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RSX: August Review

Summary RSX experienced huge volatility in August, but its share price finished the month only 0.88% lower. Russian GDP decline was bigger than expected and the situation in Ukraine started to deteriorate again. The main catalyst that should be able to push RSX price higher is oil price recovery. The Market Vectors Russia ETF (NYSEARCA: RSX ) declined by 0.88% in August. Although the 0.88% loss may indicated that August was a boring month, nothing is further from truth. Chinese economic woes initiated huge selloffs on global financial markets, Russian share market included. The share market panic was further strengthened by collapsing oil price that reached a new multi-year low at $37/barrel. On August 10, Russia announced that its GDP declined by 4.6% in Q2 2015. The decline was worse than estimated by analysts. The investors confidence was shaken also by news coming from Ukraine that indicated that the semi frozen conflict starts to heat up again. As a result, RSX was 15% lower compared to the July closing price at one moment. But as the situation on global financial markets calmed down and global share indices as well as oil price recovered slightly, RSX managed to erase most of its losses. The 4 biggest holdings in the portfolio of RSX are still shares of Magnit, Gazprom ( OTCPK:OGZPY ), Lukoil ( OTCPK:LUKOY ) and Sberbank ( OTCPK:SBRCY ). Weights of Magnit, Gazprom and Lukoil were over 7%, weight of Sberbank was slightly below 7%. On the 5th position, Norilsk Nickel ( OTCPK:NILSY ) replaced Novatek. The weight of Yandex (NASDAQ: YNDX ) keeps on declining, as shares of the company don’t perform well. If this trend continues, Yandex will slip out of the top 15 in the coming months. (click to enlarge) Source: own processing, using data of vaneck.com Out of the 15 biggest holdings, only 4 companies experienced share price growth in August. The biggest share price growth was experienced by Uralkali. Shares of the major potash producer were supported by its huge share buyback program. The biggest decline was recorded by shares of Yandex. Shares of the Russian search engine provider peaked at $21 in April. After 5 months of declines their current market price is less than $12. Source: own processing, using data of Bloomberg Although the recent months were hard for RSX, it is still up by almost 15% y-t-d. Among the 15 biggest holdings, Micex quoted shares of Surgutneftegas ( OTCPK:SGTPY ) did very well and they are up by almost 37%. Uralkali experienced a great August and as a result its share price is more than 30% up y-t-d. On the other hand shares of Yandex lost more than 1/3 of their value over the last 8 months. The second worst result was achieved by VTB Bank. VTB Bank share price lost almost 10% y-t-d. Source: own processing, using data of Bloomberg RSX remained to be very strongly correlated to the oil price (represented by The United States Oil ETF (NYSEARCA: USO ) in the chart below). The correlation between RSX and USO was stronger than correlation between RSX and S&P 500 for the better part of August. Given the important role that oil production plays in the Russian economy and given the strong position of energy companies in the RSX portfolio, it is hard to expect any meaningful and lasting change anytime soon. Source: own processing, using data of Yahoo Finance RSX share price went crazy in late August. The major share markets experienced a huge increase of volatility and the Russian share market was no exemption. The volatility measured by 10-day moving coefficient of variation was relatively stable from the middle of June to the middle of August. It was range-bounded in the 1%-3% interval. But in late August it increased rapidly and it crossed the 5% level for the third time over the last 8 months. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: The Russian companies were reporting H1 2015 and/or Q2 2015 financial results. Most of the important news were related to these reports in August. Gazprom announced its H1 2015 financial results. In H1 2015, Gazprom recorded net income of R568 billion which is 25% more compared to H1 2014. However in dollar terms, the income was only approximately $9 billion which is almost 30% lower compared to H1 2014. Norilsk Nickel surprised positively as its H1 2015 net profit remained almost unchanged compared to H1 2014, despite significantly weaker metals prices (nickel and copper prices were significantly lower compared to H1 2014). Norilsk Nickel recorded revenues of $4.9 billion (-14%), EBITDA of $2.7 billion (+8%), net earnings of $1.5 billion and