Archive for July, 2008

Morningstar: Top 10 Mutual Funds For Net Cash Inflows

Kurt Brouwer July 31st, 2008

In this piece, Morningstar’s Director of Mutual Fund Research, Russel Kinnel, takes a look at the mutual funds that have taken in the most new assets in the first half of the year.  As he points out, being on this list does not mean the fund has sidestepped this year’s difficult markets, just that investors are still pouring money in.

Regular readers of this blog should be familiar with several of these funds, in particular Pimco Total Return and Harbor International, which we have written about in the past.  Also, both funds were Morningstar Managers of the Year in 2007 (see Morningstar Fund Managers of the Year).   Obviously, the two Vanguard funds are very well known — Vanguard Total Stock Market Index and Vanguard Total Bond Index.  The American fund group was well represented with four names on the list and Blackrock and Ivy each had one name on it.

Here is the introduction along with brief descriptions of a few of the funds:

The 10 Hottest-Selling Funds In The First Half (Morningstar Advisor, July 29, 2020, Russel Kinnel)

I’m going to discuss an increasingly rare breed: funds that are getting net inflows. With the markets getting pummeled, not many funds are drawing investor interest. Because you may well be considering one of these funds as something of a safe haven in rocky times, I’ll run through the 10 funds with the greatest inflows in dollar terms for the first half of 2008. To be clear from the outset, none of these funds are true safe havens. Most have lost less than their peers in this market-and I’d expect that most would do so in most down markets-but these are all long-term funds that will likely lose money when their respective markets go in the tank.

1. PIMCO Total Return Institutional PTTRX
Net inflows of $14 billion or 13% of assets.

Bill Gross and his team made a brilliant call that the housing bubble would burst and interest rates would fall as the effects knocked down numerous dominos in the economy. For the biggest bond fund in the world to be well positioned and help protect its legion of investors is heartening. Gross still makes mistakes but this a fine long-term holding. Individual investors are better off with Managers Fremont Bond MBDFX or Harbor Bond HABDX which are virtual clones of the PIMCO fund and charge the little guy less.

2. Vanguard Total Stock Market Index VTSMX
Net inflows of $9 billion or 9%.

This fund is getting its inflows mainly via Vanguard’s target-date funds. Obviously an index fund that tracks the market will go down exactly the same amount as the market, so it’s no safe haven-though I would add that index funds rarely end up in the bottom quartile during a bear market. I like seeing a boring low-cost index fund on a bestseller list like this. Be patient with a fund like this and you’ll be rewarded.

3. Ivy Asset Strategy A WASAX
Inflows $6.8 billion or 81% of assets at the beginning of the year.

Wow. Ivy Asset strategy is a very bold fund that’s been on the money of late. Last year a big bet on BRICs (Brazil, Russia, India, and China) paid off handsomely. That should have sunk the fund this year but they made huge short bets against the U.S. and Europe, so the fund is about flat for the year to date. Be prepared for the occasional nasty pothole when the managers’ timing is off, but hats off to the great track record they’ve built.

4. Vanguard Total Bond Index VBMFX
Inflows of $6.2 billion or 11%.

You can apply everything I wrote for Total Stock market only insert the word bonds for stocks.

…10. Harbor International HAINX
Inflows of $3.9 billion or 12%.

Our 2007 International-Stock Fund Manager of the Year is having a fine follow up to a great 2007. Castegren and the team from Northern Cross trimmed their winning positions in Chinese stocks late last year but held onto some big natural-resources stocks like Petrobras. If your time horizon is greater than 10 years, this venerable fund is an excellent pick.

It’s interesting to see which funds are gaining new assets from investors.  All the funds on the list seem like worthwhile funds.  Read the whole thing.

Via: Rita Lee

The U.S. Dollar — Is The Tide Turning?

Kurt Brouwer July 31st, 2008

To paraphrase a quote from the late Max Heine (founder of Mutual Shares Fund): “The dollar was so bad it couldn’t go down no more.”

This post from the WSJ’s MarketBeat Blog [emphasis in the original] illustrates how the tide may be turning in favor of the dollar:

Slowly The Dollar Is Winning Converts (Wall Street Journal / MarketBeat Blog, July 31, 2020, David Gaffen)

Suddenly, people aren’t feeling so sour about the dollar.

This isn’t to say that the greenback is on the verge of a charge that will enhance its value against the euro, yen and other major currencies. However, the activity in the foreign exchange markets of late suggests that the knee-jerk interpretation of any and all data as dollar-negative — a view that held sway for months — is no longer operative.

