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Saturday, December 20, 2014

ETFs Are Not Always Cheaper

By Alex Bryan and Michael Rawson

Do exchange-traded funds or index mutual funds offer lower-cost exposure to similar indexes? It may be reasonable to expect ETFs to charge lower expense ratios than their index mutual fund counterparts. After all, ETF managers do not have to maintain accounts for individual investors like index mutual funds, which helps reduce their administrative expenses. In order to evaluate whether this structural advantage actually translates into lower costs, we matched ETFs and index mutual funds that track the same indexes within several Morningstar Categories and compared their annual report net expense ratios. While differences in expense ratios do not tell the whole story, they offer a good starting point, because they often represent the largest and most predictable component of the total cost of owning a fund.

We limited our data set to broad market-cap-weighted stock and bond indexes tracked by both ETFs and index mutual funds. This removes the vast majority of ETFs from our study because most track specialty indexes that are not available in a mutual fund format. We eliminated funds that were launched after Jan. 1, 2013, and grouped the remainder by Morningstar Category. Each category also had to include at least three index mutual funds and three ETFs as of April 2014 in order to remain in the sample.

Exhibit 1 illustrates the asset- and equal-weighted net expense ratios for each category of ETFs and index mutual funds we examined, based on their 2013 annual reports. The equal-weighted expense ratios suggest that ETFs offer substantial cost savings. On this measure, only the ETFs in the long government bond category were not cheaper than their mutual fund counterparts. However, outliers can have a significant impact on these averages. The asset-weighting approach mitigates this problem because low-cost funds tend to attract a disproportionate share of assets. It also better reflects the average investor's experience.

Not surprisingly, the mutual funds' asset-weighted expense ratios are generally lower than the equal-weighted expense ratios. The difference between the asset- and equal-weighted expense ratios is less pronounced among the ETFs in the sample. One possible explanation is that institutional investors may be attracted to funds that offer the best liquidity, such as SPDR S&P 500 (NYSEARCA:SPY) and iShares MSCI Emerging Markets (NYSEARCA:EEM), even if they do not carry the lowest fees. This is because they are the cheapest to trade in large quantities and often have deep options markets. These features are particularly attractive to large institutional investors, who may use these funds for short-term asset-class exposure and hedging. These funds are often early entrants. Once they build a liquidity advantage over their peers, there may be less pressure on their fees.

The asset-weighted expense ratio comparison narrowed ETFs' cost advantage in every category. Only three of the 14 ETF categories sport a lower asset-weighted expense ratio than their mutual fund counterparts. They look more expensive in eight of the categories.

Institutional and Retail
Index mutual funds' institutional share classes pull the asset-weighted average expense ratio down. However, they require high minimum investments or are only available on select retirement plan platforms. In order to separate these restricted share classes from those that are broadly available to individual investors, we grouped the mutual fund share classes by minimum investment. Those with a minimum investment of $10,000 or less fell into the retail category, and those with minimums above this threshold went into the institutional group. We also categorized all share classes that require an intermediary to access as institutional. Each retail and institutional category needed at least three funds in order to remain in the sample.

On an asset-weighted basis, ETFs were slightly cheaper than the mutual funds' retail share classes in six of the 10 categories included. However, the institutional share classes were cheaper than the ETFs in every category except for mid-growth. ETFs look like a better bargain on the equal-weighted expense ratios, though the institutional share classes narrowed the gap in five categories.

The Vanguard Factor
The results of this analysis are also sensitive to whether Vanguard funds are included. Because Vanguard prices its funds at cost, many of its index mutual funds are cheaper than ETFs from other providers. Vanguard's index funds have significant influence on the asset-weighted averages because they tend to be among the largest mutual funds in each category. However, Vanguard has a smaller share of the ETF market. Vanguard funds accounted for 80.0% of the assets in our index mutual fund sample and 32.3% of the assets in the ETF group.

After removing Vanguard's funds, ETFs look cheaper than their mutual fund counterparts on an asset-weighted basis in every category included except foreign large blend. The asset-weighted expense ratios for Vanguard's ETFs are slightly lower than the corresponding values for its mutual funds. All of Vanguard's U.S. ETFs are separate share classes of its mutual funds. Vanguard charges the same expense ratio for the Admiral and ETF share classes.

