Treasurys extend drop after weak 10-year note sale

NEW YORK (MarketWatch)—Treasury yields extended a push higher Wednesday after a weak auction of benchmark notes, putting the 3-year Treasury note yield on track to close above 1% for the first time in three years.

The shorter-term yield, which is sensitive to shifts in expectations about Federal Reserve monetary policy, has been on the rise as investors recalibrate forecasts toward earlier hikes to the central bank's key lending rates.

/quotes/zigman/4868286/delayed 3_YEAR 1.03, +0.08, +8.20% 3-year Treasury note yield

The Fed is set to release minutes of its last policy meeting at 2 p.m. Eastern, which may shed light on whether the central bank is thinking about when and how it will lift rates. The Fed is committed to a near-zero policy rate until the labor market improves further and inflation stabilizes.

The 3-year yield (3_YEAR) , which rises as prices fall was up 2.5 basis points on the day at 1.023%; the last time it closed above 1% was in April 2011.

Nonetheless, investors still view rate-hike timing as more subdued than the consensus outlook published by the Fed. Futures contracts tied to the fed funds rate project the first rate hike occurring in June 2015, according to CME FedWatch.

"The gap between the market view of rates and the Fed's summary of economic projections is smaller than it was a few weeks ago but it's still wide, suggesting the market is discounting [the Fed] significantly," said Jake Lowery, portfolio manager with Voya Investment Management.

Treasurys extended a fall after a weak auction of $21 billion in 10-year Treasury notes (10_YEAR) , where non-dealers bought a smaller portion of the debt than during recent sales. After the auction, benchmark note yield was up 2.5 basis points at 2.590%.

The 5-year note (5_YEAR)  yield was up 3 basis points at 1.727% while the 30-year bond (30_YEAR)  yield rose a basis point to 3.393%. The differential between them narrowed to the least since 2009 in what's known as a flattening yield curve.

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5 Stocks With Superb Cash Flow — YONG ZA GURE CHA CGA

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This week, these five stocks have the best ratings in Cash Flow, one of the eight Fundamental Categories on Portfolio Grader.

Yongye International, Inc. () engages in the research, development, manufacture, and sale of fulvic acid based crop and animal nutrient products for the agriculture and stock farming industry in the People's Republic of China. YONG also gets A’s in Earnings Growth, Earnings Momentum, Equity, Operating Margin Growth and Sales Growth. The stock currently has a trailing PE Ratio of 2.10. .

Zuoan Fashion () designs, manufactures and markets casual men’s clothing. ZA also gets A’s in Earnings Growth, Equity and Sales Growth. The stock’s current trailing PE Ratio is 1.70. .

Gulf Resources, Inc. () manufactures chemical products for use in oil and gas field explorations, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents, and inorganic chemical. GURE also gets A’s in Earnings Growth and Sales Growth. The stock has a trailing PE Ratio of 3.50. .

China Telecom Corp. Ltd. Sponsored ADR Class H () is an integrated information service provider that offers telecommunications services, including wireline voice services, mobile voice services, and Internet access services. .

China Green Agriculture, Inc. () engages in the research, development, production, and sale of various types of fertilizers and agricultural products in the People's Republic of China. CGA also gets A’s in Equity and Sales Growth. The stock currently has a trailing PE Ratio of 1.80. .

Louis Navellier’s proprietary Portfolio Grader stock ranking system assesses roughly 5,000 companies every week based on a number of fundamental and quantitative measures. Stocks are given a letter grade based on their results — with A being “strong buy,” and F being “strong sell.” Explore the tool here.

Dana Investment Advisors: 2014 U.S. Equity Large-Cap SMA Manager of the Year

This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor's July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.

The first of two SMA Managers of the Year in this category is Dana Investment Advisors for its Large-Cap Equity portfolio. Duane Roberts, who has managed the strategy since its inception in 1999, modestly said Dana’s process “is designed to give us some consistency to outperform in most market environments,” and outperform it has, only underperforming the S&P 500 in two calendar years.

