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Pacer ETFs modifies Trendpilot strategy with new ‘Extreme Valuation Trigger’

Pacer ETFs modifies Trendpilot strategy with new ‘Extreme Valuation Trigger’

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Pacer is set to roll out a modification to the methodology powering its flagship equity Trendpilot ETFs with the introduction of an ‘Extreme Valuation Trigger’.

Pacer ETFs modifies Trendpilot strategy with new ‘Extreme Valuation Trigger’

Pacer is to introduce an ‘Extreme Valuation Trigger’ for its trend-following Trendpilot ETFs.

The modification will mean that the strategies, which rotate between equity and Treasury exposure according to the trend of the market, will throttle back their equity or Treasury exposure when their underlying reference equity index is in extreme bull or extreme bear mode respectively.

The new trigger works by measuring each strategies’ underlying reference equity index relative to its 200-day simple moving average (SMA). If the index is trading at or more than 20% above or 20% below its 200-day SMA, the strategy will rotate into a 50/50 exposure between its reference equity index and three-month US Treasury bills, as opposed to being fully exposed to either equities or Treasuries.

This new allocation will remain in place until the traditional rules trigger a new exposure change. Thus, in order for the exposure to be nullified the reference equity index would need to close below or above its moving average (depending on whether it was previously above or below its moving average) for five consecutive trading days. This would then revert the strategy to its normal ruleset.

The adjustment will provide the strategies with a degree of protection from excessively heated markets which subsequently correct, while also protecting them against missing out on stock market gains when over-sold markets subsequently bounce back – as was the case in late March, April and May this year when the Trendpilot ETFs missed out on much of the initial market rebound that followed the coronavirus sell-off in February and March (see graphic below).

The methodology modification will be applied to the following funds effective on October 15, 2020:

Pacer Trendpilot US Large Cap ETF (PTLC US)
Pacer Trendpilot US Mid Cap ETF (PTMC US)
Pacer Trendpilot 100 ETF (PTNQ US)
Pacer Trendpilot European Index ETF (PTEU US)
Pacer Trendpilot International ETF (PTIN US)

A statement from Pacer commented: “The Pacer Advisors team, the investment adviser for the funds, has studied this addition to the rules-based methodology and believe it to be a natural evolution of the fund families’ risk mitigation strategy, especially given the extreme volatility global markets have experienced this year.”

The funds’ expense ratios and listings remain unchanged.

Pacer ETFs modifies Trendpilot strategy with new ‘Extreme Valuation Trigger’

The post Pacer ETFs modifies Trendpilot strategy with new ‘Extreme Valuation Trigger’ first appeared on ETF Strategy.

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Jay Bhattacharya on Uncommon Knowledge

Hoover’s Peter Robinson does an excellent job of interviewing Stanford’s Jay Bhattacharya on various aspects of the COVID pandemic and lockdown.
I recommend the whole thing: it’s all informative, especially for those who might have forgotten what…

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Hoover’s Peter Robinson does an excellent job of interviewing Stanford’s Jay Bhattacharya on various aspects of the COVID pandemic and lockdown.

I recommend the whole thing: it’s all informative, especially for those who might have forgotten what facts about the pandemic “we” were pretty sure of when.

I want to highlight two things.

First, something Jay said that I don’t quite understand. At about the 3o:00 point, Jay states that the fact that child abuse figures fell is not evidence that child abuse fell. He points out that one of the main ways we know that child abuse occurs is that it is noted at schools and schools, of course, particularly government ones, were shut down. Then Jay goes on to say we had a huge increase in child abuse, unmeasured, that was not dealt with.

My question: If it was unmeasured, how do we know it happened? I see his theoretical point: that when child abuse is not reported, the cost of engaging in it falls, and so more of it is engaged in. That’s the law of demand. But I don’t see how Jay can know it was a huge increase, as opposed to, say, a small increase.

Second, deaths from COVID in Florida, which had less drastic and shorter-lived lockdowns and California, which had extensive, long-lasting lockdowns. At about the 48:00 point, Jay points out that 85-year-olds have had a lower incidence of death from Covid in Florida than in California; 75 to 84-year-olds, ditto; 65 to 74-year-olds, ditto.

Again, watch the whole thing.

