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VIX: An Accurate Predictor of Market Direction

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VIX: An Accurate Predictor of Market Direction

In spite of the fact that the VIX is a prediction of option volatility and not a measure of actual or historical movement in the S&P 500, it is extremely reflective of whether the index is heading up or down. 

What is the VIX, and how can it be so eerily accurate?

What Do Investors Mean by the VIX?

The VIX belongs to the Chicago Board Options Exchange. 

It is their Implied Volatility Index. 

It is based on how high or low options’ premiums are on the S&P 500 index.

It is sometimes known as the fear index, as it is considered highly reflective of how nervous investors are about market volatility at any given time.

When premiums are high, so is the VIX—as investors are worried about volatility—and the S&P 500 tends to be low at those times. 

When premiums are low, so is the VIX—as people tend to be more relaxed about volatility—and the S&P 500 tends to be high at those times. 

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[ms_featurebox style=”4″ title_font_size=”18″ title_color=”#2b2b2b” icon_circle=”no” icon_size=”46″ title=”Recommended Link” icon=”” alignment=”left” icon_animation_type=”” icon_color=”” icon_background_color=”” icon_border_color=”” icon_border_width=”0″ flip_icon=”none” spinning_icon=”no” icon_image=”” icon_image_width=”0″ icon_image_height=”” link_url=”https://offers.thecapitalist.com/p/58-billion-stock-steal/index” link_target=”_blank” link_text=”Click Here To Find Out What It Is…” link_color=”#4885bf” content_color=”” content_box_background_color=”” class=”” id=””]This one stock is quietly earning 100s of percent in the gold bull market. It’s already up 294% [/ms_featurebox]

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Here is a chart from the CBOE’s website illustrating the correlation:

vixintro1

As you can see, while the lines are no mirror reflections of each other, they aren’t that far from it.  When one goes up, the other generally goes down.

The website gets even more specific with a table which represents twelve years’ worth of trading days.

It explains that each number in the table is the number of trading days that each index closed either up or down. 

It points out that they closed opposite from one another somewhere in the neighborhood of 80% of the time. 

That is a very strong statistical correlation.

But Wait, There’s More….

Even more strangely, the VIX is an excellent predictor of short-term volatility, perhaps the best the stock market has to offer.

How it Works

The index measures the puts that investors write during periods of stress in a bear market and goes up as those puts increase. 

It also measures the calls people write during bullish periods and goes down as they increase. 

By measuring the actions of millions of people, the index succeeds in giving investors a pretty good idea of the attitude of the market as a whole.

When the VIX Was Down (And Investors Were Complacent)

Meta Stock Professional via investopedia

s&p vs vix

The above chart shows a time when the VIX (the bottom line of the chart) was exceedingly low—all of the blue arrows show it dipping to 20 or below.  The corresponding red arrows on the S&P 500 index (the top line of the chart) show peaks at those exact times. 

Again, while the lines are not perfectly opposite one another, there is a clear trend in that direction.

Another thing to notice is that every time the VIX dipped below twenty, investors proceeded to sell, as evidenced by the long dip directly after each S&P 500 peak. 

It seems that the VIX may be a reliable indicator of sell-offs as well—as though investors have come to recognize that below twenty is maximum complacency with the market and have decided to sell at the peak.

How Investors Put the VIX to Use

Since the VIX is inverse to the S&P 500 so much of the time, investors often use VIX products to hedge. 

That way, if the S&P 500 crashes, they have protection in the form of a product that is likely to be heading skyward.

Available VIX Investing Opportunities:

  • ETFs and ETNs
  • CBOE Futures
  • CBOE Options
  • It is not possible to invest in the VIX itself, due to the nature of its calculations

Investors Also, of Course, Use the VIX to Make Predictions

  • VIX may be used in deciding whether to write a covered call for a stock
  • VIX may be used in deciding whether to write a put for a stock
  • VIX may be used for any decision that must take short-term market performance into account

The VIX’s Inverse Relation to the S&P 500 May Be Merely a Happy Accident

Originally, the intent of the VIX was to measure potential volatility and thus help options’ traders make more informed decisions about the level of risks they were taking. 

It was Robert Whaley of Vanderbilt University who began to realize that measuring volatility in the S&P 500 would indicate when investors were nervous about a possible downturn. 

It was only a short leap from there to the realization that the VIX was a powerful tool for predicting the market’s short-term performance.

To wrap it up

In the world of the stock market, nothing is certain, and everything can turn on a dime. 

