Tag Archives: china

VXX Benefiting From Backwardation, For Now

Summary VXX is benefiting from backwardation for now, we will discuss how long that might last. Historic contango and backwardation levels in relation to VIX futures. Your focus should remain on U.S. economics. First, thank you to everyone who shared or contributed to my 360 degree math classroom project . You guys are awesome! Let’s jump right in: Backwardation began on August 20th, 2015: (click to enlarge) As we discussed in the previous article , longer periods of backwardation will have positive effects on the ProShares Ultra VIX Short-term VIX Futures ETF (NYSEARCA: UVXY ) and the iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ). Popular inverse volatility products, such as the ProShares Short VIX Short-Term Futures (NYSEARCA: SVXY ) and the VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV ) have been hammered during this period of backwardation and market head fakes: How long will this last? I believe this is the number one question at hand currently. Additionally, I believe there are two outcomes in the short-term. The Federal Reserve moves to raise rates providing a negative jolt to the market. The Federal Reserve moves to keep raise low, providing a short-term positive jolt to the market. I would personally view a delay in rate hikes as a negative on the U.S. economy. Eventually rates will rise and Wall Street has enjoyed easy money for a long time. The Fed has many things to take into account and I believe they are backed into several corners in regards to their inflation targets. To complicate this decision we have China and all of the talk about its slowing economy. I highly recommend this read by one of my favorite authors, Jeff Miller. I’ll be the first to admit that I really don’t know that much about China or its economy. I think Jeff does a good job of putting things into perspective. I also highly recommend his weekly Weighing the Week Ahead series. Economics If you have followed me for a significant amount of time, you know my feelings towards economics and the VIX. Short-term events are often not tied to economics, while longer-term VIX events are. This current event falls under the economic category and it is waiting on confirmation of a weakening economy. Whether the economy begins to weaken or not is now the question. This article isn’t to discuss the state of the U.S. economy but rather how potential changes could affect the VIX. For the most current economic data I like to us the investing.com economic calendar . Here is what you need to know: If negative economic conditions arise, even in light of a delayed rate hike, backwardation could persist for a much longer period of time. If positive economic conditions remain, than we will see a return to contango shortly, even in spite of short-term negative response to hike in rates. Current Advice Patience is needed now. If futures revert back to contango, I plan on initiating a short position in UVXY through options or purchasing XIV. This position will be small as futures could easily revert back to backwardation. For more on the contango and backwardation strategy, along with the backtesting results of this strategy, I recommend viewing my previous article here . Look below for the long-term back tested results of VXX: Chart created by Nathan Buehler using historical data from The Intelligent Investor Blog . The point of this graph is to demonstrate that the longest periods of time VXX has gone without losing value, is around one year. This is primarily due to the effects of backwardation just as contango has a long-term positive effect on XIV. For more information on what drives VXX, I recommend viewing this article . Chart created by Nathan Buehler using historical data from The Intelligent Investor Blog. To describe the above chart, the weighted future is the front and second month added together and divided by two. The best times to purchase inverse futures products or short long volatility products have come after prolonged periods of extreme backwardation. We are not going to see that type of event here unless U.S. economics begin to turn negative or show more negative signs than what is currently being reported. For now, I would continue to monitor the situation and keep a very close watch on the FOMC meeting coming up soon, economic reports out of China (and the rest of the world), and most importantly economic data here in the U.S. As a final thought, October is historically the most volatile month for volatility. Seasonality doesn’t always pan through so it is just something to ponder. Feel free to share your thoughts and comments below. The last article had over 160 comments and I really enjoy the conversations and learning that occurs when we can come together and discuss strategies, predictions, and outcomes in a professional setting. I hope you have a great week! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XIV over 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.

Forget REITs, Invest In Utility ETFs Instead?

