Author Archives: Scalper1

Materials ETFs Surge On Dow Chemical, DuPont Chemistry

The latest merger talks between chemical giants Dow Chemical (NYSE: DOW ) and DuPont (NYSE: DD ) might provide a fresh lease of life to the long-ailing material sector. This is especially true as total earnings from the basic material sector were down 18.8% on 214.4% lower revenues as of December 4. The potential merger is rumored to be worth about $130 billion and split the business of the new entity into three new, per sources , namely material sciences, specialty products and agrochemicals. As of December 9, Dow had a market cap of $66.01 billion, while DuPont had a market cap of $65.28 billion. The news was brought to light by The Wall Street Journal . However, there is no assurance of the merger and talks could even disintegrate. If at all the deal is cracked, it would require regulatory clearances in several countries, per Reuters. No comment was made by either of the concerned entities. Both firms are striving to cut their underperforming assets and are gradually shifting to the high-growth areas. In the latest concluded third quarter, Dow Chemical maintained its streak of earnings beat for eight successive quarters. Strong performance by the Plastics segment backed by a lower cost of raw materials like oil and natural gas drove this outperformance. Dow Chemical also raised its quarterly dividend by 10% to 46 cents, which is the highest in the company’s history, reflecting its core strength. However, Dow’s farm chemicals and seeds unit is reeling under pressure for about a year. On the other hand, DuPont beat earnings estimate on cost containment, but its revenues and profits slipped on a strong dollar as the company is heavily exposed to international markets and a soft agriculture business due to soft demand for crop protection products, per Reuters. In such a situation, joining forces would be a win-win case as the duo can cash in on each other’s strength. CNBC estimated a cost synergy of $3 billion from the likely merger. As soon as the news became viral, Dow and DuPont shares climbed about 11.9% each on elevated trading volumes. Plus, Dow Shares advanced about 0.6% after hours of December 9, while DuPont shares returned about 0.1%. Dow shares rose on 4.3 times the regular volume, while DuPont rose on 3.8 times the daily volume. Dow Chemical has a Zacks Rank #2 (Buy) and has a Value score of ‘B’ and a Growth score of ‘A’ despite hailing from a sector which is in the bottom 25% in the Zacks universe. DuPont has a Zacks Rank #3 (Hold). Solid price performance by these two chemical bellwethers led to a rally in material ETFs that are heavily invested in these two stocks. Though these funds have an unfavorable Zacks ETF Rank of 4 or’ Sell’ rating, they gained in the range of 2.1% to 3.3% on December 9 and are on investors’ radar for the weeks ahead. Materials Select Sector SPDR (NYSEARCA: XLB ) The most popular material ETF follows the Materials Select Sector Index. This fund manages about $2.18 billion in its asset base and trades in heavy volume of around 7.5 million. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 30 securities in its basket with DOW and DD taking the top two spots, with over 11% allocation each. In terms of industrial exposure, chemicals dominates the portfolio with three-fourth share, while ‘metals and mining’ and ‘containers and packaging’ round off the top three positions. XLB is off about 6.4% so far this year (as of December 9, 2015) but rose over 3% post the news. iShares U.S. Basic Materials ETF (NYSEARCA: IYM ) This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 53 stocks in its basket. The fund has AUM of $353 million and charges 43 bps in fees and expenses. Volume is good as it exchanges around 106,000 shares a day. DOW and DD occupy the top two positions in the basket, with over 11% of assets each. The product is heavily skewed toward the chemical segment, as it makes up for more than three-fourths of the portfolio while steel, ‘forestry and paper’, ‘metals and mining’ receive minor allocations to IYM. The fund is down 10.7% year to date (as of December 9, 2015), but jumped over 3.3% in the key trading session. Vanguard Materials ETF (NYSEARCA: VAW ) This fund has amassed about $1.1 billion in its asset base and offers exposure to 120 stocks by tracking the MSCI U.S. Investable Market Materials 25/50 Index. The ETF has 0.12% in expense ratio. Here, DOW and DD are the top two firms accounting for nearly 8% share each. Chemicals make up for nearly 70% of assets, while ‘container and packaging’ and steel also make a nice mix in the portfolio. The fund is down 8.9% in the year-to-date frame (as of December 9, 2015), but added over 2.1% following the merger news. Fidelity MSCI Materials Index ETF (NYSEARCA: FMAT ) This fund provides exposure to more than 120 materials stocks with AUM of $68.8 million. This is done by tracking the MSCI USA IMI Materials Index. Here too, DOW and DD are the top two firms with nearly 8% allocation. Chemicals accounts for 69.7% share, while ‘container and packaging’, and ‘metals and mining’ round off the top three spots with double-digit exposure each. The ETF has 0.12% in expense ratio. The fund was up about 2.3% on December 9 but has lost 8.8% so far this year. Original post .

