Thursday, January 31, 2013

ADP Employment - 1-30-13


TRADEX GLOBAL INTERNAL COMMENTARY

Private payrolls jump!  ADP, the payroll processor, estimates that the private sector added 192k jobs in January.  It also revised December up from 185k to 215k.  The unemployment rate is estimated to stay fairly flat at 7.8%.  These are good numbers to start 2013 and we believe that the US economy will continue to grind along at 2% GDP.  There are still pot-holes to be careful of and the investment community is very complacent (we are not). Keep nimble – Michael Beattie


EXTERNAL RESEARCH COMMENTARY

Payroll processor ADP estimated Wednesday that private employers added 192,000 jobs in January. ADP revised December's estimate from 215,000 to 185,000 private sector jobs. The government said last month that economy ended 2012 with 155,000 more jobs in December and a 7.8% unemployment rate. It said private employers added 168,000 jobs while governments cut 13,000. The government's report on January employment and unemployment is due Friday. "U.S. private sector employment got off to a good start in 2013,"said Carlos Rodriguez, president and chief executive officer of ADP. "According to the ADP National Employment Report, private sector employers created an average of 183,000 new jobs per month during the last three months. This is an encouraging sign of steady improvement in the job market."


Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Wednesday, January 30, 2013

Case-Shiller 1-29-13


TRADEX GLOBAL INTERNAL COMMENTARY

Home prices on the move!  The Case-Shiller Property Index increased 5.5% from November 2011, the biggest year-over-year gain since August 2006.  Record low rates and a stabilizing job market are both contributing to this positive growth.  Home price appreciation is a key component in our MBS Portfolio, as it affects both prepayments and loss severities.  The reversal in the housing sector should affect the overall economy and home owners for sure.  We were early in seeing these trends and our Liquid Real Estate Portfolio has benefited greatly.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Home prices in 20 U.S. cities rose in the 12 months to November by the most in more than six years, showing the housing market will play a more central role in the U.S. economic expansion this year. The S&P/Case-Shiller index of property values increased 5.5 percent from November 2011, the biggest year-over-year gain since August 2006, according to data released in New York today. Confidence sank more than forecast in January as consumers were stung by a drop in take-home pay, another report showed. Mortgage rates near a record low will probably spur a third consecutive advance in home sales this year, which will keep property values rising. The resulting gains in home equity may help support consumer sentiment and spending, the biggest part of the economy, softening the hit from the two percentage-point increase in the payroll tax that took effect this month. “Rising home prices are providing an important cushion,” said Millan Mulraine, a New York-based economist at TD Securities LLC, who correctly forecast the gain in values. Lower confidence and smaller paychecks “will slow consumer spending this quarter, but the effect will abate in coming months.” The New York-based Conference Board’s sentiment index fell to 58.6 this month, the weakest since November 2011, from 66.7 in December, the private research group said. The 8.1-point drop was the biggest since August 2011, the month after lawmakers wrangled over how to trim the budget deficit. “The souring in moods is a reflection of the brinkmanship in Washington and the higher payroll tax,” Mulraine said.


Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Tuesday, January 29, 2013

High Yield Bonds Losing Their Luster? Afraid so…



The Tradex Group Weekly Blog
January 29, 2013
By Richard Travia, Director of Research

High Yield Bonds Losing Their Luster?  Afraid so…

Investors are realists, and when they see a political and economic landscape littered with talk of fiscal cliffs and $16 trillion debt ceilings, they measure the scene, assess the risk, and naturally gravitate to safer investments.

So it goes with the current corporate credit market, especially the relatively risky high-yield debt market, where more assets are flowing ahead of what seems to be a tumultuous 2013.

But are investors taking on too much risk in the high-yield market? That’s our view, as too many companies with frail balance sheets are benefitting, unwisely in our view, due to investors’ continued ample appetite for yield.
                                                                                                                                            
The Financial Times calls the latest debt issuance from both companies as a “dash for trash.”

