Tag Archives: alternative

Oil ETFs To Watch As Crude Slips To Below $40 Again

U.S. crude again trickled to below $40 per barrel on Wednesday following the bearish inventory storage report from EIA that has deepened global supply glut and amid fresh fears that the world’s largest oil producers will not cut production when they meet on Friday. The prospect of interest rates hike and the resultant surge in dollar added to the woes. As such, U.S. crude plunged 4.6% on the day while Brent slumped 4.2% to the nearly seven-year low. The inventory data showed that U.S. crude stockpiles unexpectedly rose by 1.2 million barrels in the week (ending November 27). This marks the tenth consecutive week of increase in crude supplies. Total inventory was 489.4 million barrels, which is near the highest level in at least 80 years. As the Organization of the Petroleum Exporting Countries (OPEC) is due to meet on Friday, the market is not expecting the members to arrest production. Instead they are expected to pump oil vigorously to protect their market share. If this happens, crude will continue to be in a free-fall territory like it was last year when OPEC had decided not to cut production. However, Saudi Arabia and its Persian Gulf allies are willing to cut back if other producers like Iran, Iraq, and Russia join them in the mission. In fact, at the meet, Saudi Arabia may propose a cut of 1 million barrels per day in the OPEC output to strike a balance in the oil markets. Outlook Remains Bleak The current fundamentals are not in favor of oil with rising output and waning demand. This is especially true as OPEC is pumping record oil since Saudi Arabia and other big producers are focusing on market share. Iran is looking to boost its production once the Tehran sanctions are lifted. Meanwhile, oil production in the U.S. has been on the rise and is hovering around its record level. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on the demand outlook. Notably, manufacturing activity in China shrunk for the fourth straight month in November to a 3-year low. The International Monetary Fund recently cut its global growth forecast for this year and the next by 0.2% each. This is the fourth cut in 12 months with big reductions in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. That being said, the International Energy Agency (IEA) expects the global oil supply glut to persist through 2016 as worldwide demand will soften next year to 1.2 million barrels a day after climbing to five-year high of 1.8 million barrels this year. ETFs to Watch Given the bearish fundamentals and the OPEC meeting tomorrow, investors should keep a close eye on oil and the related ETFs. Below we have highlighted some of the popular ones, which could see large movements ahead of the OPEC decision: United States Oil Fund (NYSEARCA: USO ) This is the most popular and liquid ETF in the oil space with AUM of over $2.5 billion and average daily volume of over 25.7 million shares. The fund seeks to match the performance of the spot price of WTI. The ETF has 0.45% in expense ratio and lost 3.6% in the Wednesday trading session. iPath S&P GSCI Crude Oil Index ETN (NYSEARCA: OIL ) This is an ETN option for oil investors and delivers returns through an unleveraged investment in the WTI crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $813.3 million in AUM and trades in solid volume of roughly 3.7 million shares a day. Expense ratio came in at 0.75% and the note was down 3.3% on the day. PowerShares DB Oil Fund (NYSEARCA: DBO ) This product also provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund sees solid average daily volume of around 311,000 shares and AUM of $477.9 million. It charges an expense ratio of 78 bps and lost 2.9% in Wednesday’s trading session. United States Brent Oil Fund (NYSEARCA: BNO ) This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $82.7 million in its asset base and trades in a moderate volume of roughly 109,000 shares a day. The ETF charges 75 bps in annual fees and expenses. BNO lost 3.7% on the day. Original post .