However, it has become a near certainty in many investors’ minds that when the S&P 500 turns, the VIX will turn in the opposite direction.

Its high and low numbers are surprisingly accurate indicators of what the market will do in the next month, and when it reaches a certain low, it’s a very good indication that people are about to sell in droves. 

All in all, it’s a miraculous little index and one that every investor should keep their eye on.

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Is China Digging Itself A Bigger Debt Hole?

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Is China Digging Itself A Bigger Debt Hole?

There is a growing consensus that China has a massive debt problem that is only going to get worse without a serious overhaul. 

China repeatedly tries to prop up her economy with the creation of new credit, which may or may not prove sustainable in the long run. 

Goldman Sachs, in particular, has raised questions about the validity of China’s reported numbers, and now their analyst, Andrew Tilton, has charted out some of the problems.

China Reached a New Credit High in the First Quarter of 2016

j9.1

As the chart shows, China created a new credit of nearly 3.5 trillion yuan at one point in the first quarter, and Goldman Sachs says the total for the quarter was something like $1 trillion dollars. 

Needless to say, that’s a humongous amount, and without serious economic growth to sustain it, China may come to regret its debt practices

It cannot be ignored that China is hugely over-relying on debt, and treating it like the solution to all of its problems.

The United States has already learned the hard way that this will not work forever.

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Shadow Lending May Mean These Numbers Are Skewed

  • These numbers may be an underestimate as China has a phenomenon known as shadow lending, which is not subject to normal regulations.
  • Shadow lending remains off the financial books, while still adding to the overall amount of debt in the country.
  • Goldman is particularly disturbed by the lack of accountability involved in this process.

China’s Debt-to-GDP Ratio is Growing

 j9.2

The chart above shows China’s debt-to-GDP ratio and how far it has gone up in recent years. 

According to CNBC, this is reflective of the fact that credit is now going to pay for existing debts instead of feeding into the growth of the economy.  It’s a vicious cycle that can only work for so long before it finally tanks.

The economy is slowing down even as debt rises, and Goldman points out that the amount of debt China carries is far larger than anyone thinks it is, due in part to shadow lending and due in part to the fact that China’s self-reporting is skewed, to say the least.

Needless to say, Goldman believes that Chinese banks don’t play fair with the regulations and that this only furthers the difficulties the country is facing with debt.

Zombie Businesses Live Off Credit and Drive Down Prices for the World

China is currently home to some of the so-called zombie businesses—steel and aluminum producers that are kept alive by the government. 

These businesses overproduce, saturating the market and making it impossible for themselves to make a living except through credit and government lending. 

The Washington Post reports that banks owned by the state simply roll these company’s loans over and let the manufacturers get on with their business.

While there are good human reasons for trying to keep these businesses alive—for one thing, the loss of jobs alone would be stunning—they ultimately help neither China’s economy nor the world’s. 

An overhaul of China’s social-services system may be necessary to help those who would be put out of work.

The Washington Post Suggests Possible Remedies for Zombie Businesses

  • Retraining programs to prepare workers for service jobs
  • Strong pensions to incentivize retirement in those close to the right age
  • Relocation programs to move workers to available jobs
  • Putting money into education and health to create jobs

Unfortunately, the Greater Debt Problem as a Whole May Not Be So Easily Solved.

With the entire economy essentially kept afloat by debt, China is sitting on one heck of a bubble.

 

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2016’s 12 Most Valuable Brands

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2016’s 12 Most Valuable Brands

Ever wonder how much your favorite brand is really worth, and how it’s doing compared to other brands? 

BrandZ has answered these questions in its Top 100 ranking of the most valuable brands around the globe in 2016. 

Here is its top twelve:

Brand #1: Google, at $229 billion in value

Perhaps unsurprisingly, Google is at the top of the heap. 

Its value went up a staggering 32% from where it was last year, garnering it the top spot.

p7.1

As demonstrated by the above graph, it’s easily the most used global search engine. 

So much so that the word Google has become a verb, as in telling someone to google it when you don’t want to have to explain a concept to them.

Also, Alphabet—Google’s parent company—has begun branching out into areas as diverse as anti-aging science and self-driving cars

Positive consumer reaction to these attempts may be part of what pushed Google past Apple and into the number one spot this year.

Google was also number one in the BrandZ ranking in 2014, and consecutively from 2007 to 2010.

Brand #2: Apple, at $228 billion in value

Apple is now trailing slightly behind number one, having gone down 8% in value in the past year.

While the company’s gadgets remain popular, Elspeth Cheung of Millward Brown—the firm that created the BrandZ evaluation—says that Apple needs to work on its people connections, as it may be beginning to lack relevance.

