Abandon Hope

 YES, this is what my friend Janice advocates.  Let us read why:

Hope in reality is the worst of all evils because it prolongs the torments of man…Friedrich Nietzsche

Take an old pair of jeans, cut a hole in one of the pockets. , and start pouring sand into that pocket. What happens? Sand runs down your leg and to the ground.   What do you do?  Keep pouring until the sand is up to your ankles, knees or waist?

At what point do you realize and act on the fact that no matter how much or how fast you pour sand into the empty pocket, you have a hole in your pocket? When do you decide that you either have to stop pouring sand or just throw your pants on the ground and run away as fast as you can?

Sadly, many of you will keep pouring until you are up to your neck in sand. Suddenly, it begins to feel like quicksand and you are trapped.  At this point, you feel like you are being pulled down into the quicksand, choking and suffocating in the murky slime.

This is how it feels to lose. The hole in your pocket is the losing position. The sand is your mental, emotional, physical, financial and spiritual capital  pouring out until you are drained and sinking in a quagmire of your own creation.  The pain of loss is excruciating, like a knife stabbing through you. Everything feels quite different when you are in a losing position.  The experience of time changes and seems to slow down to a snail’s pace.  Physical health deteriorates due to the outpouring of stress hormones that weaken your immune system. In the same manner that going long in the markets is not the inverse of going short, losing is much more than just the absence of winning.

The feeling of losing is persistent, relentless and devastating. It eats away at you like a metastasizing cancer that kills one cell after the other. If it is not contained, losing truly feels like death

What else? Irritability, sleeplessness, continual searching for confirmation, anxiety, depression, tick-it is (the toxic habit of watching every tick of the position), rumination, self-deception, guilt, shame– and it goes on and on.

Perhaps the worst aspect of this is the spiritual decay that manifests as self deception and lying to family and friends. One is rarely capable of owning true feelings of guilt, shame and inadequacy and shifts into a mind morph of rationalization where a failed trade becomes a hold and hope investment.

Of the gamut of emotions that floods traders and investors on a daily basis, the most risky is hope.  It borders on delusional to believe that the markets are kind, loving and give you money if you just keep your pants on and hang in there.    If this is what you are thinking, it might be a good time to reassess why you are in the financial markets–  among the most cruel, bloody and dangerous games that humans play.

So what can you do about this mess? Abandon hope. As extreme as this may sound, it is the only way to be consistently successful. Attachment to a losing position is a recipe for disaster. Eschew complacency and mediocrity, both in trading and life. Cut losers quickly and do not sit around waiting for the markets to rescue you.   80% of all traders are out of the game within six months because they don’t have the discipline to manage risk by cutting losing positions.

Who can say what is waiting for you at the bottom of the slippery slope of hope?  Stop pouring sand through the hole in your pants before it is too late. Suffering is optional and you are in control. Take your power and use it to make yourself strong in the service of living and breathing with freedom to trade another day.

The trouble with most people is that they think with their hopes or fears or wishes rather than with their minds… Will Durant (American Historian and Philosopher)

Janice Dorn, M.D., Ph.D.





The last day on the Mayan Calender

Musing by my friend David Kotok:

Mayans, Lincoln, Markets
December 21, 2012

Well, guess what?  The world did not end with the last entry on the Mayan calendar.  How about that?


I remember seeing the calendar when visiting Tikal, a monumental testament to a civilization that collapsed by over-taxing its resources.   After the collapse Tikal was abandoned for centuries.  Nature overwhelmed the city with tropical vines, trees, and shrubs.  To the eye, a canopy of green growth replaced Tikal.  Centuries later, the ruins of Tikal were discovered under the sea of green, and the excavations commenced.  Tikal is a wonder of antiquity worth seeing if you can get to Guatemala, and we strongly suggest a visit.


Some day, centuries hence, our grand experiment with democracy may face the fate of Tikal.  We call that experiment American politics, and we watch it now in real time.  It used to look like the movie depiction in Lincoln. To get a glimpse of how and why the US House of Representatives works, see this wonderful, five-star movie.  Thoroughly researched for historical accuracy, its stellar performances reveal the character of Abe Lincoln and the turmoil and success that immediately followed Lincoln’s re-election.


Juxtapose this history to our present circumstance, and the contrast is remarkable.  Obama is a re-elected president.  Like Lincoln’s, his opposition is in the House.  In the year preceding Lincoln’s reelection, the Senate had already passed the 13th Amendment.  Today’s Democratic party is the opposite of what it was when Democrats were trying to preserve slavery and avoid passage of the 13th Amendment to the US Constitution.  At the time, Republicans were the new political force and majority.  They lost (in 1856) their first attempt for the White House with Freemont.  They won their first national power with Lincoln’s first term.  They were re-elected with a majority while the country was engaged in the Civil War and while thousands of American suffered and died.