Fee Trends
We extended our analysis back 10 years to uncover fee trends, including funds that are no longer surviving. As before, each category had to have at least three funds to qualify for inclusion. Based on these funds' annual reports from 2004 through 2013, ETFs' asset-weighted cost advantage relative to their index mutual fund counterparts in the large-blend category fell to 0.01% from 0.10%. As the chart below illustrates, this was almost entirely because of a decline in asset-weighted index mutual fund expenses.

During this time, some of the most expensive index mutual funds shut down and new funds entered with lower expense ratios. However, most of this decline resulted from assets moving to the lowest-cost mutual funds. The reduction in the equal-weighted mutual fund expense ratio was much smaller. On this metric, large-blend ETFs continue to look considerably cheaper than the mutual funds in the category.

The fact that the equal-weighted mutual fund expense ratios were significantly higher than the asset-weighted expenses suggests that there are still a number of expensive index mutual fund share classes with very few assets. The chart below illustrates this point. It shows the percentage of assets in the large-blend category invested in mutual fund share classes and ETFs with expense ratios above the median for each vehicle.

In many cases, there were cheaper funds that offered identical exposure. The market was efficient in the sense that money tended to flow toward the lowest-cost options. But it is surprising that the most expensive funds survived at all. Inertia is a powerful force. These funds tend to be older, and investors may be deterred from selling them to avoid capital gains and the tax liabilities they could trigger. Some of the more expensive mutual fund options may also gain new assets through retirement platforms, where investors have limited choices.

The difference between the asset-weighted and equal-weighted expense ratios for ETFs was much less pronounced. This may be because it is often easier for investors to switch among ETFs, while some mutual funds enjoy a more captive audience through retirement platforms. Similar to their mutual fund counterparts, expensive ETFs did not garner significant market share in the large-blend category.

The fee trends are similar for the large-growth, large-value, mid-blend, small-growth, and small-value categories. Asset-weighted mutual fund expense ratios have declined during the past decade. However, the asset-weighted differences between ETF and mutual fund expense ratios have not changed much, with the exception of the large-growth category. ETFs' asset-weighted cost advantage in each category was also much smaller (and in some cases negative) than the equal-weighted cost advantage, suggesting that there were many expensive mutual fund share classes with few assets.

This analysis shows that investors have plenty of low-cost options, regardless of whether they choose to go with an ETF or index mutual fund. There are expensive funds, to be sure, but they do not usually attract much attention--nor should they, given the multitude of increasingly inexpensive options that investors have at their disposal. The difference in expenses between the two vehicles is small, at least on an asset-weighted basis. As measured on the basis of fees alone, one vehicle is not categorically better than the other.

While the expense ratio is the most visible--and usually largest--component of the total cost of owning a fund, investors must take additional factors, such as tax efficiency and trading costs, into account to assess the total cost of ownership.

Tax Efficiency
Market-cap-weighted index investing is fairly tax-efficient because it does not usually require turnover in response to changing fundamentals. Where the median active fund in the large-blend category had a median turnover of 46% in 2013, the corresponding figure for the median market-cap-weighted index fund was only 5%. ETFs build on this tax advantage through their in-kind redemption and creation process. This process allows managers to transfer low-cost-basis shares out of the fund in a tax-free transaction with the fund's authorized participants. The resulting incremental tax savings may give ETFs an edge over mutual funds that track the same indexes.

In order to assess the relative tax efficiency of index mutual funds and ETFs, we compared each group's median potential capital gains exposure, five-year tax-cost ratio--which measures aftertax returns at the highest marginal rate relative to pretax returns--and the frequency of capital gains distributions over the trailing five years through August 2014. For this analysis we grouped all funds into one of three categories: U.S. equity, international equity, and taxable bond. The U.S. equity ETFs in our sample appeared to be slightly more tax-efficient than index mutual funds according to each of the three metrics. International-equity ETFs also appear more tax-efficient than index mutual funds, but their advantage was smaller. This is partially because some foreign tax jurisdictions do not allow in-kind redemptions, which diminishes ETFs' structural tax advantage. Also, most international-equity funds' performance lagged that of U.S. equity funds over the five-year period analyzed, resulting in fewer capital gains and fewer opportunities for international-equity ETFs to leverage any potential tax advantage.

The picture was mixed for taxable-bond funds. Although the median taxable-bond ETF had the same tax-cost ratio as the median mutual fund and lower potential capital gains, taxable-bond mutual funds made capital gains distributions less frequently. Bond ETFs may not be able to use the in-kind redemption mechanism as effectively as their equity counterparts. Turnover tends to be higher for bond index funds because they sell bonds as they approach maturity. Bond ETFs may not be able to manage all of these trades through the in-kind redemption process. In addition, income tends to represent a larger share of the taxable distributions for bond funds than equity funds. ETFs do not have an advantage over mutual funds in mitigating the tax liabilities that income distributions trigger.

