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  Japanese Equities Still Worth A Look
Posted Under: International-Global

 

View from the Observation Deck 

  1. Today’s blog post is an update of one we did on 7/12/12 (“Japanese Stocks Worth A Look At These Levels”). The unshaded area in the chart represents the movement in the Nikkei 225 Index since 7/11/12.
  2. From 7/11/12-8/27/14, the Nikkei 225 Index posted a cumulative total return of 39.53% (USD), or an average annualized gain of 16.94%, according to Bloomberg. The index level stood at 15534.82 on 8/27/14.
  3. For the 10-year period ended 8/27/14, the average price level of the Nikkei 225 Index was 12277.58. The high was 18261.98 on 7/9/07. As of 8/27, the index stood 14.9% below its 10-year high.
  4. Despite a 6.8% contraction in real GDP in Q2’14 (The Wall Street Journal consensus estimate was -7.1%), primarily due to an increase in the nation’s sales tax from 5% to 8%, the outlook for corporate earnings is encouraging.
  5. The estimated 2014 and 2015 earnings growth rates on the Nikkei 225 Index were 15.95% and 12.13%, respectively, on 8/27/14, according to consensus estimates from Bloomberg.
  6. Japan has already begun construction projects for the 2020 Summer Olympics in Tokyo. The reconstruction of areas hit by the Tsunami in March 2011 has been slow going. Japan has earmarked $250 billion for the rebuild.
  7. Japanese equities represent a 7.1% share of the total world equity market capitalization (cap), the second-biggest behind the 36.0% share for the U.S., according to data from Bloomberg. 
  8. Based on 2013 data, Japan has the third-largest economy in the world, behind the U.S. and China, according to the World Bank.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.

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Posted on Tuesday, September 02, 2014 @ 1:16 PM • Post Link Share: 
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  The Math Matters When it Comes to Valuations
Posted Under: Weekly Market Commentary Video
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., points to the strategic importance of the math when investors consider developments in valuations and the stock market.
Posted on Tuesday, September 02, 2014 @ 12:19 PM • Post Link Share: 
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  US Stocks Week Ended Aug. 29, 2014
Posted Under: Weekly Market Commentary

 
Intensifying conflict in Iraq and Syria, lingering questions over Russia and even a 6.0 magnitude earthquake in California all failed to shake investors’ confidence as major indexes were mostly flat to up in the final days leading to Labor Day weekend. The S&P 500 returned .80% for the week.  Year-to-date, the S&P 500 has returned 9.87% and currently trades at a P/E multiple of 18.05 times while yielding 1.90%. While news was light before the holiday, there was one major deal being announced prior to the three-day weekend. Burger King announced they would acquire Canadian donut chain, Tim Hortons for $11.8 billion. This acquisition is the latest of many tax inversion deals that will enable the company to move the Home of the Whopper to a tax-advantaged domicile. Also adding intrigue to this deal was the involvement of frequent tax-avoidance critic, Warren Buffett and Berkshire Hathaway, who will help finance the deal in the form preferred securities yielding 9%. Also agreeing to be acquired was biotechnology company, Intermune. They announced they would be acquired by pharmaceutical maker, Roche Holding, for $74/share in cash. Rising 2.21% last week was electronics retailer, Best Buy. Despite appreciating shares, the company disappointed some investors, reporting that sales declined by more than 4% last week. Finally in company news, Alibaba Group, the company many call China’s Amazon.com, reported impressive gains in sales and earnings with revenues rising 46% in the quarter compared to the same period a year earlier. This is all comes ahead of their much anticipated IPO. Looking ahead, few companies will be reporting earnings in this holiday-shortened trading week. Joy Global, Toll Brothers and Christopher & Banks will be reporting results.
Posted on Tuesday, September 02, 2014 @ 8:23 AM • Post Link Share: 
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  US Economy and Credit Markets Week Ended Aug. 29, 2014
Posted Under: Weekly Market Commentary

 
Yields for longer dated Treasury Bonds increased last week as the demand for US Government Debt has surged amid increasing global tensions and speculation that the European Central Bank will add monetary stimulus. Last Monday, July New Home Sales declined to the lowest point in four months. On Tuesday of last week, Consumer Confidence increased to its highest point in almost seven years while an increase in demand for Airplanes and Automobiles drove an increase in July Durable Goods Orders. On Thursday, 2Q Annualized GDP figures were higher than forecasted, which was primarily driven by a surge in Business Investment. Initial Jobless Claims were slightly less than expected as they continue to hover near the lowest levels since 2007. Despite an improving Labor Market, July Personal Income and Spending failed to meet expectations on Friday, as the lack of wage gains have caused consumers to limit spending. Major economic reports (and related consensus forecasts) for the upcoming holiday shortened week include: Tuesday: August Markit US Manufacturing PMI and August ISM Manufacturing (57.9 and 57 respectively); Wednesday: MBA Mortgage Applications (unch.) and July Factory Orders (11%); Thursday: August ADP Employment Change and Initial Jobless Claims (225K and 300K respectively) and July Trade Balance (-$42.4B); Friday: August Change in Nonfarm Payrolls and August Unemployment rate (225K and 6.1% respectively).

