Author Archives: Scalper1

Heading Into Winter, Propane Sales Look To Repeat 2014 Results

Summary Propane distributors like Suburban Propane and AmeriGas Partners count on the next few months for substantially all their income. With propane supply near all-time highs, wholesale prices have fallen through the floor. Consumers look to benefit this year, but pricing spreads indicate a repeat of 2014 results. The early indicative data for propane distributors such as Suburban Propane (NYSE: SPH ) and AmeriGas Partners (NYSE: APU ) is a mixed bag heading into the incredibly important winter season. This period running from November-March of each year is an incredibly stressful time for these propane distributors, who derive substantially all of their operating income during the winter heating season. The first hurdle for these companies is the weather. The chance of a deep winter chill currently looks decent for some areas of the United States and mediocre for the rest . Most meteorologists forecast above average temperatures for the Northeast, with below average temperatures for much of the Southeast and East Coast. As the South and Midwest form the largest markets for propane, these forecasts end up being a mixed bag and are hard to call as solidly favorable in one direction or another. (click to enlarge) * Source: EIA.gov From a market perspective, available supply of propane continues to peak well above long-term historical averages, due to the significant bounce in production of the commodity from ever-increasing domestic production. Shortages that were widespread in many markets in 2014 seem unlikely to repeat themselves this time around. This excessive supply has brought wholesale and residential propane prices down, yielding what should be solidly lower prices going into this year’s heating season for consumers. This is a bright spot for those that count on propane to heat their homes, but what does it mean for propane distributors? Fixed Margin Pressures Usually, low propane prices provide a boost for propane distributors like Suburban Propane and AmeriGas Partners. All else equal, low propane costs increase the demand for their products and protects against customers switching to alternatives, such as heating oil or electricity. With propane and other alternative heating fuels more commonly used among rural homes with lower annual incomes, these consumers are much more cost sensitive to price changes than the heating markets served by traditional utilities. Propane distributors, while keeping that fact in mind, still try to maintain a fixed spread between the wholesale and residential cost of propane. This is where they can derive their profit, and we can see the results of that in a comparison from 2014 to 2015 below. (click to enlarge) Trying to protect this fixed margin per gallon is why we see the current market situation in propane today with resiliently high residential propane prices. While wholesale propane prices are down 46% from a year ago according to EIA data, skirting along at $0.50/gallon in 2015 from $0.93 gallon in 2014. Residential prices have remained stubbornly high in the meantime, and are only down 19% year/year. In my opinion, wholesale prices in the U.S. cannot fall much further, so this year will be as good as it can get for propane consumers. At these prices, it is barely worth it for producers to ship, store, and market it for sale. Look for propane exports to increase, as unlike natural gas, propane is more easily shipped abroad for sale, and these price declines make exporting increasingly attractive. (click to enlarge) Heating oil, a chief competitor of propane, looks more profitable going into the winter of 2015/2016. The profit spread is up, but heating oil is primarily used in the Northeast , where it heats nearly 30% of all households. If we remember our 2015 weather forecast data, this area is at this point expected to be a little warmer than usual. The demand may not simply be there for the product compared to 2014. Conclusion With margin spreads down and supply up, propane producers are counting on a chilly winter to drive some additional demand to make up the difference. Without old man winter swirling up some unexpected cold, investors should expect operating income flat to slightly down from 2014 levels. Suburban Propane has the most opportunity for surprise earnings upside over 2014 due to its heating oil exposure, but only if the Northeast comes in much colder than expected. Heating oil is set up to be better currently year/year, and with supply running at long-term averages, a cold shock in the Northeast could drive significant demand for the company.