Trading Costs
Trading costs may put ETFs at a slight disadvantage relative to no-load index mutual funds. Investors buy and sell mutual funds at NAV, often directly from the fund issuer without paying trading commissions. In contrast, ETF investors usually pay commissions and are rarely able to trade at NAV, as ETFs tend to trade at (typically small) premiums and discounts to the value of their underlying assets. But because commissions are typically fixed fees, they become less significant as the size of the trade or the length of an investor's anticipated holding period increases. Many brokers also offer commission-free ETF trading programs, which help reduce this cost hurdle.

While trading commissions are the most conspicuous component of trading costs, indirect trading costs, such as the bid-ask spread and market impact of trading, can often be more important. The smaller the trade is relative to the ETF's trading volume and more liquid the ETF's underlying holdings are, the smaller these costs tend to be. Mutual fund investors ultimately bear some of these trading costs, too. The ETF structure largely externalizes these costs rather than spreading them among all investors.

When equity index mutual funds and ETFs track the same benchmark at comparable expense ratios, ETFs may be the better option for taxable accounts. The cost equation swings in index mutual funds' favor as the frequency of transactions increases or their size decreases (assuming liquidity isn't an issue). However, in many cases, the optimal vehicle is simply a matter of personal preference.

Click here to see the full report.

Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

  • ceakins
    Dec 17 01:30 PM
    Trading cost: eTrade ETF $9.99 or free (hard to beat free), Mutual Funds $19.99, enough said.

    Your analysis on Institutional share class is irrelevant to Seek Alpha readers since we are retail investors. Which leads me to ask, who is the intended audience for this article?

    Whatever points you are trying to make on tax efficiency is irrelevant as well. In the US the taxing authorities make no distinction between EFT, MF or individual stocks for that matter. Taxes are determined on short or longer capital gains and the rules for which account investments are held (IRA, ROTH IRA), but then you folks at Morningstar already knew this.

    This article is a real stretch to draw any conclusions that EFTs are not always cheaper, on balance they are cheaper than MFs.

Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?

    Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This? 

    It isn't just the price of oil that is collapsing. The last time commodity prices were this low was during the immediate aftermath of the last financial crisis. The Bloomberg Commodity Index fell to 110.4571 on Monday -- the lowest that it has been since April 2009. Just like junk bonds, industrial commodities are a very reliable leading indicator. In other words, prices for industrial commodities usually start to move in a particular direction before the overall economy does. We witnessed this in the summer of 2008 when a crash in commodity prices preceded the financial crisis in the fall by a couple of months.

    And right now, we are witnessing what may be another major collapse in commodity prices. In recent weeks, the price of copper has declined substantially. So has the price of iron ore. So has the price of nickel. So has the price of aluminum. You get the idea. So this isn't just about oil. This is a broad-based commodity decline, and if it continues it is really bad news for the U.S. economy.

    Of course, most Americans would much rather read news stories about Kim Kardashian, but what is happening to the prices of these industrial metals at the moment is actually far more important to their daily lives. For example, when the price of iron ore goes down that is a strong indication that economic activity is slowing down. And that is why it is so troubling that the price of iron ore has almost sunk to a five year low. The following comes from an Australian news source

    The price of iron ore has held below $US70 a tonne in overnight trade, leaving its five-year low within reach.

    At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US69.40 a tonne, down 0.4 per cent from its previous close of $US69.70 a tonne and only 2 per cent above the five-year low of $US68 reached a fortnight ago.

    This week's dip back under $US70 a tonne has followed revised forecasts from JPMorgan that suggest the commodity will average just $US67 a tonne next year, about $US20 below the investment bank's previous expectation.

    Copper is probably an even better economic indicator than iron ore is. Economists commonly refer to it as "Dr. Copper," and there is a really good reason for that. Looking back over history, the price of copper often makes a significant move in one direction or the other before the economy does. And now that the price of copper just hit the lowest level that we have seen since the last financial crash, alarm bells are going off. The following comes from an article by CNBC contributor Ron Insana:

    Copper prices are now below $3 a pound and there's an expression that "the economy is topped with a copper roof." More simply put, copper tends to top out in price, before it becomes obvious that, in this case, the global economy is about to weaken.

