April 21, 2018

What does Rising Inflation Mean for Your Portfolio

Posted in Keith Knutsson tagged at 2:04 am by Keith Knutsson

With current market conditions this past quarter and U.S. inflation climbing towards the central bank’s target, commodities and other “real assets” are set to outperform the market giving investors a chance to diversify their portfolio holdings.

Investors tend to flock away from drastic changes in their portfolio as safe haven assets seem more favorable at times when the economy is unpredictable. We now need to consider the facts that output gaps have closed, trade frictions have kicked off and the overall business cycle in the U.S. is maturing. With all of this kept in mind, it is safe to assume that the U.S. inflation rate is on track to meet the central bank’s target after their meeting earlier last week. However, will this increase in rate lead to a potential overshoot picking up inflationary risk in markets like India, China and Japan? The U.S. has been in a state of transition from a time where deflation posed as a critical risk while higher inflation was beneficial for the markets, to one where the economy prefers a lower inflation rate.

Unlike equities, which often times over-anticipate earnings and growth, commodities historically have tended to do much better in the later stages of the business cycle. Its main focus is on the present economic conditions and has also shown strong performance once capacity constraints start to develop. Another factor that further suggests a growing commodity market is the crude oil futures and the analysis behind its “backwardation” curve.

Backwardation is a theory developed in respect to the price of a futures contract and the contract’s time to expire. As the expiration date comes close, the contracts start trading at a higher price compared to when the expiration date was further away. Simply put, this creates a downward sloping futures curve and implies a tightening supply. This means that commodity investors can expect to receive returns by rolling a higher-priced short-term contract into a lower-priced lower-term contract. This will in turn allow commodity investors to capture a higher return and broaden the indexes. Investors should look into “smart beta” commodity strategies to hedge their risk against bonds and equities in the coming months as we see crude oil returns tend to be positive even in the short term “backwardation” period.

Not only that, but because of a major supply shortage in the early 2000’s and a surplus in the recent years, supply and demand have started to balance out. Diversification becomes even more favorable to investors as commodities begin to react more to idiosyncratic imbalances. With the current environment, investors should reconsider their portfolio allocation strategies to further diversify their investments in oil, natural gas and metals.

Advertisements

April 16, 2018

Why Policymakers Shrug at Market Volatility?

Posted in Keith Knutsson tagged at 1:44 am by Keith Knutsson

The Fed will continue to use its methodical approach on slowly increasing interest rates after the Federal Open Market Committee (FOMC) meeting in March. One statement that caught a lot of attention last week was the relatively high chance for policymakers to change the current plan for two or three hikes in the year of 2018. Even though the full picture moving forward is a bit cloudy, there are talks of a mild overshoot of the inflation target of 2% by 2020. Keep in mind that this news does not reflect the more pronounced period of above-target inflation. The bar to change the plan of increasing rates two or three times in 2018 was further supported after most of the Fed officials upgraded their opinions on global growth, expansion of the fiscal policy and the near-term outlook for the U.S. economy.

Even though a number of Fed officials sided on a “steeper” path for the federal funds rate, it will be important to consider whether this means two or three hikes in 2018. The majority of the participants agreed to a “more appropriate and gradual” approach on the hiking cycle. Some factors investors should be wary of are prospects for retaliatory tariffs and continuing tensions of a trade war. Fed officials appeared to shrug off the increase in equity market volatility. Some policymakers predict that it would be a better option for the Fed to raise the fed funds rate above its long-run nominal rate, while showed uncertainty around the overall policy picture and “steepness” of the curve.

 An anonymous policymaker suggested, “a range of views on the amount of policy tightening that would likely be required over the medium term.”

 Taking a more technical approach to this situation, the Laubach and Williams natural interest rate model suggests an estimate of the real neutral rate of 0%. This implies that a 2% neutral nominal fed funds rate is consistent with the estimate of 0%. However, investors should consider the risks and alternatives to this model. The FOMC will continue studying the gradual tightening of the monetary policy to evaluate the neutral policy rate and further assess changes in economic conditions moving forward.