AGG: A Solid Bond Fund Offering Low Expenses And Diversification

Summary The expense ratio on AGG is one of the drawing factors for this fund. At .08% it is one of the cheapest bond funds in the market. The fund has extensive diversification in the maturity of the bonds which provides more diversification in the risk. The credit ratings are fairly high with a significant allocation to treasury securities. Allocation to MBS does not thrill me since mREITs are available at material discounts to book value, but the low expense ratio still helps the expected return. Overall, there is more to like about this fund than to dislike. The major risk factor facing the fund is rising domestic rates. The iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) is a highly diversified bond fund with a reasonable yield, great expense ratio, and great liquidity. Expenses When I’m looking for a bond ETF, I normally want to see diversification in the holdings. The only real exception would be if I’m looking for treasuries with a fairly steady maturity date. Getting any thorough due diligence on the bonds in a fund can require having a higher expense ratio to cover the costs of doing research. The challenge for a bond fund with a high expense ratio to create solid returns is that it requires them to be doing sufficient research to consistently produce superior default estimates to those available in the market or to have a method for acquiring bonds at a discount by dealing in illiquid bonds where counterparties are more difficult to find. Some funds are able to offer low expense ratios and mitigate their risks by strictly dealing in the most liquid bonds where pricing is most likely to be efficient and relying on the market to ensure that the risk/return profile is appropriate. Generally I favor ETFs that have low expense ratios and strictly deal in highly liquid bonds where the pricing will be more efficient. The expense ratio for AGG is a .08%. This is one of the funds falls into my desired strategy of using highly liquid securities and a very low expense ratio to rely on the efficient market to assist in creating fair values for the bonds. Yield The yield is 2.41%. The desire for a higher yield should be fairly easy for investors to understand. Bond funds that offer a higher yield are offering more income to the investor. Unfortunately, returns are generally compensating for risk so higher yield funds will usually require an investor either take on duration risk or credit risk. In many situations, an investor will take on a mix of the two. Junk bond funds generally carry a high degree of credit risk but low duration risk while longer duration AAA corporate funds have only slight to moderate credit risk combined with a significant amount of duration risk. Theoretically treasuries have zero credit risk and long duration treasuries would have their risk solely based on the interest rate risk. Duration The following chart demonstrates the sector exposure for this bond fund: At the present time I’m concerned about taking on duration risk in early December because of the pending FOMC (Federal Open Market Committee) meeting. I believe it is more likely than not that we will see the first rate hike in December. I think a substantial portion of that probability has already been priced into bonds, so investors willing to take the risk prior to the meeting could see significant gains if the Federal Reserve does not act. Even though most of the impact is priced in, I suspect it will happen and that there will be some impact on rates which may trigger a solid opportunity for starting investments in bonds. I’ll be looking to increase my positions in interest sensitive assets if rates move higher. I’ve been focused on bond funds that are free to trade for me or have a longer duration exposure to corporate debt, but AGG is a pretty solid option for investors looking to add bonds in December. Credit Risk The following chart demonstrates the credit exposure for this bond fund: The exceptionally high rating to triple AAA stocks includes positions in treasury securities. The very high credit rating of this fund is excellent for investors looking for something that can withstand a sharp decline in the equity market. Rather than declining with equity markets this bond fund should see strength in share prices when investors are scared about the risk of higher defaults and weaker equity performance. When things look ugly, this fund should perform well. When things look great, this fund should underperform some of the riskier options. Sectors The following chart demonstrates the sector exposure for this bond fund: I have some concerns about the sector allocation including a substantial allocation to MBS Pass-Through securities. There are several mREITs where investors can get MBS exposure at a substantial discount to book value. On the other hand, that exposure also includes exposure to hedging the portfolio with Eurodollar Futures contracts in most scenarios and the expenses of management for an mREIT will dramatically exceed the .08% expense ratio of holding AGG. Conclusion Overall the diversification here is pretty solid and I don’t see much to complain about. This is one of the largest bond funds on the market and it offers great liquidity, a decent but not incredible yield, and a very low expense ratio. That liquidity extends to the point of millions of shares trading in a single day. That keeps the bid-ask spread small and makes trading in and out the ETF much easier for investors that want to use it to stabilize their portfolio value.