    So is the global economy heading for rough waters? Could 2015 be a very rough year economically? According to Insana, the signs are all around us:

    We already have evidence that the commodity crash has ominous portents for the rest of the world:

    * Japan's recession is deeper than previously thought.

    * China's demand for basic materials, amid a glut of uneconomic construction projects, appears to be plummeting.

    * Russia's ruble has collapsed and the country is on the brink, if not already in, a recession.

    * India's economic recovery is beginning to look shaky.

    * Europe's growth rate and inflation rate, for the next two years, were just revised downward by the European Central Bank, suggesting that Europe's economic crisis is far from over. In fact, at least one former European leader with whom I recently spoke, believes the crisis in Europe may just be in its early stages.

    * Brazil and other emerging market nations are struggling with a variety of issues, from recessions at home, to the rising value of the dollar, which is complicating how emerging markets conduct economic policies at home, given how closely their currencies are tied to the greenback.

    In addition, the Baltic Dry Index is now at the lowest point that we have seen at this time of the year since 2008:

    Simply put, with collapsing commodity prices (iron ore for instance) and massive fleets of credit-driven mal-investment-based vessels, it should surprise no one that the shipping index just plunged back below 1000, now at its lowest for this time of year since 2008. Furthermore, the seasonal bounce always seen in Q3 was among the weakest ever.

    What does all of this mean? It is commonly said that those that do not learn from history are doomed to repeat it. So many of the exact same patterns that we witnessed leading up to the financial crash of 2008 are happening again. Unfortunately, very few people saw the last crash coming, and this next crash will take most Americans by surprise as well.

    I have written more than 1,200 articles about the economy on my website since 2009, and right now our financial system is more primed for a crash than at any other time since I started The Economic Collapse Blog. Hopefully we have at least a couple more months of relative stability, but without a doubt 2015 is shaping up to be the most "interesting" year that we have seen in the financial world in a very long time.

    All of the signs are there. But most people choose to believe that everything is going to be okay somehow. When the next crash comes, those people are going to be absolutely blindsided by it.

    When you see storm clouds on the horizon, the logical thing to do is to prepare. And the number one thing that most people should be working on is an emergency fund. So don't be frittering your money away on frivolous things. In the early stages of this next crisis, you are going to need money to pay the mortgage, to put food on the table and to take care of your family.

    Just remember what happened back in 2008. A lot of middle class families were living on the financial edge every month, and because they didn't have any cushion to fall back on, millions of those families ended up losing their homes when their jobs disappeared.

    You need to have an emergency fund that can cover at least six months of expenses. You don't want a job loss or a major emergency to put you into a situation where your family could be put out into the street. And for those that still have lots of money invested in the stock market -- I really hope that you know what you are doing.

    The market giveth, and the market taketh away. And when the market taketh away, the consequences can often be exceedingly cruel.

    • Jack Hutchison
      Dec 12 12:00 PM
      Sounds like a doomsday prediction, but the buyer should beware.

      Outstanding article. Thanks much. 
    • Rseye
      Dec 12 12:05 PM
      Lower oil reflecting on global demand = watch VXX (thks rtcle)
    • BennyProfane
      Dec 12 12:28 PM
      That's silly. The last commodity crash happened, as you say, AFTER 08, not before. So, how can it be a precursor this time? The 08 financial crash (which is still with us, of course) was brought on by extremely excessive leverage the developed world's banks were neck deep in, gambling like a drunken lottery winner in Vegas, and then that party, inevitably, ended. Badly. And we're still mired in the aftermath. For instance, about 14 major Euro banks are still on life support. Lets not even go near what it's like to be a young person in Greece.
      Commodities are crashing because China has maxed out on empty condos in empty cities with empty trains and highways, and factories making five times the steel and aluminum the world needs. There's your problem. 
    • jerrydd
      Dec 13 09:39 AM
      And not like Commodites haven't been dropping 2 yrs now in most cases.
      The only real problem is if leveraged loans on shale oil, etc get badly exceeded.
      If that doesn't happen the economy will just recover very nicely if repubs don't kill it again.
      Especially with lower oil prices which itself is a net 1% world GDP growth as long as they stay under $80/bbl, will suck up the surplus of barely 1% causing this oversupply.
      Copper is excellent as it is used in most everything new as a gauge of the world economy one needs to consider like oil, starting to buy at these prices as not much place to go but up. 
    • The Cynic
      Dec 13 08:25 PM
      "...Just like junk bonds, industrial commodities are a very reliable leading indicator. In other words, prices for industrial commodities usually start to move in a particular direction before the overall economy does. We witnessed this in the summer of 2008 when a crash in commodity prices preceded the financial crisis in the fall by a couple of months."

