Financial Advice by sourceWealth Management: Robo-Advisers, Cautious Investors And Survivorship

Robo-advisers, or “algorithmic investment services,” are becoming more popular these days.  Here are some things to consider: “It seems possible that an algorithm could determine a person’s financial ability to take risks, but an algorithm is assuredly less effective than a human practitioner in determining a client’s emotional ability to take on those same risks…Although they do not currently present an obvious competitive threat for traditional advisers, they soon may, as individuals from Generation X and Millennials come to make up the majority of advisory clients.”  Meanwhile, here’s an interesting survey of investors from STA Wealth Management: “When asked what is most important to them the survey showed that, by a wide margin, the majority are more focused on loss avoidance rather than chasing stock market returns.  That mentality is reflected in their asset allocation models with the roughly on 44% [sic] invested in stocks and 48% in bonds and cash…The loss of capital, due to both declines and inflation, combined with the loss of ‘available time’ to save for retirement has crippled investor psychology on many levels.  The problem is that investors today have ‘seen this film’ before and are fairly confident in how it ends.”  Also, take a second to notice that only 2% of these investors said they receive financial advice from watching television.  Meanwhile, the current tech/momentum selloff is different from the 2001 tech meltdown in at least one way (alt): “A Wall Street Journal analysis of 148 U.S. tech companies with recent or pending initial public offerings found none on a path to burn through their cash within a year, based on their pace of spending in 2013.”  Also, here’s something to watch out for when considering a fund’s historical performance: survivorship bias.  Generally speaking, when historical returns for a category of funds are calculated, “funds which have shut down are thrown out of the tally.  Since the failures take a lot of bad performance with them to the grave, category averages look better than the returns investors experienced in the real world.”  Therefore, actively-managed funds will overstate performance relative to their low-turnover, more diversified passive brethren, thanks to active funds’ lower rate of survival.

Global Trade Update

“The US, EU and others have framed the Information Technology Agreement (ITA) negotiations as a test case for China as it seeks to join much larger US-led discussions to set new global rules for the $4.6tn annual trade in services (alt)…Talks to update the ITA with 256 additional tariff-free product categories ranging from flat screen TVs to next-generation semiconductors broke down last November after China, which is now the world’s largest exporter of IT goods, sought to maintain its tariffs on more than 100 of those products.”  Meanwhile, “US steel imports surged 25.7 per cent in the first quarter (alt), fueling concerns that it is foreign producers, rather than American manufacturers, that are reaping the benefits of the shale gas revolution…The oil and gas boom is increasing the size of the market for steel tubes used in drilling, pipelines and processing plants, and reducing the cost of energy used in steelmaking…However, these companies are facing growing competition from imports… ’American producers are increasingly losing sales to foreign competitors like Korea because OCTG (Oil Country Tubular Goods) imports are being dumped into the US market.’”  Also, “to promote manufacturing services such as logistics, marketing, information and technology and research and development, China will encourage more financing and relax market access to the sector, the cabinet said after its weekly meeting.”

EU: ECB Readies Package Of Rate Cuts And Targeted Measures

“The ECB’s deposit rate already stands at zero and a cut into negative territory would see it essentially charge banks for holding their money overnight – a move that could spur more lending, though analysts are unsure how banks would react…’This will be the first major central bank to move to a negative deposit rate.  That would move the exchange rate.’…Should it decide to cut rates, the ECB is looking at also deploying either a targeted long-term loan operation, or LTRO, or else announcing a purchasing programme to buy asset-backed securities (ABS) comprised of bundled SME loans…The idea behind this second option is to build the market in Europe for SME loans bundled as ABS, with a view to making it larger and more liquid to aid the flow of credit to the smaller firms that form the backbone of the euro zone economy.”

USA: Someone Is Front-Running The Fed

Researchers have found “robust evidence of informed trading during lockup periods ahead of the Federal Open Market Committee (FOMC) monetary policy announcements…Across the four markets that we examine, estimates of informed traders’ aggregate dollar profits during lockups ahead of all FOMC’s surprise announcements range between $14 and $256 million…we find no evidence of informed trading ahead of nonfarm payroll, CPI, and GDP data releases by other government agencies.”

USA: In Shift, Regulator Says Fannie And Freddie Should Stay In Housing Market

“Watt said that the government’s takeover of the companies should not be viewed as a ‘permanent condition or a desirable end state.’  But to arbitrarily reduce the companies’ share of the market without having an alternative plan in place would be ‘irresponsible.’”

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