EWZ – November Review: The Political Crisis Deepens

Summary Share price of the iShares MSCI Brazil Capped ETF declined by 1.53% in November. The development was driven mainly by the political factors. The economic situation of Brazil is worsening, the political crisis is deepening and the financial markets would welcome the fall of president Rousseff. The iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) lost 1.53% of its value in November. Although it was up by more than 11% at one point, it lost all of its gains during the last days of the month, as the political crisis deepened and investors started to fear that the government will be unable to enforce the needed economic reforms and budget cuts. The economy is still in a bad shape, the latest data show that it declined by 4.5% y-o-y in Q3, which is worse than expected. The unemployment rate is at 7.9% and growing and inflation is in the double digit area. Shares of the beverages producer Ambev (NYSE: ABEV ) are still the biggest holding in EWZ’s portfolio, with weight of 10.61%. Ambev is closely followed by preferred shares of Itau Unibanco (NYSE: ITUB ) (10.24%). Besides Ambev and Itau Unibanco, only preferred shares of another bank, Banco Bradesco (NYSE: BBD ), have weight over 5%. The 10 biggest holdings represent 61.47% of the portfolio, which is slightly less, compared to 62.22% in October. Generally, no significant changes in the structure of EWZ could be observed in November. Only common shares of Vale (NYSE: VALE )are not among the TOP 15 holdings anymore, as their value declined sharply after the disastrous dam collapse . Source: own processing, using data of iShares.com Out of the 15 biggest EWZ holdings, the biggest gains were recorded by Fibria Celulose (NYSE: FBR ) in November. The credit rating of the pulp and wood producer has improved, it has completed the financial package for its Horizonte 2 project and it declared a dividend that will bring to its shareholders dividend yield over 7%. Shares of the company grew by 8.72% in November. Shares of the Brazilian airplane producer Embraer (NYSE: EBR ) jumped by 7.5%. For Embraer, November was the third consecutive month of very big gains. On the other hand, November was very negative for Vale. After the dam collapse, shares of the miner declined strongly. Preferred shares of Vale lost almost 25% of their value. (click to enlarge) Source: own processing, using data of Bloomberg The traditionally high correlation between EWZ and Petrobras (NYSE: PBR ) share price was disturbed during the first two weeks of November, although it increased back to its normal levels in the end of the month, after the corruption scandal became one of the main topics of discussion again. Also, the correlation between EWZ and oil prices (represented by the United States Oil ETF (NYSEARCA: USO )) and between EWZ and S&P 500 was relatively low or even negative during the better part of the month. One could say that the Brazilian share market lived its own live and the share price development was driven by the political situation in the country and by the efforts to enforce the austerity measures. (click to enlarge) Source: own processing, using data of Yahoo Finance November was a relatively calm month for EWZ. Although the EWZ share price was up by 11% only a couple of days before the end of the month, but eventually ended the month with a 1.5% loss, the overall volatility measured by the 10-day moving coefficient of variation was lower compared to most of the 2015. It moved in the 1%-3% range for the better part of November, however it broke out of this range in the last days of the month. Given the early December developments, December will be probably more volatile compared to November. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: Fibria announced that the estimated capex for the Horizonte 2 Project has been revised from $2.5 billion to $2.2 billion. The expenditures will be funded by a combination of its own cash, Agribusiness Receivables Certificates and credit facilities, the estimated average borrowing cost is only 2% p.a. The company also announced that Moody’s has improved its credit rating from Ba1/Positive to Baa3/Stable. Fibria will pay a dividend of approximately $0.96 per shares, which means a dividend yield of over 7.2%. On November 5, a disaster occurred in southern Brazil. A tailings dam owned by iron miner Samarco collapsed and more than 60 million cubic meters of toxic mud destroyed the town of Bento Rodrigues and contaminated the Rio Doce river. Samarco is a 50:50 joint venture of Vale and BHP Billiton (NYSE: BHP ) and the disaster had a significant impact on share prices of both companies. According to the latest news, Brazil sued Samarco for $5.3 billion over the spill. Cemig (NYSE: CIG ) won generation concessions for 18 hydro plants with total installed generation capacity of 699.57 MW. The new concessions should partially offset the probable loss of the Jaguara and Sao Simao concessions with total installed capacity of 2,134 MW. Companhia Siderurgica Nacional (NYSE: SID ) together with an Asian consortium consisting of ITOCHU Corporation ( OTCPK:ITOCY ), JFE Steel Corporation, POSCO (NYSE: PKX ), Kobe Steel ( OTCPK:KBSTY ), Nisshin Steel ( OTC:NSSSY ) and China Steel Corp. ( OTC:CISEY ) combined some of their assets into a new company Congonhas Mineiros. The new company will consist of an iron ore mine, railroad and port and it will be 87.52% owned by CSN and 12.48% owned by the Asian consortium. A prominent member of the ruling Workers’ Party, senator Delcidio do Amaral, was arrested due to his participation in the Petrobras related corruption. Amaral is a close collaborator of president Rousseff. His arrest further supported the voices calling for Rousseff’s impeachment. Conclusion As the early days of December showed, the Brazilian share market is still strongly affected by the Petrobras corruption scandal and the related political crisis. On December 2, the impeachment proceedings against president Rousseff opened in the lower house of Congress. As a result, the EWZ share price jumped by almost 6% in two days. The financial markets welcomed the vision of a government change and if further developments indicate that Brazil will be able to get rid of Rousseff, EWZ will grow further.