      Please read what the author said more carefully! 
    • BennyProfane
      Dec 14 10:56 AM
      Sir, everyone in the world was running for cover at the time. Most in the industry were aware that trillions could be called in or just vanish if the house of cards collapsed. Nobody really knew specifically where the real traps were, so they dumped everything. Commodities were just one of many assets liquified. Today is different. It's a demand issue. 
    • j6813f
      Dec 12 01:03 PM
      The US economic data is telling one story but the real world is telling another. Plunging commodities, soaring US Treasuries demand, sour Black Friday weekend shopping, etc. tell a very different story than the establishment econ data feed. And of course falling gas prices makes consumers super euphoric when the topic is brought up - I see that all around me, but consumers don't look under the hood as to they think there is no bad reason for it?? Again, I mention that Zero Hedge posted an article stating that federal tax withholding data for 2014 was less than one would expect given this year's stronger jobs gains...according to ZH's article, 2014 federal withholding collections were on par with 2011's. 
    • IncomeYield
      Dec 13 08:11 PM
      Quality of jobs? Layoffs of "good" jobs seem to be announced almost every day. 
    • JasonC
      Dec 14 02:45 AM
      Income Yield - every pundit with a keyboard sees all high paying jobs continually vanishing and being replaced by lousy ones that pay nothing - and has said so without a pause since the time of Malthus at the start of the 19th century. Meanwhile, actual average pay keeps relentlessly going up. But this never gives such journalists pause. Anecdote and flattery of the "poor me" whining of the latest round of losers, is the entire substance of economic thought at the level of journalism. They didn't just miss the last bull market, they missed the entire industrial revolution. They told us with the same reasoning and in practically the same terms that we would all be starving to death - for two centuries and counting. They have never been right about anything. 
    • BennyProfane
      Dec 14 10:59 AM
      Average pay relentlessly keeps going up? In what world?
    • JasonC
      Dec 14 03:20 PM
      This one -

      I see a smooth exponential increase with tiny noise. What do you see?

      Anyone think Thomas Jefferson's servants made more than workers today? 
    • gnwilliams
      Dec 14 03:57 PM
      Kudos for citing the source, but isn't that graph measuring collective wages (which will grow due to inflation and growth in number of workers), not average pay per worker? 
    • JasonC
      Dec 14 04:44 PM
      It's everything, yes. Going up way faster than population, or number working, or prices, or all of the above combined. Answer the second question - is the average worker today poorer than a servant of Thomas Jefferson?  

      Assume you agree the answer is no, at what time through that whole history did the "we are all doomed" Malthusians get the call of higher real incomes (as population ballooned etc), remotely right?

      The human race has never been more numerous, and it has never been richer per capita. It's called progress and real economic growth, and it has been exploding continually since oh, about the time Malthus put pen to paper. He wrote right at the end of eons of agricultural society that saw progress as well, but at a vastly slower rate. Which was about the take off. He proceeded to get every bit of that call as wrong as it is possible to get a call. And nothing the tech and capitalism hating doom mongers have peddled since, has updated that busted call in the slightest particular. 
    • BennyProfane
      Dec 14 11:47 PM
      Do you work for a living? Do you run a business? How ridiculous you sound. 
    • BennyProfane
      Dec 15 08:53 AM
      "Anyone think Thomas Jefferson's servants made more than workers today?"  

      Wait, what?

      Jefferson's "servants" were slaves. And, he slept with a few of them.  

      But what does that have to do with, at least, the 20th century? 
    • JasonC
      Dec 15 11:47 AM
      People are freer, they are paid more, they are healthier, they live longer, they are surrounded by an abundant technology that showers riches and luxury and comfort upon them. But gratitude has left the building, and to read the press you would think none of that happened and everyone is doomed, doomed I say. And it is a load of horsefeathers, all of it. Factually challenged, predictively deprived, busted, wrong. That whining ingratitude is immoral to the point of obscenity, but even that pales next to how flat incorrect it all is, as a factual matter.  

      Richest society in human history. Whining about all of it. 
    • JasonC
      Dec 15 11:49 AM
      Yes I work for a living, and make a very good living, and invest successfully while sharing my methods and opinions on this site with all who want them. Including my optimism and courage in investing, which are key to my own investment success. I am also grateful for all of it, and know I've never had it better. 
    • DigDeep
      Dec 15 12:36 PM
      I'll take exception with 'healthier' JC
      Yes, premature death and disease(s) has been reduced, increasing longevity stats and living saving trauma certainly is exceptional and also has lengthened life spans.

