Tag Archives: alt-investing

Will Monetary Policy Bring Further Down Oil Prices?

Summary The price of USO remained around $20 over the past month. The FOMC could start raising rates soon. Will it bring down oil prices? The potential rise in OPEC’s production could keep pressuring down shares of USO. The recovery in the oil market has cooled down as the price of WTI oil is around $60 – it hasn’t moved from this level the past month – and the United States Oil ETF (NYSEARCA: USO ) remained around $20. Besides the changes in supply and demand, which are the main factors shifting the fundamental conditions of the oil market, monetary policy also plays a role in the movement of oil prices. Let’s take a closer look at this issue and its potential impact on the oil market and the price of USO. Are interest rates going up? So far, the answer isn’t clear cut. Interest rates have gone up in recent weeks, but they are actually lower than where they were a year ago. For now, the market is still uncertain whether the Federal Reserve will raise rates this year and the pace of the subsequent rate hikes. And even if it does raise rates, how high can they go? Despite the high uncertainty, the current expectations are for the FOMC to start raising rates this year – in one scenario, the FOMC could start in September and bring the cash rate to 0.5% by the end of the year. But will higher interest rates push down oil prices? If interest rates were to start climbing up again, they may have some repercussions on oil prices. The effect of higher interest rates has been studied and here is one source that summarizes the intuitions and the factors that come into play in bringing oil prices down when rates go up. But, as you can see below, for oil prices to reach low levels – say falling below $40 – interest rates will have to climb back up to the high levels they were back in the 90s, when 10-year treasury rates were around 5%-7%. And the current oil market isn’t the same as it was back in the 90s or early 2000s. In any case, since rates are expected to remain very low this year and next, the main impact could come from the change in market expectations about where rates are heading once the FOMC starts to raise rates. (click to enlarge) Source of chart taken from FRED The chart also suggests, at face value, that there isn’t a strong relation between interest rates and oil prices. So, the basic intuition for the relevance of monetary policy in the context of oil prices is only one among many factors moving oil prices. The changes in supply and demand will likely be leading the way in impacting oil. When it comes to supply, OPEC is still adamant at keeping its quota of 30 million barrels per day, which has exceeded this level in the past few months. Even though Iran’s deal with the U.S. isn’t in place, the country is already preparing to ramp up production in the next couple of years – this could make it harder for OPEC to keep its 30 million barrels per day without someone else among the OPEC members reducing their market share. Thus, we should expect OPEC to de facto produce more than 30 million barrels per day. For the short term, however, oil prices could start to come down as the market adjusts its expectations regarding a possible rate hike by the FOMC and more importantly the change in policy that could lead to even higher rates down the line (albeit it could take a while before rates reach high levels, perhaps even years). The FOMC could shed some light on the timing of the rate hike or at least show if a rate hike is on the table in the coming months. For the USO investors, the price could take another beating as the market adjusts its expectations and rates start to climb back again. Thus, USO could also suffer from the changes in market expectations about the direction of interest rates. Even though the changes in demand and supply will trump up any changes in monetary policy, the potential rise in oil production by OPEC along with the stable oil output in the U.S. could start pressuring back down oil prices, at least for the short run. (For more please see: ” USO Investors – Beware of The Contango! “) Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

ERH: A Mix Of Bland And Spicy, But How’s The Taste?

