Pre-opening Comments for Tuesday June 5th
U.S. equity index futures are lower this morning. S&P 500 futures are down 1 point in pre-opening trade. Index futures are responding to news that the Eurozone’s May Purchasing Manager’s Index fell again from 46.7 in April to 46.0. An Index, that is lower than 50, implies contraction in the manufacturing sector.
G7 central government governors and finance ministers have scheduled a conference call today to discuss Europe’s sovereign debt crisis.
As expected, the Bank of Canada maintained its overnight lending rate to Canadian banks at 1.0%. The Canadian Dollar moved slightly higher following the news.
Goldman Sachs reduced its earnings outlook for U.S. trust banks including State Street, Bank of New York and Northern Trust.
TransCanada has been selected by Shell to build a $4 billion pipeline to Kitimat British Columbia.
Navistar (NAV $26.39) is expected to open lower after RW Baird downgraded the stock from Outperform to Neutral. Target was reduced from $56 to $31.
Brocade (BRCD $4.42) is expected to open lower after ThinkEquity downgraded the stock from Buy to Hold. Target was reduced from $6.50 to $5.00.
Aecon Group (ARE: $11.60) is expected to open lower after Canaccord downgraded the stock from Buy to Hold.
Navistar International Corp. (NYSE:NAV) – $26.39 is expected to open lower after RW Baird downgraded the stock from Outperform to Neutral. Target was reduced from $56 to $31. The stock has a negative technical profile. Intermediate trend is down. The stock trades below its 20, 50 and 200 day moving averages. Short term momentum indicators are oversold, but have yet to show signs of bottoming. Strength relative to the S&P 500 Index has been negative since the end of January. Better opportunities are available elsewhere.
Brocade Communications (NASDAQ:BRCD) – $4.42 is expected to open lower after ThinkEquity downgraded the stock from Buy to Hold. Target was reduced from $6.50 to $5.00. The stock has a negative technical profile. Intermediate trend is down. The stock trades below its 20, 50 and 200 day moving averages. Short term momentum indicators are oversold, but have yet to show signs of bottoming. Strength relative to the S&P 500 Index has been negative since mid-February. Better opportunities are available elsewhere.
Aecon Group Inc. (TSE:ARE) – $11.60 Cdn. is expected to open lower after Canaccord downgraded the stock from Buy to Hold. The stock has a mixed technical profile. Intermediate trend is down. Support is at $11.01 and resistance is at $13.49. The stock trades below its 20 and 50 day moving averages. Short term momentum indicators are neutral. Strength relative to the TSX Composite Index has been neutral since March. On the other hand, the stock remains above its 200 day moving average and Strength relative to the TSX Composite generally has been positive since last October. Preferred strategy is to liquidate the stock on strength closer to its 50 day moving average at $12.64.
Lots of cross currents again yesterday! On the positive side, short term momentum indicators indicate that the Euro is showing early signs of trying to bottom. Conversely, the U.S. Dollar Index is showing early signs of peaking.
On the other hand, Far East markets were hit following news over the weekend that China’s May Purchasing Manager’s Index declined unexpectedly to 50.4. Equity indices in China, Japan and Australia came under significant technical pressure.
In the U.S. the home building sector was notably weaker.
CNBC headline reads, “Earnings Forecast Deflating Fast Amid Slowing Growth”. Following is a link to the report:
Tech Talk’s Weekly ETF Column
(Published late on Friday at www.globeandmail.com )
Following is a hard copy of the column (including a modification).
Black Swan Investing Using Exchange Traded Funds
Before discovered in Australia, people in Europe were convinced that all swans were white, a belief that was confirmed by empirical evidence at the time. The sighting of a black swan when Australia was first settled by Europeans was a surprise. It also confirmed that one single observation can invalidate a general belief coming from the sighting of millions of white swans.
Investors for years saw lots of white swans until Nassim Nicholas Taleb published his now famous book in 2007 entitled, “The Black Swan: the impact of the highly improbable”. Prior to publishing the book, investors believed that all investments could be placed on a bell curve based on their potential risk and return. A basic assumption in the Black-Sholes Model for investing is that the bell curve works. Taleb noted that is does not work all of the time. Completely unexpected “Black Swan” events can occur that substantially impact equity markets beyond bell curve expectations. Taleb explains a Black Swan event as follows:
“First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable”.
In his book Taleb offers lots of examples that impacted the investment world, including start of the two world wars, the market crash in 1987 and the terrorist attack on September 11th 2001. More recent events include the melt-down of the financial system in late-2008 and the tsunami/earthquake that impacted Japan last year.
What is Taleb saying now in light of the financial crisis in Europe, the slew of negative U.S. economic data released last week and the meltdown by world equity markets late last week? Taleb noted the following during an event sponsored by the Alternative Investment Association in Montreal last week
“A breakup of the Euro is not a big deal. When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I’m afraid of the United States. Of course Europe has its problems, but it’s in much better shape than the United States. Rising interest rates would make things worse for the U.S. We have zero interest rates. If interest rates go up in the United States, you can imagine what the deficit would be. Europe is like someone who is ill, but is conscious of it. In the United States, we are ill, but we don’t know it. We don’t talk about it”.
Last week, Horizons Exchange Traded Funds launched two Exchange Traded Funds based on Black Swan basics. Nassim Taleb serves as a Distinguished Scientific Advisor for Universa, the managers of the two funds. The funds are designed to protect investors against Black Swan events that will impact the S&P 500 Index and the TSX 60 Index. The Horizons Universa Canadian Black Swan ETF (HUT $9.93) and the Horizons Universa U.S. Black Swan ETF (HUS.US$9.84) will combine traditional exposure to equity indices with an actively-managed options strategy. Black Swan ETFs essentially consist of two components: exposure to broadly based equity indices and a pool of put and call options that utilize the Black Swan Protection Protocol. Mark Spiznagel, founder of Universa manages a fund using the protocol that saw a return in excess of 100% in 2008.
A word of caution! These Exchange Traded Funds are specialty funds that are expected to record long periods of underperformance, but are expected to deliver positive returns correlated to the underlying index. If the index recorded a positive return, these ETFs are expected to record a positive return as well. However, potential return is substantial if and when a Black Swan event occurs. Consider the ETFs as a form of long term investment portfolio insurance policy.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF (HAC:TSX). All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/
FP Trading Desk Headline
FP Trading Desk headline reads, “Sprott: Perfect environment for gold”. Following is a link to the report:
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Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc
Horizons Seasonal Rotation ETF HAC June 4th 2012