 

April 6, 2018

Wealth Management: China

Posted in Keith Knutsson tagged at 9:23 am by Keith Knutsson

Discussed earlier, the US wealth management industry is adapting to changing demands. This is also the case in China but under different circumstances. The Chinese industry is in the hands of the younger 30s-40s demographic. With the cultural emphasis on savings adapting towards investment, the Chinese have driven worldwide investments in recent years, allowing its country to be an investment powerhouse. These factors lead to a rapidly growing industry for wealth managers. The growth is part of Chinese incredible pace in digitization. Hence, in this industry the transition went from savings accounts to digital wealth management, skipping the personal advice from financial advisers. Generally, only individuals higher up in the wealth segments request personal advice, but in China, that trend isn’t quite clear; pure technological familiarity seems to be the indicator, and the differentiation between digital wealth management and personal wealth management is not differentiable based on an account balance. Investment-wise, Chinese investors in the Wealth Management space have been focused on fixed income. They seek after products in the 3-6 percent yield range.

Another major differentiation in the Chinese Wealth Management market is its regulatory limits. Capital controls of the renminbi have created Chinese wealth-management firms that focused on local investments. With optimism about the markets opening up, such as connections with the Hong Kong markets, allows the wealth-management market to grow outside of China.

Keith Knutsson of Integrale Advisors commented, “It remains to be seen how the Chinese will respond to the ambitions of bigger banks from Europe and North America establishing a presence in China. An often-overlooked factor is that the loosening regulation might open up Chinese banks to become global players. “

March 27, 2018

Brief Look on Chinese Investment Policies

Posted in Keith Knutsson tagged at 1:50 am by Keith Knutsson

With China and the U.S. reported to have quietly started negotiating to improve U.S. access to Chinese markets, it remains important for investors to understand the perspective of the Chinese government. New research suggest that the investment of Chinese ventures is set to reach $2.5tn throughout the following decade in spite of rising protectionism. Investors believe yearly sums to consistently beat the record set in 2016, the year preceding Beijing’s wide crackdown on “nonsensical” arrangement making. Limiting the opaqueness from Beijing about what sorts of arrangements controllers will support will be pivotal to helping Chinese arrangements succeed. In the past, privately owned groups such as Anbang Insurance Group and HNA Group suffered blotched deals due clarity issues regarding ownership. Be that as it may, following a period of unclear directions from Chinese authorities, China’s bureau explicitly outlined rules before the end of 2017, laying out the kinds investments that are supported and unsupported.  The rules welcome investments that meet China’s modern approach; for example, securing cutting edge innovation and brand names, while investments in luxury products (i.e entertainment, sports, real estate) are discouraged. Even before those rules were outlined, state-owned enterprises caused the cash flow stream to rise in the past year by 50%. Over the long term, authorities will most likely continue to be supportive of overseas acquisitions to acquire advanced technology and strategic assets. 

Keith Knutsson from Integrale Advisors commented, “with the volume Chinese investments have taken on the global scale, it remains important to consider the view the state takes for investments.”

 

 

March 23, 2018

2018 Industry Outlook: Media & Entertainment

Posted in Keith Knutsson tagged at 1:53 am by Keith Knutsson

When it comes to media and entertainment, consumers will sift through abundant streaming options to find content they like. In the past few years we have seen major advancements in mobile applications that make it possible for consumers to stream across various popular steaming services.

The question is, what type of advancements have a great opportunity for growth in the content streaming business and should businesses be mindful of these developments?

As the big data space grows exponentially, we can see major growth opportunities on the advertising side of the media and entertainment segments. With customer behavior and demographics constantly analyzed by big data analytics companies, consumers are able to find content that fits their taste and personality.  With the fractured media-distribution channel, it is becoming difficult for companies to advertise new content without the reliance of social media. Of course, a major play in this space will be social media as more and more consumers latch onto social media platforms like Twitter and Facebook. However, diving deeper into the future, one challenge multiple media companies will continue to face is figuring out how to create an experience that caters to each individual customer.

Media companies continue to race one another to find applications best suited for their content when it comes to future 5G wireless technology and autonomous vehicles. Whether it be through virtual and augmented reality or wearable devices, the media and entertainment businesses are in full throttle to create a personalized user experience for its viewers.

Looking back a few decades ago, media companies benefited by making content available in specific windows at customized times, also known as “content scarcity”. Technological advancements have changed user experience by providing the opportunity to view content through “multiple windows”. This idea makes it extremely difficult to monetize content availability, but there’s one simple solution media businesses should consider. Using the bundling technique, one potential solution is to create a demand-based pricing strategy. This will give media businesses an opportunity to charge its customers based on the number of viewing windows; via mobile devices, home and theaters. Not only that, but these companies can also take advantage of the booming data analytics industry by matching variable pricing with consumer behaviors and demographics to further garner additional revenue.

