The Closing Bell: U.S. Stocks Waver As Trade Tensions Simmer (The Closing Bell will be updated sometime after 4:00 PM CDST to include the latest updates from IBD and Bloomberg Evening Briefing.)
FYI: The S&P
500 fell Tuesday, as the dimming likelihood of an imminent trade deal upended earlier gains and sent investors seeking less risky assets like U.S. government bonds.
The broad index was recently down 0.4%, giving up an earlier advance of as much as half a percentage point to put the S&P
500 on pace for another tough week. Losses widened among shares of consumer staples, utilities and energy companies throughout the session, more than offsetting gains from communication stocks.
The S&P
500 fell 0.84%, while the Dow Jones Industrial Average shed 237 points, or 0.93%, to 2
55347. The Nasdaq Composite also reversed an earlier lead, falling 0.39% in recent trading.
Investors, meanwhile, appeared to be taking on less-risky assets, such as U.S. government bonds, pushing the yield on the benchmark 10-year U.S. Treasury down to a fresh 19-month low.
Consumer staples shed 1.2% to lead the S&P
500 lower. Food companies notched some of the biggest losses, with Kraft Heinz sliding 6.3%. Kraft, which said last week it wasn’t in compliance with Nasdaq’s financial disclosure rules, has fallen 32% this year due to a regulatory probe into its procurement practices.
Utilities also struggled, shedding 0.9% in recent trading, while energy companies fell 0.7%.
Meanwhile, communication stocks were the only S&P
500 sector to still be in the green in late-afternoon trading. Shares of some media companies were helping to support the sector, along with videogame makers after a Goldman Sachs analyst said Activision is on the cusp of an earnings inflection, upgrading the stock to a buy.
Shares of Activision were up 2.6% in recent trading.
Overseas, the Stoxx Europe 600 fell 0.2, snapping a two-session winning streak, while stocks in Asia mostly gained. The Shanghai Composite added 0.6%, Hong Kong’s Hang Seng Index was up 0.4% and Japan’s Nikkei was up 0.4%.
Regards,
Ted
Bloomberg Evening Briefing:
https://www.bloomberg.com/news/articles/2019-05-28/your-evening-briefingMarketWatch:
https://www.marketwatch.com/story/stock-index-futures-edge-lower-as-trade-worries-hang-over-market-2019-05-28/printWSJ:
https://www.wsj.com/articles/investors-grow-jittery-over-italy-11559053435Bloomberg:
https://www.bloomberg.com/news/articles/2019-05-27/asia-stocks-set-for-muted-open-dollar-edges-up-markets-wrap?srnd=premiumIBD:
https://www.investors.com/market-trend/stock-market-today/stocks-fade-sp-500-today-ends-lower/CNBC:
https://www.cnbc.com/2019/05/28/stock-markets-wall-street-in-focus-amid-lingering-trade-worries.htmlReuters:
https://www.reuters.com/article/us-usa-stocks/tech-gains-keep-wall-street-afloat-idUSKCN1SY15FU.K:
https://uk.reuters.com/article/uk-britain-stocks/ftse-100-miners-capitalise-on-iron-ore-surge-galliford-jumps-idUKKCN1SY0L2Europe:
https://www.reuters.com/article/us-europe-stocks/european-shares-retreat-led-by-banks-on-italian-budget-woes-idUSKCN1SY0SEAsia:
https://www.marketwatch.com/story/asian-shares-up-in-muted-trading-after-trump-visit-to-japan-2019-05-28/printBonds:
https://www.cnbc.com/2019/05/28/us-bonds-wall-street-set-to-monitor-economic-data-treasury-auctions.htmlCurrencies:
https://www.cnbc.com/2019/05/28/forex-market-eu-elections-trumps-japan-visit-in-focus.htmlOil:
https://www.cnbc.com/2019/05/28/oil-market-chinese-economy-opec-supply-cuts-in-focus.htmlGold
https://www.cnbc.com/2019/05/28/gold-market-dollar-moves-eu-elections-in-focus.htmlWSJ: Markets At A Glance:
https://markets.wsj.com/usMajor ETFs % Change:
https://www.barchart.com/etfs-funds/etf-monitorSPDR's Sector Tracker:
http://www.sectorspdr.com/sectorspdr/tools/sector-trackerSPDR's Bloomberg Sector Performance Pie Chart:
https://www.bloomberg.com/markets/sectorsCurrent Futures:
https://finviz.com/futures.ashx
Do Not Write Off Munis: Comparing Historical Municipal Bond Returns To Stock Returns
17 monthly dividend to buy hold forever
Why Buy Bonds When They Pay Such Paltry Interest? Bonds are important to mitigate risk as one approach retirement or as the students start to pay for their college tuition with 529 funds. I agree the bond's yields are no where near the historical levels. Most average investors do not have access to other vehicles without incurring additional risk.