After Lincoln came the period of reconstruction. Illegalized, slavery ceased, but racism gave way slowly.  In some places in the United States, it is still giving way slowly.  But the country survived, and the political forces which govern us solidified.  We continued to flourish, to defend ourselves in war, and to create a system of social safety on which we currently rely.  We started to tax more heavily to pay for that safety.  In doing so, we concentrated power in Washington and removed it from the hands of the states.


It was President Lincoln who first passed the law to tax income in 1861.  That first tax was replaced with a different form of income tax in 1862.  In 1913, at the time of the creation of the Federal Reserve, the top income tax rate was 7%.  I will leave the rest of this history to serious readers who want to find it and study it.


To paraphrase the great oration of Lincoln, now we are engaged in a great national debate, determining whether this nation can balance the tension between funding the safety net and taxing income and wealth.  We all agree that we cannot tax 100% of income and wealth because we will obtain zero when we do.  We also agree that some safety net is a necessity of modern society.


We just witnessed the horrors that occur when young people in our society fall through the safety net and act in a deranged manner.  Guns will again become the focus of a huge national debate.  Query: will that debate address the lack of funding for the safety net that might have caught Lanza and prevented this mass murder?


In our view, the fiscal cliff issues will eventually be resolved.  A middle ground will be found.  Alternatively, one side will be sufficiently wearied by the political fight and the other side will find the ways to achieve sufficient votes to pass legislation.  Lincoln did it.  The Obama-led Democrats and the Boehner-led Republicans will do it, too.


We wish our readers a merry Christmas and a celebratory New Year.  We believe a political resolution will prevail because it has to.  To paraphrase Lincoln again, the nation will endure and its political character will remain intact. 


BTW, markets will like it.  Part of our American culture is the private sector and the application of capital investment.  The US stock market is under-owned.  We reached our target range of 1450-1550 by yearend.   We are fully invested.  We base that viewpoint on the assumption that any trip over the cliff is temporary.  Next stop is 1600 by the middle of Obama’s second term and 2000 on the S&P 500 index by the end of the decade.  Low inflation, low interest rates, and a slow (but gradually accelerating) recovery are all ahead of us.  Housing is recovering in over 40 states; it was deteriorating in over 40 states just three years ago.  Our current account deficit has been shrinking from its peak several years ago.


America is mending in its own volatile and erratic way.  You can bet on it.  We are.


David R. Kotok, Chairman and Chief Investment Officer


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Fed watching …

More on the Fed from my friend David Kotok to share:


Fed Watching and Forecasting Has Just Become More Important
December 17, 2012


Bob Eisenbeis is Cumberland’s Vice Chairman & Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com.  He may be reached at Bob.Eisenbeis@cumber.com.


The FOMC surprised most economists after its December meeting, not with its decision to extend its MBS purchases or to expand its long-term Treasury purchases, but with the changes to its communications strategy.  What the FOMC said in its statement was that it would keep its zero interest rate policy as long as the unemployment rate remained above 6.5 percent, provided its inflation forecast one to two years out for inflation stayed below 2.5% and longer-run inflation expectations remained “well anchored.”


While the statement seems relatively clear at first blush, Chairman Bernanke’s elaboration of the changes during his press conference indicated that the policy was filled with nuance and conditionality not fully appreciated by pundits or the press, and that there had been some backpedaling on the key inflation measure upon which the FOMC was conditioning its policies.  Bernanke indicated that in addition to the unemployment rate, the Committee would also look at many other indicators of employment and labor-market conditions that might affect its policy decision.  The Committee might not be inclined to act, for example, if unemployment dipped below the target because a large number of people had suddenly exited the labor market.  He also indicated that the Committee intended to look through what it viewed as temporary, or transitory, price increases, and that this was part of the rationale for its one- to two-year time horizon.


As one digests the Fed’s adoption of specific targets that might trigger policy moves, things become messy indeed.  The first logical question, since the change is to be based upon a forecast, is, exactly whose forecast will be used to judge whether the inflation forecast was above the 2.5% trigger?  Chairman Bernanke indicated that the Committee would look at not only its own forecasts but those of professional forecasters, as well as other market indicators.  So instead of providing a clear indication of whose forecasts would be the ones relied upon – for example, its own forecasts presented four times a year – the Committee chose to fuzz up the issue by indicating it would consider many different forecasts.  This means that the Committee can cherry pick whatever forecast it chooses to justify either making or not making a policy move; and ex anti, the public will be forced to guess as to which forecasts may or may not be in favor and relied upon by the FOMC.  Professional forecasters will certainly be hyping their forecasts and past performance as they vie for public attention.  This is not a positive step towards policymaking transparency.


