Multi-Country Interest Rates and Credit Ratings

March 24th, 2019

These rates and ratings are as of Friday March 22, 2019 and were sourced at

The tables present country, S&P credit rating, 10-year bond yield and central bank rate.

The tables are ordinated first by credit rating, then by central bank rate.


QVM Market Notes: S&P 500 Technical Charts

March 8th, 2019

Let’s explore several ways to view the last 1+ year of S&P 500 price behavior through charts.

There are no absolute laws in finance as there are in physics, chemistry and mathematics; just long-term tendencies arising from seemingly random short-term price moves, punctuated by infrequent large price declines followed by gradual recovery.   However, some chart patterns are useful to suggest which tendency is more likely than not to follow particular recognizable price patterns. 

Realize that the movement of stock prices does not reflect the view of all holders, but rather of the active traders most of the time and the last traders to act.  In the short-term price movements are not based on fundamentals of valuation, but rather on news flow and sentiment.  There are vast pools of quiet holders who are doing nothing while the price moves up, down and sideways on the charts.  For most investors, most of the time being part of the quiet money by doing absolutely nothing is the best course of action.

Visual interpretation of chart patterns (“technical analysis”) at a minimum has validity in that over time technically oriented investors have come to expect prices to tend to react to certain chart patterns in a certain way.  Whether the pattern can be traced back to specific fundamental, macro-economic or sentiment causes becomes somewhat unimportant if time and time again certain patterns fairly reliably are followed by certain price behaviors.  Technical analysis becomes self-validating as traders in the aggregate come to believe that chart pattern signals move prices in a certain way with favorable probability.

For those of us who are not traders, chart analysis can still be useful by believing in the believers tendency to act, as we decide things like should I buy that fund or stock today, or wait for the chart pattern to improve.  Accordingly, for those of us who have reserve cash that we want to put to work in US stocks, the current chart patterns suggest waiting a bit for the pattern to resolve its trend direction intentions, although if you have a 5-year to 10-year perspective, the charts might be more useful as entertainment, the same way you might watch a football game, just to see who wins.

And by the way, the football analogy for support and resistance isn’t a bad one.  You could think of support and resistance price levels as analogous to the defensive line players in football, and the price as the ball carrier, trying for a first down or a breakout run for a touchdown.  When the defensive line (the support or resistance level) is effective, the ball carrier (the price) is prevented from making headway, and may actually be pushed back a bit.  When the defense is not effective, the ball carrier (the price) breaks out and moves past the line of defense (the support or resistance level) until tackled (a short price move past support or resistance) or finds and open field to run with major yardage gain.


Chart 1 is a daily chart showing that we have been in a trading range from 2600 to 2800 for over a year, with a  breakout UP and a  breakout DOWN, with a return to the trading range.  There have been more “tops” (shown as red elipses) than “bottoms” (shown as green elipses) which suggests there may be more in the way of short-term ceiling (“resistance”) around 2800 than there is a short-term floor (“support”) around 2600. 

There is a tendency for prices to bounce down from resistance and bounce up from support, until the market makes up its mind about trend direction. Typically, once pierced former resistance becomes new support; and once pierced former support becomes new resistance – both of these tendencies failed in this case, as the market was unable to decide to continue the nascent breakouts.  We are in a period of wide range consolidation.  At the end of a long period of consolidation, there is a tendency for strong directional moves continuing or reversing a former trend.


Chart 2 is a daily “box chart” to filter out noise in price movements.  The chart does not have a linear timeline, but rather only plots a new box when the price moves by more than the average move of the last 14 market days. It simply shows the trading range, tops, bottoms and breakouts more clearly than the noisy daily Chart 1.

Chart 3:

Chart 3 is a repeat of the daily “box chart” but used to identify a different pattern, called a “head and shoulders formation”. 

Head and shoulders refers to a top followed by a shallow dip, followed by a significantly higher top, followed by a significant decline, followed by a lower top; as indicated by the circled areas in the chart.   The line drawn under the bottoms is called the neckline.  When found this pattern tends to be a sign of a major trend top.  If the price after the right shoulder drops below the neckline, it tends to go as far below the neckline as the head is above the neckline. 

We can see that in Chart 3. The price did go below the neckline, and it did go about as far below the neckline as the head is above, then it began its strong January recovery; negating the implications of the apparent head and shoulders.

Chart 4:

Chart 4 is another repeat of the daily “box chart” with a “Russian Doll” view (a doll within a doll – a pattern within a pattern).  Could it be that the current run-up is merely plotting out the beginning of the right shoulder of a wider head and shoulders pattern?  Don’t know, but we should find out pretty soon.  If it is a larger head and shoulders, that would be a bad sign.  If the breakout continues up to about 2900, then like the Etch-a-Sketch toy of our childhoods, all the former patterns are effectively erased from a prediction perspective – then they don’t matter anymore.

Chart 5:

Chart 5 is a standard daily chart with 7 indicators plotted upon it, to see if they confirm, disagree with or portend price action.

Moving Average:  This chart shows the 200-day average (the thin dashed line in the middle of the green shaded area) to be nearly flat, slightly up, after a recent dip (not Bearish, not Bullish, just Neutral)

Standard Deviation:  The outer boundaries of the green shaded area mark a 1 standard deviation distance from the 200-day average.  About 67% of the time you would expect the price to be between those two boundaries, as it is now – normal.  The outer boundaries of the beige shaded area are 2 standard deviations.   About 96% of the time you would expect the price to be between those boundaries.  To be outside of them, there should be a strong justification, or a reversion back toward the mean (the 200-day average) would be expected.