Mary Beth Franklin: How To Battle Sequence-Of-Returns Risk Hi Guys,
The uncertainties in sequence of returns is a persistent issue to portfolio survival. The level of accceptable risk for an individual coupled to portfolio survival also is an issue. Some folks would be satisfied with a 9
5% success likelihood while others would not be comfortable with those odds. We’re all different especially when risk and uncertainties enter the equation.
One tool available to all of us that allows us to explore the vicissitudes of these risks is Monte Carlo computer simulations. That tool allows us to explore countless what-if scenarios in just a few minutes. Thousands of scenarios are examined within the simulation for the given input and a likelihood (probability) of success and/or failure is the simulation output. That should help in the decision processs. And it’s fun.
I have run many simulations myself and these have indeed been useful before taking any action. I have posted this recommendation many times in reply to earlier questions, but it is still worth repeating. Please go to the Portfolio Visualizer and use it’s Monte Carlo tool. Don’t be intimidated by the math. Here is the Link:
https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResultsTry many what-if cases. Each will help identify how robust to shortfalls your portfolio really is. It just might shock you. This insight will permit you to make adjustments in your portfolio’s construction and should help you to gain confidence in its survivability odds. Changes can be made to improve those odds as required. Good luck. Monte Carlo codes are great tools when exploring the unknown and unknowable future.
Best Regards
M: Time To Buy Emerging Markets In doing a recent Instant Xray analysis of my portfolio I am currently holding, within my equity allocation, a little better than five percent in emerging markets. The two emerging market funds that I hold are NEWFX and DWGAX plus some global asset allocation funds along with some other funds that have some emerging market exposure. I'm thinking, for me now being in retirement, a seven percent position in emerging markets would be all that I'd want due to their volatility and performance over the past five year period. In doing a five year look back, NEWFX has gained an average of 3.2% per year while DWGAX has lost an average of -0.8% per year. However, for the past three year period they have both performed with average annual returns of 10.4% and 6.50% respectively. With this, they both have been underperforming funds when compaired to other funds held within the growth area my portfolio. It will be interesting to see what the next five year period brings. For me, they are both considered a contrarian investment play.
From Xray, within equities, I'm currently 1.27% Latin America, 0.42% Europe Emerging, 0.49% Africa/Middle East, and 3.18% Asia Emerging which brings my emerging market exposure to 5.36%. With this, I've got room for some more emerging market exposure before reaching my seven percent threshold. I'm also considering adding to my commodity strategy fund as many emerging market economies are also major commodity producers.
50-70% Allocation funds...
"During the year ended December 31, 2018, the volume of the fund’s activity in options, based on underlying notional amounts, was generally between 8% and 15% of net assets."
In the back section for individual securities, the option written amounted to 0.4%, and that seems to be much smaller than the 8-15% of the net assets. Am I looking at two different items?
The quote is at the tail end Note 3, describing how options may be used. My guess, and it is only a guess, is that what you're seeing is the difference between notational value (how much impact an option has) with market value (the price of the option).
https://www.investopedia.com/ask/answers/050615/what-difference-between-notional-value-and-market-value.aspRegarding the purported boilerplate nature of the Note: It jibed nicely with hank's original description, which sounded like covered calls (use of options to generate income at the cost of forfeiting upside potential).
50-70% Allocation funds... Thanks to
@msf for the SEC link. It’s much better than the (SEC) one I uncovered about an hour earlier - but still time-consuming and difficult to navigate. I managed to pull-up perhaps eight or ten reports for PRWCX. And thanks to
@Sven for the opportunity to go back and do all the reading. :)
-
Most significant is this reference to covered call overwriting by David Giroux in PRWCX’s Semi-Annual Report of June, 2013. (Since he references
the last five years I saw no need to plow back through those earlier reports.)