The euro reached a high of $1.6038 on July 15. Since then, it has fallen back, dropping to $1.5591. It’s not exactly a massive move, and doesn’t even push the euro/dollar out of its recent trading range. But it is at the lower end of this trading range, and the reaction in the foreign exchange market to Thursday’s economic data shows that investors are predisposed to think more positively about the dollar.

You are starting to get a more forgiving attitude to the dollar,” says Joseph Trevisani, chief market strategist at FX Solutions, who says investors are more likely to look at positive developments, “rather than ignoring it and only focusing on the bad news.”

The dollar is stabilizing a bit, in large part because the Federal Reserve stopped cuttings its Fed Funds interest rate.  Many people do not fully understand how significant short-term interest rates are for currencies.  Trust me, they are critical.

As a sign that times are changing, take a look at this piece from Bloomberg [emphasis added]:

Gross Likes Dollar More Than Euro For 1st Time (Bloomberg, July 13, 2020, Gavin Finch)

…Bill Gross, manager of the world’s biggest bond fund, turned bearish on the euro for the first time since the currency’s inception in 1999.

“We might have hit a point where the euro doesn’t have a lot to stand on,” said Emanuele Ravano, co-head of European strategy in London for Gross’s Pacific Investment Management Co., which runs the $129 billion Pimco Total Return Fund. “The euro is ultimately very overvalued. It could be quite a bit lower at some point in time over the next couple of years.”

I think it is interesting that Gross was so positive on the Euro back when it first came out. By way of historical reference, the Euro fell versus the dollar for the first several years of its existence. It was not until nearly 2004 that it got back to even.

This chart from the St. Louis Federal Reserve Bank makes the point.  This chart shows how many dollars it takes to buy one Euro.  That number fell for the first years of the Euro’s existence, in large part because U.S. short-term interest rates were going up:

Source: St. Louis Federal Reserve Bank

During the recession of 2001 and the aftermath of September 11, the Fed, under Chairman Greenspan, cut short-term interest rates aggressively. As a result, the dollar began falling and has continued doing so until recently. The article continues:

The euro fell as much as 1.7 percent to $1.5611 in the week following President Jean-Claude Trichet’s comments on July 3 that he had “no bias” on further changes in borrowing costs after boosting the main refinancing rate to 4.25 percent from 4 percent. Before Trichet spoke the currency traded near a record high on speculation the ECB would signal more than one rate increase was needed to tame inflation. It fell 0.5 percent to $1.5857 as of noon in London today, from $1.5938 on July 11.

…As the odds that the ECB will lift rates dwindled, hedge funds sold the 15-nation common currency, according to Zurich- based UBS AG, the world’s second-biggest currency trader behind Deutsche Bank AG in Frankfurt. New York-based Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, said it’s “increasingly confident” the euro will fall.

…The euro is 30 percent overvalued versus the dollar, based on purchasing power parity, according to Newport Beach, California-based Pimco. That’s more than any other currency among the Group of 10 richest nations. Purchasing power parity accounts for differences in the exchange rates of national currencies.

“When a currency gets between 25 percent and 30 percent overvalued it tends” to revert to the mean, said Ravano. The euro may drop to $1.535 from $1.5938 last week, he said.

...”The rally in the euro is over and we’re now incredibly bearish on the currency given the outlook for Europe’s economy,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, the most accurate foreign-exchange forecaster in a 2007 Bloomberg survey.

The euro will slide to $1.50 by the end of the third quarter and $1.45 by year-end, he said. Redeker is more bearish than most strategists. The common European currency will weaken 5.4 percent to $1.50 by year-end, and slip to $1.45 by mid-2009, according to the median of 37 analysts surveyed by Bloomberg.

“At current levels the euro is an awfully expensive currency,” said Stephen Jen, chief currency strategist at Morgan Stanley in London and a former Fed economist. “We see fair value for the currency at around $1.30.”

The Fed’s current posture is that we should not expect any additional cuts to the Fed Funds rate. As a result, the dollar has shown a little strength lately (see Is the Euro Headed For a Fall?).  The dollar fell too far versus the Euro in my opinion and that process now seems to be reversing.  Currencies fluctuate daily, weekly and monthly, but they also have long-term trends.  For the first few years of its existence, the Euro tanked versus the dollar, hitting a low point at which one Euro was worth only 86 cents.  That was one extreme.  Now, one Euro is worth $1.55 or more.  This price represents another extreme.  In my opinion, the true relationship between the two currencies should be somewhere in between.

For a fuller discussion of the historical relationship between the dollar and the Euro as well as the British pound, see How Far Has the Dollar Fallen? And Why? — What’s Next?.