One key question for investors to ponder upon is whether it will make sense for media and entertainment companies to fortify their content by making advancements in the streaming business or becoming distributors instead.

March 16, 2018

Global Impact as The ECB Plans an End to Quantitative Easing

Posted in Keith Knutsson tagged at 12:57 am by Keith Knutsson

The European Central Bank (ECB) decided on continuing its bond purchase program also known as quantitative easing till September while keeping interest rates unchanged. The ECB originally kicked off their massive quantitative easing program early 2015 in hopes to stimulate the economy and encourage banks to make more loans. The bank targeted the supply of money by purchasing corporate bonds and putting an end to the scarcity of government bonds. Earlier this month, the ECB President Mario Draghi indicated his efforts to taper quantitative easing starting September 2018.

“Incoming information…confirms the strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near-term at a somewhat faster pace than previously expected.”

The decision to eliminate this so-called “easing bias” will have a major global impact on the economy. In the past few months, the euro has risen against the dollar on the more hawkish movement from the central bank. Although a strong euro could have an impact on the European exports and influence prices in the euro-zone, the efforts to taper quantitative easing has devalued the dollar.

As the U.S. Dollar Index (DXY) gradually weakens, inflationary risk generates and upward momentum in the U.S. economy. In this case, the Federal Reserve uses short term rate hikes to help the U.S. economic structure and aggregate demand. In the most recent job report, employers added 313,000 new jobs in early 2018 without reducing the unemployment rate of 4.1%.

Former Fed advisor Andrew Levin said, “It seems increasingly plausible that the economy is still well short of full employment.”

This further suggests room for a growing economy and a tighter labor market in the United States. Inflationary risk rises when the economy heads towards a tight labor market causing the Fed to increase short-term rates. With the ECB’s plan to normalize its monetary policy and the tightening U.S. labor market, the Fed is set to raise rates three to four times in 2018 to strengthen its currency and the overall economy. The ECB continues to closely examine the exchange rates and economic outlook in the euro-zone.

March 2, 2018

Consumer Sentiment Is on The Rise

Posted in Keith Knutsson tagged at 2:27 am by Keith Knutsson

Consumer sentiment, a measure of consumers’ confidence in the economy rose this month. Some of the factors contributing to this have been low unemployment and optimism about the new tax regime. This confidence far outweighs market volatility for American consumers.

The consumer-sentiment index was 99.9 in February, compared to 95.7 in January. The preliminary report overestimated economists’ expectations for February. A final reading and report will be released March 2nd, 2018.

This month’s rise came after consumer sentiment had dropped for the previous three months. Alternatively, February’s reading was the highest since October 2017 when the index hit 100.7, the highest level since before the recession.

“Rising incomes, employment growth, and a positive perception of the impact of the tax reforms have all contributed to an increase in consumer sentiment” said Keith Knutsson of Integrale Advisors.

The rise in the latest index might be the first sign of the boost to consumers from lower taxes. Furthermore, this suggests that even if consumption growth slows in the Q1, spending will continue to grow at a solid rate over 2018.

The consumer sentiment report showed households’ expectations about inflation have yet to change. This month, consumers expected a 2.7% rise in inflation over the next year, a figure that has not changed since 2017. Currently, financial markets, the Federal Reserve, and consumers expect borrowing costs will rise in 2018.

The Fed’s next policy meeting is March 20th, 2018. Investors currently predict an 83.1% probability that the central bank will raise rates a quarter percentage point from their current range of between 1.25% and 1.5% at their next meeting.

February 23, 2018

Soaring Asset Prices, Diminishing Savings Accounts

Posted in Keith Knutsson tagged at 3:28 am by Keith Knutsson

With stock prices through the roofs and job prospects improving, Americans are finally on an optimistic spending spree. As a result, this is leaving many Americans with less in their savings accounts, taking away from how much they save for retirement.