“Before we review the portfolio, we want to briefly discuss the Capital Appreciation Fund’s covered call overwriting strategy, which we have employed for more than five years. Covered call overwriting involves buying a stock and then selling a call option—a contract whereby we agree at a future date to sell the stock at a predetermined (strike) price. In return for selling this call option, we are paid a premium (typically a 2% to 5% annualized incremental yield) that provides extra income to the fund. While the strategy caps our upside in an individual stock (usually 10% or higher), it provides incremental income that can enhance total returns, lower our downside risk, and generally has produced excellent risk-adjusted returns. Over the last five years, this strategy (a return combination of underlying stocks, calls, and dividend income) has generated a stronger return than the fund itself and has done so with less risk. However, in the first six months of 2013, this strategy produced subpar total and risk-adjusted returns mainly due to poor stock selection. Given the excellent long-term risk-adjusted returns of this strategy, we believe it will continue to play a meaningful role in your fund. As of June 30, 2013, we had calls written on about 14% of our equity holdings.”.
https://www.sec.gov/Archives/edgar/data/793347/000120677413003000/srcaf_ncsrs.htm-
Another interesting reference involves futures positions in his Annual Report from December 2014:“In addition, we have initiated futures positions in two European indexes that give us exposure to the European equity market, but we have effectively hedged much of the currency risk associated with these investments so that we have generated local currency market returns (and thus have a better risk-adjusted return for U.S. investors). The combination of these investments is still relatively modest at only about 3% of your fund’s assets and is unlikely to become greater than 5% under most circumstances.”.
https://www.sec.gov/Archives/edgar/data/793347/000120677415000583/arcaf_ncsr.htm- A breakdown of the fund’s positioning included in this (above) report shows
-1% “options”. Adding up the numbers suggests that this -1% represents a
short position in some security.
-
There’s a reference to investing in leveraged loans in his June, 2017 Report. I don’t have knowledge of how risky these are - but it’s not something I’d normally have thought the fund a big player in:
“Our high yield and leveraged loan holdings have declined from 17.9% of assets at the end of 2016 to 13.1% at the end of June due to a combination of selective sales, maturities, bonds being called, and choosing not to consent to repricings of leveraged loans. While we are continuing to buy a couple of high-quality, idiosyncratic high yield bonds, we would still expect our exposure to decline in the second half of the year—in the absence of a correction in spreads.”.
https://www.sec.gov/Archives/edgar/data/793347/000120677417002589/srcaf_ncsrs.htm-
On a final note, a recent move into Amazon was (by Giroux’s admission) far outside the fund’s normal (valuation driven) approach. My suspicion (only a suspicion) is that
fund bloat may be one driving force behind this purchase:
“We readily acknowledge that Amazon is not a classic Capital Appreciation stock, as it lacks the traditional valuation support and easily quantifiable downside found in almost every other equity investment that we have made ... While Amazon is not classically inexpensive, the size of the market opportunity available and Amazon’s sustainable competitive advantage in both cloud computing and e-commerce make it unlike anything in which Capital Appreciation has invested before either. We strongly believe that our ownership of Amazon is in the best interests of our shareholders ...” . (December 2016).
https://www.sec.gov/Archives/edgar/data/793347/000120677417000506/arcaf_ncsr.htmPS - Getting late. If any of the above links don’t work or are inaccurate, let me know and I’ll make appropriate corrections.
50-70% Allocation funds... @msf, thank you for the reference to the annual reports. I had read the manager's discussion section and have not located the statement above.
"During the year ended December 31, 2018, the volume of the fund’s activity in options, based on underlying notional amounts, was generally between 8% and 15% of net assets."
In the back section for individual securities, the option written amounted to 0.4%, and that seems to be much smaller than the 8-1
5% of the net assets. Am I looking at two different items?
SFGIX, WTF @johnN, Ted posted an interesting article from Vanguard that is worth reading on that subject. In a nutshell, International, which I assume includes EM, should outpace US over the next 10 years, 8.
5 to
5 percent. So, seems like over weighting international/ em may be the way to go.
50-70% Allocation funds... @Sven,
I’ll try to locate my earlier source / reference on the derivative strategy sometimes used by PRWCX. It may take a day or so to dig that up. But it was primarily a strategy
to generate income using stocks in some type of mutually beneficial contract with another party. The buyer of the option received a chance for upside potential should the stock increase in value. In return, PRWCX sacrificed some (or all?) of the stock’s upside potential in return for downside protection plus income. It was first mentioned
5-7 years ago by Giroux in a fund report. I haven’t read his reports recently. But just glanced at one tonight. While I can’t answer your question directly at the moment, how’s this excerpt (from Giroux) for
honesty? It’s from the December 31, 2018
Annual Report for PRWCX. (It sounds like he’s being taken to
“the woodshed” - and yet has nothing IMHO to apologize for.)