Posted on Tuesday, September 02, 2014 @ 8:20 AM • Post Link Share: 
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  It’s Time For Another Look At The Bond Market
Posted Under: Bond Market

 

View from the Observation Deck 

  1. Today’s blog post is an update of one we did on 1/9/14 and 5/27/14. Since 5/27/14, bond prices rose in four of the seven major categories featured in the chart. The other three dipped slightly. 
  2. Investment-grade bonds, in particular, appear to have benefitted the most from the 65 basis point decline in the yield on the 10-Year Treasury Note (T-Note) in 2014 (thru 8/25).
  3. Despite the strong rebound in real GDP growth in the U.S. in Q2’14 (+4.0% annualized), investors have shied away from speculative-grade debt, such as leveraged loans (bank/senior loans) and high yield corporate bonds. 
  4. Bank loan and high yield corporate bond funds (open-end) reported net outflows totaling $1.9 billion and $7.9 billion, respectively, in July, according to data from Morningstar.
  5. Year-to-date through July, net outflows for bank loan and high yield corporate bond funds (open-end) totaled $175 million and $784 million, respectively.
  6. Investors are having to navigate through some mixed signals. So far in 2014, it looks as though the economic weakness in Europe trumps the U.S. recovery, in our opinion.
  7. Weakness in Europe has pushed European government bond yields to such low levels that yields on U.S. bonds look attractive by comparison.
  8. The yield on the 10-Year T-Note in the U.S. is around 2.39%, compared to 0.95% and 1.29% for Germany and France’s 10-Year government securities.
  9. We intend to continue monitoring the comments from the Federal Reserve and the events in Europe.


This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The BofA Merrill Lynch 22+ Year U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. The BofA Merrill Lynch Fixed Rate Preferred Securities Index tracks the performance of investment grade fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market. The S&P/LSTA Leveraged Loan Index tracks the performance of a broad cross section of leveraged loans, including dollar-denominated loans to overseas issuers. The BofA Merrill Lynch 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government in its domestic market. The BofA Merrill Lynch U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The BofA Merrill Lynch U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market. The BofA Merrill Lynch Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and Eurobond markets.

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Posted on Tuesday, August 26, 2014 @ 2:41 PM • Post Link Share: 
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  US Stocks Week Ended Aug. 22, 2014
Posted Under: Weekly Market Commentary

 
Last week the S&P 500 Index closed in positive territory with a 1.75% return. The index moved up early on Monday from the previous week’s close and remained near those levels all day returning 0.86%. Better than expected housing starts data helped stocks continue their advance on Tuesday as the index returned 0.52% for the trading day. July housing starts of 1,093K at an annualized rate was much higher than expectations of 965K and June’s 945K. Fear of a potential interest rate increase by the Federal Reserve sooner than anticipated made Wednesday more volatile, but still kept the positive streak going with a 0.25% return. More positive economic data with existing home sales and jobless numbers were released on Thursday. July existing home sales of 5.15M annualized beat expectations of 5.02M. US initial jobless claims were 298K, which was a decrease from the previous week’s 311K and was lower than the consensus estimate of 303K. This helped the S&P 500 Index return 0.30% and hit a new all-time closing high of 1,992.37, surpassing the previous high of 1,987.98 on July 24. Investors were awaiting Fed Chairwoman Janet Yellen’s comments from Jackson Hole, Wyoming on Friday. There was no clear indication given of the Fed’s timeline to increase rates and the index gave us it’s only down day of the week with a return of -0.19%. Nine of the ten economic sectors had positive performance for the week. The industrials sector was the best performing sector with a 2.37% return. The information technology and financials sectors followed with 2.36% and 2.33% returns, respectively. The telecommunication services sector’s -0.38% return was the worst performance of all the sectors and was followed by energy and consumer staples which returned 0.60% and 0.78%, respectively. Keurig Green Mountain Inc., a specialty coffee and coffee maker business, turned in the best performance in the S&P 500 Index with a 15.97% gain. The next two best performers were Ross Stores Inc. and TJX Companies Inc. with returns of 13.46% and 11.70%, respectively. This week will bring earnings news from Brown-Forman Corp., Dollar General Corp., Tiffany & Co.. Best Buy Co. Inc. and others.
Posted on Monday, August 25, 2014 @ 8:05 AM • Post Link Share: 
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  US Economy and Credit Markets Week Ended Aug. 22, 2014
Posted Under: Weekly Market Commentary

