Tag Archives: alternative

The Crash Of China Is A Myth

Summary “Crash” of China’s economy is a U.S. headline manufactured myth. What I didn’t see in China this week. China A Share market is still up 35% in past year vs. a decline for S&P 500. Major Emerging Markets ETFs (EEM, IEMG, VWO) are dominated by State Owned Enterprises from the legacy managed economy and part and parcel to failed efforts to manage the stock market. Now is the time to think of buying BABA, BIDU, JD, WUBA, YY and other Ecommerce companies that may be best way to invest in the future of consumption. Before reading please know that I am conflicted. I am the founder of EMQQ The Emerging Markets Internet & Ecommerce Index, which has been licensed as the basis for an ETF (NYSE: EMQQ ). I also have an economic interest in several other China ETFs including NYSE listed YAO, HAO, TAO CQQQ. My Recent Trip to China Tuesday I returned to San Francisco after spending eight days in the Chinese cities of Shanghai, Hangzhou and Nanjing. From the headlines in US newspapers prior to my departure, I might have expected to find a country in turmoil and crisis. Indeed this expectation was reinforced in the week prior to my trip as no less than five “non-investment” people – including my mother – asked me about the “crash” of China. The sensational media coverage seemed to reach a peak the day before my departure as the Wall Street Journal reported that President Xi himself had “botched” the stock market and a CNBC reporter made the quite extraordinary claim that Premier Li Keqiang may “lose his job” because of the stock market declines. Was it possible that the 30 year secular trend of growth in China had reversed since I last visited in April? Here is what I saw: · Shanghai. The city was as frenetic as ever. Tens of thousands crowded the Bund, perhaps hundreds of thousands packed the shopping street Nanjing Road. Restaurants were packed. No signs of a crisis. · Hangzhou. Scenic West Lake, a top tourist attraction in Jiangsu province, welcomed throngs of tourists. Tour buses packed with tourists from around the country clogged the roads and parking lots around the lake. Families strolled the shores, young people took picturesque selfies to post on WeChat. No signs of turmoil. · Nanjing. The city wall and Xuan Wu Gate were also packed with families and tour groups. The constant thumping of construction equipment could be heard in the background constantly as the city continues the work of adding lines to the metro system that serves its 8 million inhabitants. No signs of a collapse. My last day in China I had breakfast with a Shanghai-based Partner at of one of the world’s leading consulting firms. This person has lived in China for 30 years and knows more about the Chinese economy, its businesses and its people than nearly any other expert you can find. While he acknowledged that China continues to struggle with its transitions from a state dominated economy to a private sector economy and from an economy based on manufacturing to an economy based on consumption, his comments reinforced my belief that the “crisis” that populates the headlines of U.S. media is a mirage. It’s not real, it’s not there. The Chinese economy is slowing, but this is not news. The slowing of China’s GDP growth rate has been a fact of life since I first became immersed in China 10 years ago. It’s part of China Economics 101 and is simply the law of large numbers. China will continue to “slow” for the foreseeable future but will still likely grow at a pace 2-3 times that of the developed world for years. Furthermore, should it be required, the Chinese Government has significant tools and resources at its disposal to combat weakness in the “real economy”. The China Stock Market Correction To be sure, China’s stock markets have had a very volatile and negative 12 weeks. The Chinese domestic A Share stock market has undergone a significant correction at best and “crash” at worst. The awkward and clumsy market intervention by the Chinese government was, for good reason, widely criticized and seen as a step backwards in China liberalizing their markets and economy. However, such interventions are not unique to China. In fact, U.S. markets – and many ETFs in particular – were whipsawed only two weeks ago, as regulations and trading curbs instituted by our government in response to the 2010 “flash crash” went awry leaving many ETFs trading at significant discounts to their Net Asset Values (NAVs). And let’s not forget, the China A share market remains up over 30% in the past 12 months vs. a loss for the S&P 500. Even those with a short rear view mirror should see that while the drop was dramatic, it was preceded by a similarly dramatic speculative bubble and is still in positive territory over past year. And let us also acknowledge that there were parties in China warning against the type of speculation that resulted in the spectacular fall. Indeed, the China Securities Regulatory Commission (CSRC) warned investors in December of 2014 that they should “invest rationally, respect the market, fear the market, and bear in mind the risks present.” Buy Fear Most of my friends and colleagues