The global investing world across asset classes was caught off guard recently by the Chinese market rout. The world’s second largest economy has completely derailed the market in August after China devalued its currency, the yuan, by 2%, to presumably maintain export competitiveness and revealed a six and a half-year low manufacturing data for the month. The tumult in global equities, currencies and commodities suddenly perked up the safe haven appeal of the market. While this risk-off trade sentiment among investors went against most asset classes, a downtrodden defensive sector – utility – cashed in on (slightly) this debacle. Investors should note that the U.S. economy is primed for a rate hike sometime later in 2015 after nine long years. Several U.S. economic data released lately were upbeat, supporting the case for an imminent rate hike. Quite expectedly, this phenomenon should weigh on rate sensitive sectors like utilities and REITs. These sectors need a high level of debt for operations and approach the capital markets for raising funds. As a result, a rising rate environment is a downright negative for these areas. While the utility sector suffered from the looming rate hike worries in the last few months, REITs seem less ruffled by this threat. Broader utility ETF Utilities Select Sector SPDR (NYSEARCA: XLU ) is down over 13% in the year-to-date frame while the Vanguard REIT ETF (NYSEARCA: VNQ ) has lost about 11%. This was probably because a healthy economy and busy activities helped the REIT space weather the rate hike worries to a large extent. However, investors should note that the retreat in VNQ was steeper in the last one-month time frame compared to XLU. In the said period, XLU was down about 6% while VNQ shed 7.9% (as of September 4, 2015). Let’s take a look at what’s giving utilities a slight edge over REITs? Safe Haven & Cheaper Valuation Win, Rate Sensitivity Loses The downward drift in utilities decelerated in recent times as these can be attractive in a choppy market like this. This sector is less volatile in nature and relatively immune to the market peaks and troughs. If this was not enough, the space is less exposed to a stronger dollar due to the lack of foreign coverage. Rather lower commodity prices amid the strengthening greenback will help lower the input costs of the utility companies. Investors should also note that long-term interest rates have been on a downhill ride post the China currency episode. Yield on the 10-year Treasury note fell to 2.13% (as of September 4, 2015) from 2.24% on August 10. If this was not enough, U.S. job numbers in August grew at the most sluggish pace in 5 months and fell short of analysts’ expectations. As per several market participants, the China issues and the latest setback on the job front have silenced the growing buzz about the likely Fed rate hike as early as this month to some extent. This played yet a big role in bringing down the Treasury yields. Since utilities usually have strong yields, investors can embrace this segment amid falling Treasury bond yields. Notably, the yield of XLU was 3.71% as of September 4, 2015. Though REITs too offer bumper yields as evident by the 4.14% offered by VNQ, REITs score lesser than utilities on safety. To add to this, after being crushed for the last few months, utility ETFs now offer a compelling valuation, which acts as another driver for its northbound ride. XLU is presently trading at a P/E (ttm) of 16 times while VNQ trades at 37 times of P/E (ttm). This clearly explains why it might be better to look away from REITs, and tilt toward utility ETFs. Even research house MKM Partners is of the same opinion. As a result, utility stocks and the related ETFs might ricochet in the coming days to reflect the flight to safety. Bottom Line We no doubt believe that the utility sector will have several deterrents over the longer term among which the Environment Protection Agency’s Clean Power Plan seems to be a big one. The norm looks to lower carbon emission from power plants and utilities have long been dependent on coal. But as of now, the sector looks solid. Investors, who normally eye cheaper plays, can thus try out a few utility ETFs to reduce the beta in the portfolio, especially until this China-induced anxiety is over and the Fed shapes up a well-defined solution over policy tightening. These funds include XLU, the First Trust Utilities AlphaDEX Fund (NYSEARCA: FXU ) , the Guggenheim S&P Equal Weight Utilities ETF (NYSEARCA: RYU ) and the Vanguard World Fund – Vanguard Utilities ETF (NYSEARCA: VPU ) . Original Post

Oil Refiner ETF CRAK: A Better Buy Amid Weak Energy

Thanks to an ever-increasing production, a large supply glut and sluggish demand, oil price skidded to half over the past one year, making the commodity the worst nightmare. In fact, trading in oil became wilder last month after China devalued its currency and weaker economic data raised worries over the health of the world’s second largest economy, suggesting lower demand for crude. Currently, U.S. crude is hovering around $45 per barrel while Brent crude is trading above $48 per barrel. Market participants are bearish on oil prices for at least the short term as global developments are expected to add to the supply glut. This is because the U.S. is still producing oil at near record levels, the Organization of Petroleum Exporting Countries (OPEC) is pumping out maximum oil in more than three years, Iran is looking to boost its production once the Tehran sanctions are lifted and inventories continue being built up. On the other hand, demand seems muted at present given the persistent slowdown in China as well as sluggishness in Europe, Japan and other key emerging markets. The International Energy Agency (IEA) in its recent monthly report stated that the global oil market would remain oversupplied throughout 2016 though lower oil prices and a strengthening economy will boost oil demand at the fastest pace in five years. Oil Refining Thriving Amid Oil Prices Given the unfavorable fundamentals and a bleak oil outlook, almost every corner of the energy segment is suffering except oil refining, which is negatively correlated with the price of oil. This is because the players in this industry use oil as an input for processing refined petroleum products like gasoline. Hence, lower oil prices are boosting margins for refiners, leading to healthy stock prices. This trend is likely to continue if crude prices (input costs) remains lower or continue to fall further, leading to higher spreads. Spread is the difference in price between a barrel of oil and a barrel of refined product like gasoline, diesel, or jet fuel. As a result, the higher the spread, the more the profits will be for the oil refiners. That being said, as long as the spread remains stable at the current levels, refiners are expected to outperform the rest of the energy sector. Further, continued outperformance in the oil refining and marketing industry is well justified by its solid Industry Rank in the top 15% . Investors could tap the rising opportunity in this niche segment with the new Market Vectors Oil Refiners ETF (Pending: CRAK ) recently launched by Market Vectors. It is a one-stop shop for investors to play the oil refining market. CRAK in Focus CRAK looks to follow the Market Vectors Global Oil Refiners Index. The benchmark measures the performance of the largest and most liquid companies in the global oil refining segment. Companies eligible for inclusion in the index should generate at least 50% of their revenues from crude oil refining including gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals, or have at least half of their assets devoted to the refining of crude oil. The product is getting the first-mover advantage as it has accumulated $1.8 million in its asset base within three weeks of its inception. It currently trades in a lower volume of about 14,000 shares a day on average. Any Downside Risk? The fund is heavily concentrated on the top 10 firms with huge allocations to Phillips 66 (NYSE: PSX ) , Marathon Petroleum (NYSE: MPC ) and Valero Energy (NYSE: VLO ) that collectively make up for one-fourth of the portfolio. This increases company-specific risk and suggests that the top firms dominate the fund’s returns. While VLO was recently upgraded to a Zacks Rank #2 (Buy), PSX and MPC were downgraded to a Zacks Rank #3 (Hold) each. Further, the fund is not a pure American play and is hence exposed to currency risk. More than half the portfolio offers international exposure, namely Japan, India, South Korea, Poland, Taiwan, Portugal, Finland, Turkey, Australia, Thailand and Greece. Investors should note that it is a relatively high cost choice in the energy space. It charges a bit higher fee of 59 bps compared with the expense ratio of 0.15% for the broad sector fund – Energy Select Sector SPDR (NYSEARCA: XLE ) . Bottom Line Given the encouraging outlook for the oil refiners, CRAK could prove to be the lone star in the energy space in a plunging oil price environment. Original Post