adjusted earnings of $1.9 billion. Sberbank experienced a huge drop in profitability. It recorded net profit of R85.2 billion which is a 50% decline compared to H1 2014. In dollar terms, the decline is whopping 72%. The decline was caused by net provision charge for loan impairment that increased by R81.5 billion y-o-y. Total operating income before impairments remained almost unchanged. Rosneft signed LNG Supply and Purchase Agreement with state-owned Egyptian Natural Gas Company. According to the agreement, Rosneft will deliver LNG to Egypt. Rosneft has also reported its H1 2015 financial results. The company recorded revenues of $46.2 billion (-42.5%), EBITDA of $10.8 billion (-36.1%) and adjusted net income of $3.5 billion (-40.7%). Uralkali announced its intention to buy own shares and GDRs worth $1.32 billion. The company plans to purchase up to 411,042,224 common shares (1 GDR represents 5 common shares), representing 14% of company’s issued and outstanding shares. The purchase price will be $3.2 per share or $16 per GDR. Magnitogorsk Iron and Steel Works , one of the biggest Russian steelmakers, signed an agreement with Yandex Data Factory, an analytical subsidiary of Yandex, to develop a mathematical model and related software for steel making. The aim of the cooperation is to optimize consumption of ferroalloys and other materials during the steel production. Conclusion August was a wild month for RSX share price and it is probable that September won’t be too much calmer. The developments in China, oil prices and FED’s decision whether to raise or not to raise interest rates will affect RSX significantly in September. It is important not to forget about the political risks. Situation in Ukraine seems to be deteriorating once again and there are also rumours that Russia is about to start a direct intervention in Syria to support the government forces in its war with the Islamic State. It is hard to predict whether RSX will grow or decline in September. The only sure thing is that it will be a volatile ride. 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. 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.

How To Avoid The Worst Sector Mutual Funds: Q3’15

Summary The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds. The following presents the least and most expensive sector mutual funds as well as the worst overall sector mutual funds per our Q3’15 sector ratings. Question: Why are there so many mutual funds? Answer: mutual fund providers tend to make lots of money on each fund so they create more products to sell. The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds: Inadequate Liquidity This issue is the easiest to avoid, and our advice is simple. Avoid all mutual funds with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the mutual fund and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the mutual fund and larger bid-ask spreads. High Fees Mutual funds should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 2.37%, which is the average total annual cost of the 632 U.S. equity sector mutual funds we cover. Figure 1 shows the most and least expensive sector mutual funds. Rydex provides three of the most expensive mutual funds while Vanguard mutual funds are among the cheapest. Figure 1: 5 Least and Most Expensive Sector Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The Fidelity Select Consumer Staples Portfolio (MUTF: FDFAX ) earns our Very Attractive rating and has low total annual costs of only 0.94%. On the other hand, the Vanguard Specialized Funds REIT Index (MUTF: VGSNX ) holds poor stocks. No matter how cheap a mutual fund, if it holds bad stocks, its performance will be bad. The quality of a mutual fund’s holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund’s performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each sector with the worst holdings or portfolio management ratings . Figure 2: Sector Mutual Funds with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Fidelity appears more often than any other providers in Figure 2, which means that they offer the most mutual funds with the worst holdings. Our overall ratings on mutual funds are based primarily on our stock ratings of their holdings. The Danger Within Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund’s performance is only as good as its holdings’ performance. PERFORMANCE OF MUTUAL FUND’S HOLDINGS = PERFORMANCE OF MUTUAL FUND Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector, or theme. 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. I have no business relationship with any company whose stock is mentioned in this article.

PJM Capacity Auction Impact On Exelon And Other Electric Utilities

Summary PJM’s annual capacity auction was completed in August. This was the first year using the stricter capacity performance standards, which led to an increase in clearing prices. Exelon was the big winner in this year’s auction, with the potential to earn over $1.7B in capacity payments. Fewer new power plants bid into this year’s auction. This could be a positive sign for the long-run outlook of generation owners. For those who follow the electric utility industry, the PJM capacity auction is usually one of the big events on the calendar. (PJM is the regional transmission organization that essentially controls the operation of the electric grid from New Jersey to Chicago.) This year’s auction completed in August was no exception. The capacity auction was created a number of years ago to help support the reliability of the electric grid in a competitive market. The auction takes place three years before the capacity is needed, so this year’s auction was for the 2018/19 planning year. Electric demand fluctuates by time of day and by time of the year. There are some power plants that are needed for those few hours each year when demand is at its highest, but otherwise don’t have to run. These plants would never stay open if they were only paid for the few hours that they operate. The capacity auction essentially pays plants a standby fee to keep them open so that there is plenty of power available on high demand days. This fee is in dollars per megawatt of capacity for each day of the year. The size of the fee is determined in the capacity auction, and varies by location within PJM based on constraints in the electric transmission system. The following map shows the zones tested for transmission constraints in this year’s auction. Exhibit 1 (click to enlarge) Source: Brattle Group The arrows in the above map represent the connection between the parent zones and smaller sub-zones that might also have transmission constraints. For example, the MAAC zone has EMAAC as one of its sub-zones. EMAAC has its own sub-zones, including PSEG, which has its sub zone, PSEG-N. After the 2014 polar vortex caused reliability scares in PJM, changes, called capacity performance (NYSE: CP ), were made to the auction creating stricter eligibility requirements to participate. It also increased penalties for plants that receive capacity payments but are unable to perform when called upon during periods of peak demand. The creation of CP led to an increase in the clearing price for generation assets this year, as the higher cost of meeting the tighter eligibility requirements raised the auction bids for many participants. The clearing price of the RTO region of PJM (basically the areas in PJM without any transmission constraints) increased almost $45/MW-day over last year’s auction. Exhibit 2 Source: PJM Since this is the first year of CP, PJM only required 80% of the generation capacity to meet the new tougher standard. Eventually all capacity will have to meet the CP standard. Capacity in this year’s auction only meeting the old standard still received almost $150/MW-day in the RTO zone, which was close to a $30/MW-day increase in price. As you can see on the following map, only two areas priced separately due to transmission constraints this year, EMAAC and COMED. The prices in these zones were $50-60/MW-day higher than in the RTO. Exhibit 3 (click to enlarge) Source: PJM There are nine major generators that are impacted by the results of the auction. American Electric Power (NYSE: AEP ), AES Corporation (NYSE: AES ), Calpine (NYSE: CPN ), Dynegy (NYSE: DYN ), Exelon (NYSE: EXC ), FirstEnergy (NYSE: FE ), NRG Energy (NYSE: NRG ), Public Service Enterprise Group (NYSE: PEG ), and Talen Energy (NYSE: TLN ). The following chart shows the capacity each company holds inside PJM, and the zone where it is located. (A free excel file with information on the size, zone, and capacity of each company’s PJM plants, as well has historical auction prices is available here ) Exhibit 4 (click to enlarge) Courtesy Garnet Research, LLC You can see that the big player in PJM is EXC. You can also see that the majority of EXC’s capacity is in the COMED and EMAAC zones, which are the two zones that received higher prices this year because of transmission constraints. One thing to remember, though, is that having capacity in a region doesn’t necessarily mean you will receive payments for all of your capacity. Exelon actually issued a press release after the auction stating that three of its nuclear units (Quad Cities, TMI, and Oyster Creek), totaling 3,230MW of capacity did not clear the auction. The lost revenue from these plants not clearing is about $240M. Exelon already has plans to close Oyster Creek at the end of 2019. TMI and Quad Cities not clearing the latest auction probably means EXC