know that while I am active in the ETF marketplace, I am a Warren Buffett groupie at heart. I “pray towards Omaha”. One of my favorite Buffett lines is that “you pay a high price for a cheery consensus”. The opposite of that is that you get your best buys when there is “blood in the streets”. Buy Fear. Sell Greed. Corny yes, but true. By all accounts China “fear” has never been higher with western investors. Buy What? One of the major problems with investing in China and Emerging Markets is that the major indexes and the ETFs that track them are dominated by state owned, legacy, inefficient and often corrupt companies. And it’s not just China that has this problem. Anyone that has followed the PetroBras disaster in Brazil should understand why these companies should be avoided. Yet, a full 30% of the largest Emerging Markets ETFs (VWO &EEM) are invested in State Owned Enterprises (“SOEs”). Many of the Chinese SOEs were part and parcel of the “botched” efforts to prop of the market and instructed to buy their shares or those of other SOEs. Investors seeking to take advantage of the fear that permeates the China investment landscape should look for the parts of the equity markets that will benefit from the long term secular increase in consumption. These sectors include traditional Consumer sectors and also the Ecommerce and Internet sectors that are benefiting both from the increase in consumption and from the spread of smartphones and mobile broadband. While the legacy manufacturing economy is slowing, retail sales posted 10% growth in the most recent quarter. The growth in the Internet and Ecommerce sector remains over 35% today and should remain high even if the broader economy in China slows further. While a year ago investors were clamoring for Alibaba (NYSE: BABA ) it has been kicked to the curb and is, as I write this, trading at near all-time lows. Other Ecommerce names haven’t fared much better as BIDU, JD, WUBA and others have all seen dramatic declines in their share prices. These are the types of companies that investors should be buying now. Unlike the stocks that dominate the indexes, these stocks trade in the U.S. and are not subject to Chinese market interventions or the erratic behavior of mainland China’s retail investors. These companies are also entrepreneurial and much more focused on shareholder returns than SOEs are. In fact, many of these companies including BABA, JD and YY have announced share repurchase programs to take advantage of the dramatic decline in share prices. This may not be the bottom. These stocks could go much lower. However, long term investors seeking exposure to Emerging Markets equities ought to consider these companies or ETFs that track these sectors. Repeat, I am conflicted. I am the founder of EMQQ The Emerging Markets Internet & Ecommerce Index, which has been licensed as the basis for an ETF . I also have an economic interest in several other China ETFs including NYSE listed YAO, HAO, TAO CQQQ. Disclosure: I am/we are long BABA, BIDU, WUBA, YY, JD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Clean Energy Fuels: Consider On The Drop

Summary CLNE shares have lost 46% of their value in the past year despite negotiating the drop in natural gas prices smartly as it has improved both its revenue and margin. CLNE’s volumes delivered have been increasing and the trend will continue in the future as natural gas is a cheaper fuel to run trucks as compared to diesel. The increase in natural gas demand is expected to provide a boost to prices going forward, but the fuel will still have a positive differential over diesel. CLNE’s customers in both the transit and refuse markets have been adding more natural gas trucks and this will act as a tailwind by increasing the addressable market. The past one year has turned out to be very difficult for Clean Energy Fuels (NASDAQ: CLNE ) on the stock market. The company’s stock price has taken a beating as the price of natural gas has dropped steeply in the past year. In fact, last quarter, Clean Energy’s revenue was down 11% year-over-year as low fuel prices affected its top line performance negatively to the tune of $5.6 million. Why Clean Energy’s drop is not justified However, I think that the 46% drop in Clean Energy’s shares in the past year is a bit harsh, especially considering the fact that the company has been able to actually improve its financial performance in the past year. This is shown in the following chart: Henry Hub Natural Gas Spot Price data by YCharts As seen above, Clean Energy’s top line performance has improved despite difficult conditions. This can be attributed to the fact that Clean Energy is seeing an increase in volumes delivered of natural gas as customers are still adopting natural gas-powered vehicles despite the drop in diesel prices. Looking ahead, it is likely that Clean Energy will continue to see an improvement in both volumes and its margins. Let’s see why. More volume and margin growth ahead Natural gas enjoys an advantage over diesel when it comes to running natural gas truck fleets in terms of both costs and emissions. This is the reason why Clean Energy is seeing an increase