      Diabetes, obesity, cancer occurrence, heart disease, etc. are on the rise. We're more unhealthy as a society than we've ever been at all age levels. The reasons boil down to big pharma, big med, big Ag and politics. There is quite a bit of doom in the direction of our sick care system and the general health of the population. 
    • JasonC
      Dec 15 01:20 PM
      The reaper gets ya, no matter how fast you run. The leading cause of increasing deaths from cancer is decreasing deaths from heart attacks - because people who don't die from heart attacks in their 50s and 60s will live long enough to get cancer. Cure both of those and strokes will rise - but so will life expectancy.

      As for Americans being very fat, there we can agree. But if you want to pretend that isn't a sign of progress and a rich person's problem, we will part company once again. I recall the Indian peasant who when interviewed explained that the reason he really wanted to visit America was to see how a society can have fat poor people...

      And no, the reason for it doesn't have anything to do with big pharma or any such corporate-hating bete noirs. People who live long enough and are rich enough will splash out for health care. Another sign of abundance, not the opposite. 
  • BennyProfane
    Dec 15 02:37 PM
    "I am also grateful for all of it, and know I've never had it better."

    Well, bully for you. Hey, I'm doing OK, too. Much better than I deserve, considering. But I suspect this is an echo chamber right now of privileged white males crowing. Back off a bit and look around you, unless all you do is live in the isolation of expensive RE where everybody is as well off as you, and don't have to use messy, smelly mass transit. Take a drive to the other side of the tracks in that Range Rover. Lock the doors, though. You may be surprised at what you find. But, you'll probably blame them for being so downbeat and full of pessimism for their situation, right? 
  • DigDeep
    Dec 15 04:52 PM
    "and no, the reason"....when you're ready for a reality...or real world check, look up GMO plants (~90% of the US corn and bean crops) with health & soil 'unintended consequences'.

    Try fishing in the gulf of mexico from the mouth of the MS river, in the dead zone the size of MA from Midwerst Ag run-off, and get back to me on your abundant harvest.

    You're one of the sharpest finance guys on the site. Hope your ego doesn't encompass all of humanity. 
  • The Cynic
    Dec 16 09:30 AM
    Some balance is needed to your comment even though I don't dispute your assertion about rising pay. What it fails to mention is rising costs or inflation too.  
    Are people better off now than a century ago? Most likely. But maybe it's not quite as better off as you portray. 
  • JasonC
    Dec 16 11:55 AM
    "Most likely. But maybe it's not quite as better off as you portray."

    See, this is what I would call just staggering ingratitude and pessimism. 100 years ago, life expectancy in the US was 50 years; there were no antibiotics; middle aged men and women routinely died of tuberculous and other infectious diseases; cars were in their infancy and owned only by the class of people who own Lear jets today; "computer" was a job description of a clerk who sat at a desk and added numbers all day long; women could not vote; the south was segregated; real income per person was less than a fifth what it is today; a starting wage was 7.5 cents an hour; Henry Ford was shocking everyone with his new high wage policy - of $5 a day. And oh, a world war had just broken out in the heart of civilization, that was killing young men by the millions.

    It takes a heart of stone to look back then and around now, see the contrast, and not be overwhelmed at our blessings. 
  • The Cynic
    Dec 17 09:09 AM
    I'm not called "The Cynic" for nothing. It's not ingratitude ... I recognize what you're saying about human progresss. But the progress certainly isn't equally distributed around the world, is it?! Of course, the American survival of the fittest attitude doesn't really give a damn about equality or even fairness or even a more equitable distribution of benefits.
    Either you have very rose-colored glasses on ... or your viewpoint is very Ameri-centric. 
  • JasonC
    Dec 17 10:08 AM
    Nothing is equally distributed, not even the number of armpits everyone has. Never has been. Never before have so many people *not* been in poverty. The last refuge of ingratitude is as bankrupt as all the others. 
  • JasonC
    Dec 12 02:00 PM
    j6813f - Actually, the real unifying theme of all of it is that the dollar is flying higher like a moon rocket. QE ended and the dreaded and endlessly predicted hyperinflation and dollar collapse it was supposed to touch off, never happened. Everyone betting on that thesis and against the US dollar now knows they were wrong and has to reverse such bets. All of them. And roughly half the world has been betting on nothing else for oh, about 4 years now. 
  • j6813f
    Dec 12 02:45 PM
    I agree that dollar thesis has turned out to be wrong, but I would have liked to have seen the bond market sell off a great deal more than it did during the heyday of that thesis. 
  • ellaruth
    Dec 12 03:08 PM
    Thanks you have arrested my attention but not my market action. I will ponder?? 
  • dsorchestra90
    Dec 12 03:20 PM
    Dr Copper isn't such a Dr. For the past 2 years it has disconnected.. rather Semi-Conductors Index has lock-in-step been a much better predictor. #replaced
  • Guardian3981
    Dec 12 04:49 PM
    Foreign economies soft, dollar strong. The real question is how much negative will this be on the US? My guess, some, but not enough for US to go in recession. End result is more of the same, slow growth.  

