AdvisorShares Weekly Market Review – Week Ending 7/18/2014
Highlights of the Prior Week
Two weeks ago markets fretted over a possible bank problem in Portugal and while the parent company may be in trouble the Banco de Portugal (the Central Bank) said that Banco Espirito Financial has enough capital endure whatever threat might come along.
Things may have calmed down in Portugal last week but escalated significantly in other parts of the world as Thursday Maylaysian Air Flight 17 was shot out of the sky over Ukraine. Then a few hours later Israel launched an offensive into Gaza.
Most markets reacted as they typically do in the face of external shocks; equities went down (about 1.2% for the S&P 500 as it turned out), US treasury yields went down to 2.45%. Gold rallied $19, the CBOE Volatility Index (VIX) finished higher by 17% although at one point it was up 24% and the US dollar also got a lift. The Gaza news came later in the US equity session and caused another leg down in prices in the final hour of trading.
Most of that action of course reversed direction on Friday with the S&P 500 rallying 1% and finishing the week higher on the week, the Ten Year US Treasury only took back three basis points to 2.48%, gold dropped by $5.50, the dollar lost ground to the British pound and Japanese yen and the VIX fell by 17%.
While it is still too early to know whether any of Thursday’s geopolitical news will have an ongoing influence in capital markets, the action of Thursday and Friday serves as a reminder of how fast declines have tended to work historically. Fast declines are often followed by snapback rallies that retrace most the initial decline fairly quickly. From there, markets then go about the business of discounting an event’s actual importance after the emotional response. While there are no absolutes this can be useful context when clients express concern when there is a fast decline.
Lately there has been a wave of some big merger, or proposed merger, activity. After months of back and forth, AbbVie (NYSE:ABBV) is acquiring Dublin based Shire (NASDAQ:SHPG) in a $54 billion deal. The deal could run into an obstacle around the taxation issue known as an inversion whereby a US company merges with a company headquartered in another country with a lower tax rate and subsequently the new merged company moves its headquarters to that country with the lower rate; Ireland has one of the lowest corporate tax rates in the world and the US has one of the higher rates in the world.
A little more interesting is the newly proposed buyout of Time Warner (NYSE: TWX) by Twenty-First Century Fox (NASDAQ: FOXA). While it is still early days in the story, Time Warner is saying no for now while Twenty-First Century Fox has already talked about expecting to sell CNN in order to address antitrust objections.
Increased merger activity sends conflicting messages. On the one hand merger activity conveys confidence and optimism but the contrarian take is that big mergers come closer to market tops than bottoms.
ETF News & Data
Last week we noted the $1.3 billion outflow from the iShares Russell 2000 ETF (NYSEARCA: IWM) and this week the selling increased and the fund again led the way with an even larger $2 billion. For weeks we have been tracking the lag of small cap stocks versus large cap. That lag continued last week with the Russell 2000 dropping 76 basis points versus a gain of 54 basis points for the S&P 500. Year to date the Russell is down 1.03% versus a gain of 7.03% for the S&P 500.
In previous commentaries we’ve also mentioned the extent to which some market participants use passive funds like IWM in active strategies and the redemptions of late in that fund looks like a rotation underway. We will be curious to see if this turns out to have been an accurate indicator for the current stock market cycle.
Last week was light for new ETFs with one fund focused on gold mining companies, an inverse bond fund and an actively managed domestic equity fund.
A few years ago Mongolia popped up in the media as a popular investment destination as the term frontier markets came into vogue. The country is resource-rich and most of the stocks are mining related. There is even an ETF with a heavy allocation to the country.
Mongolia also has its own version of the Tour de France; the Mongol Derby which is a 1000 km race across the country on horseback. The conditions, resources available to the competitors and weather were all brutal but makes for an interesting firsthand read from one of the competitors.
Earlier in the baseball season we looked at former NBA scoring champion Tracy McGrady’s attempt to succeed as a professional baseball player (as a pitcher) with the Sugarland Skeeters. Last week McGrady hung up his spikes after just 6 2/3rd innings with a 6.75 ERA but oddly no strikeouts. He finally struck out a hitter and then retired. McGrady is only 35 so hopefully he can figure out a sustainable next chapter for his life.
Roger Nusbaum, AdvisorShares ETF StrategistSource: Google Finance, ETF.com, Yahoo Finance, Wall Street Journal, XTF.com, CNBC.com, ESPN.com, Bivouac Blog
Weekly ETF Flows
For July 11, 2014 to July 18, 2014
Shares outstanding include totals as of current day NAV.
S&P Sector Analysis
As for the sectors of the S&P 500, five outperformed the broad benchmark – Technology, Financials, Telecom, Energy and Materials. The remaining five – Industrials, Discretionary, Staples, Utilities and Healthcare – each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 1.86% this week, with Technology outperforming all, and Healthcare coming in last.
For July 11, 2014 to July 18, 2014
Sector performances, as measured by the S&P 500 sector indices were: