AQR: Smart Beta Investments Leave Alpha on the Table

Investors are piling into factor-based investments for their simplicity and low fees. But a new academic paper authored by AQR researchers argues that sloppy implementation of these strategies is costing them returns.

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ALERT: The Market’s Weakest Sector is About to Break Out

This post ALERT: The Market’s Weakest Sector is About to Break Out appeared first on Daily Reckoning.

The market is beginning to reveal a surprising new leader…

The energy sector!

The days of $100 oil are long gone. But energy stocks are beginning to quietly come back from the dead. In fact, the sector just posted its strongest trading week of the year. While most investors remain fixated on the tech sector and the cryptocurrency boom, energy is looking like strong bet heading into the final trading months of the year.

As oil tops $50 a barrel for the first time since May, many forgotten energy names are starting to shine again. The market is telling us it’s time to rotate into the sector as lazy summer trading winds down.

You already know how critical it is to have your trading dollars in the correct stocks and sectors. If you aren’t catching a ride with the market’s most powerful trends, you won’t have a shot at beating a passive investment strategy.

For instance, the first half of 2017 would have been a total bust for our trading portfolio if we bottom-fished for energy stocks instead of riding the tech stock boom. Semiconductors and the other big tech names listed on the Nasdaq were fueling the market’s motor during the first and second quarter. Our positions in stocks like PayPal Holdings (NASDAQ:PYPL), Facebook (NASDAQ:FB), and Amazon.com (NASDAQ:AMZN) powered our portfolio and made up for any of the small losses we incurred.

On the other end of the spectrum, energy stocks weighed down the market’s performance. Oil was slumping to new 52-week lows as recently as June, threatening to tumble into a new bear market. The energy sector was faring even worse as oil continued to slide.

By mid-June, the Energy Select Sector SPDR (NYSE:XLE) has dropped more than 16% from its December highs. Meanwhile, sizzling comeback plays like the SPDR S&P Biotech ETF (NYSE:XBI) had jumped a staggering 29% over the same timeframe.

Digging a little deeper, we uncovered more grim energy stats. Bespoke Investment Group noted over the summer that the energy sector underperformed the S&P by more than 23% over the past year. Such a wide performance gap is quite unusual. Since 2000, Bespoke notes that this margin of underperformance has only happened twice.

Poor energy stocks just couldn’t catch a break. The latest summer slump comes on the heels of an oil price that was consistently victimized by a whipsaw market last year. In summer 2016, oil prices quickly jumped above $50 a barrel for the first time in nearly a year. U.S. stockpiles were down and China demand came in stronger than anticipated. Both factors helped push oil over the hump.

But these gains were short lived. Oil bears were just taking a quick nap. After topping out, oil prices fell for six straight days. It was the longest bearish run for oil since early 2016 when prices plummeted below $30 a barrel.

As you would expect, the once-popular energy stocks have not flourished in the new era of cheap oil. Just last year, the sector’s attempted comeback was cut short in December. It’s remained in a nasty downtrend ever since while the broad market has maintained its strong performance.

But that’s all changed over the past four weeks…

The Energy Select Sector SPDR has gained 8.5% over the past month, compared to a gain of a little more than 3% in the S&P 500. The sector is now above its July highs and looking to snap its 2017 downtrend.

This month’s action in the energy sector gives you a great shot at getting in on a burgeoning turnaround play.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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Home Depot Is Just The Beginning…

This post Home Depot Is Just The Beginning… appeared first on Daily Reckoning.

“Frank, do you smell smoke?”

My mother-in-law was in the kitchen and something just wasn’t right.

Frank, my father in law walked over to the garage door. He definitely smelled it too. And when he opened the door, he was met with a wall a billowing black smoke.

Immediately, the smoke alarms went off.

There were three kids in the house. Frank bolted upstairs to grab the baby. Patty (my mother-in-law) grabbed her two grandsons in the playroom.

By the time everyone made it out the front door and turned around to look at the house, there were flames shooting out of the roof. Within minutes the entire house was engulfed in flames.

As Patty hugged her tearful grandchildren, she whispered in their ear: “things can be replaced… but people can NEVER be replaced.”

It’s sobering to think of the tragedy that could have happened that day…

The story above really happened to my brother and sister-in-law.

By the time the fire department made it to the house, all they could do was contain the blaze.

In just a few short minutes, my relatives lost everything. Their home, their pictures, the kid’s toys, their cars… everything!

I’m so thankful everyone escaped unhurt. It’s hard not to think what could have happened if Patty didn’t smell smoke when she did.

Today, two years later, the family’s fire is nothing but a horrible memory.

Actually, if you talk to my brother-in-law, he’ll tell you that while tragic, this event turned out to be a good thing for their family.

After all, the insurance company took care of everything including a new house, new furniture, new vehicles and toys for the kids and more. And the entire experience gave them the inspiration to start neighboraid.com — a non-profit group to help families affected by disasters like floods fires, tornadoes etc.

So why am I telling you this story today?

Because tens of thousands families in Texas and Florida are facing a similar situation following Hurricane Harvey and Hurricane Irma.

Today, these families are starting to receive insurance payouts to cover their losses from these storms. And as families spend cash to replace the things they lost, a handful of specific companies will be selling furniture, flooring, fixtures and more…

As an investor, you should be able to profit from an advance in the stocks of these companies. And hopefully, you’ll use some of those profits to help someone in need following these terrible storms.

Demand Surges for Repair and Replacement Stocks

Earlier this month, we asked the question “is it ethical to profit from a hurricane?

As an investor, I think it’s perfectly fine to buy shares of companies that will benefit from the cleanup following Harvey and Irma. But I also think we have a responsibility to be generous to those less fortunate than us.

