon to resume
business as usual. I concur.
Steve Hach
Senior Analyst
ValuEngine.com