Opinion

John Wasik

How to hold fickle commodities in your portfolio

Jan 28, 2013 19:36 UTC

CHICAGO, Jan 28 (Reuters) – Commodities are among the most
skittish investments. Not only do they react to global economic
forces, they can seesaw with supply and demand, China’s
voracious appetite for raw materials and the weather.

Since commodities are tangible things that are mined or
grown, they are hard to hold and often bought through futures
contracts, which have their own peculiarities. Yet what is
undeniable about commodities is that they are usually a good
tracker of broad economic growth, inflation among producer
prices and they run inversely to the dollar’s decline. You
should have a piece of them in your portfolio, but you have to
be careful about how you hold them.

Here’s how strange commodities are: Even though there was
growth nearly everywhere except for Europe last year,
commodities, as measured by the Dow Jones/UBS commodities index,
declined 1 percent. That compares to a resounding 16 percent
gain for the S&P 500 index of large U.S. stocks with dividends
reinvested.

Commodities prices have been following muted expectations
for the Chinese economy in recent years, which is now the
world’s largest consumer of raw materials.

Despite predictions last year that the Chinese export-driven
economy would cool down due to slack demand in the euro zone and
the U.S., according to HSBC, China’s 8-percent growth rate may
not slow down this year. The IMF reports that China is consuming
some 40 percent of base metals, 23 percent of agricultural
products and 20 percent of non-renewable energy resources.

Curing the curse of the bandwagon effect before the next crisis: John Wasik

Jan 28, 2013 15:51 UTC

CHICAGO (Reuters) – During a market crisis, when everyone wants to jump off the ship in the same leaky lifeboats, that doesn’t bode well for most individual investors, who simply want to preserve capital.

The safeguard is to move against what behavioral finance experts call the “bandwagon effect” — when so many investors follow the same path that they disrupt the traditional correlation of assets.

This is what has happened when Modern Portfolio Theory (MPT) — a bedrock of investing that advocates diversifying your portfolio to temper risk and boost returns — met big institutional investors who employed the idea on steroids, plowing money into alternative investments from leveraged hedge funds to timber.

Curing the curse of the bandwagon effect before the next crisis

Jan 25, 2013 18:08 UTC

CHICAGO, Jan 25 (Reuters) – During a market crisis, when
everyone wants to jump off the ship in the same leaky lifeboats,
that doesn’t bode well for most individual investors, who simply
want to preserve capital.

The safeguard is to move against what behavioral finance
experts call the “bandwagon effect” — when so many investors
follow the same path that they disrupt the traditional
correlation of assets.

This is what has happened when Modern Portfolio Theory (MPT)
– a bedrock of investing that advocates diversifying your
portfolio to temper risk and boost returns — met big
institutional investors who employed the idea on steroids,
plowing money into alternative investments from leveraged hedge
funds to timber.

Disclosure won’t help money fund investors

Jan 22, 2013 18:30 UTC

CHICAGO (Reuters) – The $2.7 trillion money market funds market is in line for new regulations as the Securities and Exchange Commission ponders new rule changes that would give investors a better idea of how much risk they’re taking.

But no matter what happens, the funds will still be relatively safe baskets for short-term cash, though afflicted by paltry yields for the near term.

The biggest change that might come about is increased transparency. The SEC tabled a proposal late last year on a set of rules and now the matter is being reconsidered, although it may not be acted upon until a new, permanent chairman is appointed and one of the empty commissioner’s seats is filled. Another proposal before the Financial Stability Oversight Council may require that managers set aside capital against losses or price funds at the actual net asset value.

Five red flags for municipal bond investors: Wasik

Jan 18, 2013 16:43 UTC

CHICAGO (Reuters) – There is a bubble forming in the municipal bond market, and millions of investors could be impacted if it bursts.

In the coming months, as Congress and the White House wrestle over the next budget, debt ceiling and new sources of revenue, volatility is likely to roil the muni market. Skittish investors had triggered a minor sell-off in December. Yet despite a 1.2-percent loss in the last month, the Barclays Municipal Bond Index gained 6.8 percent overall in 2012.

Munis avoided the chopping block in the last round of fiscal cliff negotiations, but that does not mean they are in the clear. They are still vulnerable in the debt-ceiling negotiations since Washington is looking for new sources of revenue to reduce the federal deficit. No matter how Congress acts, you still need to be cautious. Any uptick in interest rates, or market hiccups, could trigger losses, too.

Mid-cap stocks worth a close look

Jan 14, 2013 17:56 UTC

CHICAGO (Reuters) – Like the middle children they are, mid-cap stocks are often outshined by their mega-cap brethren. The largest two constituents of the S&P 400 Mid-cap Index are Regeneron Pharmaceuticals Inc and Equinix Inc, an information technology firm. Not exactly Apple Inc or Johnson & Johnson.

Yet inattention from the investing world often misses that fact that mid-caps often outperform large companies and are worthy additions to any portfolio. These are generally companies with a market value of from $1 billion to $4 billion but with an outer range of about $13 billion,

Take Ametek Inc, a $9 billion company, which produces electronic instruments for the aerospace industry. It rarely makes headlines, but the company hit a 52-week high on January 4. Overall, the S&P mid-cap index was up almost 4 percent year-to-date through January 11, compared to 3.2-percent return for the large-cap S&P 500 Index over the same period.

The Soul of the S&P 500: Durable stocks over time

Jan 11, 2013 13:03 UTC

CHICAGO (Reuters) – It takes a lot of gumption to buy mongrel stocks at the beginning of the year.

Generally, if you’re looking for stocks with upside potential, picking a beaten-up sector is a good way to find turnaround stories.

Last year’s comeback kid was the housing industry, which has been limping along since the 2008 meltdown. One of the biggest winners was the PulteGroup, the homebuilder that posted negative returns in four out of the past five years through 2011. The company has soared about 169 percent on the rebounding housing market for the past 12 months through January 9 as the market is continuing to favor the sector in 2013.

Three smart money moves for 2013

Jan 7, 2013 16:50 UTC

CHICAGO, Jan 7 (Reuters) – Using the non-courageous power of
hindsight, it’s easy to look back on the previous year and see
where the “smart” and “dumb” money flowed.

The direction of money last year tells a well-worn tale:
When fear dominates, money moves into safer vehicles such as
bonds and money-market funds.

After 2008, you can hardly blame anyone for still wanting to
avoid volatility. But those who retreated mostly to fixed-income
have missed the better part of a bull market that’s been running
since 2009.

Hedging “cliff” volatility might not get you too far

Jan 4, 2013 16:57 UTC

CHICAGO (Reuters) – Once again, “fiscal cliff” mayhem has given investors a furtive look into the unsettling world of market volatility, which will not end with Tuesday’s deal. We will likely see more Tilt-A-Whirl politics in the coming two months as Congress deals with the debt ceiling and budget cuts.

Volatility has long been the enemy of the mainstream investor. It is easy enough to measure and hedge, but short-term gauges and volatility products such as exchange-traded notes can get you into trouble. They do not work effectively for buy-and-hold investors and have to be timed precisely for traders.

The skittish mass psychology of 2011 set the stage nicely for exchange-traded products that track or blunt volatility. After a rough summer of debt-ceiling and euro zone gyrations, the S&P 500 barely eked out a gain.

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