Two vivid examples stand out – Tenet Healthcare and Denbury Resources.

Both are emblematic of the recent trend of high-yield bond issuance that has debt selling with coupon yields below the 5% level. According to Standard & Poor’s, high-yield debt is triggering record low yields in 2013, especially for junk bonds maturing in seven years or more, with ratings that the rating agency accurately describes as being in “deep junk bond territory”.

Both Tenet and Denbury are emblematic of the trend toward what The Financial Times calls firms with “fragile” balance sheets.

This from The Times:

Companies with fragile balance sheets are capturing such low coupons as investor hunger for the bonds remains high, even as yields carved out new record lows on Wednesday at 5.64 per cent.

Investors are now accepting less in risk premium, or spread over US Treasuries, to hold junk bonds than they were only a few weeks ago. Since the start of the year, the spread has shrunk almost 50 basis points to 4.62 per cent, according to Barclays’ indices.

That outlook should continue unabated, with more and more of those fragile firms driving coupon rates from approximately 7% to 5%, and lower.

Look at Tenet. The health care firm just sold $850 million in 4.5% secured notes, due in 2021. That is a record low yield for high-yield bonds (B-rating) with maturities of seven years or more.

Denbury’s recent 4.6% yield on 10.5 year notes set another record yield hungry investors might want to avoid - new lows for subordinated bonds.

That’s a big departure from trends we’ve seen even in the past few weeks to open the year.

Dealogic reports that about $21 billion in so-called “junk bonds” hit the street already in 2013, a big uptick over the $12 billion the market saw over the first few weeks of 2012. Moreover, average coupons on those 213 deals clocked in at 6.8% - well above the Tenet and Danbury deals, but heading to a downward trend.

Still, that’s not stopping investors from pouring $1.1 billion into high-yield debt in the first week of 2013, alone. But with yields at record lows, and the quality of new high-yield debt, in our view, in significant decline (Moody’s reports that covenant protections on high-yield bonds are at weakest levels in two years), investors best beware.  We expect the lesser-known, non-flow names to be hit extremely hard just on the technicals of ETF and mutual fund redemptions.  We also expect that many of the lower quality companies in specific sectors may restructure, go out of business, etc., where the bonds may sell-off to recovery value or to zero.  In the likely event of rising interest rates, the above mentioned scenarios will be compounded (as an example, without any credit impairment, the negative convexity will cause a generic high yield bond to lose 16% on a move in the 10Y Treasury to a 4% yield). 

After all, “fragile” is not a theme you want to hang your hat on going into 2013. But with increasingly lower coupons on high-yield bonds, “fragile” should be the watchword even for yield hungry investors coming out of January.  

Wednesday, January 23, 2013

Housing Starts 1-22-13


TRADEX GLOBAL INTERNAL COMMENTARY

Sales of existing US homes took a dip in December.  Purchases fell 1% to a 4.94 million annual rate.  The reading was still the second highest since November 2009.  Even with the December dip, 4.65 million homes were sold in 2012, the most since 2007.  This is quite positive, as the level of inventory is the lowest in a decade. Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Sales of U.S. existing homes unexpectedly fell in December as supply shrank, underscoring the hurdles for an industry seeking to strengthen its recovery even as it completed its best year since 2007. Purchases fell 1 percent to a 4.94 million annual rate last month, figures from the National Association of Realtors showed today in Washington. The reading was still the second-highest since November 2009. The median forecast of 79 economists surveyed by Bloomberg called for a gain to a 5.1 million rate. “We saw housing gain momentum throughout last year, and clearly a little dip doesn’t take that away,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, who projected a drop to a 4.95 million annual rate. “For the first time in a while, it looks like it’s a sellers’ market as much as it’s a buyers’ market. I suspect prices and sales will go up again in 2013.” The usual drop in supply at this time of year and a pickup in demand spurred by historically low mortgage rates, a firming job market and growing households risk keeping inventories lean, pushing prices even higher. The median price of an existing house climbed 6.3 percent in 2012, the most since 2005. Stocks climbed to five-year highs on better-than-forecast earnings from companies including Travelers Cos. and Freeport- McMoRan Copper & Gold Inc. The Standard & Poor’s 500 Index rose 0.4 percent to 1,492.56 at the close in New York.


Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Tuesday, January 22, 2013

Five “Game Changers” Investors Can Expect From Hedge Fund Sector in ‘13


The Tradex Group Weekly Blog
January 22, 2013
By Michael Beattie, Chief Investment Officer

Five “Game Changers” Investors Can Expect From Hedge Fund Sector in ‘13

New data out from industry sources tells a dynamic story about the hedge fund sector - wealthy private investors are increasingly turning their backs on hedge funds, while pension funds and insurance companies are embracing hedge funds. Why? It's all about the conservative nature of the new era of hedge fund clients, and how the lack of risk is sending rich clients to the exits.

That’s just one trend percolating out of the gate as January 2013 gains some momentum. What are some other key trends hedge fund investors can expect to see this year?

Tradex Global took some time this week to take a look, and we see these five trends at the top of the list:

Mixed Signals On New Regulations? - In a November 2012 survey of 100 global hedge fund managers and 50 major institutional investors by Ernst & Young, fund managers said that while new regulations and compliance mandates from government regulators were “taking a toll” on hedge fund performance, there is widespread industry skepticism over whether or not those new reform rules are working, especially in terms of “protecting investors’ interests and preventing another financial crisis”. Expect heavy lobbying efforts in Washington D.C. and in foreign capitals as the hedge fund industry looks to lighten the load, regulation-wise, to save performance while better serving investors.

Management Compensation An Emerging Issue – Investors who have seen lower rates of return from hedge fund managers are pumping up the volume on hedge fund management compensation. Meanwhile, compensation levels are expected to rise in 2013, according to the HedgeFundCompensationReport.com.  The group estimates that the average hedge fund cash compensation in 2012 was $314,000 – a figure that HFCR said will rise in 2013. Investors in smaller, niche funds aren’t complaining so much, as performance has been relatively solid. But that’s not the case for investors in large funds, the report states. “Despite reports of significant amounts of capital moving to large funds, it seems these small funds are outperforming the market,” said David Kochanek, lead researcher on the hedge fund compensation report.

Hedge Fund Investors Want Transparency, But Want It Gratis – With legitimate questions about exposure, counterparty risk and liquidity concerns, particular over Eurozone fund investments, investors will want greater transparency from hedge fund managers in 2013. But there’s a caveat – there’s little evidence they want to pay for that added “protection”.

’13 Growth Driven By Pension Funds – Data from Agecroft Partners says that 2013 should set a high benchmark for hedge fund assets even though performance in 2011 and 2012, especially from larger funds, has been meager. Driving industry growth in the face of challenging performance headwinds will be increased asset inflows from pension funds, and from an expanding hedge fund investor base due to Congressional passage of the JOBS Act, Agecroft reports. (Per the JOBS Act, hedge funds are now required to generate higher clarity and transparency on key issues like risk and investment process, thus attracting a wider pool of investors.) Expect more pension funds to enter the hedge fund arena, as managers seek to curb downside risk and beef up returns, especially with interest rates remaining low, dampening enthusiasm for fixed income funds.

Smaller Target For Investors – 2013 should see some consolidation among investors, who may concentrate their investment assets to a smaller pool of hedge funds. Expect to see about 90% of all hedge fund investments allocated to a handful of fund firms. But there’s a twist  -that doesn’t mean larger hedge fund outfits will benefit. Increasingly, better performance from smaller funds and a well-honed marketing message from the JOBS Act will “level the playing field” and steer more of those concentrated assets to smaller firms.

There are no guarantees in life, unless you’re a Chicago Cubs fan, but expect the issues above to gain greater prominence as 2013 takes shape.

