SAO PAULO (Dow Jones)--It used to be that Brazil was the darling of emerging markets in the Americas, but the global financial market maelstrom and economic slowdown have now prompted investors to turn their back on the country.
Brazil's Ibovespa stock index has lost more than 40,000 points since May 28, when it reached an historic intraday high of 73,920 points. That's when foreign investors rewarded the country with a fresh infusion of capital after Fitch and Standard & Poor's gave the country its much sought-after title of investment grade.
Most investors still love the Brazil story, although for now they prefer to sit on the sidelines.
Brazil is energy self-sufficient in both ethanol and petroleum. It's a huge commodities producer, but also boasts significant manufacturing and services sectors, including a sophisticated banking industry that's free of the "toxic assets" that have sunk many financials in the U.S. and Western Europe. It also sports a large and growing consumer base.
Nevertheless, its attraction has waned, and U.S. asset managers that don't have to invest in Latin America's biggest economies have no plans to come back for several months.
"As late as the third quarter we still had some emerging market assets ... but we sold them all," said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management, Inc. owners of the $170 million SmarthGrowth fund of funds.
"We have no emerging market allocations and won't consider them, including Brazil, until the first quarter of 2009."
Whether investors are exposed to Brazil through exchange traded funds, American Depositary receipts, or investing directly in the Bovespa, Brazilian equities have suffered net outflows of foreign capital since June.
The Bovespa suspended trading six times this year. Mostly in the last two months. The Bovespa had net outflows of 3.3 billion Brazilian reals ($1.4 billion) so far in October, and BRL21.7 billion so far this year, compared with BRL12.3 billion in 2007 and BRL6.1 billion in 2006, according to the Bovespa.
Commodity prices have fallen sharply, with benchmark crude prices down more than half since their July highs, and base metals prices also down significantly.
The global dollar liquidity squeeze and outlook for slower growth have undercut prices for Brazilian commodities - whether it's ethanol, soybeans or beef. And slower economic growth in Asia - particularlyChina - means less demand, for example, for Brazilian steel and iron-ore from major companies like Vale do Rio Doce (RIO), whose shares have lost 56% of their value over the last 12 months. Brazil's key Ibovespa stock index is down 51% over the same stretch.
Brazil's economy might be fundamentally sound, and bolstered by just more than $200 billion in foreign exchange reserves - but a recession in Europe and the U.S. and slower growth in China, are prompting analysts to reckon with Brazilian economic growth of 2.5% in 2009, half of the 5% expected this year.
That's not much for dedicated emerging market funds to lean on, no matter how much they like Brazil's long term prospects, says Ed Kuczma, investment analyst for the $77 million Van Eck Emerging Markets Fund (EMRCX).
"It's been a very rough year for us. We get calls everyday from clients asking us if we can reposition the portfolio, but unless you're in cash, it's tough to position an equity fund defensively, especially an emerging markets one," Kuczma said.
Around 14% of the fund is allocated to Brazilian assets, either directly into small companies, or through ETFs. The fund's down 48% year-to-date as of September 30, 2008.
"We are neutral on Brazil at this point and only looking at smaller names that are cash rich and have no short term debt," Kuczma said.
"We have the cash, but Brazil is a moving target and with risk aversion like this around the globe, emerging markets are the first thing to go," he said.
The fund holds small names like clothing retailer Hering (HGTX3.BR) and medical supply company Cremer SA (CREM3.BR), both underperforming the index year-to-date.
Joe Clark, director at the Indiana based $200 million asset management firm, Financial Enhancement LLC, said he is actively trading a dwindling number of Brazilian assets through holdings in the iShares MSCI Brazil Index ETF (EWZ).
"We sold out of all emerging markets in November and bailed out of Brazil in early September once Lehman Brothers went bankrupt," said Clark.
The $2.7 billion Brazil iShares ETF is down to $29.94, from a 52-week high of $102.21. "We are sitting on at least 40% cash for our clients and we will wade in and out of Brazil if EWZ looks like it can go to $34 a share. We'd be buyers at that level," Clark said, "but that doesn't mean we won't wade out fast."
(Reuters) - U.S. government debt prices slipped on Tuesday as hopes of stabilization in the stock market pared safe-haven bids a day after Wall Street's worst day in more than 20 years.