She does, however, praise its investment in Didi Chuxing, the Chinese rival of Uber, as she feels this expansion was a good move.

Brand #3:  Microsoft, at $122 billion in value

This is the second consecutive year that Microsoft has come in third, with its brand valuation climbing by 5%.

Cheung cites Windows 10 as one reason for the brand’s continued success. 

Windows 10 is now the second most used desktop operating system, and Cheung points out that it also works well with tablets, laptops, and mobile devices and even behaves nicely with products by the dreaded Apple.

The company is even working on a Windows Holographic platform.

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Brand #4: AT&T, at $107 billion in value

  • AT&T’s value shot up 20% over the past year
  • Cheung posits that AT&T is changing its relationship with consumers, branching out into entertainment services to become more than a mere telephone provider
  • By acquiring DirecTV last year, AT&T has done wonders for the content it can offer while staying ahead in its sector

Brand #5: Facebook, at $103 billion in value

This is the first time Facebook has appeared in the top 10 for BrandZ when its value went up a staggering 44% this year. 

This should come as no surprise, given how popular it was and has continued to be:

p7.2

According to the above, most recently published chart, Facebook remains, to say the least, popular on the Internet. 

Furthermore, Cheung says that the company is growing by staking out new territory, such as creating Facebook Bots for Messenger, which will provide users with access to answers on everything from news to shopping to the weather.

Brand #6:  Visa, at $101 billion in value

  • Visa’s value has gone up 10% since last year.
  • Cheung says that it continues to come up with new ways to make payments—for example, the debit ring that is currently in testing.
  • Cheung also points out that Visa makes online security a priority, which consumers approve of.

Brand #7:  Amazon, at $99 billion in value

It’s no secret that Amazon is a big deal online. 

Look at the following chart of how it won on Cyber Monday last year:

p7.3

Cheung says that the company not only fills existing needs but interests consumers in things they did not know they wanted until they visited the site.  The brand has upgraded its delivery and logistics system to the point where some speculate it may be trying to separate from UPS and FedEx, and its value has skyrocketed 59% since last year.

Brand #8:  Verizon, at $93 billion in value

Verizon’s brand value went up 8% in the past year. 

It plans, via its takeover of AOL, to become big in digital media by marrying a big player in mobile to a big player in content production.

Brand #9: McDonalds, at $89 billion in value

McDonald’s brand value has inched up 9% from last year, even as Cheung acknowledges that it has an image problem with regards to people viewing its food as unhealthy.

It is trying to create a healthy image, and has added massively popular all-day breakfasts to its menu, both of which seem to be helping.

Brand #10:  IBM, at $86 billion in value

IBM is undergoing a difficult transformation into a cloud company, and its brand value has slid 8% this year as a result. 

It has also been going through a decline in sales for 16 consecutive quarters, including the worst it has seen since the year 2002.

However, Cheung says that consumers have been wowed by the fact that the company is looking into artificial intelligence and cognitive computing.

Brand #11:  Tencent, at $84.9 billion in value

You may or may not have heard of Tencent.

They are a Chinese company who specialize in value-added Internet, mobile, and telecom. 

They also do online advertising.

Their brand value increased 11% this year.

Brand #12:  Marlboro, at $84.1 billion in value

Yes, Marlboro. 

Besides the fact that they produce an arguably addictive commodity, their brand value nudged up 5% this year. 

In spite of this, the brand dropped two rankings since last year, falling out of the top ten.

Conclusion

While many of the inhabitants of the top twelve list are unsurprising once you consider their popularity, it is still fascinating to see which brands rank where and why. 

For the full top 100 list, see page 16 of BrandZ’s full report, which is available online.

One thing many of the top contenders seem to have in common is innovation, especially innovation of a sort that captures the public’s imagination.  Yes, they are large companies, but they are also trying new things, and piquing the interests of new consumers. 

Perhaps this is something that everyone, from the biggest corporation to the smallest start-up, can learn from.

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Your Guide to Retirement: FAQs About Bonds

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Your Guide to Retirement- FAQs About Bonds

Bonds are an important part of your retirement portfolio, and the closer you get to retirement, the more of them you should have. 

Nevertheless, beginning investors often have a number of questions about bonds. 

Here’s what you need to know.

If I Invest in a Bond, How Much Money Can I Make Off It?

That depends on the issuer and the bond’s maturity—that is, the length of time it lasts and pays you interest until the principal is returned to you.  Generally speaking, longer terms pay higher interest rates.