It is particularly interesting that the Committee’s own forecasts were not specifically selected as the ones to be relied upon.  Perhaps this is because the Committee has failed in its experimental efforts to construct a consensus forecast.  And it probably failed because there is neither agreement among FOMC participants as to what the appropriate assumptions should be about the future path of policy, nor is there much consistency in the models used and the forecasts produced. 


As an aside, it is virtually impossible for the individual governors to produce the kinds of sophisticated forecasts that the Fed staff produces, since the governors don’t have their own independent staffs.  This suggests that the governors’ forecasts are likely to be highly collinear with those of the staff, while the Reserve Bank presidents’ forecasts are more heterogeneous and independent, because each has his or her own staff economists who prepare separate forecasts with often differing views about the structure of the economy and its dynamics.  This situation gives the seven governors and, by implication, the Board’s staff an even more dominant position in policymaking than the formal structure of the FOMC, with its seven governors and five Reserve Bank presidents, might suggest.  The question then becomes, whose forecasts are more accurate, those of the Board’s staff or those of one or more of the Reserve Bank presidents? 


The second logical question is what criteria will be used to determine whether inflation expectations are “well anchored?”  Will that be triggered by a particular change in measures of inflation expectations by professional forecasters, by surveys, or by a change in estimates of inflation expectations extracted from the term structure?  How much of a change needs to be observed before concluding that expectations are no longer “well anchored?”


In light of the FOMC’s new communications strategy, market participants will be incented to devote significant resources to monitoring labor-market conditions and inflation forecasts, since fortunes depend upon front running FOMC policy moves.  Who, for example, wants to be long MBS when the Fed ceases its purchases, or who wants to be invested in fixed-income securities when rates start to rise?


The key for investors lies in obtaining credible, high-quality forecasts and intelligence about labor-market conditions and inflation that approximate, or are better than, those relied upon by the FOMC.  Predicting unemployment is relatively easy, because the unemployment rate changes very slowly.  The mean change in the monthly unemployment rate from January 1950 through November 2012 was just .0016, with a standard deviation of 20 basis points and a mean absolute deviation of 14 basis points.  In many models, the best forecast of next month’s unemployment is simply that of the past month. 


The really troublesome issue centers on the reliance upon inflation forecasts one to two years out.  First of all, is the critical time horizon one year or two years?  There is a big difference!  The chairman, in his press conference, indicated that forecasts of inflation become suspect after only a few quarters.  In addition, work by myself and former colleagues at the Atlanta Fed demonstrated that it is extremely difficult for a forecaster to be right consistently in forecasting the key economic variables.  Even the best forecasters have relatively high error rates with even their short- and intermediate-term forecasts.  Their forecasts may be dead on one quarter and way off for the next quarter.  Figuring out who is right and when isn’t easy.


So, the key question is whether this change in communications has helped markets participants or simply added to uncertainty.  The change clearly shows us what factors to look at, but we knew those before the change.  But what it hasn’t done is tell us how the Committee will weigh the various measures of labor-market conditions or what inflation forecasts will be given more or less weight when it comes to decision time. 


With so much money riding on the FOMC’s decisions, the switch back to core inflation, for example, is a puzzle – if in fact that change was actually made – and requires more attention.  Headline inflation is more volatile than core PCE, and skeptics might conclude that the change back was a backdoor way of indicating that the Fed might have a greater tolerance for short-term deviations in the more volatile headline PCE inflation index than the 2.5% core PCE tolerance number mentioned might imply.  I would also note that not one policy maker deviated from a 2% forecast for inflation over the longer run, and the Committee doesn’t even provide forecasts for core PCE over the longer run. 


The Committee’s choice of the one to two year time period also suggests that the projection materials, to be useful will have to add a separate set of projections for one year and two years in order to separate their hope, or target for inflation, from the reality of where it actually is. 


In addition, the change in communications policy begs for more frequent forecasts by the FOMC.  Preferably, forecasts would be produced and released at every FOMC meeting.  Consider the difficulty the FOMC will face the first time it has to change policy following a meeting in which forecasts are not made or not made public.  This doesn’t seem like a positive development when it comes to the Fed’s transparency objective.


Several things are now more clear, however.  First, the demand for both Fed staff who involved in the forecasting process and the output of the best private-sector forecasters has just gone up significantly.  Beware of those touting recent forecasting success! Look for consistent performance.  Research shows that consensus measures and the averaging of several forecasts tend to be better than relying upon any one forecaster.


