Month: November 2016

Market Perspective for November 28, 2016

Equity markets have advanced for three consecutive weeks, leading major indexes to new all-time highs with broad support from several sectors. The Russell 2000 turned in a 15-day winning streak last week and early holiday sales data has been encouraging.  A slight pullback in early Monday trading following further skepticism regarding OPEC’s latest production deal did little to sway bullish sentiment as investors look ahead to a December interest rate hike and President-elect Trump’s proposed policies to stimulate the economy in 2017.

The jobs report is the last one before the Federal Open Market Committee (FOMC) meets mid-December to set interest rates. Analysts are forecasting an increase of 175,000 new jobs on Friday’s monthly nonfarm payroll report. A reading much stronger or weaker could influence if and how much the Fed adjusts rates at the meeting. Odds are now above 90 percent that the Fed will increase rates by 25 basis points at its mid-December meeting. European Central Bank (ECB) President Mario Draghi is scheduled to deliver a speech to the EU parliament Monday. His remarks will be watched closely for insights into the European economy and any future actions on the part of the ECB. There is also an important meeting of OPEC and non-OPEC countries early in the week, though many cautious investors moved out of the sector ahead of that meeting.  U.S. weekly crude inventory is forecast to report a 2-million-barrel build on Wednesday, which could further complicate oil prices should OPEC again fail to agree on production cuts.

Consumer price index (CPI) and manufacturing purchasing manager index (PMI) reports from around the world will be available this week. The latest U.S. consumer confidence reading, which is expected to rise significantly, and the revised third quarter gross domestic product (GDP) figures will be released Tuesday. The forecast is for a slight upward revision in GDP. Eurozone CPI is expected to rise slightly but remain well below the ECB’s 2-percent target. Economists expect the Chicago PMI will rise from last month’s 50.6 to 51.8. Chinese and UK PMI numbers are due out on Thursday. While the Chinese report is expected to remain unchanged, the forecast is for a slight decline in Britain. The Domestic PMI number is forecast to rise slightly.

Pending U.S. home sales and the weekly mortgage purchase applications index will be released on Wednesday.  U.S. dollar strength has led to a sell-off in Treasuries and an uptick in mortgage interest rates. The Personal Income and Outlays report is expected to show a slight increase in wages and spending. The Federal Reserve Beige Book is also due out Wednesday. Analysts anticipate a drop when the latest light vehicle sales figures are released Thursday.

Corporate news will be relatively quiet as earnings season winds down. At opposite ends of the spectrum, Tiffany’s (TIF) and Dollar General (DG) are scheduled to report this week. Supermarket chain Kroger’s (KR) is scheduled to release latest earnings and revenue numbers on Thursday, which may have been reduced due to falling food prices.

Market Perspective for November 25, 2016

Major averages continued to set new all-time highs throughout the abbreviated holiday week. The Dow cleared 19,000, the S&P 500 index rose more than 1 percent to break above 2,200 and the Nasdaq was up slightly less than 1 percent to almost 5,400. The financial, telecommunication and technology sectors led the rally. On Wednesday, the U.S. dollar index rose sharply, and the price of gold dropped approximately $30 per ounce to a nine-month low of $1,180.90.  West Texas Intermediate Crude rose to nearly $50 per barrel on news that OPEC may be close to a production agreement, but settled below $48 after weekly inventory data reflected a large build in gasoline stockpiles. OPEC oil ministers are expected to meet Wednesday in Vienna. Shares of the Energy Select Sector SPDR ETF (XLE) rose almost 2.5 percent this week.

European Central Bank (ECB) President Mario Draghi spoke Monday before the European parliament. He reiterated that the Eurozone is recovering at a moderate pace and the unemployment rate is declining. Notes from the most recent FOMC meeting confirm confidence that the strengthening economy will justify a December rate hike.

U.S. existing home sales rose to their highest level in more than nine years, despite rising prices and higher mortgage rates. The forecast was for a slight decrease. Sales of new homes unexpectedly fell 1.9 percent last month. The weekly mortgage application index rose over 4 percent. Durable goods orders increased 4.8 percent to handily beat consensus estimates of 1.5 percent. As expected, weekly unemployment claims rose slightly, though initial jobless claims have been below 300,000 for the past 90 weeks. The University of Michigan Consumer sentiment index rose to 93.8, more than 8 points above its pre-election figure.

Tyson Food (TSN) shares fell approximately 15 percent lower-than-expected fourth quarter earnings and revenues and news that CEO Donnie Smith will step down at the end of the year. Hewlett Packard Enterprises (HPE) shares were down by more than 4 percent before recovering following disappointing earnings and revenues and a security breach that compromised the personal information of more than 134,000 current and former U.S. Naval personnel.