Percentage Change: The red dashed vertical line shows that we essentially already had the Bear we have all been looking for (a mini-Bear at just down 20%, but it did happen). It was very quick, so probably did not clear out all of the weak hands. The average Bear takes about 1.5 years to reach its bottom, and then 3+ years to regain the former peak.  This one happened so fast that it probably did not flush out all of the investors who would run away in a typical deeper Bear building over a longer period.  That probably means there are remaining weak hands to be concerned about.

Advance/Decline Percentage: The first panel below the price chart is the Advance/Decline Percentage.  AD Percent = (Advances Less Declines) / Total Issues. 

It shows that when the percentage is down to about -90% (a 90% down day)  by hitting the bottom blue horizontal line, a bottom is near or at hand, and that a strong up day is likely to follow.  That happened clearly at the end of December with a 90% up day following the 90% down day.  It also gave clues to the weakening of the most recent rise as it approached the current downturn.

Percent of Constituents Above Moving Averages: The second panel below the price chart plots the percentage of the S&P 500 constituents that are above their 200-day average in blue and the percentage above their 20-day average in dashed red.

Levels below 30% (the lower blue horizontal line) suggest oversold conditions and the probability of an increase in buying.  The indicators strongly suggested a bottom in late December, and shows the recent overbought condition (plots above 70%, the upper blue horizontal line) to be fading, which is consistent with the current dip in the price.

Money Flow Index: The third panel below the price panel is the Money Flow Index.  It measures the amount of money traded in the security on positive days versus the amount of money flowing through the security on negative days over a selected period of time (in this case 14 days).  Levels below 20 are considered oversold (and due for an upward turn), and levels over 80 are considered overbought (and vulnerable to a downward turn, although overbought conditions may last longer than oversold conditions).  The direction of movement of the indicator is instructive, and crossing the 50 level might be considered transitioning between positive and negative condition.

Money Flow was oversold at the December bottom, flirted with overbought in January, and has been losing steam in February, crossing below 50 yesterday.   Overall, it suggests more downward movement for a while.  Basically this confirms the current dip.

MACD: The bottom panel is the popular MACD (Moving Average Convergence/Divergence oscillator) short-term indicator. It tracks the positions of short-term moving averages relative to each other.  When the shorter rise above the longer, that is positive, and when the shorter falls below the longer that is negative.   We show it here as a histogram.

It reached its peak in mid-January, declined steadily and went negative on February 28, and continues to become more negative – also indicating more probable downward movement in the S&P 500 in the short-term.

Chart 6:

Chart 6 is a quarterly chart of the S&P 500 since its inception in 1957 (241 quarters) along with the 1-quarter rate of change of the S&P 500 price.  The 2018 Q4 decline was 13.97%.  That level or worse noted by the dashed red horizontal line has occurred only 10 times in 241 quarters, which makes it unusual.  The vertical blue lines helps show where in the index price history those strongly negative quarters occurred.  They tended to occur at bottoms, which is an encouraging sign for intermediate-term potential for the index.


S&P 500 Resistance and Support Levels

March 4th, 2019

In the long-term price chart visual pattern recognition (“technical analysis”) doesn’t tell you much. In the short-term, it can often be a good guide when deciding when to make the next addition to a position.

Right now the S&P 500 chart suggests holding off on making additional investments in US large-cap stocks until the technical condition becomes Bullish – it is now unclear. It does not suggest reducing US equity exposure, but it does not suggest increasing US equity exposure either.

If you have a new slug of money to invest, or have a cash reserve position to invest, it may be prudent to do that when the technical indicators are more favorable.

Even if technical analysis is basically voodoo, like voodoo it works because people believe in it. If enough investors believe that certain current chart patterns precede and indicate certain near-term future price behavior, then they will act upon that belief, and the belief will be fulfilled – perception is reality.

“Support” and “Resistance” are among the more solid technical indicators. Double and Triple Tops are a commonly accepted indication of a price resistance level. Double and Triple Bottoms are a commonly accepted indication of a price support level.

Prices tend to bounce down from resistance and bounce up from support. When prices move above resistance or below support, they tend to move by a significant amount. That makes support and resistance useful for various kinds of short-term investment decisions, among which is deciding to make that next investment now, or to wait a little while for the price to decide whether to be bounded by the support and resistance, or to break free to continue a trend.

Two other common ways support and resistance are used are in selecting stop-loss exit points, and it selecting strike prices when buying or selling options.

Right now, today, I suggest deferring that next investment into the S&P 500 (or comparable fund) until the price stops playing with the current resistance level (the red dashed line at approximately 2800, formed by the triple top in 2018 shown by red down arrows).

If resistance proves durable (resists multiple attempts by the price to go above it), a material decline in the price of the index would normally be expected, at which point the support level (the dashed green line at approximately 2650, formed by the double bottom in 2018) would then move front and center. If the price does go above the resistance level and remains there for a few days, or moves strongly above the resistance level, a significant price increase would normally be expected. If the price does go below the support level and remains there for a few days, or moves below strongly, a significant price decrease would be expected.

2800 resistance and 2650 support are important lines of demarcation between Bullish and Bearish market views of the index.

The farther apart the failures (“tops”) are and the deeper the drop after, the more meaningful they are as resistance indicators. The two runs at resistance over the last few days are encouraging, because there was not a material decline between them, and the index came right back to try again.

A nice example of support and resistance in play at the bottom of the Bear market after the DotCom crash shows the strong upward price move after the price broke above a resistance level. The tops and bottoms that formed those resistance support levels were spaced apart in months and were at price levels more than 10% apart (both very meaningful). That triple bottom around 800 after a Bear market decline was strongly encouraging, and when the price moved above the resistance around 950, the index moved more than 20% higher over the next 6 months.