Wells Fargo Advantage Utilities & High Income Fund isn’t a pure utilities fund. What it does provide is an interesting mix of “high” risk and “low” risk assets. Overall, though, I’m not impressed, but it might make sense for those playing premiums and discounts. I recently wrote a couple of articles about infrastructure closed-end funds, or CEFs. One of the comments asked about my thoughts on the Wells Fargo Advantage Utilities & High Income Fund (NYSEMKT: ERH ). My take: It’s an interesting fund, but it’s not easy to pin point what kind of fund it is or provide a good reason for owning it. Not an infrastructure fund As soon as you take a look at the portfolio of ERH you see that it is not an infrastructure fund. Sure, it owns infrastructure assets, primarily in the utility space (though it also owns some pipelines). But it isn’t as broadly diversified as the Reaves Utility Income Fund (NYSEMKT: UTG ), the Cohen & Steers Infrastructure Fund (NYSE: UTF ), or the BlackRock Utility and Infrastructure Trust (NYSE: BUI ). All of which venture well beyond the utility sector, including such things as toll roads. ( I compare UTG and UTF here , and I examine BUI here .) So, if you are looking for broad infrastructure exposure, you’d be better off with a different fund. But, interestingly, this is not the defining difference between ERH and these other funds. The defining difference is that ERH combines utilities with preferred stock and high yield debt. At the end of February , the portfolio breakdown was roughly 60% stocks (mostly utilities), 30% high yield bonds, and 10% preferreds. So about 40% of the fund was invested in fixed income, or at least fixed-income like, assets. Moreover, the 30% in bonds was focused around high-yield bonds, which many would consider living on the complete opposite side of the risk spectrum from utility stocks. But that’s where this fund becomes interesting. It isn’t alone in pairing up different asset classes. For example, the Cohen & Steers REIT and Preferred Income Fund (NYSE: RNP ) is another fund that combines disparate income-focused assets under one roof. A yield kick? For ERH, the benefit of putting utilities, high-yield bonds, and preferred stock together is to create a portfolio that spits out plenty of income. On that front, the fund’s yield of nearly 8% is above UTG and UTF, but about on par with BUI. BUI makes use of options, which helps enhance distributions. ERH does not use options, but does use leverage (about 22% of assets at the end of the first quarter), like UTG and UTF. So it appears that adding high-yield debt to the picture allows ERH to add income over roughly similar funds that focus more on equity investing. That said, it is worth noting that ERH cut its distribution in 2011. Return of capital made up a little over half of the fund’s distribution the previous year, so that 2011 call was likely a good one. In fact, since that time, the fund’s net asset value, or NAV, has grown from $11.20 or so a share to around $12.70. All the while it’s spit out a steady $0.90 a share in distributions each year with none coming from return of capital. An odd ball While it’s hard to complain about that, the fund is an odd mixture of risks. For example, when it comes to bonds, high-yield is among the most aggressive options out there. But, interestingly, even high-yield bonds are lower risk than stocks, using most broad benchmarks. But in stocks, utilities are usually considered low risk. So there’s this interesting low risk/high risk mash up going on. ERH’s trailing five year performance through May provides a good example of what can happen when things go well. Over that span, ERH’s standard deviation was roughly 9.3. The Vanguard High Yield Corporate Fund’s (MUTF: VWEHX ) standard deviation was lower, at 5.4, while the Vanguard Utility Index Fund’s (MUTF: VUIAX ) was higher, at 11.4. Trailing annualized performance, which includes the reinvestment of distributions, meanwhile, fell along the risk lines. VWEHX had a trailing five year return of 8.8%, ERH posted an annualized 12% or so, and VUIAX came in at 13.8%. For comparison, SPDR S&P 500 Index ETF turned in a trailing return of 16.4% with a standard deviation of roughly 12.3. Essentially, the mix of assets in ERH reduced volatility and enhanced return relative to investing in stocks alone. The trailing three year numbers are roughly similar, but the trailing 10-year results are a stumbling block. ERH’s standard deviation was higher and return lower than both VWEHX and VUIAX over that span. So the fund doesn’t always live up to what you might expect. Unique and not right for most I could keep going, but there’s enough here to show that ERH is really an odd duck. It isn’t an infrastructure fund, it isn’t a utility fund, it isn’t a high-yield bond fund, and it isn’t a preferred fund. It’s a little bit of each. And while the idea of mixing different asset types makes logical sense, it hasn’t always work out the way an investor might hope here. While recent performance has been solid, longer-term results have been mixed, at best. Moreover, I’m not sure that ERH would play nicely with your portfolio if you use an asset allocation model. Yes, it could be used to shift allocations on the edges, but I’m not sure utilities, preferred stock, and high-yield are the places you should be looking for flexibility. For most investors seeking utility or infrastructure exposure, I’d suggest going with a fund that is really focused in those spaces. For investors seeking income, I think there are probably better ways to go about finding it. Unless you are looking specifically for a high-yield and utility fund for some reason, I’d suggest passing on this one. That said, if you like to play premiums and discounts, ERH is currently trading hands at a nearly 10% discount to its NAV. It’s trailing three-year discount is around 4%. With such a wide break from historical averages, now could be a good time to try to take advantage of this disparity. Other than that, I can’t come up with a great reason to own this fund. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Profit From The Stock Market’s Newest Red-Hot Tech Sector

