Author Archives: Scalper1

Health Of Eurozone Recovers: ETFs To Watch

The eurozone is showing signs of a speedy recovery, as evident from the four and a half year high expansion in its business activity for the month of November. According to a flash estimate by data firm Markit, the eurozone purchasing managers’ index inched up to 54.4 this month from 53.9 in October . This surpassed the threshold score of 50, which hints at an expansion in activity. The growth profile has weakened in recent times in the eurozone, failing rounds of monetary easing. The bloc recorded 0.3% growth in Q3, declining from a 0.4% rise in Q2 and falling short of market expectation. The growth rate in Q3 was the softest in a year as development cooled down in the eurozone’s heavyweights Germany and Italy. In such a backdrop, the news of fast-expanding business activity spread optimism among investors. New business growth was noticed in both service and manufacturing sectors. Germany turned up a super performer as companies experienced “their strongest monthly gains in new business orders for two years”. The boost has come at an opportune moment, when the ECB is mulling over further easing in policies to boost inflation and economic growth. The European Central Bank (ECB) president, Mario Draghi, reassured of a more intensified and protracted QE measure, if need be. He reaffirmed the evaluation of the monetary policy by the end of this year based on a volley of economic data. However, the latest upbeat data raises confusion over the ECB’s potential altruism in the December meeting, forcing some to believe that further easing may not be as generous as thought previously. But a stubbornly low inflation profile, thanks to the commodity market rout, gives all reasons to expect further monetary easing from the ECB. Overall, the chief economist at Markit indicated that the eurozone was “on course for one of its best quarterly performances over the past four and a half years.” Based on this data, he expects the euro bloc to post 0.4% economic growth in the final quarter of the year. Meanwhile, Greece received a bailout loan from the euro area member states as the former agreed to enact the stated austerity measures. ETFs to Watch Below, we highlight three European ETFs that could be tapped to play the latest uptick in business sentiments. To do this, we land up on currency-hedged ETFs, as this is the most-watched investing technique currently, thanks to opposing monetary policies in the U.S. and the eurozone. While the greenback is strengthening on a looming rate hike in the U.S., the euro is sliding on accommodative policies by the ECB (read: Guide to Currency Hedging ETFs ). WisdomTree Germany Hedged Equity ETF (NASDAQ: DXGE ) Since Germany was the main driver of the latest surge in business activity, German ETFs warrant a look. This German ETF holds 75 securities in its basket. It has a slight tilt toward the consumer discretionary sector, with 21.7% share, followed by double-digit exposure each in financials, industrials, materials and healthcare. It has managed assets worth $286 million, and trades in good volume of 165,000 shares a day, on average. The fund charges 48 bps in annual fees, and is up 9.6% so far this year (as of November 23, 2015). DXGE has a Zacks ETF Rank of 2 with a Medium risk outlook. WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) This fund can be viewed as a replica of the broad-based European growth. The fund appears rich, with AUM of nearly $21.3 billion. Its expense ratio comes in at 0.58%. Holding 130 securities in its basket, the product is pretty well spread out across components, with no firm making up for more than 6.19% of its assets. Consumer staples, industrial, consumer discretionary, financials and healthcare each have double-digit weight in the fund. In terms of country allocations, Germany and France are leading with 26.1% and 24.2% share, respectively, followed by the Netherlands (17.2%) and Spain (16.5%). The Zacks Rank #3 (Hold) fund is up 11.2% so far this year (as of November 23, 2015). WisdomTree Europe Hedged SmallCap Equity ETF (NYSEARCA: EUSC ) Since small-caps companies tend to pick up more when an economy improves, a look at the small-cap European companies seems justified. The fund provides exposure to close to 237 of the smallest European companies. This ETF has amassed about $245.7 million. The product is highly diversified, with no stock accounting for more than 2.06% of the portfolio. Sector-wise, industrials get the maximum exposure, at 25.9% of the portfolio. Financials and consumer discretionary also get double-digit allocation each, while energy gets the least exposure, at only 2.35% of the basket. As far as country exposure is concerned, Italy (21.1%), Germany (17.2%), France (16.4%) and Finland (13.1%) get top priority. The fund charges 58 bps in fees, and is up about 1.6% so far this year. Original Post