 
The middle of the yield curve is typically more sensitive to monetary policy expectations and moved substantially more than the short and longer yielding Government Bonds last week as the Federal Reserve discussion of monetary policy at Jackson Hole last week focused on the strengthening US economy. There was only a small increase in the yield of longer denominated bonds as global tensions continue to support investor purchases of safe US government debt. Last Tuesday, the July CPI met expectations but was lower than June’s and housing starts were slightly below expectations as were building permits. On Thursday of last week, Initial Jobless Claims were slightly less than expected as were continuing claims. Much of the improvement is attributed to fewer layoffs from U.S. employers. This and the discussion at Jackson Hole leads many investors to believe that additional stimulus measures will be considered unnecessary and that an increase in interest rates is possible, though the Federal Reserve has left the timing of such an increase unclear as it is difficult to get a clear employment picture due to “slack,” or underemployment. Major economic reports (and related consensus forecasts) for the upcoming week include: Monday: July New Home Sales (430K); Tuesday: July Durable Goods Orders and August Consumer Confidence Index (7.6% and 88.5 respectively); Wednesday: MBA Mortgage Applications (unch.); Thursday: Initial Jobless Claims and 2Q Annualized GDP (300K and 3.9% respectively); Friday: July Personal Income and Spending (.3% and .2%) and August University of Michigan Confidence Survey (80.2).
Posted on Monday, August 25, 2014 @ 8:01 AM • Post Link Share: 
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  Tracking The Retail Investor’s Appetite For High Yield Corporate Bonds
Posted Under: Bond Market

 

View from the Observation Deck 

  1. High yield corporate bonds are speculative-grade securities (higher level of credit risk) that tend to pay a higher rate of interest than their investment grade counterparts over time. 
  2. One of the primary indicators used for assessing risk levels in the high yield corporate bond market is the industry default rate. A bond default occurs when the issuer fails to make an interest or principal payment within the specified period.
  3. The global speculative-grade default rate has averaged around 4.7% since the early 1980s, according to data from Moody’s. The U.S. speculative-grade default rate stood at 1.8% in July 2014.
  4. In November 2013, Barron’s reported that Martin Fridson, high yield corporate bond guru and head of FridsonVision LLC, released a forecast calling for a steep rise in high yield corporate bond defaults beginning in 2016.
  5. From 2000-2013, total assets held by open-end high yield bond funds accounted for an average of 14.25% of the total average amount of assets held by all open-end taxable bond funds (see chart).
  6. As clearly indicated in the chart, asset levels dropped dramatically during the financial crisis in 2008 and remained below average through 2012.
  7. The 14.25% average share of total taxable bond fund assets nearly matches the average share of high yield corporate bond issuance relative to total corporate bond issuance.
  8. From 2000-2013, high yield corporate bond issuance as a percentage of total corporate bond issuance was 15.40%, on average, according to data from Thomson Reuters.
  9. From 12/31/99-8/20/14, a period that included a number of challenges and shocks to the economy, the BofA Merrill Lynch U.S. High Yield Index posted an average annual total return of 7.70%.


This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The BofA Merrill Lynch U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market.

To Download a PDF of this post, please click here.

Posted on Thursday, August 21, 2014 @ 2:05 PM • Post Link Share: 
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  Europe…A Distinction With A Bit Of A Difference
Posted Under: International-Global

 

View from the Observation Deck 

  1. European equities have experienced a pullback of late. The sell-off has been more pronounced in the European Union (EU or Eurozone), which is comprised of 18 countries. Broader Europe spans 28 countries.
  2. From 6/10/14-8/18/14, the MSCI Europe Index and EURO STOXX 50 Index posted total returns of -5.2% and -8.3%, respectively. A correction is usually defined as a 10.00% to 19.99% decline in prices.
  3. Stocks have traded lower in Europe due in large part to some soft economic data in Q2’14 and the uncertainty over sanctions between European nations and Russia stemming from the Russia/Ukraine conflict.
  4. As indicated in the chart, Europe has only been in growth mode (GDP) for five quarters, on a year-over-year basis. The Eurozone has only been expanding for three quarters.
  5. The European Central Bank (ECB) has been accommodating via its monetary policy and its commitment to backstopping the capital markets. The ECB’s involvement helped restore investor confidence during the sovereign debt crisis in the EU. 
  6. The ECB is under pressure to do more to counter low inflation, according to The Economist. One of the options on the table is to initiate quantitative easing programs, such as those the Federal Reserve adopted in the U.S.
  7. We believe that investors holding European equities should expect some bumps in the road to recovery. The U.S. economic recovery, which just turned five years old in June, has been rather choppy since it commenced in July 2009. 
  8. Here were the real GDP figures (y-o-y) for the U.S. over the past 10 quarters: 2.4% (Q2’14); 1.9% (Q1’14); 3.1% (Q4’13); 2.3% (Q3’13); 1.8% (Q2’13); 1.7% (Q1’13); 1.6% (Q4’12); 2.7% (Q3’12); 2.3% (Q2’12); and 2.6% (Q1’12).


This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. This chart is for illustrative purposes only and not indicative of any actual investment. The MSCI Europe Index is a free-float weighted index designed to measure the performance of the developed equity markets in Europe. The EURO STOXX 50 (Price) Index is a free-float market capitalization-weighted index of 50 European blue-chip stocks from those countries participating in the European Monetary Union.

To Download a PDF of this post, please click here.

Posted on Tuesday, August 19, 2014 @ 1:57 PM • Post Link Share: 
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  The Dog Days of Summer
Posted Under: Weekly Market Commentary Video
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., provides an August 2014 update and takes a look ahead at the rest of the quarter.
Posted on Monday, August 18, 2014 @ 12:19 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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