Quarterly Review and Outlook - Fourth Quarter 2013

In The Theory of Interest, Irving Fisher, who Nobel Laureate Milton Friedman called America’s greatest economist, created the Fisher equation, which states the nominal bond yield is equal to the real yield plus expected inflation. It serves as the pillar of macroeconomics and as the foundational relationship of the bond market. It has been reconfirmed many times by scholarly examination and by the sheer force of historical experience. Examining periods of both low and high inflation offers insight into how each variable in the Fisher equation affects the outcome.

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The Value of Advice : An Investor Viewpoint

Canadian retail investors are exposed to financial markets that are among the most developed yet poorly regulated in the world. They enjoy an overwhelming supply of products and services to address their financial and investment needs. Advice is a component of this unduly complex marketplace. Canadians historically have chosen to invest and manage their financial decisions with the help of advisors. But things are changing . According to J. D. Power and Associates, one third of full service brokerage clients also do some investing online, and 26% of bank mutual fund investors are also using the online channel.

Whether its investment dealer shenanigans, incompetent advisers, high mutual fund fees, the non-bank ABCP fiasco, poor fund performance , the Earl Jones Ponzi debacle, or advisor fraud, retail investors are looking at alternatives to the commission-driven advisor channel. Too many 'advisors' are basically salespersons interested in collecting trailer commissions on mutual funds and other expensive packaged products. A recent Nanos Research poll found that 77 % of respondents rated medical doctors as "high" or "very high" when it comes to honesty and ethics in their profession; business executives 25% , bankers 31%. and Stockbrokers rated just 18%

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Investment risk and financial advice

A guide to using Vanguard’s risk profiling tool as a starting point to discovering a client’s true risk profile.

Your clients’ perception of ‘risk’ and what the investment industry portrays as ‘risk’ can differ radically. This can lead to challenges for advisers if they rely solely on quantitative measures of risk, such as ‘volatility’ for example.

Experience in markets where fee-based advice models are well established, suggests that advisers should consider taking a more comprehensive approach to educating their clients about the nature of investment risk, as well as understanding their clients’ true and complete risk profile.

For investment professionals only – not for retail investors. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

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QE and ultra-low interest rates: Distributional effects and risks

A new report from the McKinsey Global Institute examines the distributional effects of these ultra-low rates. It finds that there have been significant effects on different sectors in the economy in terms of income interest and expense. From 2007 to 2012, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks (exhibit). Nonfinancial corporations—large borrowers such as governments—benefited by $710 billion as the interest rates on debt fell. Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5 percent in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards.

Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income.

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Market Indices, Asset & Risk Management Numbers: December 2013

Great summary of investment performance - monthly, quarter, Year to date and 1-year stats. Updated performance data: stocks, bonds, mixed portfolios, etc.

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4Q Earnings Guidance for S&P 500 Companies

  • For Q4 2013, 94 companies in the S&P500 have issued negative EPS guidance and 13 companies have issued positive EPS guidance. If these are the final numbers, it will mark the highest number of companies issuing negative EPS guidance and tie the mark for the lowest number of companies issuing positive EPS guidance since FactSet began tracking the data in 2006.
  • The percentage of companies issuing negative EPS guidance is 88% (94 out of 107). If this is the final percentage for the quarter, it will mark the highest percentage on record (since 2006).
  • On average, companies have issued EPS guidance that has been 5.7% below the mean EPS estimate. This percentage decline is smaller than the 5-year average of -11.1% and 5-year median of -7.8%.
  • The average price change (2 days before issuing guidance through 2 days after issuing guidance) for companies issuing negative EPS guidance for Q4 is -1.5%, which is below above the five-year average (-0.8%). The average price change for companies issuing positive EPS guidance is -0.1%, which is well below the five-year average (+3.0%). This is the first time the average price change for companies issuing positive EPS guidance has been negative since Q4 2008.
  • For the current fiscal year, 149 companies have issued negative EPS guidance and 116 companies have issued positive EPS guidance. There was a 15% increase in the number of companies issuing positive EPS guidance from the end of September through the end of December.

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