    Commodities are priced based on worldwide factors now, not just US. In theory US demand for something can be strong or even growing yet the price can be in decline because of weak foreign economy and or US dollar value. 
  • Bill Houseman
    Dec 13 07:45 AM
    Actually, nickel's price is not collapsing, nor is aluminum's:

    World commodities are priced using an average of currency values. When the Dollar is up, as it is now, you should expect the commodity price level to be down when priced in Dollars.

    Your article is a great theory, but the facts are not as you suggest. 
  • ant21b
    Dec 13 09:08 AM
    Wrong they are declining not collapsing same thing at a slower pace.
  • yakov
    Dec 13 08:00 AM
    i breezed thru your article titles. your a doom and gloomer predicting collapse on monday, on tuesday, on wednsday, on.....

    you have an agenda. take it someplace else. 
  • ant21b
    Dec 13 09:08 AM
    Your wrong just facts are stated. 
  • 212138
    Dec 13 02:01 PM
    Yakov: Are you saying "doom & gloomers" have an agenda but you don't?
  • billcharlesdixon
    Dec 13 09:06 AM
    Really bearish, and I for one don't believe you. The 2008-2009 crash, from which we are still slowly emerging, was caused not by a commodities crash but by the bundled (worthless) mortgages sold by nonchalant banks. Of course, there were more variables involved, but the scene now is far far from the scene at that time, and the prevalent sentiment, minus this irrational sell-off in the wake of falling oil prices, is positive.  

    I would however say that we need a turnaround before the end of the year; the investor community needs to MATURELY see things for what they are and stop following gut instinct and pulling triggers that only hurt them and those around them. In a word, this horrible sell-off of the last week need not have been, but the bears were in full control. Or the chickens, if you will. 
  • 212138
    Dec 13 02:09 PM
    bcd: He didn't say a decline in commodity prices caused a selloff in equities. He simply said (paraphrasing) 'such price declines in commodities tend to preceed such selloffs and because that has happened often in the past, the current price declines ( in commodities) may be warning of a similar selloff event in equities in the (near?) future.' 
  • gphineas
    Dec 13 10:41 AM
    Commodities index has been in gradual decline since 2011, when there was mini-boom recovery from the 2008 plunge. The index is still substantially above long-term trend. (IMF data) Doesn't sound like a precursor of doom to me. 
  • Taibucko
    Dec 13 11:19 AM
    So many know so much. Res ipse loquitor. 
  • 212138
    Dec 13 02:13 PM
    I agree with the english sentence and your inference (I think!). I am guessing the latin phrase means: 'what a bunch of baloney'.
  • Rich W
    Dec 13 11:25 AM
    Who is Kim Kardashian? 
  • quantcoyote
    Dec 14 06:06 PM
    Not sure, precisely, but her appearance must foretell imminent market collapse. 
  • stockplaza
    Dec 13 02:53 PM
    Dooms Day for the last 4 years ... Wow not even right like a broken clock ..
    Your day of "broken clock" may come true at some point so you can claim glory

    How much have you lost betting against the markets last 4 years? 
  • rwdurham
    Dec 13 09:45 PM
    The SPY is off about 4 percent from an all time high. Get a grip. 
  • homard03003
    Dec 14 12:15 AM
    We are waiting for author's answer to valuable critics of his commodities index leading indicator thesis
  • James Hanshaw
    Dec 14 12:52 PM
    Has anyone noticed how natural gas use is up? It is displacing oil in many applications just as it displaced coal in power generation. The US EIA 2011 projected use for US NG by 2035 has already been surpassed. There is also growing output of renewables like wind power. That is not a sign of economic decline. 
  • Taibucko
    Dec 14 01:49 PM
    Wait until it is off 40%. Then you'll get the grip. 
  • stockplaza
    Dec 14 11:15 PM
    How long you have been fear mongering that dude? Time for you to get grip. S&P is damn cheap relative to corp. earnings and low interest rates. Even if SPX gets a PE of 25, it is still cheap relative to 2% 10 year yield. 