Tracking The Sequoia Fund: Q3 2015 Update

Summary Year-to-date, the fund is up 1.97%, versus -5.29% for the S&P 500. Top 10 holdings (65.2% of the fund): Valeant Pharmaceuticals, Berkshire Hathaway, TJX Companies, O’Reilly Automotive, Fastenal, Precision Castparts, MasterCard, Idexx Laboratories, Mohawk Industries, and Google. During the third quarter, the fund was adding to its positions in Rolls-Royce, Constellation Software, and Jacobs Engineering. An update on Valeant Pharmaceuticals. Since its inception on 7/15/1970 an investment in the Sequoia Fund (MUTF: SEQUX ) has returned 14.34% annually versus 10.65% for the S&P 500. The fund is noted for its long-term value investing style, portfolio concentration, and outperforming in down years. For more background on the fund you can check out my original article here . The big news for the Sequoia Fund is the Valeant Pharmaceuticals controversy. The fund started accumulating shares in the second quarter of 2010 and by the end of the year held 11.3 million shares. The stock price during this period ranged from $14 to $30. You can find the fund’s reasoning for getting into the company in the 2010 annual report, which you can find here . Valeant quickly became the fund’s largest position. It said at the time: Valeant and Biovail merged during the year, and on December 31 the combined company, called Valeant, was our second largest holding. In recent weeks, rapid appreciation in Valeant shares caused it to surpass Berkshire and become Sequoia’s largest holding. It is the first time in nearly 20 years that Berkshire has not been the largest investment in the Fund. Speaking of Berkshire, it was Charlie Munger that first sounded the alarm that all might not be up to snuff. Munger is Chairman of the Daily Journal Corporation and was asked about Valeant at the last annual meeting. He responded: Valeant is like ITT and Harold Geneen come back to life, only the guy is worse this time. For those unfamiliar with the ITT story you can check out this article , which gives a nice summary. Basically, like Valeant, ITT was built up on acquisitions and debt. And what was once a growth story turned into a mish mash of debt laden businesses. Despite Munger’s warnings Valeant’s stock continued its upward trajectory, reaching a high of $263.81 on August 6th. Munger wasn’t the only one suspicious of the stock. On August 13 blog AZ Value Investing published an article on Valeant, calling it a dangerous story told well. You can find the article here . Trouble for Valeant was just around the corner. On September 17th infectious disease website Healio reported that Turing Pharmaceuticals raised the price of its Daraprim drug from $13.50 per tablet to $750. The USA Today followed up with its own article the next day and did the math for us, noting the price hike was 5,000%. Then Hillary Clinton jumped on board, tweeting on September 21st: Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on. That put all specialty pharma companies in the crosshairs, including Valeant. In a week the stock dropped from $245 to $155. But the pain wasn’t over. On September 28 Citron Research, a specialist in unearthing frauds and terminal business models, published a report saying a congressional subpoena to Valeant on price gouging should be granted. Plus it gave a short term price target of $130 with the stock in the $170-$180 range at the time. The initial report didn’t move the stock much. But sure enough on October 14 subpoenas were issued. And then Citron wrote another report detailing the whole Philidor RX issue. By the time the dust had settled Valeant had dropped 50%, from $180 to $90, in just a few days. On October 28 the Sequoia Fund addressed the issue in a letter to shareholders which you can find here . Key comments: The short seller Andrew Left (of Citron Research), writing as Citron Research, exploited the negative sentiment surrounding Valeant. Our consultations with lawyers who specialize in the pharmaceutical industry lead us to believe there is no legal reason Valeant can’t advise, control or own Philidor. We work hard to understand Valeant and its business model. Our belief has always been that Pearson is honest and extremely driven. He does everything legally permissible to maximize Valeant’s earnings. At a recent price of $110, Valeant trades for about seven times the consensus estimate of 2016 cash earnings, which does not strike us as a rational price for a company with a diverse collection of product lines and strong earnings growth. So it appears the Sequoia Fund is sticking with