On Monday, the unexpected defeat in the House of Representatives of a proposed $700 billion rescue of the financial sector caused a stampede out of stocks and other risky assets and a scramble into cash and Treasuries, especially Treasury bills.
However, investor optimism on an eventual plan to stabilize the financial system emerged.
"A lot will hinge on the passage of a rescue plan, the sooner the better. It remains an uncertainty in the market," said Kevin Mahn, chief investment officer at Hennion & Walsh Inc. in Parsippany, New Jersey.
The yield on one-month T-bills, which investors see almost as good as cash, dipped closer to zero percent in early trading, while the three-month bill rate jumped 40 basis points above 0.50 percent.
One of the immediate goals of the bailout proposal was to thaw credit markets, lower borrowing costs and unleash funds to banks, companies and consumers.
With a rescue plan in limbo, interest rates in the interbank market soared.
The London interbank offered rate (Libor) on overnight dollar funds jumped by a record 430 basis points to 6.87 percent, the highest in at least 7-1/2 years, according to Reuters data.
While a number of economic reports are scheduled for Tuesday, traders were focused on whether lawmakers can revive a bailout or come up with an alternative to resolve the current credit crisis, analysts and investors said.
A report from the National Association of Purchasing Management-New York showed business activity in New York City shrank more rapidly in September, contracting for the eighth time in nine months.
Also, prices of single-family homes plunged a record 16.3 percent in July from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indexes.
Consumer confidence data from the Conference Board and a report on Midwest business activity are due later on Tuesday.
Among cash maturities, the price on benchmark 10-year Treasuries was down 12/32 at 103-3/32. Their yield, which moves in the opposite direction to price, was 3.62 percent, up 5 basis points from late Monday.
Two-year notes were down 6/32 in price for a yield of 1.72 percent, up 9 basis points from Monday.
Owners of IRAs, self-directed 401(k)s like the investments
Lisa Shidler September 28, 2008
Investors who maintain self-directed 401(k) accounts or individual retirement accounts are increasing their investments in exchange traded funds.
Self-directed accounts allow investors to buy a range of equities and other securities, which sophisticated investors find appealing, financial advisers said.
"There are individual participants who are clamoring to get ETFs in 401(k) plans," said Tom Lydon, president of Global Trends Investments of Newport Beach, Calif.
In addition, investors are interested in adding ETFs to their IRAs, said Scott Burns, an analyst with Chicago-based Morningstar Inc.
While aggregate data on ETF holdings in IRAs isn't available, he thinks that investors will commit IRA assets to ETFs at the expense of mutual funds. In fact, Mr. Burns made that move with his own assets from a 401(k) plan that he moved into an IRA.
During the past year, advisers were introducing the concept of ETF investing in IRA accounts, and it has begun to catch on with clients.
Investors "are asking about them all of the time, and they want them added to their portfolios," said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management Inc. of Parsippany, N.J., which manages about $300 million.
ATTRACTING ASSETS For their part, mutual fund companies are aware of the change in investors' attitude. Most of them now allow participants with self-directed brokerage accounts in their 401(k) plans to purchase ETFs, a decision that has attracted assets.
For instance, ETFs are held in about 6% of self-directed brokerage accounts at Merrill Lynch & Co. Inc. in New York, up from about 4% at the end of 2006.
At The Vanguard Group Inc. of Malvern, Pa., about 10% of participants hold ETFs through brokerage accounts in their 401(k) plans, up from about 6% since 2006. ETFs now make up 22% of retirement assets within brokerage accounts at The Charles Schwab Corp. of San Francisco, which is up from 20% on June 30, 2007, Lindsay Tiles, a Schwab spokeswoman, wrote in an e-mail.
"We've been finding that these employees are increasingly interested in investing in ETFs, which are probably not available in the core part of their plan," she wrote. To be sure, smaller plans offer ETFs on their platforms.
For instance, ePlan Services Inc. of Denver has 136 plans with more than $42 million in ETF assets. Just 18 months ago, there were zero assets in ETFs, said Mark Gutrich, president and chief executive of ePlan Services Inc., which has about $500 million under management.
"I think it is safe to say that there has been an increase in the level of interest among small 401(k) plans to use ETF products," he wrote in an e-mail.
Officials at State Street Global Advisors of Boston are awaiting approval for an ETF target date fund designed for 401(k) plans, said Anthony Rochte, senior managing director.
