Tag Archives: china

Stay Out Of Shipping Stocks; Bankruptcies Loom

Despite the Baltic Dry Index popping briefly, shipping rates are falling once again. Dry shipping is a tough sector to be in, fraught with dilution. If rates stay this low and the global economy slows, we will see M&A and bankruptcies. “We expect a marginal improvement in earnings from the third quarter but this will be too small to have any noticeable effect on industry income. We anticipate a recovery from 2017 driven by rising demand from developing Asian economies,” – Rahul Sharan, Drewry’s lead analyst for dry bulk By Parke Shall The Baltic Dry Index continues to drop with Chinese markets correcting, the global economy in question, and federal interest rate rises on the horizon. U.S. markets have led global markets in shaky trading over the last couple of weeks and many, including us, are speculating that this could be the beginning of a global slowdown in growth. The Baltic Dry Index has never seen a global recession with rates as low as they are now, and with nowhere lower to go and with oil on the rise, we think the stage could be set for some bankruptcies and dilutive offerings in the sector. It’s for this reason we suggest avoiding dry shipping altogether. Here’s the BDI over the last month, after it’s quick pop up over 1,000. (click to enlarge) It was just weeks ago when the Baltic dry Index had popped over 1,000; we came out and said not to get used to it, and that rates will continue lower again as many global economies continue to churn a little bit slower. You could see this with China’s PMI out about two or three days ago, which came in between 47 and 49. Those that follow drybulk carriers and drybulk shipping know the BDI very well. Elsewhere in the financial world, it is a semi-unknown indicator. To those that follow drybulk shipping and commodities transport (especially import/export commodities from Asia and Africa) know that the BDI is one of the key indicators as to the world’s economic view on shipping via the oceans. The index is based out of London. The simple reasoning? When there’s more demand for cross-ocean shipping of goods, rates go up. Therefore, when the price rises, productivity globally is thought to be increasing. The same goes for when rates drop, which usually signals too many carriers without enough goods to ship. Export/import shipping declines, generally seen as a signal that the global economy could once again be slowing. Our thesis now is that the BDI doesn’t have much lower it can go and the economy is shaping up to slow, not grow. With contracting demand for oil and coal and oil prices on the rise, we could be setting the stage for disaster. Look at these recent sentiments from Hellenic Shipping News , The dry bulk shipping market will remain in recession due to contracting demand for iron ore and coal, and any recovery is not expected until 2017, according to the Dry Bulk Forecaster report published by global shipping consultancy Drewry. Falling demand and oversupply has severely impacted commodity values, with iron ore and coal prices in virtual free fall. The dry bulk shipping sector has been a casualty of these developments with resultant impacts on vessel earnings. However, there is some optimism for small vessel employment, as the onset of El Nino weather conditions will increase demand in the long-haul grain trade. The depressed state of the dry bulk sector has led to doubts about the future of many shipowners and their ability to withstand prevailing market conditions. Drewry believes that the future of a number of yards and owners are at risk and further details of this analysis are available in the report. (click to enlarge) Again, we don’t feel that oil is going to head back to or under its lows again and with oil being a major expense for many dry bulk carriers, we’re wary of the effect this will have on the already dilapidated industry. It’s very difficult to recommend dry shipping stocks after the last few years that they’ve had, the questions about dilution for all of them, and the way that the global shipping market sits. We think there is a real risk of the global economy slowing down here and not only taking some you know oil and energy stocks out of their misery, but also some dry shipping carriers either being forced to merge at horrible terms, dilute heavily or go under altogether. We think investors should stay out of shipping stocks, as there’s only more bad news ahead. 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.