Support and resistance can be useful tools to help confirm changes in the direction of a trend.


Multi-Source ESG Arguments

March 4th, 2019

This article is broad scope ESG, whether by integration with other processes or as a stand-alone process.  This article is not in my words, but is a collage of expressions by numerous important sources. Each expression has a link to the source.

This is not about narrow focus, thematic funds such as funds following religious issues, or specific social or environmental issues, for example.  It is about asset management utilizing ESG (environmental, social and governance) evaluation in the broadest sense for both inclusionary and exclusionary purposes.

Third party comments are organized under:

  • Strong Opponents
  • Professional Organizations
  • Credit Rating Agencies
  • Accounting Firms
  • Academic Research
  • Government and Agency Regulations
  • Pension Plans, Pension Associations and Publications
  • Polling Results
  • Consulting Companies
  • Popular Business Publications
  • ESG Index Providers
  • Asset Managers


Milton Friedman, 1976 Nobel Price in Economics

“[in 1970 said] there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud … What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers …”

Kevin OLeary (“Mr Wonderful”) is Shark Tank host, founder of O’Shares ETFs and now frequent commentator, and seemingly a Friedman disciple:

“[in 2019 said] The truth is the performance has been abysmal …I think it’s thematic, it’s a fad, it’s sitting around the fireplace singing ‘kumbaya …It makes no sense to me. If you’re an institutional investor, you have to make money for your shareholders, they can take their profits and redistribute their wealth any way they want.”


CFA Institute

May 2017, 47,208 CFA Institute surveyed 47,208 portfolio managers and research analysts members online and received 1,588 valid responses … 73% of survey respondents take ESG issues into account in their investment analysis and decisions, with governance being the most common.

Harvard Law School

… Public companies are being bombarded with messages, requests and demands around “ESG”—environmental, social and governance—matters. …



At Moody’s, we seek to incorporate social considerations, where meaningful, into our credit analysis.

S&P Global Ratings

Environmental, Social and Governance risks and opportunities have the potential to affect creditworthiness. At S&P Global ratings our analysts work to ensure that we provide essential insights into ESG factors as the relate to the financial markets … we have incorporated relevant environmental, social and governance (ESG) factors, where material in our view, into the qualitative considerations and forecasts for the entities we rate …..



Pre-Financial Risks: Environmental, social and governance (ESG) risks increasingly demand the attention of chief financial officer (CFOs). Companies that aren’t addressing these issues may be caught flat-footed as these pre-financial risk become central to business strategy. …

Ernst & Young

It is clear from the latest EY research that there is a general, global trend toward increased interest in nonfinancial information on the part of investment professionals. … “One of the key benefits provided by ESG analysis for investors is risk avoidance and measurement.”


We see ESG issues as being fundamental to a company’s long-term performance, requiring serious attention in the boardroom. How a company manages environmental and social issues—and connects these activities with strategy—are important signals to investors of how well the company is run and its long-term financial sustainability…. Given the significant opportunities and risks associated with ESG, companies that excel at identifying and incorporating these issues into their strategy enjoy a competitive advantage in the marketplace and among institutional investors. It is increasingly clear that ESG and ROI are connected…

Price Waterhouse Coopers

There’s good reason for investors to put this emphasis on ESG questions. Companies with risk management practices that take into consideration broader industry, regulatory and societal risks are more likely to drive long-term sustainable performance—and shareholder value.


Harvard Business School (ESG for stocks)

Myth Number 1: Environmental, social, and governance (ESG) programs reduce returns on capital and long-run shareholder value. Reality: Companies committed to ESG are finding competitive advantages in product, labor, and capital markets, and portfolios that have integrated “material” ESG metrics have provided average returns to their investors that are superior to those of conventional portfolios, while exhibiting lower risk. …

Myth Number 5: ESG adds value almost entirely by limiting risks. Reality: Along with lower risk and a lower cost of capital, companies with high ESG scores have also experienced increases in operating efficiency and expansions into new markets …

… Myth Number 6: Consideration of ESG factors might create a conflict with fiduciary duty for some investors. Reality: Many ESG factors have been shown to have positive correlations with corporate financial performance and value, prompting ERISA in 2015 to reverse its earlier instructions to pension funds about the legitimacy of taking account of “non-financial” considerations when investing in companies.

Wharton Business School (ESG for bonds)

Companies are increasingly scrutinized on how they manage environmental, social and governance (ESG) risks. … ESG risks do affect a company’s bottom line…

Is there an alpha? How much do [stock investors have] to give up in terms of returns or can we reduce the volatility of returns? …But if you think about who takes a long-term perspective, looking 10 to 20 years out, it’s been the creditors. There has been a surge of interest looking at bonds and loans, and trying to see if better management of environment, social and governance risk factors affects loan spreads, credit spreads, or credit default swap spreads.. … There is data that shows that credit default swap spreads, credit spreads and loan spreads actually do correlate with the ESG risks….. The amount you pay goes up if you’re not very good on ESG. Credit default swap spreads are financial derivatives whose prices are correlated with the likelihood that a bond will default


Principles for Responsible Investment

… 38 of the top 50 economies have or are developing some sort of government-led ESG disclosure guidelines for corporations ..

United States Dept. of Labor / ERISA (May 2018) – Harvard Law School summary

U.S. Department of Labor issued a bulletin on its prior interpretations related to considerations of ESG factors by ERISA plan fiduciaries. Since then there has been some speculation that perhaps the positions outlined in the Bulletin would act as a speed bump to the increasing focus by investors on ESG matters at public companies.