Economy Grew Modestly In Second Quarter

Kurt Brouwer July 31st, 2008

Source: Carpe Diem


As the following report from the Wall Street Journal indicates [free registration required; emphasis added], the economy grew modestly in the second quarter, fueled by exports and consumer spending.  Given all the dire reports we have had on the economy, this is a positive, albeit mixed result.  We had modest growth in this quarter on the one hand, but downward revisions in previous quarters.  For example, GDP growth for the 4th quarter of 2007 was revised downward though from positive 0.6% to negative 0.2%.  So this report has something for everyone — positive growth for those who believe we will muddle through this downturn and some negatives for those who believe we are in a recession.

 GDP Accelerates In Second Quarter On Exports, Stimulus Spending (Wall Street Journal, July 31, 2020, Jeff Bater)

...Gross domestic product rose at a seasonally adjusted 1.9% annual rate April through June, the Commerce Department said Thursday in the first estimate of second-quarter GDP. The increase came below expectations on Wall Street. Businesses drew down inventories sharply, putting a big drag on GDP — yet suggesting smaller cuts in production down the road.

Price inflation gauges were mixed in the second quarter. The key price index for personal consumption expenditures rose by 4.2% after increasing 3.6% in the first quarter. The PCE price gauge excluding food and energy grew 2.1%, after increasing 2.3% in the first quarter.

GDP growth in the first quarter was revised down to a 0.9% rate of increase, compared to a previously reported 1.0% rate of increase.

The Commerce Department on Thursday also released revisions to past GDP numbers, stretching from 2005 through 2007. These adjustments show GDP shrank in the final months of 2007, declining 0.2% October through December instead of rising 0.6% in that quarter as previously reported. The decrease, however, doesn’t mean the nation slipped into a recession. A recession is widely defined as two consecutive quarters of economic decline. Third-quarter 2007 GDP surged 4.8%.

…International trade jolted the economy in the spring, adding 2.42 percentage points to GDP. U.S. exports rose by 9.2%. Imports decreased 6.6%, a likely reflection of higher oil prices constraining demand for foreign petroleum and of general economic weakness. In the first quarter, trade added 0.77 percentage point to GDP; exports in that period were 5.1% higher and imports fell by 0.8%.

Business spending climbed 2.3%. Investment in structures went up 14.4%. Equipment and software outlays decreased 3.4%. Overall first-quarter outlays by businesses had gone up 2.4%.

Businesses liquidated inventories sharply in the second quarter, by $62.2 billion. Stockpiles of all goods decreased by $10.2 billion in the first quarter. The deceleration cut April-June GDP by 1.92 percentage points. While the big drawdown hurt GDP in the spring, it signals companies won’t get caught with an oversupply of goods in the future. And that translates to less downward pressure on production…

We have had predictions of deep recessions for several months now and, so far, it has not happened.  However, the growth we had in the second quarter was not very strong.  This report is positive, but not conclusive.  I think the third quarter is the key.  If that is positive, we will probably be through the worst of the financial panic and slump brought on by the subprime lending mess and the steep drop in home prices.

One positive forward-looking sign was the business inventory issue.  Businesses cut back on the goods they are holding for resale and that hurt second quarter GDP growth.  Assuming they begin restocking that will be good for the third quarter. My prediction is that this quarter’s results will be interpreted by all sides as bolstering their argument — for weakness or for modest growth as the case may be. My opinion is that this report is not conclusive for either side.

President Signs Housing Bailout Legislation

Kurt Brouwer July 30th, 2008

Bush Signs Measure for Homeowners, Fannie, Freddie (Bloomberg, July 30, 2020, Roger Runningen)

President George W. Bush signed into law legislation that helps 400,000 homeowners facing foreclosure and extends a lifeline to Fannie Mae and Freddie Mac.

Bush signed the measure at the White House shortly after 7 a.m., spokesman Tony Fratto said. Treasury Secretary Henry Paulson, Housing and Urban Development Secretary Steve Preston and Federal Housing Administration Director Brian Montgomery were among those present.

“We look forward to putting in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac,” Fratto said.

The law is aimed at stemming foreclosures and halting a free-fall in housing prices by providing federal insurance for refinanced 30-year mortgages for homeowners struggling to make their monthly payments.

The measure also is designed to restore confidence in Fannie Mae and Freddie Mac by tightening regulations and authorizing the Treasury secretary to inject capital into the two biggest U.S. providers of mortgage money.

The measure passed the Senate July 26 and the House three days earlier.

The recession in the housing market, the worst since the Depression, along with higher fuel prices and a shrinking job market, is weighing on consumers and the economy.

…The law creates a new, independent regulator called the Federal Housing Finance Agency. It would ensure that Fannie Mae and Freddie Mac adhere to minimum capital requirements, limit the size of portfolios and oversee executive pay for the two government-sponsored enterprises.