Global Infrastructure Investments

By Todd Rosenbluth Once every four years, America’s civil engineers provide a comprehensive assessment of the nation’s major infrastructure categories. The latest report card has a poor cumulative GPA for infrastructure of D+, with rail and bridges each earning a C+. While Congress continues to debate whether, and how, to fund the projects to improve the quality of the nation’s backbone, there has been some encouraging news at the state level. Nearly one-third of U.S. states, including Georgia, Idaho and Iowa, are addressing infrastructure investment through gasoline tax increases to support improvement of local roads and bridges. Indeed, nearly two-thirds of the assets inside the S&P Global Infrastructure index are domiciled outside of the U.S., with China (5%), Japan (4%), Italy (8%), Spain (5%), and the United Kingdom (7%) among the ten largest countries. The S&P Global Infrastructure index seeks to provide broad-based exposure to infrastructure through energy, transportation, and utility companies in both developed and emerging markets. S&P Capital IQ Equity Analyst Jim Corridore thinks that companies that construct infrastructure are likely to see increased demand over the next several years due to the need for upgrade and expansion of infrastructure both within the U.S. and around the world. Within the U.S., aging and outdated roads, electric transmission grids, and energy transmission facilities are in dire need of repair and replacement, according to Corridore. Meanwhile pipelines, water treatment, and rail are seeing increased demand and need for expansion. From an industry perspective, transportation infrastructure (40% of assets) are well represented in the global infrastructure index, but this is partially offset by stakes in electric utilities (22%) and oil, gas & consumable fuels (20%) companies. Holdings include Kinder Morgan (NYSE: KMI ), National Grid (NYSE: NGG ) and Transurban Group ( OTCPK:TRAUF ). The S&P Global Infrastructure index generated a 9.6% annualized return in the three-year period ended July 2015. However, given the strength in the US dollar relative to most currencies in the last three years, many currency hedged international approaches have outperformed those that hold just the local shares. This is one of those examples, where the currency neutralized infrastructure index was even stronger with a 13.0% three-year return. On a calendar year basis, the hedged index outperformed in 2013 and 2014, after underperforming in 2012. Meanwhile, from a risk perspective the three-year standard deviation for the hedged S&P Global Infrastructure index was 20% lower. S&P Capital IQ thinks that global infrastructure needs has created some investment opportunities. However, we think investors need to be mindful of the impact currencies can play. There are four ETFs that offer global infrastructure exposure and 39 non-institutional mutual fund share classes. Disclosure: ©S&P Dow Jones Indices LLC 2015. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to S&P DJI. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI and to see our full disclaimer, visit www.spdji.com/terms-of-use .

SCZ: Do You Need Some International Small-Cap Companies For Your Portfolio?