"Clearly, in the 401(k) space, there's been an awful lot of demand."
ETFs may seem like a natural fit for IRAs, but there are obstacles that have slowed their adoption in 401(k) accounts in general, Mr. Mahn said.
For example, while conventional mutual funds carry higher costs than ETFs, their open-end structure is conducive to the regular, periodic purchases that are made for plan participants. ETF purchases, by contrast, carry commission charges, which mitigate the benefits of their lower costs.
In addition, 401(k) purchases often involve fractional shares, which are cumbersome with ETFs, and not all record keeping platforms can handle the product.
Many of these obstacles need to be addressed, said Luke J. Novak, a vice president at Chicago- based Rothschild Investment Corp., which supervises $2 billion in assets and celebrated its 100th anniversary recently.
In the meantime, he is hesitant to allow his clients to serve as guinea pigs.
"We don't want to be the first ones to try it out with our clients," Mr. Novak said.
Advisers adopt long-term perspective in wake of wild ride
Jeff Benjamin September 22, 2008
The extreme stock market volatility kicked off a week ago when the Dow Jones Industrial Average dropped more than 500 points underscored the fear spreading across the investment community, leaving financial advisers scrambling for answers and sound advice.
In a week during which the industrials ultimately ended about where they started, there was a tendency to reflect on past stock turmoil for either comfort or perspective.
"If you just drew a line through the market from the early 1990s through 2005 and you ignore all the stuff that happened in the middle, it would be a very even upward trending line," said Henry Sanders III, a portfolio manager with River Road Asset Management LLC, a Louisville, Ky.- based firm that manages $3 billion.
Last Monday's 504-point decline ranked as the sixth-largest single-day drop in the history of the index. On a percentage basis, the 4.42% decline ranked as the 96th worst of all time.
A 449-point drop two days later — the seventh-largest ever — drove the index to its lowest close in almost three years.
'CONFIDENCE GAME' "It's just a big confidence game, and unfortunately all the confidence is gone right now," said Mr. Sanders, who cited a popular mantra for times like these: "Don't just do something; stand there."
Most financial advisers have tried to adopt a similar long-term perspective even during a week when some of the nation's most substantial financial institutions exposed dire balance-sheet vulnerabilities.
"Ten years from now, it won't matter if you got into the market now or last month or next month," said Jeffrey Dunham, chief executive of Dunham & Associates Investment Counsel Inc., a San Diego-based firm with $1 billion under management.
Even while emphasizing the fact that much of the damage on Wall Street has so far been contained to the financial sector and that other market fundamentals remain positive, advisers recognize that investors aren't not yet thinking of the long term, or even the medium term.
"Confidence is what it will take to find a bottom in the short term, and to get there we need six months of no more bad news," Mr. Dunham said.
Meanwhile, a case was also being made for taking advantage of the stock market's most recent beat-down and realizing that there are segments that might suddenly be dramatically undervalued.
With the industrials dropping to the 10,600 range by midweek, it represented a 25% decline from the 52-week high of more than 14,164 on Oct. 9.
"You can't tell me those companies are worth that much less right now," Mr. Dunham said.
That kind of attitude could help encourage market stability.
"In the near term, this is all going to lead to increased volatility. But if we can get past this, I can see the market turning around in the fourth quarter, and I see a nice rally in the first quarter of next year," said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management Inc., a Parsippany, N.J.-based firm with $300 million under management.
"Fortunately, this is still contained to the financial sector, and that's why it's getting to the point of a really attractive buying opportunity for some stocks," he added. The bigger picture, however, involves the general cleansing effect that the fallout is likely to have on the markets.
"Right now, we're going through a process of creative deconstruction where we're redefining Wall Street," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC, a Princeton, N.J.-based firm with $22 billion under management.
STIMULUS IN PLACE "I still think the market will be higher by the end of the year and a year from now because there are some [economic] stimulators in place," he said.
Considering that inflation and unemployment remain relatively low and there is an expectation of lower interest rates from the Federal Reserve, the case is being made for a rally from what could be the bottom — assuming no more big surprises.
"The more the markets are allowed to work things out, the better," Mr. Mahn said. "Before you know it, it'll be the end of October, and we'll all be talking about the election again."
Of course, such a rosy outlook doesn't fly with everyone.