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Shadow Inflation: Shipping Costs Are Up Way More Than You Think

Shadow Inflation: Shipping Costs Are Up Way More Than You Think

By Greg Miller of FreightWaves,

Name something that costs far more than it did before the pandemic that simultaneously gives you far less value for your money than it used to.

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Shadow Inflation: Shipping Costs Are Up Way More Than You Think

By Greg Miller of FreightWaves,

Name something that costs far more than it did before the pandemic that simultaneously gives you far less value for your money than it used to.

Of all the goods and services in the world, it’s hard to find a better pick than ocean container shipping. As rates have skyrocketed, delivery reliability has collapsed amid historic port congestion. Ocean cargo shippers are paying more than they ever have before for the worst service they’ve ever experienced.

The true COVID-era inflation rate for ocean shipping, when adjusted upward to account for lower quality, is much higher than the rise in freight rates.

Rates spike, quality plummets

For businesses that rely on imports and exports, ocean shipping is a necessity, not a luxury, so pricing rises if demand exceeds supply regardless of how bad the service is. U.K.-based consultancy Drewry recently upped its forecast and now predicts that global container rates will increase by an average 126% this year versus 2020, including both spot and contract rates across all trade lanes.

Norway-based data provider Xeneta sees most long-term contract rates in the Asia-West Coast route averaging $4,000-$5,000 per forty-foot equivalent unit, double rates of $2,000-$2,500 per FEU at this time last year. Spot rates have risen much more than that, both in dollar and percentage terms. The Freightos Baltic Daily Index currently assesses the Asia-West Coast spot rate (including premium charges) at $17,377 per FEU, 4.5 times the spot rate a year ago.

Daily assessment in $ per FEU. Data: Freightos Baltic Daily Index. Chart: FreightWaves SONAR (To learn more about FreightWaves SONAR, click here.)

Service metrics have sunk as rates have risen. Denmark-based consultancy Sea-Intelligence reported that global carrier schedule reliability fell to 33.6% in August, an all-time low. In August 2019, pre-COVID, reliability was more than double that. Sea-Intelligence calculated that the global delays for late vessels was 7.57 days, almost double the number of days late in August 2019.

Charts: Sea-Intelligence. Data sources: Sea-Intelligence, GLP report issue 121

U.S.-based supply chain visibility platform Project44 highlighted the diverging paths of pricing and quality by contrasting its data on average days delayed with Xeneta’s short-term rate data. Between August 2020 and this August, project44 found that the monthly median of days delayed on voyages from Yantian, China, to Los Angeles increased 425%, from 2.46 days to 12.93. Over the same period, average short-term rates jumped 102%.

Chart: p44. Data sources: p44 and Xeneta

Shadow inflation

Neil Irwin of The New York Times recently wrote about “shadow inflation”when you pay the same as before for something that’s not as good as it used to be, so you’re effectively paying more. A pre-COVID example of shadow inflation: the infamous Lay’s potato chip incident of 2014. Lay’s intentionally included about five chips less per bag, lowering content from 10 ounces to 9.5, yet still charged $4.29 per bag, meaning customers were paying (and Frito-Lay was making) 5.3% more per ounce of chips.

The opposite — and until COVID, far more common — scenario is when product quality rises faster than pricing, decreasing effective inflation, as in the case of computers and other tech products. This downward effect on inflation is incorporated into the Consumer Price Index (CPI) via so-called hedonic adjustments.

As recounted by Irwin and Full Stack Economics author Alan Cole, COVID flipped hedonic adjustments in the other direction, toward lower quality per dollar paid, the equivalent of inflation. Pointing to restaurants and hotels, Irwin wrote, “Many types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices (or not only by raising prices), but by taking steps that could give their customers a lesser experience.”

According to Cole, “Over the last 18 months … goods and services are getting worse faster than the official statistics acknowledge,” implying that “our inflation problem has actually been bigger than the official statistics suggest.”

Shadow inflation and container shipping

Ocean container shipping is an extreme example of the “services are getting worse” trend, despite enormous freight-rate inflation.

Measuring quality adjustments to inflation is inherently difficult, which is why very few CPI categories have hedonic adjustments. One way to do a back-of-the-envelope estimate of ocean shipping shadow inflation is to focus on time: the longer the delays, the less quality, the higher the cost fallout, the higher the effective inflation above and beyond the rise in freight rates.