Sunday, January 13, 2013

Small Ball: Niche Hedge Funds Outmaneuver Giant Hedge Funds



The Tradex Group – White Paper Series
January 14, 2013
By Richard Travia, Director of Research

Small Ball: Niche Hedge Funds Outmaneuver Giant Hedge Funds

Behemoth - something of monstrous size, power, or appearance, i.e. “The newest SUV is a gas-guzzling behemoth that doesn't even fit in a standard parking space.” – Merriam-Webster Dictionary

Being a behemoth has its advantages – think of Wilt Chamberlain dunking a basketball unimpeded, or a T-Rex cornering a hapless duck-billed dinosaur.

But in the hedge fund world, being small, nimble and unique outweigh any advantages the hedge fund leviathans bring to the table.

Make no mistake; Wall Street is seeing increased allocations in hedge funds of all sizes, as investors embrace the “value-added” benefits of hedge funds. According to Towers Watson, hedge fund assets under management hit $2 trillion at the end of 2011, and should crest $2.6 trillion by 2013.

Obviously, all hedge funds are not created equal, and three critical areas favor niche hedge funds over their larger siblings:

·                     Performance – In the performance vector, alpha is significantly easier to achieve with unique hedge funds.  As such, funds can hire smaller, yet highly seasoned managers.

·                     Liquidity – With vertical funds, given a 30-day notice, over 90% of the portfolio can be liquidated in one week.

·                     Transparency – Niche hedge funds enable potential investors to “look under the hood” and more easily research fund management metrics.

Investors get the big picture on niche funds, as smaller hedge funds are experiencing more substantial inflows, especially fixed-income and emerging market hedge funds. Comparably, larger hedge fund flows have fallen since July 2007, according to data from TrimTabs Investment Research.

Performance the Difference

Performance seems to be the most significant driver - and difference – between small hedge funds and large hedge funds.

A study from PerTrac said that smaller hedge funds (defined as hedge funds with less than $100 million in assets) generally outperformed not only mid-sized hedge funds, but large hedge funds, as well. The PerTrac data has smaller funds earning a 558% return on investment from 1996 to 2011, compared to 356% for mid-sized hedge funds (between $100 million and $500 million), and 307% for larger hedge funds (over $500 million).

Here’s a more complete breakdown of niche hedge fund performance versus large hedge fund performance:

·         From 1996 thru 2010, funds managing less than $100 million had a compounded annualized rate of return of +13.6%, funds managing $100 million - $500 million had a compounded annualized rate of return of +10.87% and funds managing over $500 million had a compounded annualized rate of return of +10%.
         
·         In 10 of the 15 years in that time period, both funds managing less than $100 million and funds managing $100 million - $500 million have outperformed those managing over $500 million. 

·         In four of the five years where both funds under $100 million and funds managing $100 million - $500 million did not outperform those funds managing more than $500 million, funds managing less than $100 million did outperform funds managing over $500 million.  
         
        That general trend continued in 2011, with funds managing under $500 million outperforming those managing over $500 million. Additionally, hedge funds with assets under $100 million outperformed hedge funds with more than $500 million in assets in 12 of the past 16 years, PerTrac reports.
         
What exactly accounts for the outperformance of small hedge funds? Several reasons stand out:

An increasingly level playing field – Historically, conventional wisdom says that larger hedge funds have, given their ample size, more research capabilities. But investment research has become commoditized, and is increasingly as readily available to smaller hedge fund managers as it is to larger hedge fund managers.

The stealth factor – Larger hedge funds, cumbersome by nature, have a size problem. Specifically, big hedge fund managers must accumulate targeted positions without impacting market prices. That often drives up investment prices not only for large funds, but for anyone else buying up shares of a particular stock. Smaller hedge funds don’t have that issue – fund managers can move nimbly, acquiring positions in favored investments without a spotlight shining down on them or paying an unnecessary, and performance-dragging, premium for fund investment holdings.