will seriously be reviewing whether or not these plants should also be closed in the next few years. In general companies don’t publish which plants clear the auction because of competitive reasons, so it is difficult to know exactly which units will be receiving this revenue each year. Taking a company’s capacity in each zone and multiplying by the auction clearing price and by 365 days gives you an idea on how much potential revenue it could get from capacity payments. In this year’s auction, if you assume all of EXC’s capacity cleared at the latest prices, they would be receiving almost $2B in revenues. EXC is by far the biggest, but you can see the potential for the major players in the following table: Exhibit 5 (click to enlarge) Courtesy Garnet Research, LLC So without the three nuclear plants we know didn’t clear, Exelon still has the potential to earn over $1.7B of capacity payments. The above table also shows the biggest beneficiaries from the constraints in the electric transmission system. EXC obviously has the biggest benefit on a dollar basis, but PEG gets the biggest percentage benefit. Most of PEG’s plants are in EMAAC or in EMAAC’s sub-zones. Historically this has been a very good place to own power plants, because transmission constraints have impacted at least one sub-zone of EMAAC in all but one of the past capacity auctions. Exhibit 6 (click to enlarge) Courtesy Garnet Research, LLC So one thing to keep in mind when looking at PEG’s historical earnings is that they have been a big beneficiary of these transmission constraints. These constraints have been there for a long time, and with the difficulty in building new generation and transmission capacity, it is likely PEG will continue to be a beneficiary well into the future. This is actually the first time that COMED has ever broken out separately in the auction, which was partly driven by some power plant retirements. It remains to be seen if this year’s breakout was a one-time event, or the start of a trend. The ATSI zone, where the majority of FE’s assets are located, actually set an auction record with a $357/MW-day clearing price for 2015/16. But this year’s 2018/19 auction had ATSI just receiving the RTO price. So just because a zone received premium prices in an auction, it doesn’t mean this will continue for a long time. While EXC has the most potential revenue from the auction, on a percentage basis the impact to the bottom line is significantly greater for independent power producers Dynegy, NRG, and Talen. If you assume a $20 change in the auction clearing price across all zones, that all of each company’s capacity clears the auction, and a 40% tax rate on the incremental revenue, the impact is over 35% of NRG’s 2016 Street earnings estimate. The IPPs tend to trade more on EBITDA than EPS, and Talen Energy is actually the most sensitive on that metric. You can see the impact by company in the table below: Exhibit 7 (click to enlarge) Courtesy Garnet Research, LLC AEP, EXC, FE, and PEG all have sizable regulated wires businesses as part of their companies, which leads to the auction’s smaller bottom line impact for these names. While these names might not get as big a boost from the auction increase, their regulated business helps protect them when power markets suffer any downturns. Besides the increase in prices, this year’s auction may have brought additional positive news for competitive electric generators. Over the past few years record numbers of bidders have proposed adding new capacity to PJM. Last year almost 6,000 megawatts of new capacity cleared the auction, but this year less than 3,500MW was even offered. Exhibit 8 (click to enlarge) Courtesy Garnet Research, LLC This could be a sign that the economics of building a new power plant are becoming less attractive. The decrease in natural gas prices over the past few years has knocked down power prices and has been a big reason for the building binge, with generators trying to take advantage of a cheaper fuel source. If this buildout slows there would be fewer new power plants to compete with the current set of plants and would be supportive to companies that currently own capacity. This would be a positive for all generation in PJM, and could mean increased stability for power prices in the region. It also gives hope that the higher level of this year’s capacity auction might stick around for a while. Conclusion If the latest auction is a sign for a turnaround in the mid-Atlantic electricity markets, investors would benefit most by obtaining shares in DYN, NRG, or TLN. If investors want exposure to these markets, but with more regulatory assets to give some downside protection, then Exelon is probably the preferred name. FE and PEG are also similar to EXC, but they lack the added protection of Exelon’s geographic diversity. 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.