Jason Miller, associate professor of supply chain management at Michigan State University’s Eli Broad College of Business, suggested using accounting of inventory carrying costs to measure the time effect.

“If I already own a product and I took possession of it overseas at the port of departure, and it’s on my balance sheet and it’s just sitting on the water, then in inventory management, there is a charge incurred every day it’s not sold,” he explained.

Miller explained, “There is the cost of capital. Every $100 in inventory is $100 that can’t be allocated elsewhere for a more value-producing purpose. There is also the cost due to obsolescence. It’s essentially opportunity costs. The longer the delay, the more additional costs from stockouts [as shelves empty] or the need to buy more safety stock.”

Rate rises affect different shippers differently

Whether it’s price inflation from rate hikes or indirect shadow inflation from slow service, different shippers are affected very differently.

On the rate side of the equation, Xeneta data shows a massive $20,000-per-FEU spread between the lowest price paid by large contract shippers in the trans-Pacific trade and highest price paid by small spot shippers.

Erik Devetak, chief data officer of Xeneta, told American Shipper, “We see the very bottom of the bottom of the long-term market at approximately $3,300 per FEU, although there are very few contracts at this price. On the other hand, we see the short-term market high up to $23,000 per FEU, again, in rare situations.”

In the latest edition of its Sunday Spotlight report, Sea-Intelligence analyzed how rate hikes affect different shippers and found a huge competitive advantage for larger shippers given this gaping freight spread.

Sea-Intelligence, using Xeneta data, estimated that a large importer on contract (in this case, in the Asia-Europe trade) shipping a 40-foot box with $250,000 of high-value cargo would see freight costs rise from 0.5% of the cargo value a year ago to 1.8% currently — an easily digestible increase. A small shipper in the spot market moving the same load would see freight costs jump from 0.7% of cargo value to 6.2%.

Sea-Intelligence then ran the same exercise with a low-value cargo worth $25,000. It said that in this case, the large contract shipper’s freight-to-cargo-value ratio rose from 5% last year to 18% currently, while the small spot shipper’s freight-to-cargo-value “exploded” from 7% to 62%.

Service delays affect different shippers differently

Rising rates affect high-value cargo the least because the freight rise equates to a small proportion of the cargo value. But with shadow inflation from voyage delays, it’s the opposite, according to Miller. Shipments of high-value goods get hit much harder than low-value goods.

Accounting carrying costs are derived from cargo value. The higher the cargo value, the higher the carrying costs. “Where these delays especially matter is for high-value imports,” said Miller. “It’s ironic. The importers that are least affected by high spot prices are the ones who are getting really hurt most by the delays.”

One example: A large importer pays $4,000 in freight under a contract to ship a high-value cargo of $250,000 worth of electronics in a 40-foot box. There is a 30% annual carrying cost, in part due to high obsolescence risk, thus a carrying cost of $205 per day, so a 10-day delay would equate to an accounting cost of $2,050, adding 51% on top of the freight cost.

A contrasting example: A small importer pays $15,000 in the spot market to ship a low-value cargo of $25,000 worth of retail products in a 40-footer, with a 20% annual carrying cost. A 10-day delay would equate to an accounting carrying cost of $137, just 1% more on top of the freight rate.

It’s not just high-value cargoes that suffer from delays, Miller continued. Obsolescence risk is key. On the high end of the value spectrum, that relates to goods like electronics; on the low end, to things like holiday items and seasonal fashion.

Another major factor: whether the delayed import item is a component in a manufacturing process. In that case, the cost of ocean shipping delays can be enormous, dwarfing the increase in freight rates.

American Shipper was recently contacted by a manufacturer that has a vital component of its production process trapped in containers aboard a Chinese container ship that has been at anchor waiting for a berth in Los Angeles/Long Beach since Sept. 13.

“When imports are actually inputs into a production process, and if a stockout is going to shut down a plant, you are now facing a huge opportunity cost,” warned Miller.

Tyler Durden Sun, 10/24/2021 - 15:30

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“Emergency Mode” – China Warns Covid Outbreak To Worsen In Coming Days

"Emergency Mode" – China Warns Covid Outbreak To Worsen In Coming Days

Any hopes that covid is finally on its way out and won’t be used by the establishment to ram through trillions more in stimulus, are about to die a slow, painful death….