Faster, better – Niche hedge funds have another “nimbleness” advantage that fuels outperformance. Being “leaner and meaner”, niche funds can move quickly, as market and client needs move dynamically. In addition, since niche hedge funds aren’t as shackled to their asset bases as are larger funds, they can navigate sluggish markets better, particularly where liquidity is constrained, and can capitalize on niche investments and move positions faster than more sizeable hedge funds.

By and large, smaller, niche hedge fund managers, when properly researched, investigated and understood, generally outperform their larger counterparts and the overall hedge fund universe. 

In addition, smaller funds can afford to be more hands-on, and more flexible with their investment strategies. Also, increased competition between service providers has allowed smaller funds to meet operational standards such as:  high quality service provider relationships, requisite asset verification, appropriate wire transfer controls and detailed valuation policies, among others.

In the hedge fund world, bigger isn’t necessarily better, as niche funds carve out a dominant role in the investment industry landscape.

Expect that trend to continue in the years ahead.

Wednesday, January 9, 2013

MBA Mortgage Applications 1-9-13


TRADEX GLOBAL INTERNAL COMMENTARY

Mortgage applications rebounded last week; up 11.7% from the previous week.  The refi index jumped 12.1%, while applications for new homes jumped 9.6% from the previous week.  The refinance share of all applications held steady at 82%.  Fixed 30-year mortgage rates rose 9 basis points to 3.61%, from 3.52% in the previous week.  This is the highest rate for the 30-year mortgage since November 2012.  I think our thesis of refinancings cresting and mortgage rates rising is playing out.  We are not 100% sure that Washington will not pull one more trick out of their bag to get additional mortgages refinanced, but we are very sure that we are close to the end of the “final” refinance wave.  In our Liquid Real Estate Portfolio we are going to have a full allocation to IO’s shortly, as we believe this is a compelling time to overweight this sector.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Applications for U.S. home mortgages rebounded last week after three straight weeks of declines, even as interest rates jumped, data from an industry group showed on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, surged 11.7 percent in the week ended Jan 4. The index of refinancing applications jumped 12.1 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, climbed 9.6 percent. The refinance share of total mortgage activity held steady at 82 percent of applications. Fixed 30-year mortgage rates increased 9 basis points to average 3.61 percent compared with 3.52 percent the week before. It was the highest level since early November. The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.


Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Monday, January 7, 2013

Tradex Global’s Four “Sell Signs” For Alternative Investments



The Tradex Group Weekly Blog
January 7, 2013
By Michael Beattie, Chief Investment Officer

Tradex Global’s Four “Sell Signs” For Alternative Investments

New data from Morningstar says that investors want to learn about alternative funds, but want more information on the topic. How about four, sure-fire “sell signs” that will have investors signing onto alternative investments without missing a beat?

How can fund managers satisfy that demand, and attract more client assets to alternatives? Let’s take a look.

Roll back to 2008, when the U.S. economy nearly collapsed, and the financial markets suffered their worst losses in decades.

But like most disasters, there was a silver lining. The toxic, roiling 2008 financial markets taught investors a good lesson about the importance of non-correlated investment returns. Increasingly, investors began to see alternative funds, especially hedge funds, as a solid, stable, relatively low risk investment vehicle.

While the S&P 500 lost 38% in value that year, hedge funds only fell by 19%, raising eyebrows all over Wall Street and among the investor community.

Since then, the growth of alternatives have exploded.

What’s attracting investors to alternative investments? And what should investment firms push on the sale and marketing front to attract more clients? Here are some ideas:

Sell liquidity – For years, alternatives were considered an illiquid investment, with hedge fund investors growing accustomed to seeing their assets “locked up” for long periods of time. But with the growth of liquid hedge funds, and from the growth of long and short funds, it’s easier for investors to get their cash in a pinch. That makes alternatives a great selling point to investors who may not know the liquidity story behind hedge funds.