ERISA requires plan fiduciaries to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing benefits to such persons and to discharge their fiduciary duties with the care, skill, prudence and diligence a prudent person would use under similar circumstances.

… Managers of mutual funds and governmental pension funds are not bound by the Bulletin as these funds are not subject to ERISA and therefore not subject to DOL oversight.

The Bulletin makes clear that plan fiduciaries in managing and investing plan assets cannot assume greater investment risks, or sacrifice investment returns, to fulfill social policy goals.

… But social policy issues, which might otherwise be considered “collateral issues,” could be treated by plan fiduciaries like any other economic consideration when those issues present material business risk or opportunities that officers and directors need to manage as part of their companies’ business plans.

… plan fiduciaries cannot focus on ESG factors solely to benefit the greater societal good, or assume that ESG factors that promote positive market trends are by their nature economically relevant. However, ESG factors or tools, metrics or analyses can be evaluated if fiduciaries believe they would impact an investment’s risk or return.

European Commission (Non-Financial Reporting Directive)

EU law requires large companies to disclose certain information on the way they operate and manage social and environmental challenges. … Companies are required to include non-financial statements in their annual reports from 2018 onwards. … This covers approximately 6,000 large companies and groups across the EU

China Securities Regulatory Commission (Harvard Law School summary)

Pension funds and investment managers in China are now encouraged by the government to look closely at ESG risks and opportunities in their investment process. … these themes are also part of the newly revised Code of Corporate Governance for Listed Companies (2018) from the China Securities Regulatory Commission (CSRC);


Japan’s $1.37 Trillion Government Pension Investment Fund CIO Hiromichi Mizuno:

“Asset managers have to adjust their conventional business model. Investors will be more focused on the long-term investment theme, as AI will take over the short-term trading…In other words, investors will shift their focus to the long-term sustainability of their portfolio, and more focus on their investment themes like ESG …”

… The world’s largest pension fund takes a strong stance. Japan’s Government Pension Investment Fund with US$1.4 tn of assets under management now requires external asset managers to incorporate ESG. GPIF’s size and focus on ESG integration is having a material impact on investor stewardship and engagement with ESG, including for passive asset managers …

Investment and Pensions Europe Magazine

Nobel prize-winning economist Milton Friedman argued that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud”. His views influenced generations of academics and corporate executives.

Friedman stated in his 1970 article for the New York Times: “What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers.”

Institute for Pension Fund Integrity

In our experience, long-term value creation is not possible for companies entangled with ESG controversies.


Harvard Institute of Politics

… survey, done by Harvard University in 2016, showed that a majority of millennials reject capitalism. According to the data, 51% of young adults aged 18 to 29 said they didn’t support capitalism …

Pensions & Investments (on Edleman survey)

(surveyed 500 CIOs and buy-side analysts managing $4.5 Trillion assets) … Most institutional investors demand public companies address environmental, social and governance issues to be regarded as trustworthy … It’s plain to see that ESG is a major criteria for investors … this is a meaningful shit within the investment community in terms of critical mass being reached …

State Street Global Advisors

According to a survey of 475 institutional investors … more than half of institutions that have adopted environmental, social and governance (ESG) investing cite a lack of clarity over ESG terminology.

Bank of America Merrill Lynch

… we analyzed (2005 to 2017), S&P 500 stocks with high Environmental scores based on the three datasets we analyzed would have outperformed their low ranked counterparts by as much as 3ppt per year. An investor who only bought stocks with above-average Thomson Reuters’ Environmental and Social scores five years ahead of a company’s bankruptcy would have avoided 90+% of the bankruptcies that occurred in the S&P 500 since 2005. And ESG is a better signal of earnings risk than any other metric we have found. ..

Morgan Stanley

June 2018 Morningstar polled 118 public and corporate pensions, endowments, foundations, sovereign wealth entities, insurance companies and other large asset owners worldwide

Compared to the investment universe as a whole, more than one quarter of the world’s professionally managed assets— roughly $22.9 trillion—now have some sort of sustainable investing mandate, with about $8.7 trillion of that in the United States, $12 trillion in Europe and the rest shared by other regions.

consumer trends point toward greater returns for sustainable companies. Nearly nine in 10 (87%) U.S. consumers say they will purchase a product because of a company’s stance on an issue they care about, and 78% say they want companies to address important social issues…. Among millennials, this is even more pronounced. Our 2017 survey of individual investors found that millennials are more than twice as likely as other generations to purchase products from companies they view as sustainable.

… fully 78% of respondents listed risk management as an important factor driving their adoption of sustainable investing.

a majority (57%) continued to believe that investing sustainably requires a financial tradeoff.8 While this perception may have grown out of early views of ESG as a negative screen that narrows the investment universe, it appears that large institutional asset owners may be replacing this view with a more sophisticated recognition that ESG factors provide unique insights into long-term risks and opportunities that might not be captured by traditional financial factors. The belief in a trade-off appears to be fading

ESG Integration ESG integration—proactively considering ESG criteria alongside financial analysis—emerged as the most common approach …More than half are required to do so by their Investment Policy Statement

Restriction Screening Restriction screening, employed by 85% of respondents, intentionally avoids investments generating revenue from objectionable activities, sectors or geographies

Thematic Investing Thematic investment strategies, used by 81% of respondents…


Callan Associates (pension consultants)

3% of US institutional investors incorporated ESG factors in 2018 vs 22% in 2013

McKinsey & Company

Strengthening risk management. Institutional investors increasingly observe that risks related to ESG issues can have a measurable effect on a company’s market value, as well as its reputation. Companies have seen their revenues and profits decline, for instance, after worker safety incidents, waste or pollution spills, weather-related supply-chain disruptions, and other ESG-related incidents have come to light. ESG issues have harmed some brands, which can account for much of a company’s market value. Investors have also raised questions about whether companies are positioned to succeed in the face of risks stemming from long-term trends such as climate change and water scarcity.