Dollar Tree (DLTR) shares rose more than 12 percent on Tuesday after beating earnings and revenue expectations. Existing same-store sales increased a better-than-expected 1.7 percent due to higher foot traffic and an uptick in average spending per customer. John Deere and Company (DE) hit an all-time high of $104 per share on Wednesday with earnings and revenues that beat expectations and improved sales guidance as crop prices recover.

Fund Spotlight: WisdomTree Japan Hedged Equity Fund (DXJ)

After pulling back in late 2015 and early 2016, the Nikkei 225 has resumed the bullish rise that began four years ago in response to what has been called “Abenomics.” Named in honor of Japanese Prime Minister Shinz? Abe, the economic policies that he advocates are based on “three arrows” of structural reform, fiscal stimulus and monetary easing aimed at spurring the Japanese economy, boosting gross domestic product (GDP) and increasing the nation’s exports.

Nearly all of the world’s central banks have engaged in some form of extraordinary monetary policy since the global financial crisis, although the measures instituted by the Bank of Japan (BoJ) have been the most aggressive by far. While the BoJ has signaled that it will begin to tighten monetary policy and taper its bond purchases, the central bank will continue to expand the country’s monetary base until inflation reaches the 2 percent target by pinning the yield on the benchmark 10-year government bond at zero percent.

The postelection U.S. dollar rally has significantly weakened the yen. Prudent investors expect the yen’s infirmity to persist in light of Japan’s overwhelming government debt and the deflationary effects of a stronger U.S. dollar. WisdomTree’s Japan Hedged Equity Fund (DXJ) is well-positioned for such climates and should be considered by those who are bullish on Japanese stocks and bearish on the yen.

Fund Overview

This exchange-traded fund (ETF) seeks to track the returns of WisdomTree’s Japan Hedged Equity Index. Generally, 95 percent of the passively managed fund’s $7.1 billion in assets under management (AUM) will be invested in components of the index or other investments that have substantially identical economic characteristics. The index is designed to neutralize fluctuations between the yen and the dollar while providing exposure to Japanese equity markets.

Investment Strategy

DXJ is slanted toward dividend-paying companies incorporated in Japan that have an export tilt and are listed on the Tokyo Stock Exchange. The companies need to derive less than 80 percent of their revenues from inside Japan. Thus, holdings typically have greater exposure to fluctuations in world currencies and may decline when the yen appreciates. Selection criteria include paying at least $5 million in annual cash dividends, a market capitalization of at least $100 million and an average daily trading volume of $100,000. The index is dividend-weighted and rebalanced annually. While the maximum exposure to a single company is capped at 5 percent, a sector weighting cannot exceed 25 percent. The ETF enters into forward currency and futures contracts designed to offset the portfolio’s total exposure to the yen.

Portfolio Composition and Holdings

With an average market cap of $18 billion, which is slightly lower than the underlying index, the portfolio has a 59.16 percent exposure to giant-cap shares and a 25.86 and 12.11 percent exposure to large- and mid-cap stocks, respectively. The ETF also has a 2.8 percent investment in small-caps and negligible exposure to micro-cap shares. In addition to a P/E ratio of 13.16, the ETF has a price-to-book ratio of 0.92. The fund is overweight basic materials, consumer cyclical and financial services sectors while underweight communication services, consumer defensive and technology shares. The top 10 holdings account for approximately 32 percent of AUM. In descending order, they are Toyota, Mitsubishi UFJ Financial, Sumitomo, Mizuho Financial and Japan Tobacco, followed by Canon, Nissan, Honda, Takeda Pharmaceutical and Mitsui.

Historical Performance, Risk and Fees

Featuring a Morningstar average return rating, DXJ has delivered total one-, three- and five-year returns of -8.06, 4.79 and 13.35 percent, respectively. These compare with the Japanese stock category averages of -3.28, 4.69 and 9.87 percent, respectively, over the same periods. The ETF has a three-year beta of 0.94 and a standard deviation of 19.27. The category averages are 0.76 and 14.04, respectively. DXJ has an expense ratio of 0.48 percent.

DXJ is suitable for investors with a well-balanced core portfolio who are looking for additional hedged exposure to Japanese equities. This popular ETF is positioned to benefit from the increased economic activity in Japan spurred on by Abenomics and the weakening of the yen versus the U.S. dollar. DXJ is one of the most liquid funds in the segment. An alternative investment for investors is the iShares Currency Hedged MSCI Japan Fund (HEWJ). This ETF invests in iShares MSCI Japan (EWJ) and adds a currency hedge. For investors who still want a passive index approach, this fund has sufficient volume and charges the same fees as DXJ. We prefer DXJ because it focuses on dividend payers and tilts the portfolio in favor of exporters who will benefit from a weaker yen.

We have raised our recommendation for DXJ to a Strong Buy with a ranking of 87.