in gallons delivered even though diesel prices have dropped rapidly in the past year. In fact, Clean Energy saw its transit customers add more than 224 buses to their fleets in the previous quarter. This represents natural gas fuel consumption of 3 million gallons annually. On the other hand, waste haulers such as Republic Services (NYSE: RSG ) have also been enhancing their natural gas fleets. In 2015, Republic has increased its CNG fleet by 130 trucks. Looking ahead, by the end of the year, Republic plans to add 150 more trucks to its fleet. This is despite the fact that the cost of a natural gas conversion kit is $50,000 more than a diesel truck. Now, the fact that Clean Energy’s customers are still adopting natural gas trucks despite the drop in diesel prices is not surprising, as natural gas is still a cheaper fuel when compared to diesel. This is shown in the chart below: (click to enlarge) Source: Clean Energy Fuels investor relations Looking ahead, I won’t be surprised if Clean Energy’s volumes continue improving as the adoption of natural gas vehicles gains more momentum. As per Navigant Research , “global annual NGV sales are expected to grow from 2.5 million vehicles in 2014 to 4.3 million in 2024.” More importantly, apart from volume growth, Clean Energy is also focused on reducing its expenses. The company has reduced its selling, general, and administrative expenses by over 16% as compared to last year. Also, it has reduced its capital expenditure by more than 58% to $26 million in the first six months of the year as compared to the prior-year period. As a result of these moves, Clean Energy has been able to improve its EBITDA by $3 million as compared to the first quarter and $2.1 million from the prior-year period. More importantly, this improvement in EBITDA has been achieved despite a double-digit drop in revenue from last year. Thus, Clean Energy is following a smart two-pronged approach to grow its business – first by increasing volumes and second by lowering costs. However, Clean Energy will need a boost from better natural gas prices in order to enhance its financial performance. Higher natural gas prices are a possibility The Energy Information Administration expects natural gas prices to improve in the future due to an increase demand in both domestic as well as international markets. In a reference case study, the Henry Hub natural gas spot prices are expected to rise from $3.69 per MMBtu in 2015 to $4.88 per MMBtu in 2020, followed by $7.85 MMBtu in 2040 as shown in the charts below. Source: EIA The expected increase in natural gas pricing is not surprising as global gas demand is expected to grow 51% by 2035. The increase in demand will be driven by an increase in consumption from the power and industrial sectors. New gas-fired power plants are being built to meet the increase electricity demand and existing plants are being converted from burning expensive and polluting oil products to cheaper, cleaner natural gas. So, this switch from coal to gas-fired power plants will increase demand for the fuel, thereby leading to higher prices. More importantly, despite the expected rise in natural gas pricing, the fuel is expected to be cheaper than diesel. This is shown in the chart below: Source: Westport Innovations Thus, as seen above, the differential between gas and diesel price is expected to favor the former in the long run, and this will aid Clean Energy’s growth. Conclusion Clean Energy Fuels has been beaten down badly in the past year, but the drop seems unjustified. The company has been able to do well in a difficult end-market environment and its outlook looks strong as well. Hence, in my opinion, the drop in Clean Energy’s shares in the past year is an opportunity to buy as the company could do well in the long run on the back of improving NGV adoption and an expected rise in natural gas pricing. Thus, investors should consider the drop in Clean Energy’s shares as a buying opportunity since the stock could deliver upside in the long run. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Sell UVXY: It’s Still A Busted ETF Heading Lower

UVXY is a widow-maker of an ETF, down more than 99.9% over the past five years. A recent trebling in its share price is irrelevant to longer-term investors. UVXY is still a terrible product, sell it or short it. It’s going to drop further. Volatility ETFs are one of the worst inventions to hit retail investors in the past decade. These products that are literally designed to go to zero if you read the fine print in the prospectus. And yet thousands of small-time investors and speculators get sucked into them, thinking this is a good way to bet on, or even prudently hedge against volatile markets. The iPath S&P 500 VIX Short-Term Futures ETF (NYSEARCA: VXX ) is still the gold standard for the space. And it’s a very lousy product. Short it or avoid it. However, with the dark magic that is a leveraged fund, you can take the inherent terribleness of VXX and cube it. Enter the ProShares Ultra Vix Short-Term Futures (NYSEARCA: UVXY ). The Velocity Shares Daily VIX 2x (NASDAQ: TVIX ) is basically the same functional product as UVXY in a slightly