Second, even more attention will now be paid to speeches by both bank presidents and the governors, as people seek clues to determine how each views labor-market conditions and the inflation outlook.  Third, the pressure for more frequent FOMC forecasts should be heightened.  Fourth, one should expect a great deal of speculation in financial markets in long and short MBS and bond positions , and hedging against upward movements in rates will become preeminent. For this reason, market participants should expect sharp upward movements in rates once there is even a hint of a policy move.  And these hints will now be based more upon publicly available forecasts rather than Fed forecasts.  Finally, the FOMC should not be surprised if it is constantly placed in the position of having to ratify forecasts with policy moves, to maintain credibility.  Disappointing markets with detailed ex post rationales and explanations as to why policy moves weren’t delivered as expected or as indicated by the FOMC’s crude numerical targets will destroy credibility and the FOMC’s ability to act independently. 


Bob Eisenbeis, Vice Chairman & Chief Monetary Economist


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What the new Fed means for Markets

By my friend David Kotok.

Also my latest
Seasons’ greetings video


New Fed Policy & Markets
December 15, 2012

My colleague Bob Eisenbeis will address the Fed’s new policy and what it means for “Fed watching.”  Let me address what I think it means for markets.


We expect market agents to focus on the numbers.  6.5% has become the targeted unemployment rate for the headline unemployment statistic.  That is now the “Evans rule,” named for Chicago Fed President Charles Evans, who pushed for this numerical standard as a threshold for the Fed to change its policy from the present expansive and stimulative one.  Evans argues that the Fed should stay the course until the unemployment rate falls to this level or lower. 


The number itself is an unambiguous reference.  It is computed and published monthly.  It is released at 8:30 AM on the first Friday of each month.  Most of the time there is controversy about its computation.  Media coverage has evolved into a game of forecast roulette on each month’s “employment Friday.”  Surveys of economists’ estimates coalesce to a single number as the Friday draws near.  Then the pre-employment-Friday ADP release on Wednesday is a forerunner in forecasting the actual unemployment rate.  ADP’s record is mixed, but it is now part of the circus activity.  Speculation about the employment report has no penalty for error among forecasters.  Out comes the number and all the pre-release commentary is forgotten.


Most important are the revisions to prior numbers, since the first set of releases is composed of initial estimates and the refined numbers are more accurate.  But the revisions get less attention than the roulette game of forecasting.  Oh, well.


Over longer periods of time, the headline unemployment rate is an indicator of the health of the US economy.  From the Fed’s viewpoint it is the single best-understood labor-related number to watch.  Of course, market agents will now try to anticipate the Fed.  Watch the market start to adjust when the unemployment rate falls below 7% and stays below it for several months.  Watch the bond market attempt to project when the rate will reach 6.5%.  We will be seeing that in the shape of the yield curve.  Forward rates can be expected to move quickly every month as the employment number is released.  The closer we get to 6.5%, the more volatility we will see.


Bob Eisenbeis will also discuss the use of “core PCE” again.  He and I have been examining this change in Fed policy since Bernanke revealed it in the Q&A session.  Bob notes the work of St. Louis Fed President Jim Bullard regarding the reasons why “core PCE” is a preferred indicator of inflation.  The selection of this indicator and its use are very important for market agents to consider.


Market instruments do not easily trade on the “core PCE.”  For markets, the reference is the headline CPI.  It is the CPI which determines the pricing of TIPS and rents and social security payments and pension indexing and income tax brackets, etc.  There is a vast difference (30 to 50 basis points) between the CPI and the PCE and more difference between the headline CPI, which includes food and energy, and the “core PCE,” which uses different component weights than the CPI and does not include food and energy.  Markets are now going to have to estimate the gap between CPI and “core PCE.”  This is like estimating the difference between “apples and oranges” (or maybe I should say the difference between the prices of apples and oranges).  Both grow on trees; both make juices.  Oranges make lousy pies.


The computational details of the PCE and CPI are a large topic, but there are references to watch for each of them.  Jim Bianco publishes a comprehensive list of inflation measures each month as the data becomes public.  Many others examine the data with different statistical approaches.  Good work is available on the Cleveland Fed website (median CPI) and on the Dallas Fed website (search under “trimmed mean PCE”).


The bottom line is that there is a lot of variability between the “core PCE” and the headline CPI.  They can be as much as 100 basis points apart and heading in different directions.  Markets will be looking at market-based pricing by examining how the CPI-based TIPS market and TIPS forward rates adjust to each month’s releases. 


The danger here is that expectations can and, in our view, will be over-reactive.  We expect that the new Fed policy of predicating policy change on a threshold of 2.5% for “core PCE” will invite more volatility in the bond market, not less.  In fact, the Fed’s action to include this inflation reference may end up being counterproductive to the Fed’s policy objective.  Don’t be surprised if the headline CPI is over 3% and rising on an energy price spike while the core PCE may be simultaneously 2% and falling.  The opposite construction is also possible.  This will be the market’s new conundrum with Fed policymaking.