Sell the growth of alternatives – Assets are pouring into alternative investments. According to a 2012 study from McKinsey & Co., worldwide alternative investment assets reached $6.5 trillion. The growth rate for alternatives has grown by seven times more than of traditional asset classes. McKinsey says that by 2015, alternative investments will comprise 25% of all retail investment class assets.

Sell the risk benefitsAlternatives offer a rich diversity of risk categories for different investors. More affluent investors are a good sell for hedge funds or traditional private-equity funds. Regular investors can be steered toward long and short mutual funds, and to exchange traded funds.

Sell the correlation benefits – Investors are drawn to alternative investments as investment returns provide a lower correlation than traditional stocks and stock mutual funds. Alternatives also allow investors to diversify their investment portfolio by industry or sector; by portfolio manager, or by investment strategy.

Couple all that with solid investment returns, and investment firms have an easier sale than they might think with alternative investments.  

And 2013 should be no different.


Thursday, January 3, 2013

MBA Mortgage Applications 1-3-13


TRADEX GLOBAL INTERNAL COMMENTARY

Mortgage applications fell for the third straight week!  MBA said that its index, which includes both new mortgages and re-financings, fell 10.4% in the week ending December 28th.  The index of re-financings also fell a whopping 10.4% (we have been predicting pre-pays would be cresting) and we believe that refi’s will fall off more as we move into 2013.  The percent of mortgage applications that were for refinancings held steady at 82% of applications, but we believe that will also come down soon.  30-year mortgage rates averaged 3.52% in the week, up 1 basis point.  We monitor this closely and believe that this is positive news for the IO’s in our Liquid Real Estate Portfolio.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Applications for U.S. home mortgages fell last week for the third consecutive week as refinancings fell to the lowest level since last April, an industry group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 10.4 percent in the week ended Dec. 28. The MBA's seasonally adjusted index of refinancing applications also fell 10.4 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, fell 10.5 percent. Both indexes dipped for a third straight week. The refinance share of total mortgage activity stayed at 82 percent of applications. Fixed 30-year mortgage rates averaged 3.52 percent in the week, up 1 basis point from 3.51 percent the week before. The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA. The release covered two weeks of data because of the holidays. 


Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Jobless Claims 1-3-13


TRADEX GLOBAL INTERNAL COMMENTARY

Jobless claims rose to 372k, higher than forecasted by economists who were estimating 360k claims.  The underlying claims trend is still fairly low, and at this time of the year weekly numbers can be volatile.  The four week moving average on claims was slightly higher at 360k from 359k, and that is what we focus on.  An ADP report showed that companies added more workers in December than forecasted.  We see layoffs and firings slowing and believe that jobless claims are under control.  ADP reported a 215k increase in employment in December, the largest increase since February 2012.  I would like to see the 4-week moving average of new jobs steady at 200k soon and move to 250k by mid-year in order to be convinced that the money that has been printed is moving into the real economy and that employers are more confident.  This is still a good start to the new year and we will take it along with the markets.  Keep nimble and Happy New Year from Tradex – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

More Americans than forecast filed claims for unemployment insurance payments last week, according to government figures that were estimated because some state agencies closed during the holidays. Applications for jobless benefits increased 10,000 to 372,000 in the week ended Dec. 29, the Labor Department reported today in Washington. Economists forecast 360,000 claims, according to the median estimate in a Bloomberg survey. A report from the ADP Research Institute showed companies added more workers than projected in December. “The underlying claims trend is still really low,” said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida. “There’s a lot of volatility this time of year. Job destruction is really not a problem right now, it’s really hiring that’s the issue.” The four-week average of claims, a less volatile measure, was little changed, indicating employers held on to current staff at the end of 2012 even as Congress made little progress in budget talks. The deal passed by lawmakers this week averted tax increases on about 99 percent of households while failing to reach a bargain on spending and debt. The data today from the Roseland, New Jersey-based ADP Research Institute indicated the job market finished 2012 with momentum. The 215,000 increase in employment was the group’s largest since February and followed a revised 148,000 gain the prior month that was larger than initially reported.


Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global