Valeant. As of 6/30/15 Valeant was a $2.5 billion position in the fund, and its largest, accounting for 28.7% of the fund. As of 9/30/15 Valeant was a $2.0 billion position in the fund, and its largest, accounting for 24.8% of the fund. Based on my numbers, assuming the fund didn’t sell any shares, the position is now worth about $1 billion at a price of $90. It will be interesting, to say the least, to see the fund’s activity in Valeant during the fourth quarter of 2015. Here’s the fund activity for the third quarter of 2015. New Stakes: None. Stake Disposals: None. Stake Increases: Rolls-Royce ( OTCPK:RYCEY ) designs, develops, manufactures, and services integrated power systems worldwide. The company is known for its expertise in making engines for wide body jets. The fund has been in Rolls-Royce since 2007. It built up the position to over 12 million shares by the end of 2008. Since then it’s held, save very minor selling. Despite continuing to hold, the fund is very concerned over the position. While it admires its jet engine business, it questions the board of directors recent decisions to diversify into marine engine and power generation businesses. It’s also concerned the company is abandoning its Total Care service contract selling model which was very successful under the former CEO. As for the current CEO, John Rishton, the fund says, “… in our meetings with him, has shown minimal awareness of the returns on capital his acquisitions have generated.” The fund was selling in the second quarter of 2015, trimming the position by 437k shares when prices traded between $13.75 and $16.00. Rolls Royce announced in April that John Rishton was retiring and be replaced by John Rishton. The fund must like East’s plan as they did an about face in the third quarter of 2015, adding just over 7 million shares as prices ranged from $9.75 to $13. Constellation Software ( OTCPK:CNSWF ): Constellation Software, based out of Toronto, acquires, manages, and builds vertical market software (VMS) businesses. The fund likes the company because the software they provide tend to be essential to the customers’ operations. It also likes Constellation for being an adept acquirer and then increasing the cash flow of acquisitions. During the fourth quarter of 2014 the fund acquired 257k shares for a 1.09% position. Prices for the fourth quarter of 2014ranged from $240 to $300 for the ADR. During the third quarter of 2015 the fund added another 165k shares boosting its position by 64%. Prices ranged from $380 to $460. This is now a 2.19% position in the portfolio. Jacob’s Engineering (NYSE: JEC ) provides technical, professional, and construction services to industrial and government clients. The fund first established a position in the fourth quarter of 2013, picking up 743k shares when prices ranged from $56 to $64. That turned out to be near the high point for the stock which has been falling since January of 2014. The fund added another 716k shares in the second quarter of 2014 when prices traded between $53 and $65. This past quarter the fund added another 764k shares. Prices traded between $36.50 and $44.50. This stock is a 1% position in the portfolio. Stake Decreases: None. Kept Steady : Omnicom (NYSE: OMC ), Precision Castparts (NYSE: PCP ), Compaignie Financiere Richemont SA ( OTCPK:CFRUY ), O’Reilly Automotive (NASDAQ: ORLY ), Canadian Natural Resources (NYSE: CNQ ), Sirona Dental Systems (SRIO), Berkshire Hathaway (BRK.A & BRK.B), Danaher (NYSE: DHR ), EMCOR Group (NYSE: EME ), Trimble Navigation (NASDAQ: TRMB ), Mohawk Industries (NYSE: MHK ), Expeditors International (NASDAQ: EXPD ), Perrigo Company (NYSE: PRGO ), Valeant Pharmaceuticals (NYSE: VRX ), West Pharmaceuticals (NYSE: WST ), Zoetis (NYSE: ZTS ), Fastenal Company (NASDAQ: FAST ), Praxair (NYSE: PX ), IMI plc ( OTCQX:IMIAY ), MasterCard (NYSE: MA ), Brown & Brown (NYSE: BRO ), Google (NASDAQ: GOOGL ) and (NASDAQ: GOOG ), Goldman Sachs (NYSE: GS ), International Business Machines (NYSE: IBM ), Waters Corporation (NYSE: WAT ), Admiral Group ( OTCPK:AMIGY ), Hiscox Ltd. ( OTC:HCXLY ), Verisk Analytics (NASDAQ: VRSK ), Costco Wholesale (NASDAQ: COST ), Tiffany & Co. (NYSE: TIF ), TJX Companies (NYSE: TJX ), Walmart (NYSE: WMT ), Croda International ( OTCPK:COIHY ), Cabela’s (NYSE: CAB ), and Idexx Laboratories (NASDAQ: IDXX ) saw no changes from the second quarter of 2015 to third quarter of 2015. Here’s a snapshot of the activity from the second quarter of 2015 to the third quarter of 2015: (click to enlarge) Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.