For market agents, the whole business of managing money has now become much more complicated.  We already have the Fed actively engaged in targeting two points on the yield curve instead of one.  The Fed policy now focuses on both the short-term rate and the longer-term rate.  It has been hard enough for the Fed to get one of them right; now it is trying for a twofer.


Add the fact that the Fed is now focusing on references and thresholds to determine when it will make a policy shift.  It is using the unemployment rate, but it has introduced a conditional inflation rate.  The unemployment rate number is firmly identified; the inflation number is derived from an abstract notion and is questionable and controversial.  Again the Fed has to get two things right, and both are very difficult.



So the Fed now has a two-by-two matrix.  Two interest rates (short-term and long-term) and two economic indicators (inflation and unemployment) need to align for the Fed to make a shift.  And each of them has a mean and standard deviation; and one of them, the “core PCE,” is viewed by market agents as a proxy that reflects itself in the CPI.


It is going to be an interesting few years.


Meanwhile, the near term is quite predictable.  The inflation rate is well below the Fed’s target.  The unemployment rate is well above the Fed’s target.  The Fed has committed itself to several more years of the present low interest rates as a policy.  At the same time, the deleveraging of the last five years is intensifying as financial repression continues to crush the yields of savers when they encounter maturity rollover.  And fiscal stimulus has certainly peaked in the United States and most other major economies, so various forms of austerity are acting as a global agent of compression.


Bottom line:  Interest rates are likely to be low for quite some time.  It is too soon to sell your bonds.  We like spread product and particularly tax-free Munis of higher credit quality.  The bond bull market is not over.


David R. Kotok, Chairman and Chief Investment Officer


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Singapore among the top economies

As commented by Bill Witherell hereunder

An Asia-Pacific Equity Portfolio Tilt
December 10, 2012



This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist.  He joined Cumberland after years of experience at the OECD in Paris.  His bio is found on Cumberland’s home page, www.cumber.com.  He can be reached at Bill.Witherell@cumber.com.



Last summer the Obama administration announced a “tilt” towards Asia, that is, a strategic rebalancing of US military forces to the Asia-Pacific region. Meanwhile, at Cumberland Advisors we have recently rebalanced our international and global equity ETF portfolios toward the Asia-Pacific region (with the exception of Japan). We discuss this shift and its rationale below.


The global economy is expected to grow at a somewhat more rapid annual rate of 3.5% next year, as compared with 3.3% in 2012. The emerging-market and developing countries of the Asia-Pacific region will likely be the global growth leaders. The World Bank projects 7.6% economic growth for “East Asia and Pacific,” centered on a return of China’s growth to above 8%. The advanced economies in the region, on the other hand, will register growth rates at or below the global average (Singapore 3.5%, Hong Kong 3%, Australia 2.6%, New Zealand 2.5%, and the one significant weak spot, Japan, at 0.7%.). Asia-Pacific equity markets should also benefit from benign inflation, improved earnings, and generally attractive valuations.


We closely monitor 42 economies in order to develop our global investment strategies. In addition to economic growth, we give considerable weight to the quality of governance and to factors affecting the international competitiveness of these economies. We are developing a ranking of these countries that seeks to bring all these elements together. While this is still a work in progress, it is noteworthy that in our preliminary ranking, eight of the twelve top positions are economies in the Asia-Pacific region: Korea, Taiwan, Malaysia, Australia, China, Thailand, Singapore, and Indonesia. These are countries that over the medium to long term appear to be attractive places in which to invest. The other four in our preliminary top 12 are the United States, the United Kingdom, Canada, and India. Japan is ranked 15th, the Philippines 17th, and Hong Kong 24th.


The mounting evidence that the Chinese economy has indeed turned the corner, including the rise in the November PMI index, is central to the improved outlook for the region. China, which has the world’s second largest economy, accounts for 45% of the region’s exports. While those exports have been hurt by the recession in Europe, they have been sustained by continued demand in the United States and within the Asia-Pacific region. The November export orders index rose to a six-month high. Within China, domestic orders, retail sales, and fixed-asset investment have all strengthened and profits have improved. International investor sentiment toward China is getting better. The new leaders of the Chinese government have shown promising signs that they will pursue responsible policies that will be conducive to a sustained revival of the economy and reforms that will improve the quality of growth.


Following several years of underperformance, Chinese equities – or to be more precise, the shares that are investible by foreigners, mainly the so-called H-shares listed in Hong Kong – have risen by some 18% over the past three months. We expect this outperformance to continue in 2013, not only because of a quickening pace of economic activity but also because Chinese shares are at a 20% discount to the emerging-markets benchmark.