And this is true all the time – not just after disasters like the ones we’ve seen in the last few weeks.

Shares of home furnishing and home repair stocks should do particularly well over the next few months, thanks to demand from hurricane victims.

Think about the thousands of homes that will need new carpet, hardwood floors, couches, beds, appliances and more. There are dozens (if not hundreds) of companies that will profit from new purchases related to the recent storms.

I expect these profits to be exceptionally high, and to continue for several quarters as insurance settlements are reached.

Insurance companies will be paying policyholders enough cash to replace all of the items that were lost during the storms. And these payments should usually cover the cost of new items (such as new flooring, new furniture, new washers and dryers etc.). So the amount of demand for new items could far exceed the actual value of the things that were lost due to flooding or wind damage.

Of course with so many claims to be filed and reviewed by adjusters, the process will take a long time. Not to mention the fact that homeowners will often take their time picking out just the right items to replace what was lost.

So home furnishing and repair companies should not only see demand surge right away, but that demand should continue to be high for months and months to come. And that’s why I expect many of these stocks to trend higher for some time to come…

A Great Spot to Find Disaster Relief Profits

With so many companies potentially benefiting from a surge in home repair and home furnishing purchases, investors have lots of stock opportunities.

If you’re looking for shares that will benefit from this surge in demand, I’d suggest checking out the SPDR S&P Homebuilders ETF (XHB).

Now, I’m not suggesting you buy shares of XHB. As a general rule, instead of buying the whole fund I’d rather you pick the best stocks that they hold.

Morningstar.com has a great resource that allows you to see the top holdings of any mutual fund or ETF. By looking at these holdings, you can see a great list of companies that are included in the fund, and pick your favorite stocks to buy in your own account.

To find this list, go to morningstar.com and put a fund’s ticker in the “quote” box at the top of the page. Once you’re on the fund’s page, click on “portfolio” for that particular fund. Finally, click on the “holdings” tab for the fund and you’ll see the top positions held by that fund.

In the case of XHB, there are a few companies that caught my attention (see list here):

  • Mohawk Industries (NYSE:MHK) is a leader in flooring and should sell more carpet and hardwood flooring to customers in Florida and Texas.
  • Tempur Sealy (NYSE:TPX) is a mattress company that should benefit as insurance companies pay to replace waterlogged bedding.
  • Home Depot (NYSE:HD) and Lowes (NYSE:LOW) will both profit not only from hardware to renovate damaged homes, but also from appliance sales such as dishwashers, refrigerators, washers and dryers.
  • Williams Sonoma (NYSE:WSM) is a niche retail store that should sell more decorative items as customers try to make newly renovated houses look and feel more like “home”

If you check out Morningstar’s page for this homebuilder / home furnishings fund, you’ll find some other great companies that are worth checking out. I think you’ll find quite a few worthwhile investment ideas.

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge
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Big Brother Is Coming for Bitcoin

This post Big Brother Is Coming for Bitcoin appeared first on Daily Reckoning.

Interest in bitcoin is red-hot right now. It’s impossible to open a website, listen to a podcast or watch a video in the financial space without hearing about the meteoric rise in the price of bitcoin.

I know about the bitcoin frenzy firsthand.

I’m a frequent guest on financial television and do many online interviews. Sooner or later in almost every interview, the anchor will turn to me and say, “Jim, I have to ask, what’s your opinion on bitcoin?” And away we go.

The fact is I actually don’t like talking about bitcoin; it’s one of my least favorite topics. But I can’t avoid it!

Of course, bitcoin is just one of many cryptocurrencies. There are hundreds in total with names like ether, dash, dogecoin and blackcoin.

For convenience, I will refer to all cryptocurrencies here as “bitcoin.” But you should understand that the analysis offered applies to the other cryptos as well.

Maybe you know a “bitcoin millionaire” who bought 500 bitcoins a few years back for $50,000 and is now sitting on a bitcoin fortune worth over $2 million. It’s true, those people actually do exist.

While I’m not a fan of cryptocurrencies, I am a believer in the power of the technology platforms on which the cryptocurrencies are based. These are usually called the “blockchain,” but a more descriptive term now in wide use is “distributed ledger technology,” or DLT. There’s no denying that fortunes have been made and still will be made in various DLT applications.

When it comes to cryptocurrencies like bitcoin, I take a laissez-faire approach. Do your own thing. If you want some bitcoin in your portfolio as part of a diversified bundle of assets, that’s up to you. If you want to speculate in some of the other lesser-known cryptocurrencies, that’s fine, too. You might make a lot of money.

My only admonition is caveat emptor. Please take the time to understand how it works and what the risks are.

I am not a technophobe and I’m not a bitcoin basher. I understand bitcoin very well at a technical level. I’ve read the original technical papers on bitcoin from 2009 and many commentaries since.

I even worked with a team of experts and military commanders at U.S. Special Operations Command (USSOCOM) to find ways to interdict and disrupt ISIS use of cryptocurrencies to fund their terrorist activities and caliphate.

My opinion is straightforward. Again, I’m not telling anyone not to own cryptocurrencies, but I don’t own any bitcoin and I don’t recommend cryptos to investors. My reasons have to do with bubble dynamics, potential for fraud and the prospect of government intrusion.

The latter is especially important.

There is every indication that governments, regulators, tax authorities and the global elite are moving in on cryptocurrencies. The future of bitcoin may be one in which Big Brother controls what’s called “the blockchain” and decides when and how you can buy or sell anything and everything.

Furthermore, cryptocurrency technology could be the very mechanism used by global elites to replace the dollar-based financial system.

Regards,

Jim Rickards
for The Daily Reckoning

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