"We have to have our finger on the market's pulse and be willing to go to cash at times like these," said Brian Schreiner, vice president of Schreiner Capital Management Inc., an Exton, Pa.- based firm with $185 million under advisement. His technical research drove him to a 65% cash position two months ago.
"Going to cash is not a silver bullet, and we can get whipsawed. But right now, nobody has a clue what's going to happen in the market, and a lot of people are pretending they do," Mr. Schreiner said.
"We believe everything from a 1929-style crash to a rally is in play, and we need to learn to live in that range of possibilities," he said.
Negative sentiment, as has been vividly illustrated by the stock market's recent volatility, is a necessary part of the cleansing process, according to Mr. Dunham.
"The market will continue to fall until there is so much buying opportunity investors can't help themselves anymore," he said. "If you're a long-term investor and if you're going to invest in the equity markets, these kinds of pullbacks are seen as salivating opportunities."
Advisers adopt long-term perspective in wake of wild ride
Jeff Benjamin September 22, 2008
The extreme stock market volatility kicked off a week ago when the Dow Jones Industrial Average dropped more than 500 points underscored the fear spreading across the investment community, leaving financial advisers scrambling for answers and sound advice.
In a week during which the industrials ultimately ended about where they started, there was a tendency to reflect on past stock turmoil for either comfort or perspective.
"If you just drew a line through the market from the early 1990s through 2005 and you ignore all the stuff that happened in the middle, it would be a very even upward trending line," said Henry Sanders III, a portfolio manager with River Road Asset Management LLC, a Louisville, Ky.- based firm that manages $3 billion.
Last Monday's 504-point decline ranked as the sixth-largest single-day drop in the history of the index. On a percentage basis, the 4.42% decline ranked as the 96th worst of all time.
A 449-point drop two days later — the seventh-largest ever — drove the index to its lowest close in almost three years.
'CONFIDENCE GAME' "It's just a big confidence game, and unfortunately all the confidence is gone right now," said Mr. Sanders, who cited a popular mantra for times like these: "Don't just do something; stand there."
Most financial advisers have tried to adopt a similar long-term perspective even during a week when some of the nation's most substantial financial institutions exposed dire balance-sheet vulnerabilities.
"Ten years from now, it won't matter if you got into the market now or last month or next month," said Jeffrey Dunham, chief executive of Dunham & Associates Investment Counsel Inc., a San Diego-based firm with $1 billion under management.
Even while emphasizing the fact that much of the damage on Wall Street has so far been contained to the financial sector and that other market fundamentals remain positive, advisers recognize that investors aren't not yet thinking of the long term, or even the medium term.
"Confidence is what it will take to find a bottom in the short term, and to get there we need six months of no more bad news," Mr. Dunham said.
Meanwhile, a case was also being made for taking advantage of the stock market's most recent beat-down and realizing that there are segments that might suddenly be dramatically undervalued.
With the industrials dropping to the 10,600 range by midweek, it represented a 25% decline from the 52-week high of more than 14,164 on Oct. 9.
"You can't tell me those companies are worth that much less right now," Mr. Dunham said.
That kind of attitude could help encourage market stability.
"In the near term, this is all going to lead to increased volatility. But if we can get past this, I can see the market turning around in the fourth quarter, and I see a nice rally in the first quarter of next year," said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management Inc., a Parsippany, N.J.-based firm with $300 million under management.
"Fortunately, this is still contained to the financial sector, and that's why it's getting to the point of a really attractive buying opportunity for some stocks," he added. The bigger picture, however, involves the general cleansing effect that the fallout is likely to have on the markets.
"Right now, we're going through a process of creative deconstruction where we're redefining Wall Street," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC, a Princeton, N.J.-based firm with $22 billion under management.
STIMULUS IN PLACE "I still think the market will be higher by the end of the year and a year from now because there are some [economic] stimulators in place," he said.
Considering that inflation and unemployment remain relatively low and there is an expectation of lower interest rates from the Federal Reserve, the case is being made for a rally from what could be the bottom — assuming no more big surprises.
"The more the markets are allowed to work things out, the better," Mr. Mahn said. "Before you know it, it'll be the end of October, and we'll all be talking about the election again."
Of course, such a rosy outlook doesn't fly with everyone.
"We have to have our finger on the market's pulse and be willing to go to cash at times like these," said Brian Schreiner, vice president of Schreiner Capital Management Inc., an Exton, Pa.- based firm with $185 million under advisement. His technical research drove him to a 65% cash position two months ago.