The US-based ETF investor is fortunate to have a wide range of alternative ways to gain access to the Chinese market. Setting aside the leveraged and inverse ETFs, which we do not use, there are currently 19 Chinese equity ETFs on the US market and one ETN. A number of these are rather new and/or have limited liquidity. Our favorite continues to be the SPDR S&P China ETF, GXC, which provides the broadest diversification across all investible Chinese shares and is highly liquid, with a market capitalization of $960 million. We also use the largest China ETF ($7 billion market capitalization), the iShares FTSI China 25, FXI, which holds shares in 25 of the largest and most liquid Chinese companies listed on the Hong Kong Stock Exchange. Financial firms account for almost 60% of FXI’s holdings, as compared to 32% in the case of GXC. The very dynamic small-cap sector in China can be accessed with the Guggenheim China Small Cap ETF, HAO, (market capitalization of $264 million), which invests in companies with a market capitalization of less than $1.5 billion. Also of possible interest is the Global X China Consumer ETF, CHIQ, with a market capitalization of $150 million.


Many economies, particularly those in the Asia-Pacific, have become dependent on developments in the Chinese economy. They are now benefitting, and will continue to benefit from in 2013, the rebound in the Chinese economy. Korea, where exports have recently begun to strengthen, is a case in point. Domestically, we expect Korean business capital investment to pick up as the external outlook improves. Korea’s economic growth should return to the 3.5-4% range in 2013. The iShares MSCI South Korea ETF, EWY, is up 15.7% so far this year, 2.8% in the last 4 weeks. It is important to note that in this ETF one company, Samsung, accounts for 22.6% of the holdings.


Economic growth in Taiwan also should return to the 3.5-4% range next year. Recently, the Taiwanese stock market has been bolstered by a government statement that it will undertake measures to bolster equity prices. The iShares MSCI Taiwan ETF is up 16.8% year-to-date and 6.1% in the last four weeks alone. Information technology firms account for about 55% of this ETF’s holdings, and thus its performance is significantly affected by the US technology market.


There are two markets in the region that have performed very strongly this year and were doing so well before China’s economy started to rebound: the equity markets of Thailand and the Philippines. Both of these economies appear likely to register economic growth rates of better than 5% this year. We expect the Philippines to continue to grow at a similar rate next year, while the Thai economy appears to be slowing somewhat. The iShares MSCI Thailand Investible Market ETF, THD, is up an impressive 30.6% year-to-date and 3.6% over the past four weeks. The iShares Philippines Investible Market ETF, EPHE, has surged by 45.4% year-to-date, including a 6% advance during the last four weeks. In both cases a pause in these advances would not be surprising, but their medium-term prospects remain attractive.


In contrast to the above two economies, there are two others in the region whose equity markets are laggards: Indonesia and Malaysia. This is despite both countries having strong economic growth prospects for 2013 – 6.3% for Indonesia and 5% for Malaysia. Indonesia has fared the worst. The Market Vectors Indonesia ETF, IDX, is essentially unchanged for the year to date, at +0.25%, and declined over the past month by 2.5%. The other Indonesian ETF, the iShares MSCI Indonesia Investable Market Index Fund, EIDO, has registered a modest year-to-date increase of 2.4%, but it has also declined over the past four weeks, by 2.9%. These recent declines occurred despite the better news out of China. Indonesia is experiencing weakness in its exports and unfavorable terms of trade, and its declining equity market could well trigger a reversal of international portfolio flows. Malaysia’s equity market has done a little better. The iShares MSCI Malaysia ETF, EWM, is up 9.9% for the year to date, while off 1.9% over the past four weeks. It has been trending upward since November 27th, which suggests it is somewhat more sensitive to developments in China.


Turning to the advanced markets in the region, with the exception of Japan we are attracted to their sound economic policies and the quality of their governance. Australia, New Zealand, Singapore, and Hong Kong are all equity markets in which we would tend to maintain investment positions over the long term. Of the four, only Australia looks likely to have somewhat slower economic growth in 2013, although this prospect could well improve with more rapid growth in China. The iShares MSCI Australia ETF, EWA, is up 17.4% so far this year and up 1.9% over the past four weeks. The small equity market of New Zealand has had a good year so far. The iShares MSCI New Zealand ETF, ENZL, is up 27.7% year-to-date, with a 2% advance in the past four weeks.


The Singapore economy declined in the third quarter, with electronics and financial services looking particularly weak. We expect the economy to bounce back in the coming months. The iShares Singapore ETF, EWS, has registered a solid 25% gain so far this year, including a 2% gain in the past month. Hong Kong is now part of China, of course, but its equity market remains somewhat separated from the mainland China markets. The Hong Kong equity market is strongly influenced by developments in China and also by its high-flying real estate market. The iShares MSCI Hong Kong ETF, EWH, has advanced by 24.4% year-to-date, but has been flat in the last month, eking out only a 0.2% gain.