Bain & Company

… the investor community will fully integrate environmental, social and governance (ESG) considerations into its investing approach.

There is no question that sustainability is moving up on the corporate agenda. When Bain & Company surveyed 297 global companies, 81% said sustainability is more important to their business today than it was five years ago, and 85% believe that it will be even more important in five years. The evidence is everywhere. Sustainability is now incorporated into two-thirds of companies’ core missions …

Boston Consulting Group

…For decades, most companies have oriented their strategies toward maximizing total shareholder return (TSR). This focus, the thinking has been, creates high-performing companies that produce the goods and services society needs and that power economic growth around the world. According to this view, explicit efforts to address societal challenges, including those created by corporate activity, are best left to government and NGOs.

Now, however, corporate leaders are rethinking the role of business in society. Several trends are behind the shift. First, stakeholders, including employees, customers, and governments, are pressuring companies to play a more prominent role in addressing critical challenges such as economic inclusion and climate change. …


Our analysis indicates that, in general, increasing exposure to ESG rarely underperforms the market, and often outperforms the market,…

… to what extent are ESG scores different from the factors found in commercial fundamental factor risk models, such as value, size, industries and countries? … To the extent that ESG scores overlap with traditional factors, then ESG can be interpreted as beta (“smart beta” to the marketers); to the extent these scores do not overlap with traditional factors, then ESG can be interpreted as residual, idiosyncratic or company specific (“alpha” to the quants).

Addition of ESG may not always boost performance, but it also appears unlikely to be a significant drag on performance. And there have been periods of time across multiple regions in which ESG has improved performance.

Finally, we note that there is no standard, accepted methodology for combining separate E, S, and G scores into a composite ESG score. It is possible, indeed, likely, that ESG scores from different vendors will exhibit different performance characteristics.


The Economist

Two perennial questions have accompanied the deluge of money. The first is whether the approach comes with special costs: ie, is there a virtue discount? Second is the question of what should be measured. Neither is easy to answer

…One attempt to answer the first looked at the converse: were returns higher for shares that would not qualify for inclusion in these efforts: in other words, is there a vice premium? … A paper published in 2009 called “The Price of Sin”, by Harrison Hong and Marcin Kacperczyk, two academic economists, concluded that there were indeed unusual returns in firms that sold tobacco, alcohol and gambling. …

However, a second paper published this year (“Sin Stocks Revisited”, by David Blitz of Robeco Asset Management and Frank Fabozzi of EDHEC Business School) contests these results. It argues that added risk factors such as low reinvestment rates mean that there is no evidence that sin stocks provide a premium for reputation risk. Robert Whitelaw, a professor at New York University’s Stern School of Business, says that the conflicting analyses reflect the broader results of more complex efforts aimed at tracking results from (“virtuous”) companies that would qualify for these funds. Results are mixed.


…. Of the world’s largest 250 companies, 92 percent reported in some way on their social and environmental impact in 2015

Alternative Bottom Lines …Numerous terms are used for investments that consider social and environmental effects. Many are used interchangeably [but they are not the same].

  • exclusionary screening, divestment, negative screening
  • ESG (environmental, social, governance), positive screening, active ownership
  • impact investing, double-bottom line investing, thematic strategies
  • values-based investing, fait-based, responsible, ethical or mission related

…Warren Buffett has pledged to give his fortune away but has said social-impact agendas in business force executives to pursue a confusing array of goals. Free-market guru Milton Friedman decried them in a 1970 essay that’s still debated today. … Advocates of sustainable agendas dispute the premise that there must be a cost. They cite studies in which companies with such goals financially outperformed companies without them, though researchers face a challenge proving it was the strategy that created better results… In any case, better information is needed to determine how companies perform on non-financial goals.


…ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis, yet may have financial relevance. … Institutional investors were initially reluctant to embrace the concept, arguing that their fiduciary duty was limited to the maximization of shareholder values irrespective of environmental or social impacts, or broader governance issues such as corruption. … But as evidence has grown that ESG issues have financial implications, the tide has shifted. … The idea that investors who integrate corporate environmental, social and governance risks can improve returns is now rapidly spreading across capital markets on all continents. …Cynics may argue that responsible investing is just a fad. But a closer look at the forces that have driven the movement over the past 15 years suggests otherwise. … For investors, ESG data is increasingly important to identify those companies that are well positioned for the future and to avoid those which are likely to underperform or fail. …


…Today there’s a growing body of evidence showing that companies that put social responsibility first can also finish first in the market. … When companies make decisions that show respect for the environment, their communities, and their employees, there’s less likelihood that they’ll be hit with the kinds of fines, public backlash, and boardroom turmoil that can slam their share prices. … There’s also a strong correlation between ESG-minded management and longer-term strategic thinking—another factor that increasingly distinguishes top companies from laggards.


According to ESG advocates, companies that stand out in these areas will be more successful over the long haul than companies that don’t. … The knock on all social investing strategies has been that … you sacrifice some return. Morningstar analyst David Kathman says maybe not. “There is no evidence that shows ESG or socially responsible investing helps or hurts performance …Over the long term, it probably evens out.”