5 Sector ETFs For December

So far, the month December has been downbeat for the U.S. market with the S&P 500 and Nasdaq Composite Index losing about 2.6% each (as of December 9, 2015) and the Dow Jones Industrial Average shedding about 2.2%. The commodity market rout instigated by fresh oil lows, the possibility of a Fed lift-off in a few days, the persistent slump in Chinese economic indicators, milder-than-expected generosity from ECB regarding the stimuli in the Euro zone, a strong greenback and depreciating emerging markets have set the backdrop for this investing lull. People are speculating hard about what the potential bet could be at this point of time, given the above-mentioned deterrents. Since equities are in the negative territory, hearsay is rife that there may not at all be any sector winner this month. For them, below are five sector ETFs which could be in watch for the rest of this month. The sectors have been chosen as per the Zacks Market Strategy. Semiconductor – Market Vectors Semiconductor ETF (NYSEARCA: SMH ) Since the second half of 2015 marked the rebound of tech stocks, semiconductors can’t be far behind. The semiconductor market will be propelled by smartphones and automotive in the coming days. As car sales are soaring and consumers are binging on tech gadgets this holiday season, demand for semiconductors should surge. Moreover, some analysts believe that the PC market is set for a rebound, helping companies like Intel (NASDAQ: INTC ). Meanwhile, the semiconductor titan Intel hiked its dividend and provided a bullish outlook for 2016. Impressive Q3 earnings are also driving this sector. In the last one month (as of December 9, 2015), the fund gained over 2.5%. Medical Devices – iShares U.S. Medical Devices ETF (NYSEARCA: IHI ) Though the healthcare sector has confronted a number of issues regarding steep pricing on drugs, overvaluations of biotech stocks and the future of ObamaCare, the sector sailed through pretty smoothly. The medical sector has seen earnings rising 15.2% on 9.7% higher revenues in Q3, with 80.8% of the companies beating EPS estimates and 59.6% surpassing on revenues. In the sector, medical products seem the most stable if we consider both earnings and revenue growth of 13.4% and 12.2%, and beat ratio of 71.4% and 61.9%, respectively. As much as 86% of the fund is invested in healthcare equipment followed by life sciences tools & services (12.84%). The fund has a Zacks ETF Rank #1 (Strong Buy) and was down 1.4% in the last one month (as of December 9, 2015). US Global JETS ETF (NYSEARCA: JETS ) Development in the airline industry is rampant these days. Busy traffic on improving travel and business demand, restructuring indicatives, stepped-up ancillary revenues, limited capacity growth and most importantly rock-bottom oil prices have put the spotlight on this area. Fuel accounts for a large portion of airlines’ operating expenses and the possibility of soft oil prices for longer has helped the sector to battle headwinds like a stronger dollar and global growth worries. The sole airline ETF JETS might have lost 1.1% in the last one month (as of December 9, 2015) on the November Paris terror attacks which resulted in lower tourism; but is due for a reversal in the coming days. KBW Premium Yield Equity REIT Portfolio (NYSEARCA: KBWY ) The interest-rate sensitive REIT sector might underperform once the Fed enacts a lift-off, but the underlying fundamental for the area is quite strong. As demand for housing picks up in the U.S., and the economy rebounds, the requirement of establishment rises and so does rent. So, income for REITs should go up. Notably, when rates rise on the back of a pickup in the economy, REITs outperform. As per reit.com , “in the 16 periods since 1995 when interest rates rose significantly, Equity REITs generated positive returns in 12.” Finally, REITs are strong dividend vehicle. The fund KBWY yielded 5.59% as of December 9, 2015 which is way above the current benchmark U.S. treasury yield of 2.22%. The fund has a Zacks ETF Rank #3 (Hold) and was flat in the last one month. SPDR S&P Retail ETF (NYSEARCA: XRT ) Traditionally, December is the month for retail and discretionary purchases. Though shopping euphoria has subdued a little among cautious consumers in recent times, spending on apparel, accessories, footwear and tech gadgets is still high thanks to the holiday season. As a result the Zacks Rank #1 XRT should be closely watched. The fund has 22.3% exposure in apparel followed by 16.4% in specialty stores and 15.4% in automotive retail. However, XRT was down 3.6% in the last one month. Original Post

