An Oil Breakout and Pullback

Oil, and more specifically gasoline, has been in the news recently. Will $4 or $5 gasoline kill the consumer one more time? For the moment it seems the improving jobs picture is helping to insulate the consumer, but at some point there will come a choking point. With that said the price chart for oil looks like it’s heading higher.

Three Ways to Evaluate Portfolio Returns

Consumers of investment management might consider three different methods to analyze investment returns. The first method is to look at absolute returns in the context of your financial plan. If the portfolio return was 7% annualized for ten years, was that return high enough for you to achieve your financial goals? What about 3% annualized returns, or 12% annualized returns? Of course, looking through the lens of absolute returns would disqualify negative returns as helping anyone to achieve their goals, so investors often look to other methods to evaluate portfolio returns. Today it is rare to find a manager in any asset class, including hedge funds, who claims to be able to consistently generate absolute returns.

A Bearish Divergence

On October 7, 2011, I wrote a blog post describing a bullish divergence forming in the Financial Sector SPDR. I used the Relative Strength Indicator to measure momentum and the price of the XLF to show that although the XLF made a new price low, the indicator did not confirm the drop. I could have used other indicators and equity positions, and the result would have been the same.

Is the Volatility Tap Poised to Flow Again?

We have been patiently waiting for markets to correct and give us a chance to purchase positions that edge our portfolios closer to a neutral stance. But so far this year, the volatility tap has been shut as we continue to watch a slow drift up in the markets. This has tested our patience as we wait for a catalyst to erupt and take some of the froth out of the market.

Fixed Income 101 (or maybe 201)

The duration of a bond portfolio tells you how much the price of your bonds will change for each percentage change in interest rates. A high duration means more sensitivity or price volatility as interest rates change. Duration tells you virtually everything you want to know about the price sensitivity of U.S. government bonds, which are presumed to be risk-free from the standpoint of default risk. Prices of government bonds move with a mathematical certainty depending on the coupon and the maturity of the bonds, both of which go into the duration calculation. Investors increase the duration of their portfolio by increasing the maturity of the bonds they own, and shorten the duration by shortening bond maturities. As you move up the risk-of-default scale from government bonds, you can invest in what is known as “spread products,” or bonds that are priced based on the difference, or spread, in their yield to U.S. Treasury securities. Spread products include mortgage bonds, high quality corporate bonds, junk bonds, and emerging market bonds, all of which typically offer investors higher yields in exchange for a higher risk of default. The price of spread products is not only impacted by their duration, but is also greatly affected by investor’s perceptions of the default risk of the underlying bonds. These bonds are priced on their creditworthiness, and are often simply referred to as credit.

How Bulls and Bears See Fed Policy

Bearish investors look at the chart below and immediately notice that Fed intervention in the form of QE1 and QE2 (quantitative easing program 1 and 2, or perhaps more accurately, money printing programs 1 and 2) occurred after substantial market declines. QE1 is announced after the Lehman Brothers collapse in 2008 and QE2 is hinted at when Bernanke addressed the Jackson Hole conference in the summer of 2010 (after we learned of the Greek debt problems). Given that last week’s news regarding fourth quarter GDP was somewhat disappointing, bears would warn risk takers not to count on the Fed to announce a new QE3 program that would support the equity markets until after the next major stock market correction, or bear market. In addition, the magnitude of the impact of the Fed announcements on the market seems to be diminishing. The market move during QE2 was less than QE1, and the subsequent policy shifts have had less impact than QE2.