Introducing the Yellen put

Introducing the Yellen PutBack in the 1980s and 1990s, the term Greenspan put was widely used as shorthand for a (presumed) Federal Reserve (Fed) strategy of easing in order to prevent a bear market in stocks. A put, as options investors know, gives investors downside protection against a stock falling below a certain price. The so-called Greenspan version of the put was born out of the aggressive Fed response to Black Monday in 1987 shortly after Mr. Greenspan became Fed chairman. The term gained additional popularity in 1990 and in 2000 when the Fed started easing fairly soon after stock prices turned downward. By 2007, it had become the Bernanke put, but the meaning was the same—that it was safe to own stocks because the Fed would act to prevent steep declines in the equity market.

The term survived despite the fact that stock prices declined sharply in 2001 and 2002 and even more sharply in 2008 and 2009. The Greenspan put was apparently ineffectual. Fed officials argued (and still do) that there was no put. Fed easing was in response to the threat of a recession, not an effort to arrest a decline in stock prices. While history supports the Fed’s contention, that has not stopped a host of market observers from employing the term.

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Wireless lawn mowing has cosmic implications

Better-than-expected earnings reports and more stimulus from China helped the major indexes recoup much of their losses from their drubbing on Friday.

The Dow jumped 208 points, with 26 of its 30 components higher; the S&P 500 Index gained 19; and the Nasdaq rose 62. Advancers led decliners by seven to three on the NYSE and two to one on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $9.40 to close at $1,193.70 an ounce, and the price of crude oil advanced 56 cents to settle at $57.88 a barrel.

In earnings news:

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Earnings don’t (yet) outweigh the Fed

Manley on the Street: Earnings don’t (yet) outweigh the FedI don’t believe that the stock market will go up forever. However, I don’t yet see what will make it go down now. The Federal Reserve (Fed) seems ready to raise interest rates but not until Fed officials are convinced that an increase will not represent a tightening of policy. Fed Chair Janet Yellen is very smart, and she understands the risks of a premature tightening. Tapering was not tightening, and the cynics who expected a stock market collapse were left to look for other reasons for a downdraft. I don’t think that interest rates will rise significantly until earnings do, and that may be one reason that we are within a few points of an all-time high on the Dow and the S&P 500 Index.

Earnings are important—but not as important as the Fed. When the Fed tries to encourage economic growth, it pushes money toward the economy. That money flows through the capital markets and tends to make them rise. Usually, the stock market gets its fair share. However, if earnings are very bad, the markets can divert those flows toward other capital assets, such as bonds or commodities. The earnings have to be pretty bad for that to happen—not down 5% for a couple of quarters (due to lower oil and a higher dollar) but down 20% or 30% or more, as in a recession.

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Global worries send U.S. stocks lower

Financial regulators in China are tightening rules on borrowing to buy stocks and making it easier to bet against stocks, regulations aimed at cooling down its markets. The news sent Chinese futures sharply lower. Investors are also becoming more concerned that Greece may default on its debt. These two items, in addition to economic data strengthening the case for a rate hike later this year, weighed heavily on U.S. markets today.

The Dow dropped 279 points, with all 30 components declining; the S&P 500 Index lost 23; and the Nasdaq was down 75. Decliners led advancers by four to one on both the NYSE and the Nasdaq. Treasury prices were flat. Gold futures rose $5.10 to close at $1,203.10 an ounce. Crude oil dropped $0.79 to settle at $57.32 a barrel.

For the week, the Dow declined 1.28%, the S&P 500 Index fell 0.99%, and the Nasdaq lost 1.28%.

In earnings news:

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What kind of mobile shopper are you?

Stocks erased today’s gains as investors weighed corporate earnings, mixed economic reports, and OPEC’s foreboding comments on the future of U.S. oil production. The Dow slipped 6 points, with 21 of its 30 components retreating; the S&P 500 Index fell 1 point; and the Nasdaq lost 3.Decliners led advancers by 9 to 7 on the NYSE and by 10 to 9 on the Nasdaq. The price of the 10-year Treasury strengthened, and the price of the 30-year Treasury ended flat. Gold futures fell $3.30 to close at $1,198.00 an ounce. The price of crude oil rose by 32 cents, settling at $56.71 a barrel.

In earnings news:

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How alternatives fit into your portfolio

In part two of a four-part series, Dr. Brian Jacobsen discusses the when and the where of alternative strategies.

This month, we’re looking at how to put alternative investments to work. When do these different strategies work, and when do they not?  And also, importantly, where do they fit in a portfolio?

Not every strategy works in every environment.

With the equity hedged and relative value strategies, those tend to work a little bit better in fairly directionless, but choppy markets.  Global macro strategies – those tend to work when you have a lot of policy changes taking place not only domestically, but even globally.  Thinking about the environment in which we’ve gone through over the last year, where you have the Federal Reserve talking about raising rates and yet the European Central Bank is now engaging in an asset purchase program, that’s creating some volatility and valuation differentials in those various markets.  That’s where perhaps a global macro strategy could perform well.

Then you also have the event driven strategies. Those tend to be a little bit more individualized and specific to companies as far as what they’re doing on the merger and acquisition front, whether or not they are announcing new dividends or share buybacks, or if there’s any new drug, perhaps, that they have created that is going to receive FDA approval.  Those are all types of events that can make an event driven strategy work.  Those clearly are relatively unpredictable and create opportunities for managers who do a lot of due diligence on the companies that they invest in to really add some value.