The story behind those two years tells you why the Large-Cap Equity strategy is so successful. “Our process is designed to be consistent, but there’s a weakness to any investment process,” Roberts said. “Because of our belief in equal weighting holdings, which helps us avoid volatility risk, when performance is heavily concentrated in mega-cap companies” or when the index is being led by lower quality companies, the Dana portfolio will underperform in comparison.

Year in point, 2009, when “you had a lot of low-quality, ‘rebound’ companies that were on the verge of bankruptcy before the recovery started in March, and then you saw 200% to 300% returns,” said Roberts, but they were lower-quality stocks, which he wasn’t interested in. Another time when the strategy will underperform for good reasons? “When you have speculative growth companies leading the markets,” which Roberts said “might not be low-quality per se but at valuation levels we don’t like.”

So what is the process? “First and foremost, we approach the stock selection process from a value perspective; there’s a consistent value tilt to our portfolio,” said Roberts. While the Dana team’s securities selection process “is consistent with a value manager’s approach, growth is an important part of valuation. So we emphasize the growth piece—we want to make sure people don’t miss that when they talk about us.”

On the value side, however, “you’ll never see us compete with deep discount managers; we have a relative value approach, without sacrificing growth.” The team of five analysts on the strategy will track “eight or nine” of the standard pricing metrics when considering a stock for inclusion in the portfolio, but will lean slightly toward growth: “We might be ahead of the growth benchmarks.”

Dana also has learned the lessons of behavioral finance which helps it on both value and growth. “On the quant side,” Roberts said, value might be “expectational,” but when focusing on valuation, you should remember that “some stocks are cheap for a reason.” The team asks, “’Is there some other reason why this stock is out of favor?’ Behavioral finance helps you distinguish between those two sides of cheap stocks.”

What about growth? “On the flip side there’s many behavioral characteristics tied to high-momentum, high-growth stocks,” which he said Dana tries to avoid. “We sometimes view momentum as indicating why the market is excited” about a given stock, but that “doesn’t make it a long-term” prospect.

The investment process includes first running a quantitative model, followed by fundamental analysis by the team that seeks to “confirm that the quant model is giving us valid info,” then considers metrics that are common to the “classic DuPont analysis,” which measures performance by profitability, operating efficiency and financial leverage. “We want to see strong returns, and improving trends, with sustainability.”

However, one thing the team doesn’t like to see is rising leverage—“it’s another source of risk.” They look at how a given company’s valuations compare to other companies in the sector, along with forward earnings and cash flow. While “we’re basing our analysis on models done by Wall Street, we see that as a conduit for information and ignore their recommendations.”

In fact, Roberts says that while “investment returns is how the outside world views us, we look at internal measures to see how well we’re doing,” including tracking positive and negative surprises in every earnings season.

Turnover of the portfolio averages about 60%, though a third of that comes from rebalancing and risk controls, Roberts said. “We want to be long-term investors. If you find companies valued correctly you can hold them for a long time, but markets are dynamic and companies are dynamic. We’d love to buy and hold companies forever, but we’re not afraid to sell, even if we like them. We want to be in long-term relationships, but we’re not married to the stocks” in the large-cap portfolio.

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This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor's July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.

How to Help Today’s Bond Investors

Treasury bond investors got it bad and that ain’t good.

Five-years after the worst financial crisis of our generation, the yield on 10-year U.S. Treasuries has already fallen 33.58%.

Not only is that well beyond the generally accepted definition of a 20% bear market, but the 33% reduction in yield income serves as a rough approximation of the income blow that Treasury bond investors have suffered through. (Bond investors holding 30-year Treasuries have taken a 28% income hit over the same five year time frame, June 2009-June 2014)

A shortage of retirement income is one of the biggest predicaments facing Baby Boomers and a few years ago, the Center for Retirement Research at Boston College pegged it as a $6.6 trillion conundrum.

The center’s analysis took into account major sources of retirement income like Social Security, traditional pension plans, personal savings, and 401(k) retirement plans. And even after adding up all these sources, people were short on retirement income. And the low yield, low rate environment is exacerbating the income shortage.