Under the law, the FHA can now insure higher loan limits, up to $625,500 from $417,000 in high-cost areas. The law also raises the nation’s debt limit to $10.6 trillion from $9.816 trillion to accommodate the Paulson plan.

A new FHA program, a unit of the U.S. Department of Housing and Urban Development, would insure up to $300 billion in refinanced 30-year fixed loans for about 400,000 borrowers struggling with their monthly payments after loan holders agree to cut their mortgage balance.

HUD Secretary Preston expressed misgivings when asked in a Bloomberg TV interview if he was confident that money for the program would be spent effectively with no loss to the taxpayer.

“No, I’m not,” Preston said. “Roughly a third of the people who get this assistance will end up in foreclosure,” he said, citing Congress’ own estimates, “and many more, we believe, will be chronic delinquencies.”

The last section in bold is a refreshing bit of candor from a public official.  Bill Gross of Pimco stated a while back that this is necessary and I’m willing to suspend my normal skepticism about government bailouts, but I tend to agree with Secretary Preston.  See Bill Gross — Stop Falling Home Prices Now.

Stocks Soar — Climbing a Wall of Worry

Kurt Brouwer July 29th, 2008

U.S. stocks soared today despite a long list of negatives.  There is an old term on Wall Street term that applies in this situation — that stocks are ‘climbing a wall of worry’ as they rose today despite plenty of potential problems.  Actually, though we can’t really make this claim unless and until stocks enter a protracted upturn.  So, maybe we’ll just say that investors have been whipsawed over the past couple of days as this stock market tries to figure out what it wants to be when it grows up.

The DJ Industrials rose 266.48 points, which is +2.39%

The S&P 500 rose 28.82 points, which is +2.33%

The Nasdaq Composite rose 55.40 points, which is +2.45%

There were plenty of negative stories such as the continued decline of home prices, a huge writeoff of assets at Merrill Lynch, news of bankruptcies at retailer Mervyns and restaurant chain Bennigan’s Steak and Ale.  And, finally, even Starbucks is hurting as it announced the layoff of 1,000 employees.

In other words, there was plenty of negative news such as that which triggered yesterday’s market decline. Yet, stocks went up.  What’s going on?

  • First, there has been a significant pullback in commodity pricing, particularly in oil. Oil prices fell again today and are off roughly $25 per barrel from the high point of $147.
  • Second, there was a bit of strengthening in the dollar. These two pieces are connected and for much of the year, a declining dollar has exacerbated the soaring price for oil.

Assuming this trend — falling oil prices and a stronger dollar — continues, we will see the reverse situation as we pay a lower price for oil because of strength in the dollar.  This is a big if though, so I’m not making too much of this trend.  If you want to dig deeper, see Declining the Dollar and Oil Prices — Too Low For Too Long.

  • Another factor that has clearly helped stocks is that corporate earnings are growing at many companies. Obviously, financial stocks and housing-related companies are spewing red ink, but many publicly-traded companies have announced surprisingly strong earnings. Earnings or corporate profits drive valuations of publicly-traded companies and these announcements are - well - a bit of a surprise for many who focused on all the bad stuff that is happening in financial stocks.
  • A related point to the earnings picture at non-financial companies is that valuations are pretty darn good. In fact, some portfolio managers seem to be pretty excited about these valuations.

For example, in a recent interview in Barron’s, hedge fund manager, Lee Cooperman, said this:

…[Barron's]: Are there any particular pockets of the market where you have been finding opportunities?

Cooperman: To some degree, I feel like a kid in a candy store. We find a tremendous number of values in the stock market. Consider that Anheuser-Busch [ticker: BUD] was trading at 47 when it got acquired by InBev [INBVF.Belgium] for $70 a share in cash, or 22.4 times 2008 earnings. That’s about a 45% premium. Hercules [HPC] was selling at $16 when earlier this month it agreed to be acquired by Ashland [ASH] for $23, or 14.1 times earnings — a 40% premium. Rohm & Haas [ROH] is getting acquired by Dow Chemical [DOW] for 21 times earnings, a 74% premium. These are cash deals, so there is plenty of money around. We have two markets, one being the financials, where companies are losing tens of billions of dollars that they are equitizing to replace their losses. And you have the industrial economy, which has done fairly well; its assets are selling at well below replacement cost…

I have heard similar statements from other smart, savvy portfolio managers.  However, we are still in a bear market for stocks (real estate too obviously).  Good days like this one are nice, but they do not mean the trouble is behind us.

For a more in-depth treatment on the state of stocks, see The Kitchen Sink Stock Market.

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