The 4 Horsemen Of Southern Utilities, Revisited

Combined, these four utilities service over 22.8 million customers in 11 states. These states represent some of the best for regulatory friendliness to utilities, an important fundamental for all utility investors. The Southeast’s economic growth has lagged the national average, but the recent growth curve appears to be favoring this region. In March 2013, I penned an article that suggested owning four utilities servicing the southern states. These were Southern Company (NYSE: SO ), Dominion Resources (NYSE: D ), Duke Energy (NYSE: DUK ), and SCANA Corp. (NYSE: SCG ). There is still good reason to implement this strategy. The first is the geographical territory covered by these. Combined, the geography stretches from Virginia to Mississippi and from Florida to Indiana and Ohio. A basic concept for utility investing is: It’s all about location, location, location. After SO gobbles up AGL Resources (NYSE: GAS ), these four will service a combined 22.8 million customers. Below is a list of states covered by each firm: Southern Co.: Mississippi, Alabama, Florida, Georgia, and soon to add Arkansas with the AGL merger Dominion Resources : Virginia, West Virginia, and Ohio Duke Energy : Florida, South Carolina, North Carolina, and Indiana SCANA Corp. : South Carolina, North Carolina, and Georgia These states represent areas of improving economic growth. Over the past four years, the Bureau of Economic Analysis has pegged the average annual growth in the Southeast at 1.3%, after getting a slow start in 2011 at a sub-par growth of 0.6%, or less than half the 2011 national average. In 2014, the percent change in GDP for the Southeast was 1.7%, still slightly worse than the national average of 2.2%. However, the percentage growth trend line is one of the best in the country. From a regional growth perspective, the Southeast has improved from last in 2011 to fourth out of eight in 2014. Continuing regional and national outperformance in key service states of Georgia, Florida, South Carolina, West Virginia, and Ohio will offer better organic opportunities for these utilities. Personal income annual growth has been approximately the same as the national level at a four-year average of 3.75%. Population growth has been strong at 12% above the national average at 0.9% a year. Below is a graph of GDP growth by state offered by the BEA. (click to enlarge) These four utilities cover states that are usually considered healthier for regulatory oversight. The credit side of S&P offers an assessment of the regulatory environment as their friendliness, or lack thereof, has an impact on the credit worthiness of regulated utilities. Pre-2014, S&P offered a four-category grouping (More Credit Supportive, Credit Supportive, Less Credit Supportive, Least Credit Supportive), but since changed to a three-category grouping (Strong, Strong/Adequate, Adequate), which is a bit less precise. However, it is still a meaningful comparison of the 10 states listed above. Southern Co.: Mississippi (Adequate, Credit Supportive), Alabama (Strong, More Supportive), Florida (Strong, More Supportive), Georgia (Strong/Adequate, More Supportive), and Arkansas (Strong/Adequate, Credit Supportive) Dominion Resources: Virginia (Strong/Adequate, Credit Supportive), West Virginia (Strong/Adequate, Less Supportive), and Ohio (Strong/Adequate, Credit Supportive) Duke Energy: Florida (Strong, More Supportive), South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Indiana (Strong/Adequate, More Supportive) SCANA Corp.: South Carolina (Strong, More Supportive), North Carolina (Strong, Credit Supportive), and Georgia (Strong/Adequate, More Supportive). On average, Duke and SCANA have better regulatory profiles than Southern and Dominion. Below are S&P Credit post- and pre-2014 utility regulatory assessments by state: (click to enlarge) Source: S&P Credit (click to enlarge) Source: S&P Credit Below is a table comparing various stock fundamentals for each of the four horsemen: Source: Guiding Mast Investments, reuters.com, morningstar.com Since 2013, Dominion’s equity rating fell one notch while SCANA’s increased one notch. Southern Company’s credit rating fell by one notch and Duke’s increased by the same amount. From the table above, the PEG ratio indicates the better value seems to be Dominion and SCANA while Southern and Duke have the highest yields. Dominion and SCANA’s trailing 12-month return on invested capital, ROIC, is higher than their respective five-year averages, indicating improving capital management. Below are fastgraph.com presentation of each of these stock’s 20-year history and current valuations: (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Below are total return performance charts of the four utilities, as offered by Morningstar.com, starting with a graph of total return of a $10,000 investment five years ago: Source: morningstar.com However, each utility has some issues. Southern Co. and SCANA share similar concerns with large nuclear power construction projects in progress. Dominion is spinning off natural gas assets into its drop-down MLP. Duke may have paid a high price for its latest acquisition as it continues to move towards a higher exposure to regulated returns. Both Duke and Southern Company are expanding their regulated businesses by buying more natural gas customers in existing service territories. Within the realm of underlying consolidation trend in the utility sector, three of the four should remain the acquiring companies while SCANA could be an acquired company, especially after its large construction exposure diminishes over the next few years. For example, with an enterprise value of $15 billion, SCANA could be absorbed by any of the other three. Overall, utility investors looking to expand their horizons should consider any or all of these four horsemen of the southern utilities. Author’s note: Please review disclosure in author’s profile.