"Going to cash is not a silver bullet, and we can get whipsawed. But right now, nobody has a clue what's going to happen in the market, and a lot of people are pretending they do," Mr. Schreiner said.
"We believe everything from a 1929-style crash to a rally is in play, and we need to learn to live in that range of possibilities," he said.
Negative sentiment, as has been vividly illustrated by the stock market's recent volatility, is a necessary part of the cleansing process, according to Mr. Dunham.
"The market will continue to fall until there is so much buying opportunity investors can't help themselves anymore," he said. "If you're a long-term investor and if you're going to invest in the equity markets, these kinds of pullbacks are seen as salivating opportunities."
Advisers adopt long-term perspective in wake of wild ride
Jeff Benjamin September 22, 2008
The extreme stock market volatility kicked off a week ago when the Dow Jones Industrial Average dropped more than 500 points underscored the fear spreading across the investment community, leaving financial advisers scrambling for answers and sound advice.
In a week during which the industrials ultimately ended about where they started, there was a tendency to reflect on past stock turmoil for either comfort or perspective.
"If you just drew a line through the market from the early 1990s through 2005 and you ignore all the stuff that happened in the middle, it would be a very even upward trending line," said Henry Sanders III, a portfolio manager with River Road Asset Management LLC, a Louisville, Ky.- based firm that manages $3 billion.
Last Monday's 504-point decline ranked as the sixth-largest single-day drop in the history of the index. On a percentage basis, the 4.42% decline ranked as the 96th worst of all time.
A 449-point drop two days later — the seventh-largest ever — drove the index to its lowest close in almost three years.
'CONFIDENCE GAME' "It's just a big confidence game, and unfortunately all the confidence is gone right now," said Mr. Sanders, who cited a popular mantra for times like these: "Don't just do something; stand there."
Most financial advisers have tried to adopt a similar long-term perspective even during a week when some of the nation's most substantial financial institutions exposed dire balance-sheet vulnerabilities.
"Ten years from now, it won't matter if you got into the market now or last month or next month," said Jeffrey Dunham, chief executive of Dunham & Associates Investment Counsel Inc., a San Diego-based firm with $1 billion under management.
Even while emphasizing the fact that much of the damage on Wall Street has so far been contained to the financial sector and that other market fundamentals remain positive, advisers recognize that investors aren't not yet thinking of the long term, or even the medium term.
"Confidence is what it will take to find a bottom in the short term, and to get there we need six months of no more bad news," Mr. Dunham said.
Meanwhile, a case was also being made for taking advantage of the stock market's most recent beat-down and realizing that there are segments that might suddenly be dramatically undervalued.
With the industrials dropping to the 10,600 range by midweek, it represented a 25% decline from the 52-week high of more than 14,164 on Oct. 9.
"You can't tell me those companies are worth that much less right now," Mr. Dunham said.
That kind of attitude could help encourage market stability.
"In the near term, this is all going to lead to increased volatility. But if we can get past this, I can see the market turning around in the fourth quarter, and I see a nice rally in the first quarter of next year," said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management Inc., a Parsippany, N.J.-based firm with $300 million under management.
"Fortunately, this is still contained to the financial sector, and that's why it's getting to the point of a really attractive buying opportunity for some stocks," he added. The bigger picture, however, involves the general cleansing effect that the fallout is likely to have on the markets.
"Right now, we're going through a process of creative deconstruction where we're redefining Wall Street," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC, a Princeton, N.J.-based firm with $22 billion under management.
STIMULUS IN PLACE "I still think the market will be higher by the end of the year and a year from now because there are some [economic] stimulators in place," he said.
Considering that inflation and unemployment remain relatively low and there is an expectation of lower interest rates from the Federal Reserve, the case is being made for a rally from what could be the bottom — assuming no more big surprises.
"The more the markets are allowed to work things out, the better," Mr. Mahn said. "Before you know it, it'll be the end of October, and we'll all be talking about the election again."
Of course, such a rosy outlook doesn't fly with everyone.
"We have to have our finger on the market's pulse and be willing to go to cash at times like these," said Brian Schreiner, vice president of Schreiner Capital Management Inc., an Exton, Pa.- based firm with $185 million under advisement. His technical research drove him to a 65% cash position two months ago.