“We were disappointed in our investments in industrials, such as Middleby, a manufacturer of commercial food service equipment and high-end residential kitchen equipment. We bought it because the valuation and stock price had come down, management had a very good long-term track record on M&A, and, given higher labor costs at restaurants in a tight labor market, we felt that Middleby’s sales would benefit from a movement to substitute equipment for labor.
From a process perspective, we made multiple errors that we do not intend to make again. First, we bought the stock without having met management. Assessing the quality of a management team is a very important part of our investment process. Second, earnings quality had deteriorated, with free cash flow conversion to net income dropping below 100%. Third, while capital allocation had been positive over the long run, recent acquisitions in the high-end residential kitchen equipment space had performed poorly.
“With GE, we started buying the stock right after the announcement that Larry Culp would become CEO. We bought too much too quickly given the risk profile of the company, and this hurt returns in 2018. We believe in GE and its new CEO and consider their aviation and health care businesses to be fundamentally solid. However, the initial position size should have been smaller, and we should have built the position more slowly.
Again, we hope to avoid these mistakes in the future.”
https://prospectus-express.broadridge.com/m_document.asp?clientid=trowepll&fundid=77954M105&docid=2205655&doctype=ann&docdate=20181231&back=1
50-70% Allocation funds... "During the year ended December 31, 2018, the volume of the fund’s activity in options, based on underlying notional amounts, was generally between 8% and 1
5% of net assets."
Annual Report, Dec 31,2018.IMHO it's not the use of derivatives (including options) per say that can be a concern, but rather how they are used. As you noted, PIMCO uses them extensively - for boosting returns, for creating virtual leverage, etc. In contrast, FPINX makes extensive use of derivatives for defensive purposes, e.g. to reduce interest rate risk. I don't know what use PRWCX makes of derivatives.
CGMFX WTF According to morningstar, the expense ratio of CGMFX is 2.45% and assets are down to $494 million which means that he has been selling a lot. I briefly owned CGMFX in the past but bailed as the fact that he trades a lot was a huge negative. I still own FAIRX as the asset bleeding at FAIRX seems to have stopped. I also owned Third Avenue credit and got stuck holding the bag as everyone else left. I guess Heebner selling equities to meet redemptions is NOT as bad as Third Avenue credit fund having to sell illiquid junk bonds when the redemption calls came. However, when you have a run at at MF, then hedge funds might start shorting those holdings and cause the issues to get worse (although Heebner is in and out all the time so not sure people can short his holdings). Heebner was short treasuries for a while and of course yields on treasuries are still low.
CGMFX WTF Totally inspired by similar post on SFGIX...
I really know how to pick them.
HSGFX
FAIRX
now CGMFX
I've gotten back my principal some time back so have been letting this ride. However I have watched my current cost basis of $6000 go to as much as $7700 and now is at $5200 odd. YTD down over 15% YTD.
Now I know Heebner invests on a whim but can't believe he would be so out of step with things. Then I did something I normally don't do with this fund. I looked at the portfolio.
>45% in Emerging Markets as per M*. "WTF" does not begin to explain it.
How many idiots besides me still hold this fund? Please feel free to lie.
SFGIX, WTF Hi folks... What should your distributions in EM be 5 to 10%?.. US MARKET may seem to be better bets long term but prob best to have both... Think we have roughly 5 or 6%in EM
SFGIX, WTF @Edmond, my opinion is EM is one of the categories where returns will be better with a managed fund. Just my opinion, but also everything I've read agrees with that thought. Actual results will only be known 20 years from now.
My biggest argument when considering my own portfolio right now (being 6
5) is do I even need an EM fund. I hold SFGIX because I believe it is the least volatile approach to EM investing. But frankly, I don't believe SFGIX will outperform FMIJX (my 1 international fund) in most any time frame over 3 years.
50-70% Allocation funds... I was able to arrange things as I'd planned: though not a resident of Hawaii, I was able to open a 3-way account (joint) with the young man and his mother, at a local CU, in person. I will use it to feed the mutual fund from time to time. And if the worst should happen to me, there is nothing to worry about, legally. The account will simply carry on, in their names. The fund we're starting with will be BIAWX. If we are fortunate enough to NEED to branch-out, we will choose from the many suggested allocation funds offered here. We have just sent the mutual fund's application forms, too. If there are any glitches, surely they will let us know. I have urged the young man to begin an IRA. At his age, a Roth is the way to go. But at 18, it's a difficult thing to get him to FOCUS and think it through. I'm just an "honorary" uncle, anyhow. His mother is very smart, a good mother. Except re: finance. Like the vast majority, it seems. So... I live 5,000 miles away, at least for the present.