different wrapper and with less trading volume, but the same analysis applies. VXX, UVXY, TVIX and other such long volatility instruments are designed to benefit when the VIX rises. However, since VIX – somewhat inaccurately known as the “fear gauge” — is a mathematical construct rather than an actual investable instrument, no ETF tracks VIX properly. What you’re investing in when you buy VXX or UVXY isn’t the VIX you see scrolling across the CNBC ticker but rather a blended combination of futures contracts (derivatives) that aim to predict where VIX will be at a later date. There’s usually a large disconnect because VIX today and VIX in the future, leading to the returns on VXX and UVXY not coming close to what you’d expect just looking at spot VIX changes on the day. The general case against VXX and UVXY is rather simple. Volatility in the future is generally projected to be higher than volatility today. Since traders fear unknown future events more than the present knowable situation in most cases, traders will pay up more for protection farther into the future. Traders are usually more fearful of a crash farther along the horizon than in the short-term. Since VXX, UVXY and others own a mix of current month VIX futures and next month VIX futures, they tend to lose value when they have to rollover contracts. Say spot VIX as quoted on CNBC is 14, VIX futures for September are 16, and VIX for October is 18. Every day, VXX and UVXY have to sell some of their September contracts at 16 and buy Octobers at 18. They lose more than 10% of their net asset value (NAV) every month rolling over. Once October comes, October futures will be down to 16, Novembers at 18, and they’ll lose another 10% rolling again. VXX tends to lose about 70% of its value every year, and it’s largely driven by this effect. The long term impact of this effect, named contango, is most difficult. It’s why these funds always go down over the longer term, and why they make for poor investments. VXX is down from a peak of 7,000 (split-adjusted various times) in 2009 to 29 today. A drop of 99.6% since inception. UVXY’s done even worse, given the 2x leverage, falling from almost 500,000/share (yes, you read that right) to 64 just since 2011! (click to enlarge) Ouch! These are very-poor performing investments that most folks should steer clear of. However, now that the market is dropped and UVXY has tripled off the lows, everyone’s all excited about volatility products again. Now the talk of the town is that volatility is in “backwardation” meaning the usual value-destroying albatross that hits these investments is no longer in play. Backwardation, explained simply, is that now this month’s futures are worth more than next. If you can sell Septembers at 18 and buy Octobers at 16, your (NAV) rises 10% a month. If that state is maintained for awhile, particularly with UVXY’s leverage, you get some fat upside. And yes, that’s all true. But no, it doesn’t generally play out like that. Look at the long-term log chart of UVXY posted above. There were two periods of relatively long-lasting backwardation, during both the 2011 and 2012 market sell-offs. And UVXY and TVIX did indeed benefit from rising volatility and backwardation… however, the increases were very small compared to the larger downward trend. These instruments are so poorly constructed that brief periods of backwardation don’t move the needle. Backwardation almost never persists for a lengthy period of time because the market is almost always more fearful for the future than the present. Unless you’re actively seeing markets go through the floorboards right now, like during the recent Monday’s flash crash festivities, volatility expectations are almost always higher at a later date than what you see at present. While UVXY got to 90 during the current panic, it sold back off to 60 in just two days on a rather modest market recovery. And Tuesday, it dumped 19% again in a single day. Any instrument where you lose 33% of your money in two days or 19% overnight during a fairly routine market recovery is best avoided by most market participants. When you’re long UVXY, you are playing with fire. September VIX futures are currently at 26. Around 15 has been normal during this bull market. So just a reversion to normal wipes out more than a third of VXX’s value, and UVXY will suffer losses greater than that due to the leverage. The lottery ticket type upside in a crash scenario just isn’t worth the near certainty of an 50-75% loss in UVXY in coming weeks as the market and volatility stabilize. Even if you manage to time a sell-off correctly, you’re almost undoubtedly better off just buying puts on the market, through an ETF such as SPY. UVXY may go up 6x-8x if you hit a sell-off just right. Getting that, or a whole lot more, from SPY puts is no more difficult. In a perverse sort of way, it’s nice that these ETFs’ lives have dragged on as long as they have, as they are among the best short sales in the market. It will be a sad day when these sources of easy alpha are taken away from the short-selling arsenal. Disclosure: I am/we are short UVXY, VXX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.