Finally, for the Asia-Pacific, we have the third largest economy in the world, Japan, with the region’s largest equity market. Japan, still not out of a twenty-year slump and burdened by ineffective governance and ineffective central bank policies that have led to an inappropriately strong currency, together with adverse demographics and natural disasters, has not been able to engineer a sustained economic recovery. There are hopes that a new government – a likely outcome from the forthcoming election – will be able to get the economy and financial markets operating at a healthier pace, with a significantly weaker currency. Indeed, it is the future rate of the yen that will largely determine the level of Japanese equity prices. We will stay on the sidelines until there is some convincing evidence of real progress. Our current projections are for economic growth rates of less than 1% next year and in 2014 as well.


The $4.5 billion iShares Japan ETF, EWJ, has recently picked up along with the hopes for a new government and weaker yen in the coming year, advancing 2.7% in the past four weeks. That is about the same as its year-to-date gain of 2.6%. US-based investors have several other reasonably liquid Japanese ETFs to consider. The Precidian MAXIS Nikkei 225 ETF, NKY, is up 6.4% year-to-date and 2.7% in the last month. The WisdomTree Japan SmallCap ETF, DFJ, advanced 3.4% year-to-date and 1.9% in the last month. An interesting alternative to the above three is the WisdomTree Japan Hedged Equity Fund ETF, DXJ, which provides access to the Japanese market while hedging exposure to fluctuations between the value of the US dollar and Japanese yen. This ETF has achieved a 7.5% advance year-to-date and 4.8% in the last month.



Bill Witherell, Chief Global Economist

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Bullish mood

My friend is bullish nevertheless as hereunder:

Market Bullets on Employment Friday
December 7, 2012

We are currently scheduled to “guest host” Bloomberg’s Surveillance from 6 to 7 AM on Monday, December 10.  Morning coffee with Sara Eisen, Scarlet Fu and Tom Keene will be interspersed with market and economic commentary.


Now let’s get to some bullets following the employment report.


Today’s jobs report is a very strong upside surprise.  There are some anomalies in it due to Sandy but the overall response has to be constructive.


Fed policy will not change because of this one-month report.


Fiscal cliff negotiations are underway.  This employment report does not change them.


Our equity market thesis remains intact.  Our equity risk premium calculations are based on a very low interest rate trajectory for some extended period of time.  We measure that in years, not months.


That means stocks are cheap.  Maybe they are really cheap.  We confirm our forecast of 1450 to 1550 for the S&P 500 Index by yearend.  We are nearly at the lower band.  Markets are breaking out to the upside.


We confirm our longer-term forecast of higher than 2000 on the S&P 500 by the end of the decade. 


We confirm our estimate of S&P earnings of $100 plus or minus $3 for next year and of $125 to $140 by end of decade.


We confirm that the dividend yield on stocks (over 2%) is higher than the riskless ten-year Treasury note (1.6%) and that the dividend is likely to increase by end of decade.


We confirm our slow-growth, slow-recovery strategy, with low interest and inflation rates for the remainder of the decade.  The upside changes to this forecast will be gradual in the beginning.  The housing sector recovery is slowly gaining strength.


We are fully invested in our US stock market portfolios, with sector choices reflecting this bullish outlook.  And we are still favorably inclined toward the energy sector and the banking-financial sector.


Finally, we have a note on the Obama-Boehner debate, with thanks to readers, including Carol and John Merrill. 


They wrote:


“David, you speak for many of us.  Here are things that really gall me about this discussion: 1) A couple earning $250k/yr is far from rich … why is everybody buying into this artificial line in the sand? 2) $250k was the bracket for the top rate when Clinton established it in 1993; that bracket level has been indexed for inflation and is now something over $380k, so imposing the higher Clinton rate on the $250k level is a huge step backward in relative taxation. 3) Why are the Republicans going down swinging to defend the carried interest treatment of management fees that enable a handful of ultra highly compensated individuals to be taxed at a 15% rate? It’s obscene.”


Thank you, Carol and John. 


In spite of the politicians, we remain bullish.  Markets are going higher, maybe much higher.


David R. Kotok, Chairman and Chief Investment Officer


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Personal views of David

christmas fractalAS  Shared by David Kotok himself:

My Personal View on the Fiscal Cliff
December 5, 2012

Numerous readers have emailed and asked me a personal question:  “What would YOU like to see happen with the fiscal cliff?”  We thank you for the question.

Please remember, this missive will not be about what is going to happen.  We do not know that outcome and neither does anyone else.  We hold an opinion that there is a deal coming.  We think it will be at the 11th hour or even early next year after we tumble over the January 1 cliff.  But that is just an informed guess.  President Obama didn’t add much clarity to that view in his Bloomberg interview today.  Readers may see it and hear it on Bloomberg.com.