The “Internet of Everything” offers incalculable benefits as millions of devices become connected across the planet. At the same time, the explosion in connectedness has introduced the world to a new word in our vocabulary – “cybercrime.” Ironically, this also offers traders and investors one of the most exciting investment opportunities in an otherwise flatlining U.S. stock market. Over the past year, cybercrime has become a staple of the evening news. In October of 2014, the breaches of the databases of The Home Depot (NYSE: HD ), JPMorgan Chase (NYSE: JPM ) and Target (NYSE: TGT ) resulted in the compromised security of 56 million credit cards, 76 million households, seven million small businesses and 110 million accounts. Last month, the IRS announced that the identities of 2.7 million taxpayers were hacked last year. Last week, the government revealed that hackers stole personnel data and Social Security numbers for every federal staffer, past and present. According Symantec’s annual Internet Security Threat report, cyber attacks and cybercrime against large companies – those with over 2,500 employees – rose 40% globally in 2014. Attacks on small and medium-sized companies, which accounted for 60% of targeted attacks, increased 26% and 30%, respectively. And as the world becomes ever more interconnected through ever-expanding computerized networks, the frequency and scale of cyber attacks are likely to increase. By 2020, Gartner estimates that there will be over 26 billion Internet-connected devices, 250 million Internet-connected automobiles and a $50-billion market for surveillance. And as mobile payment technologies like Apple (NASDAQ: AAPL ) Pay and Google (NASDAQ: GOOG ) Wallet take off, mobile devices will become more prominent victims of cyberattacks. The Eye-Popping Costs of Cybercrime The costs of cybercrime are already huge. The Home Depot estimated that investigation, credit monitoring, call center and other costs of its breach last year could top $62 million. Target estimates that its breach-related expenses hit an eye-popping $146 million. That’s a lot of money. No wonder an estimated 60% of all companies experiencing a cybersecurity breach go out of business within six months of suffering an attack. Overall, cybercrime costs the globe over $400 billion per year. That’s more than the annual gross domestic product (GDP) of the Philippines, a country of 100 million people. And cyber attacks are about more than just losing money. Attacks can potentially shut down or manipulate a country’s energy infrastructure, weapons defense systems, medical devices and transportation systems. Russia launched the first cyber war against tiny Estonia in 2007. The president of Stanford University told me two years ago that the Silicon Valley-based university was being attacked dozens of times a day, with most of the attacks coming from China. How to Profit from the Cybersecurity Boom Cybersecurity companies claim they can stop more than 99% of cyber attacks from happening. And defense against cyber attacks is becoming a very big business. Gartner estimates cybersecurity spending topped $71 billion worldwide last year. FBR Capital Markets predicts a global 20% increase in spending in 2015. This year’s spending, in turn, could double to more than $155 billion by 2019. Of course, picking the long-term winners within the dynamic and ever-changing cybersecurity sector is a challenge. That said, savvy investors know that the pattern for making money in any new sector is similar, whether it’s automobiles in the early 1990s or the Internet in 1999. Stage one involves a general run-up in the sector across a wide range of players. Stage two is a painful period of consolidation. In the end, there will be a handful of winners. If you are holding one of them, you will make a fortune. But if you bet on one of the losers, you can lose a lot of money. As I recently recommended to my Alpha Investor Letter subscribers, the PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) – a broad-based bet on the cybersecurity investment theme – is one way around this. HACK tracks the ISE Cyber Security Index, investing in 31 stocks across the planet, each focused on software systems and other solutions that defend against cyberattacks. HACK’s top three holdings include Cyberark Software Ltd. (NASDAQ: CYBR ), 6.09%; Fireeye Inc. (NASDAQ: FEYE ), 5.96%; and Infoblox Inc. (NYSE: BLOX ), 5.14%. The fund invests 49.35% of its portfolio in the top 10 holdings. This means that the risk in the fund is quite concentrated. And, as a result, it is quite volatile. HACK has outperformed both the S&P 500 and the NASDAQ 100 – by more than 27% and 23% over the past 12 months, respectively. HACK itself is up 22.54% this year. (click to enlarge) Still, most of today’s biggest opportunities in cybersecurity lie in next-generation solutions, including cloud security and big data security analytics. It is these cyber startups that are providing the most innovative solutions, and many are doubling and tripling revenues annually. That’s why cybersecurity is a sector best suited for short-term traders skilled at playing both the long and short side of highly volatile individual stocks. But whether you’re a long-term investor or short-term trader, just realize that the cybersecurity rocket ship has taken off. So strap yourself in for the ride.