You can throw a rock and hit any of the many analysts on Wall Street that have wrongly predicted higher interest rates. Although such conditions would help income investors to squeeze out more yield, advisors need to prepare their clients for the other scenario – a market environment where ultra-low interest rates persist. What are the chances this happens?

The International Monetary Fund (IMF) gave its latest outlook of the U.S. economy and how it believes that zero percent short-term interest rates could persist even longer than the Federal Reserve is projecting. The IMF’s research noted:

“The Fed currently has to contend with multiple areas of uncertainty: the degree of slack remaining in U.S. labor markets; the extent to which this slack will translate into future wage and price inflation; and the transmission to the real economy of a future move upwards in policy rates. These substantive ambiguities make the outlook for U.S. monetary policy particularly uncertain, as the Fed has repeatedly communicated. At the same time, longer-term treasury yields and the term premia have been compressed to very low levels. Under the staff’s baseline, the economy is expected to reach full employment only by end-2017 and inflationary pressures are expected to remain muted. If true, policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets.”

Never mind what the IMF thinks about interest rates – I threw it in there to give this article some color. Besides that, the IMF is bound to be just as wrong about the direction of rates as the rest of us.

Simultaneously planning for two opposite extremes – one of higher interest rates and one of lower – is a Herculean task. But isn’t that why bankers get paid the big bucks? Advisors should always be addressing the client’s problems today, while anticipating tomorrow’s problems.  

An immediate solution for the 33% income shortage that Treasury investors are facing is to look at alternatives. This includes high yielding sectors that do well during low rate conditions like utilities (XLU), master limited partnerships (AMLP), and real estate investment trusts (VNQ). It can also mean employing high income strategies like selling covered calls to generate income on top of income derived from stock dividends and bond yields.  

The future solution for a rising rate environment will involve capital preservation by sticking with bond funds and ETFs that have maturities of less than 10-years. It may also involve strategic hedging via ETFs that are designed to increase in value when bond prices fall because of rising yields. (See TBT and TMV.)

Ultimately, the exact solutions you choose will depend upon what you determine is best for the client.

In the meantime, Treasury investors are screaming for help and if they’re not, they either not paying attention or they’re dead. Go help them! (The ones that are alive.)

 

 

 

 

5 Stocks With Bad Earnings Growth — BBRY TCI ZQK RBCN MGPI

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This week, these five stocks have the worst ratings in Earnings Growth, one of the eight Fundamental Categories on Portfolio Grader.

BlackBerry Limited () engages in the design, manufacture and marketing of wireless solutions worldwide. BBRY gets F’s in Earnings Momentum, Analyst Earnings Revisions, Equity, Cash Flow and Sales Growth as well. .

Transcontinental Realty Investors, Inc. () is a real estate company that owns a variety of properties located across the United States. TCI also gets F’s in Earnings Momentum, Equity and Cash Flow. .

Quiksilver, Inc. () is an outdoor sports lifestyle company that designs, produces and distributes a diversified mix of branded apparel, footwear, accessories, snowboards and related products. ZQK also gets F’s in Earnings Momentum, Analyst Earnings Revisions, Equity and Sales Growth. Since January 1, ZQK has fallen 59.3%. This is worse than the S&P 500, which has remained flat. .

Rubicon Technology, Inc. () is an electronic materials provider that develops, manufactures and sells monocrystalline sapphire and other innovative crystalline products for LEDs, RFICs, blue laser diodes, optoelectronics and other optical applications. RBCN gets F’s in Earnings Momentum, Analyst Earnings Revisions, Equity and Sales Growth as well. The price of RBCN is down 3.3% since the first of the year. .

MGP Ingredients, Inc. () produces and markets ingredients and distillery products. MGPI also gets an F in Equity. .

Louis Navellier’s proprietary Portfolio Grader stock ranking system assesses roughly 5,000 companies every week based on a number of fundamental and quantitative measures. Stocks are given a letter grade based on their results — with A being “strong buy,” and F being “strong sell.” Explore the tool here.