"Going to cash is not a silver bullet, and we can get whipsawed. But right now, nobody has a clue what's going to happen in the market, and a lot of people are pretending they do," Mr. Schreiner said.
"We believe everything from a 1929-style crash to a rally is in play, and we need to learn to live in that range of possibilities," he said.
Negative sentiment, as has been vividly illustrated by the stock market's recent volatility, is a necessary part of the cleansing process, according to Mr. Dunham.
"The market will continue to fall until there is so much buying opportunity investors can't help themselves anymore," he said. "If you're a long-term investor and if you're going to invest in the equity markets, these kinds of pullbacks are seen as salivating opportunities."
NEW YORK, Sept 19 (Reuters) - Short-sale exchange traded funds fell sharply on Friday as the U.S. Securities and Exchange Commission suspended short selling of a select list of financial stocks through Oct. 2.
The 10-day suspension, announced late Thursday, left short sellers no option but to turn to ETFs as a way to bet against certain stocks, though such funds are made up of credit swaps and futures rather than specific stocks.
Short selling involves selling securities that are borrowed, in the hope of repurchasing them later at a lower price. "ETFs will matter more than they ever have now through Oct 2," said Kevin Mahn, managing director of Hennion & Walsh, a New Jersey-based brokerage. "It gives the investor the ability to short through sector as opposed to a specific stock."
Benchmark ETFs tumbled early Friday until a computer overload caused a brief suspension in trading. The sell-off resumed when systems came back up shortly after midday. UltraShort Financials ProShares SKF.A closed 13.98 percent lower at $99.30, the Short Financials Proshare SEF.A fell 11.43 percent to $62.90, and the Rydex Inverse Select Sector ETF Trust RFN.A fell 22.32 percent to $57.73.
In a statement, ProShares cited the SEC action as the reason for the temporary trading halt in its funds. It declined to comment further. Rydex declined to comment. The SEC said its action, effective on Friday, covers 799 financial institutions and may be extended for no longer than 30 calendar days.
(Reporting by Bob Margolis, editing by Richard Chang)
The stock market is holding its own today as investors adjust to the latest speculation over the status of some of the nation’s largest financial institutions.
The Dow Jones Industrial Average was in positive at mid-afternoon following Monday’s precipitous 504-point decline Monday.
It was the sixth-largest point drop in the history of the index.
On a percentage basis, the 4.42% decline ranked 96th all time.
Although jarred by the extreme volatility, many financial advisers and market watchers took the sudden spike in relative stride, with some even calling it a buying opportunity. “If you’re going to invest in the equity markets, these kinds of pullbacks can be seen as salivating opportunities,” said Jeffrey Dunham, chief executive of Dunham & Associates Investment Counsel Inc., a San Diego-based firm with $1 billion under management.
The general sense among advisers is that most of the damage in the markets has — fortunately — been contained within the financial sector, and that there are still reasons to be optimistic for a recovery during the upcoming months.
“Right now we’re going through a process of creative deconstruction where we’re redefining Wall Street,” said Tom Sowanick, chief investment officer at Clearbrook Financial LLC, a Princeton, N.J.-based firm with $22 billion under management. “I still think the market will be higher by the end of the year and a year from now because there are some (economic) stimulators in place,” he added.
Considering that inflation and unemployment remain relatively low, and the anticipation of lower interest rates from the Fed in the long run (today, the Fed left the rate unchanged at 2%), the case is being made for a rally from what could be the bottom – assuming no more big surprises.
“The more the markets are allowed to work things out the better,” said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management Inc., a Parsippany, N.J.-based firm with $300 million under management.
“Before you know it, it’ll be the end of October and we’ll all talking about the election again,” he added.
By TRANG HO Moves by Wall Street and regulators have been coming fast and furious since the U.S. government's takeover of Fannie Mae and Freddie Mac two weekends ago. IBD asked several exchange traded fund experts for their outlook on the financial industry and which ETFs they recommend now.
Paul Mazilli, director of ETF Research at Morgan Stanley:
We are neutral on the financial sector and think there is still a lot of healing to be done before long-term recovery.
While we think people are getting balance sheets under control, lower leverage and a slow economy are hurting earnings prospects. We think people need to be selective in the sector and favor ETFs with diversification and lower risk. We are still in a bear market.