Portfolio Diversification Strategy During The Fed’s Rate Hike Cycle

Summary Where the Fed, analysts and the market see the Fed funds rate and when. What we’re trading and how to capture the move higher in the Fed Funds rate. How to experiment with any potential outcome for this fully disclosed Fed Funds Trade. HCB Stocks & trading strategy, which I believe will offer a superior return on risk during the rate hike cycle. I believe diversification and objective risk control will be essential during the next 36 months as the Fed gradually hikes rates. My objective of this report series is to introduce new sectors and strategies to capture the major market moves being generated by current extreme economic fundamentals. As opportunities develop in metals, energies and currencies I’ll share what I’m doing in these sectors and how. I encourage your comments on sectors and trades your in with similar or higher returns on risks. The goal of this report series is generating POSITIVE dialogue among fellow TRADERS who share the objective of finding the most effective solutions to the problem of making money. It’s not set up for tradeless academic master debaters who can subjectively criticize but can’t offer objective facts to support their opinion or a solution. In this report I have provided strategy to capture the move higher in the Fed Funds rate over the next 13 months . I’ve also included 11 HCB stocks (high cash buffers) that could benefit from higher rates and included defined risk strategy on how to trade them during the rate hike cycle. The first rate hike in 10 years is on deck in 5 days (16 December 2015). Using this fully disclosed strategy even if the Fed is wrong about the Fed Funds rate the Fed sets, there is no hike on 16 December 2015, this position is structured to maintain and capture any future rate hikes over the next 9 FOMC meetings through 31 December 2016. Last objective guidance where Fed Chair Yellen sees the Fed Funds rate and when (video 1:59) Source Federal Reserve What the move is worth Current contract value = $552 (cash market 0.1325%). Fed projection by December 2016 = $7,500 (1.8000%). Fed projection by December 2017 = $13,125 (3.1500%). Probability = 85.30% for 16 December 2015 . Source Chicago Mercantile Exchange Click here for more information on what this rate is and how it’s set. One simple trade to capture the move higher in the Fed Funds rate through 31 December 2015 . Trading the Fed Funds rate higher requires establishing a short position in the underlying futures contract . To convert the contract price into the rate it represents Take 100.00 – the contract price = the rate. Example 100.00 – a contract price of 99.46 = a rate of 0.54%. Each 0.01 change in price = $41.67 change in contract value. Position Short at 99.46, the December 2016 CME futures contract (ZQZ16) Trading this rate higher from 0.54% Contract value = $2,250 Objective The Fed’s target by 31 December 2016 Contract price = 98.20 Rate = 1.80% Contract value = $7,500 Click here to enlarge the rate, price, valuation chart below Current chart and quotes To experiment with any potential outcome for this trade. Click here and open the interactive risk reward spreadsheet Watch the 5 minute video linked below on how to use it As this position appreciates we’ll update its performance and share hedging strategy/updated spreadsheest showing you how we’re locking in gains. This trade was originally posted on Seeking Alpha 12 October 2015 . Federal Open Market Committe meetings schedule & Fed statements The last tightening cycle from 1.00% June 2004 to 5.25% June 2006 Stock diversification strategy during the rate hike cycle Below are 11 companies that have built sizable cash buffers and links to monitor them on SA moving forward: Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ), Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Pfizer (NYSE: PFE ), Cisco (NASDAQ: CSCO ), Goldman Sachs (NYSE: GS ), Moody’s (NYSE: MCO ), Oracle (NYSE: ORCL ), AT&T (NYSE: T ), AbbVie (NYSE: ABBV ) and JPMorgan Chase (NYSE: JPM ). From past ratios and what I’m seeing between interest rate hike expectations through December 2018, relative to stock price change, it appears rate hikes might actually fuel these stocks higher. I’m trading these stocks using “collars” to define my risk on all trades and for the duration of every trading period. Example of a “collar” to define risk: Own 1,000 shares of GOOGL at $745 Write the $800 call collecting premium (1,000 shares) Using the collected premium buy the $700 put (1,000 shares) Trade outcomes 1) The market stays the same, if you set the trade up right you should be collecting approximately as much time value on the $800 call you’ve written against your $745 long position as you’ve spent on the purchase of the $700 put to hedge the position. In some scenarios you’ll actually have a credit. 2) Market sells off hard to $500, your loses below $700 are negated by the put you’ve purchased at $700. At $500 you can offset the put for a $200 profit and reestablish a new hedge by buying a new put at $500 lowering your entry cost by $200. Your new average entry price has now dropped from $745 to $545 making recovery more obtainable. 3) The market continues to move higher and the position is called away at a profit at $800, you can always reestablish it. Click here for more on Seeking Alpha on why we’re trading these high cash buffer (HCB’s) stocks and how.