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"Emergency Mode" - China Warns Covid Outbreak To Worsen In Coming Days

Any hopes that covid is finally on its way out and won't be used by the establishment to ram through trillions more in stimulus, are about to die a slow, painful death. To be sure, there has been much to the optimistic about: covid cases in the US have plunged in the past month, with hospitalization numbers sliding and daily covid deaths now sharply lower.

This hopeful backdrop prompted Bank of America last week to write that "with the much more transmissible Delta variant now dominant, are we in for another difficult winter? Probably not." It also led JPMorgan's Marko Kolanovic to declare on Oct 6 the de facto end of the pandemic:

Our core view remains that the COVID situation will continue improving driving a cyclical recovery. This will be the case for at least the next  3-4 months given COVID wave dynamics, but most likely also beyond that. We believe that this was the last significant wave, and an effective end to the pandemic.

Alas, not so fast.

Last Friday, Bloomberg issued the first "new wave" covid alert, targeting the UK, and writing that "after 19 months spent attempting to ward off Covid-19 while safeguarding jobs and businesses, the U.K. is heading into winter with a growing problem: The coronavirus is spreading rapidly, just as the economy starts going in the opposite direction."

According to the report, "U.K. cases are accelerating faster than in other western European nations, while deaths have jumped to their highest since March." And while UK government ministers are having to deny they are planning for a new lockdown, "at the same time, economic growth is slowing, inflation is running high, the Bank of England is expected to hike rates soon and households are facing a cost-of-living crisis."

In short, a new wave of covid - whether real or imagined - is about to be unleashed on the UK at the worst possible time, just as the BOE may be about to hike rates in a matter of weeks to offset the UK's soaring inflation with 5Y breakevens hitting the highest level this century.

But it's not just the UK: with China's economy rapidly contracting even as its energy crisis has sent commodity prices soaring and threatens to unleash record PPI prints in coming months...

... the world's second largest economy is about to face a far greater threat. According to Bloomberg, a Chinese health official said that the country's new Covid-19 infections will increase in coming days and the areas affected by the epidemic may continue to expand.

Of course, this being China not one statement about anything can be made without lies, and this one was not exception: speaking at a briefing in Beijing on Sunday, Wu Liangyou, an official at the National Health Commission, said that the current outbreak in China is caused by the delta variant from overseas. Right, it's all the foreigners fault. 

Origins aside, the wave of infections spread to 11 provinces in the week from Oct. 17, Mi Feng, spokesman for the commission, said at the briefing. Most of the people infected have cross-region travel histories, Mi said. He urged areas that have been affected by the pandemic to adopt “emergency mode.”

In preparation for the new wave, already some cities in the provinces of Gansu, including its capital Lanzhou, and Inner Mongolia have halted bus and taxi services because of the virus, according to Zhou Min, an official at the transport ministry.

China reported 26 new local confirmed Covid-19 infections on Saturday, including seven in Inner Mongolia, six in Gansu, six in Ningxia, four in Beijing, one in Hebei, one in Hunan and one in Shaanxi, according to the National Health Commission. Another four local asymptomatic cases were reported in Hunan and Yunnan.

And while the latest wave is still modest, with Goldman counting just 70 local Covid cases reported in the Oct 22 week, for Beijing to take the surprising step of making a public announcement that it's about to get worse, suggests just that: that the "data" is about to show a major spike in local cases.

It also means that China's effective lockdown index is about to take a sharp turn higher.

Meanwhile, the epidemic is also spreading in the capital Beijing, where it has expanded to three districts including Haidian, a scientific hub, Pang Xinghuo, vice head of the Beijing Center for Disease Prevention and Control, said at a briefing Sunday; he added that five new confirmed local Covid cases and an asymptomatic one were reported between Saturday midday to Sunday 3 p.m.

As part of the coming round of lockdowns, Beijing will cancel a marathon originally scheduled for Oct. 31 due to the virus, the Beijing Daily reported. People in cities where infections have been found are banned from visiting or returning to the capital at present, the newspaper said.

Bottom line: while power blackouts lead to a sharp swoon in Chinese output in the early part of the month, it now appears that covid will be blamed for the next round of factory lockdowns, and the result will be even more snarled supply chains only this time the Biden administration will not blame "too much demand" but not enough Chinese supply. The end result, however, will be the same: even fewer goods and even higher prices for virtually everything this holiday season.

Tyler Durden Sun, 10/24/2021 - 11:00

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