    If RISK FREE yields are 2%, then the risk assets can trade meaningfully higher PEs 
  • nblumstein
    Dec 14 11:03 PM
    Absolutely no basis for your doom and gloom predictions. Odd that you do not rebut any of the comments posted. What is going on in the world is a deleveraging that is the result of the 2008 bust. This deleveraging is making the dollar strong, commodity prices lower, interest rates lower and stock prices higher.
    The US has adopted well to the deleveraging. Europe is about to embark on a liquidity cure,Japan will turn the corner. Russia is a different story and is due for an agonizing rebalancing China will be fine. 
  • stockplaza
    Dec 14 11:25 PM
    nblumstein - you got a good grip on what's happening ... don't let the idiotic scare mongers who missed the rally of last 5 years or lost their shirts shorting the markets last 5 years scare you out.

    OIL is down not so much on fundamentals but more so the drop is needed to score some geo-political victories. The day when and if Russia falls out and Putin backs out of Ukraine, expect OIL to rally sharply. The demand for OIL has not dropped 40% suddenly and 2M bpd cuts (excess supply) can be cut which equates to 2% of the demand. Is it better for them to reduce supply 2% or take a price cut of 40%? 
  • nblumstein
    Dec 15 10:43 AM
    Stockplaza - Do you remember the BP oil spill in the Gulf. Did you see the gusher of oil coming out and unable to be plugged for a couple of months. There is a possible thesis that the world has between 100 - 250 years of oil reserves.
    No reason for oil prices to strengthen in fact I think the price will go significantly lower. XOM and CVX showed annual profits of 30 billion and 20 billion respectively, probably the highest returns next to APPL. No reason for that kind of return on investment. They can survive with lower oil prices, Remember the price of oil in the 70s was $3.00/barrel. Low oil prices will affect certain highly leveraged oil sectors and certain countries oil dependent such as Russia, Venezuela ,Nigeria etc. But on the whole the world will prosper with low oil. Inflation will stay low and interest rates will stay low. 
  • stockplaza
    Dec 15 05:27 PM
    nblumstein - yes, for all net OIL importing companies (majority of countries in the world) - the falling OIL prices are a boon. These economies include the US, China, India, etc. all major economies.

    It is BAD for OIL exporters whose budgets are tied to $100 OIL price. It was like California economy of dot com bubble for them. Once dot com burst, CALIFORNIA came into the brink of BK and the liberals there had hard time cutting the FREE dole outs or teacher unions from robbing the state. Now Russia or Nigeria had to go through what CA had to after dot com burst.

    Right now the markets are worried on spill over effects of economies like Russia crashing or the Junk bond defaults of energy companies in the US etc. and that's why SPX is going down on such fears. But make no mistake, the falling OIL prices are NET positive for the economy and consumers worldwide and the US and particularly so for economies in India and China. It is a MAJOR boon for them.

    Once the OIL trades settle down to new normal OIL prices at $50 a barrel, SPX will stabilize and spring back to new highs IMO.

    More importantly the DEMAND for OIL is growing year over year at a respectable level. It is not the DEMAND has fallen off like 2008. What caused the IMBALANCE is SUPPLY growth exceeding the DEMAND growth. This is a KEY difference here. Over SUPPLY (due to massive production) does not mean the DEMAND has fallen. Its like SUPPLY went from 100 to 110 while the DEMAND still rose from 100 to 105 leaving a gap of 5. This will get adjusted once the RETAIL is robbed by hedgies who are fear mongering now to cause FEAR and SHAKE out! 
  • stockplaza
    Dec 15 07:02 PM
    One got to watch this video of Peter Schiff - in which he says "he is a better barometer" predicting $200/barrel oil prices. He also says "high oil prices" are bad implying "lower oil prices" are good for the US economy. Here we go, "lower oil prices" .. instead of OIL going to 200 - they went down to 55. 

    Peter Schiff was another of these doomsayers predicting doom for years and his broken clock has not come true of the last 5 years (I think he was right one out of 10000 calls he made or something like that based on interviews I saw of him)