MSCI (largest provider of ESG data in the world)

Lower risk of severe incidents … Over the past 10 years, higher ESG-rated companies showed a lower frequency of idiosyncratic risk incidents, suggesting that high ESG-rated companies were better at mitigating serious business risks.


In 2018, most major asset managers are committed to incorporating ESG criteria and risk factors in their investment … As increasing numbers of investors seek to integrate sustainability and ESG risk factors in their investment strategies, it is becoming clear that there is a lack of clarity with regard to the various approaches adopted as well as a sense of frustration that there is no general consensus about what is financially material in this context. … Investors are generally asking, “Which factors and underlying data should we consider,what are the key sources of ESG risks and subsequent value creation for a particular industry or company, and which long-term risk patterns are likely to have a negative impact on these value drivers?” … ESG performance can be directly related to companies’ revenues and costs … allows investors to hedge potential portfolio drawdowns, i.e. a certain minimum frequency of severe risk incidents related to a particular ESG issue in a specific sector is XX % likely to have a negative impact of at least YY bps and increase beta of a stock by ZZ %.

JUST Capital Foundation

… companies who invest in their employees, treat their customers well, work to create quality products, are sustainable, care about their communities, create jobs, and have ethical benefit employees, consumers, communities, and the environment, [but do they] benefit shareholders and the companies themselves … do JUST stocks outperform over the long-term? … Since its November 30, 2016 inception through September 2018, the Index has cumulatively outperformed the Russell 1000 … [but] does the Index provide a positive alpha, or unexplained investment residual, after controlling for the five Fama-French factors? After running a regression of the daily [index] excess return over the Russell 1000 on the five Fama-French factors from December 1st, 2016 through August 31, 2018 … we’d answer yes, it does.



One of the most frequently asked questions is whether an investor can “do good and do well” when screening portfolio. … A simple yes-or-no answer is no reasonable because there are a variety of potential inclusionary and exclusionary screening preferences … There is currently no industry consensus on this answer and commonly cited meta study has shown mixed results …


ESG Investing (environmental, social, and corporate governance) used to carry the stigma that investors needed to make certain concessions in order to participate. But research shows you don’t necessarily have to sacrifice performance or price when choosing investments that make a positive impact.

Wellington Management

“Evidence shows that companies that have better ESG management tend to outperform in the long term, and they’re more resilient during times of economic downturn,” says Christina Zimmerman, manager of ESG research at Wellington Management. “We do this to get better risk-adjusted returns.”


“If you don’t take it [ESG] into account, you miss part of the puzzle when evaluating a company,”

Neuberger Berman

Neuberger Berman believes that ESG considerations are an important driver of long-term investment returns from both an opportunity and a risk mitigation perspective

Northern Trust

Is ESG such a factor?With some caveats, we feel that ESG can indeed be utilized as a factor in portfolio construction.most academic studies on the topic suggest that at worst the relationship between ESG and corporate financial performance is at least non-negative.

What makes ESG unique is the degree of disagreement regarding what should go into an ESG score and how those metrics should be weighted. Further, there are no simple ESG definitions, no book-to-price equivalent of ESG that can be applied universally. … When building a quantitative, factor-based portfolio, we feel that these ESG ratings are best used when integrated with certain other financial factors.

Specifically , we find that ESG and quality make a particularly potent factor combination as each factor captures a different dimension of sustainability — non-financial and financial. … he jury is still out on whether ESG is a compensated risk factor.


We find ESG can be implemented across most asset classes without giving up risk-adjusted returns. … ESG-friendly portfolios could underperform in ‘risk-on’ periods – but be more resilient in downturns. … Early evidence suggests that focusing on ESG may pay the greatest dividends in emerging markets (EMS).

State Street Global Advisors

… while accidents and impropriety can happen at any time, the ESG themes manifest themselves over longer time horizons as opposed to more traditional financial metrics whose consequences can impact more quickly. … ESG information tends to be the most effective at identifying poor ESG firms that are more likely to underperform as opposed to predicting future outperformers.


Since the Forum for Sustainable and Responsible Investment (US SIF) began researching SRI in 1995, the assets in these types of investments have grown from $639 billion to nearly $12 trillion. That’s an 18-fold increase and a compound annual growth rate of 13.6%.1

Additional data from Morningstar shows that, on average, SRI mutual funds have slightly outperformed their non-SRI counterparts in the short, medium and long terms …

GMO (Grantham, Mayo & Van Otterloo) – login required

EM … countries are generally both more vulnerable to ESG issues and less prepared to deal with them. … although ESG signals are worth integrating in all strategies …

performance and integration of ESG data in an investor’s EM country and stock selection processes. …

the value in integrating ESG into investment decisions as it impacts security valuations through a host of avenues such as the volatility of earnings, resilience of assets, and the cost of capital …

EM countries are more vulnerable to the ill effects of ESG issues as they have far greater exposure to extreme weather events (e.g., floods, droughts); resource scarcity (e.g., water, food); social unrest; corruption; and poor governance

AQR Capital Management (in Journal Of Investment Management)

… we show that poor ESG exposures predict increased future statistical risks. While the effect is modest in magnitude, it is consistent with ESG exposures conveying some information about risk that is not captured by traditional statistical risk models. … ESG exposure tends to predict increases in statistical risks (i.e., risks captured by traditional risk models) in the future. Controlling for current risk characteristics of a given stock, that stock’s ESG score helps forecast future statistical risks up to five years later. In other words, ESG exposures may convey information about future risks that are not captured by statistical risk models….