Summary SCZ has over 1500 holdings across the globe which appear to give it great internal diversification. The term “across the globe” might be overly optimistic since over 50% of the holdings are in two locations. The weakness for SCZ is that SCHC and VSS both offer materially lower expense ratios and more holdings for enhanced diversification. Since SCZ has a beta higher than 1, it has to be expected to generate fairly substantial returns. On top of the high beta raising required returns, SCZ also needs to be able to beat out SCHC and VSS to justify the high expense ratio. One of the funds I analyzed for exposure to international markets is the iShares MSCI EAFE Small-Cap ETF (NYSEARCA: SCZ ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. By reducing risk at the portfolio level investors can get their best shot at producing alpha. Expense Ratio The expense ratio for SCZ is .40% for both gross and net expense ratio. That may not seem bad for international small-cap equity and an ETF with 1555 holdings. However, investors should be aware that they also have options in the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) and the Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEARCA: VSS ). SCHC has an expense ratio of .18% and 1645 holdings. VSS has an expense ratio of .19% and 3352 holdings. It should be no surprise that I see SCHC and VSS as the strong front runners for this kind of portfolio exposure. In the interest of full disclosure, while I don’t have a position in any of these ETFs yet, I do have a pending limit-buy order on SCHC. That order is quite a ways under the current share prices and is only intended to activate if share prices start falling hard again. Geography The geography of the exposure is important in considering international equity options. The chart below demonstrates the exposure for SCZ. Japan and the United Kingdom only represent over 50% of the market capitalization of the holdings in SCZ. I’d like to see more exposure around the globe. This is international and I’m okay with excluding China since I’ve been bearish on their market for months, but I’d like to see a few more continents included. Aside from the concentration being so heavily focused on the top two options, I don’t see any other problems there. Sector Exposures The following chart has the sector exposures within the ETF: I’m not seeing this as a huge problem, but it seems interesting that the exposure is so heavily focused on a few categories again. If it were reasonably possible, I’d like to see better diversification across the industries as well as across the globe. International ETFs are usually plagued by having fairly high levels of volatility and more diversification within the sectors might reduce that volatility some. On the other hand, when financial markets exhibit significant stress factors, it is common for correlation levels to increase throughout international markets so even more diversification in the holdings might not make a material difference in the volatility. Building the Portfolio This hypothetical portfolio has a moderately aggressive allocation for the middle aged investor. Only 30% of the total portfolio value is placed in bonds and a third of that bond allocation is given to high yield bonds. This portfolio is probably taking on more risk than would be appropriate for many retiring investors since the volatility on equity can be so high. However, the diversification within the portfolio is fairly solid. Long term treasuries work nicely with major market indexes and I’ve designed this hypothetical portfolio without putting in the allocation I normally would for REITs on the assumption that the hypothetical portfolio is not going to be tax exempt. Hopefully investors will be keeping at least a material portion of their investment portfolio in tax advantaged accounts. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. (click to enlarge) A quick rundown of the portfolio The two bond funds in the portfolio are the PIMCO 0-5 Year High Yield Corporate Bond Index ETF (NYSEARCA: HYS ) for high yield shorter term debt and the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) for longer term treasury debt. TLT should be useful for the highly negative correlation it provides relative to the equity positions. HYS on the other hand is attempting to produce more current income with less duration risk by taking on some credit risk. The Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) is used to make the portfolio overweight on consumer staples with a goal of providing more stability to the equity portion of the portfolio. The iShares U.S. Utilities ETF (NYSEARCA: IDU ) is used to create a significant utility allocation for the portfolio to give it a higher dividend yield and help it produce more income. I find the utility sector often has some desirable risk characteristics that make it worth at least considering for an overweight representation in a portfolio. The core of the portfolio comes from simple exposure to the S&P 500 via the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), though I would suggest that investors creating a new portfolio and not tied into an ETF for that large domestic position should consider the alternative by Vanguard’s Vanguard S&P 500 ETF (NYSEARCA: VOO ) which offers similar holdings and a lower expense ratio. I have yet to see any good argument for not using or another very similar fund as the core of a portfolio. In this piece I’m using SPY because some investors with a very long history of selling SPY may not want to trigger the capital gains tax on selling the position and thus choose to continue holding SPY rather than the alternatives with lower expense ratios. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. Despite TLT being fairly volatile and tying SPY for the second highest volatility in the portfolio, it actually produces a negative risk contribution because it has a negative correlation with most of the portfolio. It is important to recognize that the “risk” on an investment needs to be considered in the context of the entire portfolio. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of TLT’s heavy negative correlation, it receives a weighting of 20% and as the core of the portfolio SPY was weighted as 50%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the S&P 500 . Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. Conclusion SCZ is the most volatile investment in the portfolio when viewed in isolation as it has a volatility level of 18.7%. That problem is compounded by the high correlation between SCZ and the S&P 500. The combination leads SCZ to having a beta of 1.06% which is unfavorable. Under modern portfolio theory the only way to get risk adjusted returns on SCZ is for it to be outperforming the S&P 500 over the long run since it is increasing portfolio volatility. Will it outperform the S&P 500? I have no idea. The better question would probably be: “Will it outperform SCHC and VSS?” In that regard, I’m skeptical. It certainly could happen but SCHC and VSS have an advantage from having materially lower expense ratios which allow more of the returns to reach shareholders. 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. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.