Now, hopefully, what you’ve seen with these different strategies is not all of them work at the same time, which is why I think that it makes a lot of sense to take these four and combine them into a portfolio of alternative strategies. That can hopefully make more consistent returns and also allow an expert manager to manage the risk of that overall portfolio.

So let’s talk about where alternatives fit in a portfolio.  Perhaps the number one question to ask is: How do you feel about your current allocation?  Are there parts of it that keep you up at night? Because investing isn’t something that should keep you up at night.  If it’s the equity portion of your portfolio, well, perhaps you want to swap out a small part of the equity exposure in favor of alternatives. Or if it’s the fixed-income portion, because you’re concerned that interest rates might bounce higher, that might be a good place to substitute in alternatives for your existing lower-yielding fixed-income exposure.

But wherever it is, I think that you can think of alternatives as being either at the core of your portfolio and you build around that or alternatively you can stick to your strategic allocation of traditional assets and then add on alternatives around what we would refer to as the satellite portion, looking for more of the opportunities to generate returns in a more consistent fashion over a full market cycle.

But wherever it is that you think alternatives should go in your portfolio, take advantage of the commentary (pdf) that you can receive from the alternatives managers.  Keep in mind alternative strategies are typically global in nature and give you access to new ideas.  It’s actually a great way to not just diversify your assets, but to diversify the ideas that go into your asset allocation, because that’s what alternative investing is really all about.

I’m Brian Jacobsen, until next time, stay informed.

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Lost bags catching up with airlines, not owners

Stocks posted moderate gains on a full day of economic and earnings news. Earnings were generally positive, while a surge in oil prices rallied the energy sector.

The Dow rose 75 points, with 21 of its 30 components advancing; the S&P 500 Index gained 10; and the Nasdaq closed 33 points higher. Advancers led decliners by two to one on the NYSE and the Nasdaq. The prices of Treasuries were mixed, with the 30-year weakening and the 10-year strengthening. Gold futures rose $8.70 to close at $1,201.30 an ounce, and the price of crude oil jumped $3.10 to settle at $56.39 a barrel, a 2015 high.

In earnings news:

  • Bank of America swung to a profit of $3.36 billion compared with a loss a year ago of $276 million, when it paid a $6 billion mortgage-related settlement. Revenue was $21.42 billion, down 5.9%, due partly to lower investment banking fees and trading income. Results were slightly lower than analysts’ expectations. The decreased litigation amounts showed up in its reduced costs, which dropped 29%. Bank of America’s shares (BAC) fell 1.14%.

In other business news:

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Office makeover edition

Man in a waiting roomYour office speaks volumes. What’s it telling your clients? Wayne Badorf, CFP®, CFS®, and Jon Lagerstedt provide insight.

Listen to the podcast.

Wayne Badorf: I’m often struck by how many times our first impression is not when we actually meet the professional we may be working with, but it’s often times before that.

I want to talk about whether or not it’s time for our advisors to make over their office.

I’m Wayne Badorf.

Jon Lagerstedt: And I’m Jon Lagerstedt.

Wayne: And welcome to The Essential Practice.

You know, Jon, I’ve been thinking about this topic having recently spent some time in waiting rooms with my family, and I know that when I step into any professional’s office, I immediately notice the décor and begin to assess if I’ve made a good selection.

Jon: Sure, sure—maybe an end table with a stack of old ratty magazines on it. It’s become a world of service. I was thinking about my car dealership, and they’ve totally reinvigorated and reinvented what a sitting room looks like. Now they have coffee cafés with Keurig machines with twenty different types of coffee. They have WiFi, current magazines. And I think that can apply to any type of business out there.

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Questioning the current-sy of U.S. currency

Mixed economic data and earnings reports led to mixed results in the markets today. The Dow rose 59 points, with 17 of its 30 components moving higher, and the S&P 500 Index added 3. The Nasdaq fell nearly 11 points on weak performance from biotech and semiconductor stocks. Advancers led decliners by five to three on the NYSE, but decliners outpaced advancers by nine to eight on the Nasdaq. Today’s weaker-than-expected economic data sparked a rally in the Treasury market, sending prices higher. Gold futures fell $6.70 to close at $1,192.60an ounce. Crude oil gained $1.38 to settle at $53.29 a barrel on news that the Iranian oil minister requested that the Organization of the Petroleum Exporting Countries reduce its output ahead of its June meeting.

In earnings news:

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Can negative yields persist?

Negative yieldsSummary

  • Negative yields persist overseas for several possible reasons. One is what economists call home bias.
  • Interest rate expectations in the U.S. and Europe as well as currency risk might also be sustaining the negative yields.
  • Low yields overseas are not, by themselves, enough to prevent U.S. yields from rising, but they might be sufficient to keep them from rising sharply from current levels.

An estimated $5 trillion of debt securities in the global markets now offer negative yields, including the five-year notes of the governments of Germany, Switzerland, the Netherlands, and Sweden. Yields on French and Portuguese two-year notes also trade at negative yields. Yields on Japanese five- and two-year notes are essentially zero.

In a world in which capital flows freely among global markets, why do these negative yields persist? One would expect assets to leave those markets and move to markets in countries such as the U.S., where the 10-year yield is around 2%. If such shifts were sufficiently large, yields would rise overseas and fall in the U.S., eliminating the negative readings. The chart shows that the current yield advantage of the benchmark U.S. 10-year notes versus the German 10-year bund is the widest in modern times. Capital mobility is apparently not sufficient to eliminate these generous yield spreads.

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