We favor a number of ETFs in many markets other than the financial sector: iShares Dow Jones U.S. Telecommunications, Dow Jones U.S. Aerospace & Defense, MSCI EAFE, MSCI Hong Kong, MSCI Singapore, Taiwan; Vanguard Europe Pacific, Emerging Markets, European, Pacific; PowerShares DB Commodity, DB Agriculture, Wilderhill Clean Energy; Market Vectors Russia, SPDR Gold Trust and Claymore S&P Global Water.
Kevin Mahn, a portfolio manager at SmartGrowth Mutual Funds and chief investment officer at Hennion & Walsh; assets under management $300 million:
With the continued news and noise around AIG, Washington Mutual, Lehman Bros. and Merrill Lynch, it all seems like it's going up to a crescendo in terms of the doom and gloom and bad news. That suggests to me, looking back at history, that we're getting close to a bottom.
If you look at Bear Stearns and the short-term liquidity problems that they had, they were still bought out. The bondholders were still made whole and the stockholders got JPMorgan stock.
Something needs to turn it around but the state of financials itself isn't as dire as everyone is making it out to be. Do we really believe the mortgage market in the U. S. is dead? Do we think America, which is a society of debt, isn't going to use mortgages again and that the U.S. Treasury isn't going to issue debt again?
These are the types of businesses that built the Lehman Bros. and Merrill Lynches of the world. If they can get through this period of calamity, they're going to return to profitability in 2009.
But we're not out of the woods in any way. Commercial real estate is the next area that's going to become pressured, as we've seen on the residential side. But throw in the fact that September is usually the worst month of the year for the stock market as a whole. It won't be until November-early December that we'll have enough information about who else was impacted.
ETF picks: SPDR Financial Select Sector and Vanguard Financials.
Bill Koehler, chief investment officer, ETF Portfolio Solutions; assets under management $45 million: These are healthy developments for the markets in general and the financials in particular. The markets are being allowed to clear and markets have to be allowed to clear. They may begin to look at what the financial landscape will be on other side of this credit crunch. Obviously somebody at Bank of America has gone through Merrill Lynch's portfolio and assigned some type of value to the distressed securities in their portfolio.
SPDR Financial Select Sector will certainly be a beneficiary.
Matthew D. McCall, president of Penn Financial Group; assets under management $20 million: I would not be surprised to see something else happening in financials.
But I think what happened here with Lehman was very important because the government did not step in as it did with Fannie, Freddie and Bear. The government let the free market take advantage of that. And we saw that with the Merrill Lynch takeover. The free market let Bank of America come in and buy it for what they thought it was worth.
SPDR S&P Biotech (and) iShares Dow Jones U.S. Medical Devices are two ETFs I do own. A medical equipment ETF, which has nothing to do with Lehman, will be down on a day like this, giving investors long-term opportunity.
Another one I own is Consumer Staples Select Sector SPDR. It gives us exposure to companies that are as far away from financials as possible. There's a good chance I'll be buying financials in the next couple of weeks or months but just not yet. As we know over history, when the mass is going one way, it's usually a buying opportunity.
Kevin D. Mahn is a managing director and chief investment officer at Hennion & Walsh.
Advisors have referred to our SmartGrowth fund family as alternative strategies. These '40 Act funds, which are essentially funds of exchange-traded funds (ETFs), track the Lipper Optimal Target Risk Indices. As a portfolio manager of the family, I have taken leveraged short exchange-traded fund positions to implement those indices.
The indices are objective, risk-based tools composed of carefully selected ETFs that are rebalanced on a quarterly basis. Their overriding objective is providing an appropriate combination of ETFs for different levels of risk appetites. The indices, and by extension the funds themselves, have taken on several defensive positions since the summer of 2007. These defensive positions have not only included bond-oriented ETFs but also short and leveraged short ETF positions on certain asset classes, sectors, styles and market caps.
ProFunds’ ProShares also offers leveraged positions via ETFs. These types of leveraged and non-leveraged short and long ETF products have presented investors and advisors with the ability to add diversification and, at times, downside protection to their investment portfolios. These products have also afforded mutual fund portfolio managers the opportunity to utilize leverage selectively within their own fund offerings.
One has to be careful to control the amount of leveraged exposure that one has not only to a given asset class, sector, style or market cap but also within one's portfolio as a whole. Keep in mind that when the market moves against a particular holding, the associated losses are magnified.
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