…the total volatility of the average stock in the first quintile (worst ESG) is 35%, versus 30% for the average stock in the fifth quintile (best ESG). …

Goldman Sachs

… a revolution rising – from a low chatter to a loud roar … ESG factor allows for greater insight into intangible factors such as culture, operational excellence and risk that can improve investment outcomes … nearly half of all S&P 500 companies addressed ESG issues in Q4 2017 conference calls … society’ rally call on ESG topics are getting louder … Twitter posts mentioning ESG topics grew 19x over the last five years …

Environmental and social shareholder proposals represented 41% of all documented shareholder proposals in 2017, up from 33% in 2016, including contributions from BlackRock, Vanguard, Fidelity, Capital Group and others …

…Social media platforms such as Facebook, Twitter and Glassdoor have handed society a powerful megaphone. The speed and scale at which news now spreads expose companies to new reputational risks and in effect holds them more accountable to internal and external ESG issues. …

… according to surveys from Deloitte and Cone Communications (part of Omnicom Group), responsible business practices have a profound effect on Millennial’s views of business and ultimately their employment decisions. …

…ESG is directly impacting credit ratings, as agencies integrate ESG factors into their risk assessment and ratings methodologies …

BlackRock CEO Larry Fink: “Environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects”

T. Rowe Price CIO Rob Sharps: “Environmental, social and governance factors are important in any comprehensive investment research process.”

Putnam Investments CIO Aaron Cooper: “There is a growing realization in the marketplace that companies engaged in sustainability often show enhanced fundamental and financial performance”

GMO Founder and CIO Jeremy Grantham: “Interest in ESG isn’t necessarily because of the rush of blood to being good. It could be just good business. … There’s quite a lot of work that suggests that people who are early movers on good behavior are demonstrating that they are simply thinking more about the future, how it will look, how it will play out over 10 or 15 years.”

Martin Currie

Martin Currie believes ESG is especially valuable in emerging markets where corporate governance standards are often more complicated.

Putnam Investments

Deep fundamental research plus intense sustainability analysis are at the heart of our investment process.

Russell Investments

…when investors seek value these days, they often end up with securities that represent values – an alignment with increasingly popular environmental, social and governance (ESG) principles. …we identified positive ESG tilts as consistent with many fundamental investment processes.

… We had heard that ESG might be value-detracting, so we expected to see a negative tilt in active portfolios. Instead, we discovered that many active managers, who are seeking to add value over their benchmarks, actually have positive ESG tilts. In a number of regions, more active managers have positive ESG tilts than negative ESG tilts.

This finding suggests that positive ESG tilts are consistent with managers’ intent to add long-term value through security selection. While the manager may or may not be purposefully screening for ESG factors, their investment criteria are identifying securities that in fact result in significant ESG tilts. Think of this as latent ESG.

Bank of America / Merrill Lynch

…we recommend using ESG in conjunction with fundamental attributes like valuation, growth and quality. In this report, we analysed results from combining ESG with other fundamental factors, and found that adding ESG would have consistently outperformed fundamental strategies with less risk. For example, dividend investors who had added ESG to their process would have increased their average returns by ~200bps per annum….

… Is ESG just another Wall Street fad? We see sticking power…


Current Best Choice for Loan Allocation

October 23rd, 2018

We have been asked recently why we are using an ultra-short-term, investment-grade, floating rate debt fund instead of some other higher yielding debt fund in the Loan allocation.

The short answer is that ultra-short-term, investment-grade, floating rate debt is currently most attractive considering inflation, taxes, rising Fed Funds rates, and degree of correlation with stock market price changes and stock market event risk.

That more attractive status will continue until the Federal Reserve has substantially completed its interest rate normalization program sometime in 2019.

The blue line in this chart is the actual Federal Funds rate; and the red line is the Federal Reserve forecast of where they expect the Federal Funds rate to go. You can see that the forecast is for about 3.4%. The current 10-year Treasury rate is about 3.2% which will surely rise as short-term rates rise.

(click images to enlarge)

Looking across the various types of debt available in mutual funds and ETFs, it is clear to us that ultra-short-term, investment-grade, floating-rate debt (“UST-IG-FR”) is the best current choice.

Senior floating-rate bank loans will probably have higher return after inflation, after taxes, after Fed rate increases than UST-IG-FR debt, but with significantly higher credit risk, and significant stock market “event risk”. Due to low loan quality, bank loan debt has significant correlation with stock market price moves, and limited liquidity in a crisis. T-Bills will have essentially no credit risk or stock market event risk but lower return than UST-IG-FR debt after inflation, taxes and Fed rate increases.

At this late stage in the stock market cycle, using debt with a high correlation to the stock market is not good risk management.

We expect to redeploy our Loan allocation to longer duration debt sometime in later 2019, based on the published schedule of rate increases from the Federal Reserve.

This is how the prices of T-Bills, UST-IG-FR debt and senior banks loans did over the past 12-months as the Fed Funds rate rose 1.02% over those 12-months.

The following charts plot the price change of funds representing key debt categories over the past 12-months, during which the Federal Reserve raised the Fed Funds Rate (the base rate for USA debt) by 1% in 0.25% increments at a steady pace.

We make the simplistic assumption that the funds will experience a repeat of price changes over the next 12 months that they experienced over the last 12 months. That is because the Federal Reserve rates over the next 12 months are expected to rise by the same amounts, at the same pace, over the next 12 months as they did over the lasts 12 months.






The next table  illustrates our view on key debt types and shows UST-IG-FR debt as one of three categories with expected positive return after inflation, after taxes, after a 1% Fed Funds rate increase over the next 12 months. The other two are 1-3-month Treasury Bills and senior, floating rate bank debt.