Instead, today’s letter is about what we would like to see happen, and why. My view is simple: until we experience the cliff, we will not understand what it really means.  Hence, we will not act wisely if we do it prospectively.

We believe the markets and citizenry are too complacent about our government.  US investors are used to watching the Washington charade.  Voters, in nearly every congressional jurisdiction, are trapped by limited choices, which is why we re-elect most incumbents.  Our politics are the politics of default choices.

Our markets are driven by forces such as low interest rates and global demand and geopolitical risk.  We go on about our daily business in spite of our broken government.  We engage in a collective trillion economic decisions each and every day, without government help.  Leave us alone and we can pretty much figure out what to do.

We have a broken political system, in which our leaders are about as popular as the proverbial used-car salesperson (according to recent polls).  Most of us feel that way about them but cannot do anything about it, so we go on with our lives and let the self-serving “leaders” in Washington decide our fate.

One defining characteristic of Americans is to rally in time of crisis.  We do that in wartime.  We do that with natural disasters like Katrina and Sandy.  We do that with regard to health matters.  We are generous with our charity.  Mainstream Americans are mostly good folks.  But we are reactive, not proactive.

So, let’s see if we can rally to deal with this government crisis.  But we won’t do it unless and until we know we have a real crisis on our hands.  So, let’s have at it.  To get there, we need to go over the cliff and stay there long enough to actually begin to experience what it feels like, and what it means, to be off the precipice.

Let’s see what happens when all the income tax credits expire on lower incomes and when 140 million Americans get hit with an average $1000 a year in a payroll tax hike.  Let’s see what the experience is when sequestration kicks in hard.  Let’s watch the layoffs of defense contractors who have to downsize since they won’t be paid by the federal government.  Let’s tax capital and dividends and income at high rates and let our citizens begin to feel the impact in their pocketbooks.  Let’s tax estates at confiscatory rates.  Let’s allow tax-free bonds to be penalized when our schools and sewer systems need financing.  Let’s subject 24 million folks to the alternative minimum tax.  And on, and on, and on.

The political morons generalize in their pronouncements because they fear giving us real details.  Our president repeatedly attacks the rich with class-warfare rhetoric.  He says upper 2% of income but he doesn’t say that many are independent businesses.  Does he ever mention an S-Corp small business that is trying to accumulate capital to grow a business and hire folks?  Many small businesses finds themselves burdened with a marginal effective tax rate above 50% under the present tax system – before we even go over the cliff?  That is where a small business can find itself when all taxes imposed are combined.

Obama avoided this detail today.  He cited CEOs of big companies.  He ignored the half of the country that is small and independent firms even while claiming that 97% of them will benefit.

Obama uses the new-age definition of millionaire: a couple filing a joint income tax return with a $250,000 annual income.  He never mentioned that his failure to compromise means the lower-income tax groups will incur a very high tax hike once we’re off the cliff.  He never admits that some of the lower middle-class tax rates he claims are obtained are in place by using the deception of credits.

The Republicans are not any better.  Republicans never say, “We defend the 15% carried interest provision.”  They never explain the details by which many wealthy Americans benefit from provisions in the tax code that are engineered to benefit the few at the expense of the many.  They just say no changes in tax rates.  And now they are clamoring for “revenue,” which means changing the tax code, not the rates.

Readers, please note, it is the effective tax rate that really counts.  Let me repeat and add clarity.  It is ONLY the effective tax rate that counts.

Both Republicans and Democrats are disingenuous.  That is a nice term for lying to us and deceiving us and using fuzzy language to mask the truth.

So, my personal proposal is to have a major fight and a resulting stalemate that persists until there is real pain in the land.  I would like to see my fellow citizens get really angry with Washington and set aside their partisan differences and then throw out some of the bums of both parties.

I would like to see us get mad enough and scared enough and clear enough about what’s really happening to us, that we realize we have to pull together to claw our way back from the cliff and get this country on stable ground.

Let me invoke a scene from a movie that will date me.  What I want you to do is throw open the window, stick out your head, and yell “I’m mad as hell and I’m not going to take this anymore.”  If you are too young to remember the movie, Google the phrase and watch the scene (YouTube will take you there).

That is what I would like to see happen, dear readers.  We need to open our windows and yell.  Get 314 million of us angry enough at our government, and we will stop this nonsense.  Unless we get that angry, this broken-down system of ours is going to go clickety-clack right off the cliff.

Happy holidays to all cliff dwellers (us).  Get angry.  Tell your congress people that you’re angry.  Whether you’re Democrat or Republican, be angry, be clear-headed, and demand the truth. It’s our country!

Thank you for asking.

David R. Kotok, Chairman and Chief Investment Officer

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