As far as issuers go, the less stable ones will generally offer a higher interest rate to you. 

This is to attract you as an investor, since you know there is a higher chance that this particular issuer will fail to make its bond payments. 

For the absolute safest bet, go with Treasury bills, which the United States government issues.

What Do the Returns Look Like Compared With Stock Returns?

p6.1

As you can see, stocks are the clear winner return-wise.

Why Then, are Bonds Considered Better for Retirement?

  • Bonds provide you with a stability that stocks cannot, so having at least some bonds in your portfolio cushions you against major stock losses.
  • Bonds provide regular income in the form of interest payments
  • Bonds are incredibly secure. U.S. Treasuries are second only to cash in liquidity and safety.
  • There are bonds which are non-taxable. While their yields tend to be lower, the lack of tax may cancel out this difference for individuals in higher tax brackets.

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How About the Risks?

Inflation poses a serious risk to bond holders. 

The cost of goods and services goes up over time—the payout from your bonds do not. 

Long-term bonds run a serious risk of not keeping up with inflation.

With all but the most stable bonds—U.S. treasuries—there is a risk that the issuer will default on its payments. 

This risk is particularly magnified with junk bonds, issued by borrowers with such a poor credit rating that it will be unsurprising if they fail to make payments to you at all.

Should you choose to sell your bond before its term is out, you should be aware that bond prices are subject to market pressures and rise and fall just as stock prices do.

p6.2

The above is a sample from Barclays Indices on the web, which gives information related to the latest movements in bond indices.

The price of bonds tends to have an inverse relationship to interest rates—when one goes up, the other goes down, and vice versa. 

If your bond has a very long term, and you wish to sell it early, there is a good chance it will not cost what it did when you bought it, which may or may not be a good thing for you.

I’ve heard of TIPS—What Are They?

  • TIPS stands for Treasury Inflation-Protected Securities
  • TIPS’ rate of interest is not as high as other Treasury bonds
  • However, the face value of TIPS is changed to keep up with the consumer price index.
  • Thus, inflation no longer poses a risk, as the face value and interest of your TIPS go up to match.

What Should I Put in my Retirement Portfolio?

You should diversify with bonds the same way you would diversify with stocks

A good spread would be amongst high-grade corporate bonds (avoid junk bonds) and Treasury bonds. 

If you are in a high tax bracket, you may also want to look into municipal bonds, as their interest is tax-free.

How Do I Buy Bonds?

You can choose to buy almost any kind of bond through a broker, same as stock, though the transaction costs may be a whole lot higher.

For TIPS or U.S. Treasuries, it’s better and cheaper to buy from the Feds, as no broker is necessary for this transaction. 

The federal government offers these at auction fairly regularly.

If you would like to look into the details, a good place to start is the TreasuryDirect Website, which among other things contains auction schedules like the example below:

p6.3

If you are a small investor, look into mutual funds for diversification purposes. 

Getting good diversification through individual bonds tends to cost $25,000 to $50,000, whereas bond funds will open you up to owning stakes in dozens of bonds for far less.

Which Should I Buy—Short-Term or Long-Term Bonds?

For a higher interest rate, go with longer-term bonds as opposed to shorter. 

An example is, the difference between 30-year Treasury bonds and five-year Treasury notes—the former pays at least a percentage point more in interest. 

The reason for this discrepancy is that the longer the life of the bond the greater the chance of erosion by inflation or interest rates.

For the majority of long-term investors, bonds that last from one to ten years are in a good sweet spot, as they have decent yields but less volatility than their longer or shorter-lived peers.

How Heavy Should My Portfolio Be In Bonds?

This depends on where you are in your life and career. 

As a younger, working individual, you should put more emphasis towards stocks for their higher returns. 

However, the older you get and the closer you are to retirement, the more you should move towards bonds for their stability and guaranteed income.

How Will My Bonds Be Taxed?

Some bonds generate taxable income. 

Corporate bonds, for instance, will always make taxable interest payments. 

Treasuries, however, only garner federal taxes while being exempt from local and state taxes.

Municipal funds are also free of federal taxes, and may be free of local and state taxes when bought in-state. 

Retirement accounts may also offer tax savings.

Conclusion

Bonds are an important tool to have in your retirement arsenal. 

They provide guaranteed income, and while they may not give as high a return as stocks, they are more stable. 

U.S. Treasuries are considered some of the safest investments that there are.

So, however far away from retirement you may be, it is a good idea to become more educated about bonds. 

The more you learn now, the more you will know what you are working with later.

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