UST-IG-FR debt has a lower net yield than Senior Bank Loans, but much lower credit risk and much lower stock market event risk. UST-IG-FR has some minor credit risk being rated “A” and minimal stock market event risk.

If essentially zero credit risk and essentially zero stock market event risk is the goal, then T-Bills are the way to go. However, we think Ultra-Short-Term, Investment-Grade, Floating Rate Debt is where we want to be at this time and until the Fed substantially completes rate normalization in 2019.

For the “Duration Price Effect”, we make the assumption that the price behavior over the last 12 months during a 1% Fed Funds rate increase will be duplicated over the next 12 months during which the Fed’s behavior is expected to be the same as the last 12 months. The Fed raised its base rate 1% over 12 months and plans to do the same over the next 12 months.

The Maximum Drawdown is a measure of the largest drop from a peak to a trough during the indicated period.

You can see that an estimate of the total return after inflation, after taxes and after duration price effect is 0.04% for T-Bills, 0.35% for UST-IG-FR debt and 0.81% for senior floating rate bank debt (note this sort of bank debt has major potential liquidity problems during a crisis).


Medical Equipment ETF (XHE) Added To Tactical Sleeves

September 26th, 2018
  • ETFs with solid momentum are currently focused on tech, health care and small-cap.
  • Only 18 of 2051 ETFs passed our momentum screening filter rules.
  • We further subjectively evaluated quantitative and qualitative data for the 18 and selected medical equipment ETF XHE as an addition to our tactical sleeve.

For those clients who complement their core strategic positions with a tactical momentum rotation sleeve as part of their Personal Investment Policy, we have added the medical equipment ETF (XHE) to those tax deferred accounts where we have discretion; and we recommend that addition for those accounts for which we provide advice.

That advice is to clients only. For readers here, this article is for information purposes only, and is not personal investment advice.

The filter we use to select ETFs for tactical momentum rotation requires at minimum these things:

  • Upward sloping 1-year regression trend line
  • 200-day average higher than 1 month ago and price above 200-day average
  • Price return 10% or more in excess of both T-Bills total return and S&P 500 total return over 12 months ending 1 month ago
  • Maximum drawdown over last 3 months not more than 10%
  • 3-month average Dollar trading volume per minute at least $15,000
  • Total Dollar trading volume over 3 months greater than the 3-mo total volume ending 3 months ago.

From the current 18 survivors of that filter out of 2051 ETFs, we subjectively evaluated other quantitative and qualitative factors, to select XHE for addition to tactical momentum rotation sleeves.

To remain in the portfolio a tactical position must continue to satisfy the minimum conditions on a weekly review basis, except that the total return, if greater than that of T-Bills, need only exceed that of the S&P 500 by 2%; and trading volume growth is not required. A position might be replaced with a more attractive tactical selection if the total amount allocated to the tactical sleeve is fully invested.

The following presents some, but not all, of the information we used in addition to our rules-based filter to make our selection.

The next two charts effectively demonstrate the recent historical momentum and superior performance that suggests the likelihood (but not certainty) of short-term inertial continuation of momentum for XHE.

(click images to enlarge)


This shows the 1-year total return of S&P 500 (SPY in blue), S&P 500 Health Care Sector (XLV in orange), and S&P Total Market Medical Equipment (XHE in red).


This shows the relative total return performance of SPY, XLV and XHE over the past 3 years.

The next two charts add another healthcare ETF (PSCH) currently in our tactical sleeve, and also as a useful comparison, the iShares momentum factor ETF (MTUM).



Currently, of the 18 momentum ETFs identified by our filter, they are all small-cap, technology, health care, except for one retail ETF.

The relative returns of the five identified ETFs can also be viewed in tabular form to isolate specific trailing periods from 1 month to 3 years, as shown here:

Additionally, you can see the volatility (standard deviation) and Sharpe Ratio [(total return in excess of T-Bill return)/standard deviation)].

XHE is generally higher return than SPY and XLV, but is also more volatile. However, its Sharpe Ratio (return you get for the volatility of the ride) is competitive with the S&P 500.

This next table presents some comparative valuation and fundamental data.

XHE has higher valuation ratios, lower yield, lower ROE and ROA than the S&P 500 and its health care sector, which are risk factors. It has somewhat lower debt.

The following table shows a “growthier” XHE, compared to the S&P 500 and its health care sector. Its 1-year PEG (P/E divided by 1-year forward earnings growth expectations) is competitive with the S&P 500 and better than the S&P 500 healthcare sector.

State Street Global advisors forecasts a 14.6% 3-5 year earnings growth path for the health care sector versus a 13.4% path for the S&P 500.

Looking inside of XHE’s 74 holdings, and comparing them to the holdings of factor funds operated by Vanguard, we see that 33 of them accounting for 48% of XHE assets by weight are included in the portfolio of VFMO (Vanguard’s momentum ETF based on the Russell 3000).

We also see that 9 XHE holdings (16% of its assets by weight) are included in VFMF (Vanguard’s multi-factor fund, also based on the Russell 3000). The multi-factor fund holds stocks that present a balance of attributes between value, quality and momentum, after excluding the most volatile stocks.

Including those not seen, 3 of the XHE holdings are in the Vanguard value factor fund (VFVA) and 21 are in the Vanguard quality factor fund (VFQY).

We do not commit to publish an article when this position is closed. We may do so, but make no promise to do so; and even if we did it may not be timely.

If you take a tactical position in any security mentioned here, do not rely on a subsequent article to notify you of a change in our position on the security. We, of course, keep our clients advised of any changes or actions on a timely basis.