U.S. household net worth rose from $56 trillion in 2008 to $97 trillion in Q3 of 2017. Economists say it is natural for individuals and families to be spending more money when asset values are increasing. This is called the “wealth effect.” The wealth effect is the premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

However, when spending is taken too far it can serve as a warning that markets are getting overheated. Previous busts, as we saw in the mid-2000s and the late-1990s, were preceded by periods of rising asset values and extremely low saving.

In December, the U.S. household saving rate dropped to its lowest level since the height of the 2000s housing boom, when many Americans were drawing on rising equity in their homes to spend on vacations, luxury goods, and other consumer discretionary products as opposed to saving. One factor that is different this time around, is that consumers are not spending on debt as aggressively as they used to. With new regulations in place, consumers and investors are less vulnerable should another recession hit the U.S. economy.

According to the U.S. Commerce Department, the saving rate was 2.4% of disposable household income. This is the lowest rate of saving since September 2005. The saving rate had risen to 6.6% when the recession ended in June 2009.

“U.S. consumers are now confident about their employment prospects, see their portfolios and properties increasing in value, and feel that their assets are doing the saving for them” said Keith Knutsson of Integrale Advisors.

February 10, 2018

Retailers On Returns

Posted in Keith Knutsson tagged at 4:17 am by Keith Knutsson

Over the holiday shopping season, retailers score big. However, in late December and January, when disputes over purchases spike, it’s time for payback for consumers.

According to a report by the U.S. Commerce Department, U.S. merchants and credit card issuers can expect to see $980 million in disputed charges reversed in the consumers’ favor. The volume of these post-holiday chargebacks is 25% to 35% higher compared with other times of the year.

The following factors contribute to the increase:

  • The disputes rise proportionately as holiday spending increases. Online retailers, eager to cash in on the buying spree, decrease security rules for approving transactions. Furthermore, increasing the count of stolen card numbers, allowing scammers to advantage of the opportunities, leading to even more disputes.
  • “Friendly fraud”, when consumers make online purchases with their own cards and then, after receiving the goods or services, claim they haven’t, and request chargebacks.
  • Less than 1% of transactions result in chargebacks. However, payment-card purchases exceed $5 trillion on an annual basis.
  • There are multiple parties are involved in a chargeback, including the cardholder, card issuer, card network, merchant processor and merchant, making the process rather complicated.

A chargeback occurs when a card issuer or retailer pays back a cardholder for a disputed transaction. When the issuer and retailer disagree over who is liable for the charge, the network decides. Often, the consumer wins due to the avid competition for customer loyalty and company reputation.

“The ability to return a good has become an essential feature in the retail industry. However, chargebacks can certainly be misused, and this is reflected on the retailers’ bottom line” said Keith Knutsson of Integrale Advisors.

February 2, 2018

Amazon Sells Groceries, Get Used to It

Posted in Keith Knutsson tagged at 7:49 pm by Keith Knutsson

One year after it was promised, Amazon.com Inc.’s cashierless convenience store is scheduled to open to the public on Monday January 22nd, 2018.

The new Amazon Go store, which will be located in the base of Amazon’s main headquarters in Seattle, uses machine-learning algorithms and computer imaging to track consumers and charge them for what they put in their cart. Therefore, eliminating checkout counters, cashiers, and baggers. This is an experiment done by Amazon that is part of the company’s broader effort to reinvent how consumers do their grocery shopping, and eventually, perhaps all of their shopping.

Amazon announced the new Go store in December 2016, and said it would open to the public in early 2017. The opening was delayed, however, as some technical issues needed to be worked out. In addition, Amazon workers were used to train the system. That training helped Amazon Go’s technology better identify objects and follow the different speeds and patterns of shoppers.

“The Go project shows how Amazon is attempting to transform shopping in physical retail stores after many years of setting the standard for retail online” said Keith Knutsson of Integrale Advisors.

In August 2017, Amazon completed a $13.5 billion deal to buy grocery chain Whole Foods, adding 470 brick-and-mortar stores to its portfolio overnight. The Amazon Go technology uses cameras throughout the store to track shoppers once they are inside. A customer entering the store scans his or her phone and then becomes represented internally as a mobile 3-D object to the system. Cameras also are pointed at the shelves to determine shoppers’ interactions with goods.

Although some store jobs become obsolete with this system, others do not. Certain store associates are still needed for maintaining the system functions, customer service if a shopper is not satisfied, and for instances where customers purchasing alcohol must show identification.

 

Previous page · Next page