Chile As A Proxy For Copper

Summary Copper has fallen a great deal in recent months, which means a bounce in prices is likely. Copper is extremely important to Chile’s economy, which makes it very vulnerable whenever prices go down. Chile will most likely remain weak in the near future even if copper prices recover somewhat. Prices in the commodity sector have certainly been on the decline. Of all the commodities that have seen prices go down, one of the worst affected has to be copper (NYSEARCA: JJC ). Copper has in fact been on the decline the last four years and is now down roughly 60 percent from its highs in 2011. This decline has even accelerated the last six months with prices down by a third. The two charts below show how copper has behaved the last five years and the last 12 months: Such a big decline of more than 30 percent in such a short amount of time increases the odds of a bounce in copper prices. Copper is very much oversold, and there is a good chance that prices should go up somewhat at these levels. Those who are still negative on copper may therefore be interested in an alternative, and that alternative can be found in the country of Chile. Why Chile can be considered a proxy for copper Chile is by far the biggest producer and exporter of copper. For the whole of 2014, statistics show that Chile contributed 5.8 million metric tons of copper with global production at 18.7 million metric tons. Copper makes up almost half of Chile’s total exports, making its economy highly dependent on whatever happens to copper. If copper prices go down as they have been in recent times, Chile is bound to feel the effects. Economic indicators suggest that Chile is getting weaker as copper prices are sliding. For instance, exports have been shrinking, led by the decline in copper prices, as the chart below indicates. Both the government budget and the trade balance are now in a deficit, which seems to be getting bigger as time goes by. A sharp reversal from the sizable surpluses seen in recent years: (click to enlarge) Overall, growth in Gross Domestic Product (“GDP”) is slowing down, and the economy is struggling to avoid falling into a recession. The weakness in Chile’s economy is best reflected in the exchange rate between Chile’s domestic currency, the peso, and the U.S. dollar. The peso has already lost 17.5 percent of its value in 2015 and further devaluations are very likely, if not necessary, versus the U.S. dollar. The current trend certainly does not look good for Chile. (click to enlarge) Copper prospects While copper prices may witness a bounce in the short term, if only because of oversold conditions, a return to recent highs is highly unlikely. The strong growth of copper in recent years was primarily driven by China, which now accounts for almost half of the global consumption of copper. However, growth in demand for copper in China seems to be moderating and is now only in the low-single digits. Demand for copper outside of China is much weaker. The International Copper Study Group (“ICSG”) forecasts a flat market for copper with supply and demand evenly balanced. Much will depend on what happens in China or its economy, but there isn’t much demand for copper globally once you ignore China. There’s the possibility that there may be a slight deficit in copper supplies next year, especially if companies cut production more than expected, but nowhere near the levels seen in previous years. This should help keep a lid on copper prices, which is not good news for Chile. Chile relative to copper Since copper is oversold as a commodity, it’s realistic to expect a bounce in prices in the not-too-distant future. Initiating new shorts at these levels is therefore not recommended, at least for now. Those who are still negative when it comes to copper may instead want to look at Chile as an alternative or a proxy to copper. Exposure to Chile can be had through, for instance, ETFs such as the iShares MSCI Chile Capped ETF (NYSEARCA: ECH ). Chile could also serve as a hedge for any long or short positions in copper. For instance, a long position in Chile to offset a short position in copper or vice versa. This will remain the case for as long as Chile’s economy is heavily dependent on the export of copper and it does not diversify its economic base. The fact is that Chile is overly exposed to the prospects of a single commodity (“copper”), which in turn is highly dependent on the prospects of a single country (“China”). If copper prices go up by a lot, it’s boom time for Chile. But, if copper prices go down, Chile’s economy will get weaker. Not a very healthy situation to be in. The bottom line is that even if copper prices were to increase somewhat in the future, Chile will still not experience the windfall it received in previous years. For that to happen, copper would have to return to the very high prices of several years ago. A very unlikely prospect. Chile can be expected to remain relatively weak even if copper experiences a bounce in prices.