Possible Shutdown, Yellen And Volatility

Summary An update on the current volatility landscape. Possible backwardation scenarios. A look at how previous events have effected UVXY. There has been talk, from both sides of a government shutdown. This article will look back on the recent shutdown and how that effected volatility. For the basis of discussion, we will use the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ). We will also examine the recent Federal Reserve commentary and how that could also affect December volatility. Previous Shutdown The last time the U.S. government shutdown was on October 1, 2013. In the history of the U.S. there have been several funding gaps and government shutdowns due to issues from abortion, the budget deficit, health care, and general political showmanship. In the weeks leading up to the last shutdown the front month VIX futures contract traded between $14-$15 (it currently trades around $18), roughly speaking. It climbed and peaked at a closing price of $19.40 on October 8, 2013. In the weeks following the resolution front month futures quickly settled back to the $14-$15 area. See below for a charts on how UVXY reacted during the 2013 shutdown: (click to enlarge) Current Situation One important fact to note is that 2016 is an election year. 2013 was the year after an election year. Bold and risky political decisions are usually made when the repercussions have more distant consequences. I believe the current situation is nothing more than the political showmanship and bickering that we have seen over the past decade. In the end there will probably be a last minute deal that doesn’t solve any of the real problems and kicks the can down the road for someone else to take care of. The Federal Reserve Janet Yellen has single-handedly been volatility’s best friend the last several years, with one exception. That exception was the August meeting where markets were expecting a signal on rate increases and nothing happened. Why would Janet do this? She knew that’s what the market wanted and has followed their demands for so long that it should have been a no-brainer (satire). This spooked the markets and caused a major spike in volatility which hadn’t previously been seen since 2011. At the September meeting nothing happened again and there was another small increase in volatility. Markets were spooked because they now view the Federal Reserve rate increases as a predictor for the strength of the economy. If the economy was healthy and inflation was expanding at a more robust pace, rates would already have been raised. However, time after time global economic weakness and slack in the labor market continue to be cited as cause for concern. See below for the UVXY reaction during those events: Conclusion We once again approach a potential, but unlikely, government shutdown at the end of next week. After that Yellen is back up to deliver the final bit of big news before Christmas. Will Yellen be naughty or nice to the markets? I am focused on a 0.25% increase in rates and Yellen’s comments on the overall economy. Markets will be focused on comments relating to the pace of future increases. If you are a regular reader, we discussed an increase in volatility throughout the second half of 2015 and into 2016. We certainly have seen that uptick and I continue to expect increased volatility levels due to the level of uncertainty in the markets. There are currently many unanswered questions about the economy and what I view as the new normal of slow growth. Job growth continues on its positive track and has been the bright spot in the overall economy. I am working on a very interesting piece that focuses on the psychology behind volatility and how irrational moves by others can make rational gains for your investment account by using volatility ETFs such as UVXY. For more information about UVXY, I recommend viewing this article that gives a beginners guide to the unleveraged version of UVXY, which is the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ). We have two more weeks until school is out for break and I look forward to relaxing with family. I hope you have the opportunity to as well and wish your family a very happy and prosperous holiday season and new year. My current advice is to stay patient and up to date with current events. Keep a keen eye on U.S. economic indicators heading into 2016. It wouldn’t take much to move this economy into negative territory which creates perfect opportunities for exaggerated irrational behavior. It is a risky time to be involved with both inverse and long volatility products such as UVXY. I would remain on the sidelines and wait for a clearer opportunity of shorting volatility to present itself (for more information on my theory of only shorting volatility and when to do it, view this article ). If backwardation levels rise over 5%, then I will begin to pay attention to what is happening. Ultimately in this environment I would expect a maximum backwardation event of around 20% (excluding a war). Let August be your guide as to how quickly this market will hit the panic button. For now just sit back, relax, and don’t do anything greedy until the right opportunity presents itself. As always, thank you so much for reading and we will speak again soon.