Tag Archives: ideas

No Danger From COP21 For Airline And Shipping ETFs

The world is striving to arrest the rise in the global temperature to 2 degree Celsius by the end of this century. In that vein, global leaders assembled in Paris at the COP21 meet – which was the 21st annual conference of parties – to chalk out an elaborate and comprehensive plan to lower carbon emissions and moderate the warming of the planet. In any case, efforts to check global warming have been constant across countries. Not only developed economies, but the emerging ones too are pushing themselves to attain this goal. However, following two weeks of sharp diplomacy, 196 countries agreed upon a historic agreement on climate change last Saturday. Per the agreement, developed economies will provide a minimum of $100 billion to developing nations a year to finance the needed reforms they can’t pay for to restrain greenhouse gas emission. Needless to say, clean energy stocks and ETFs as well as fossil-fuel free investments will enjoy a huge benefit in the coming days. Is There Any Loophole in COP21 Treaty? Two key pollution causing sectors, international shipping and aviation were excluded from the COP21 treaty. International shipping emits 2.4% of global greenhouse gas emissions, almost the same that the whole of Germany does. Total aviation gives up about 2% of global GHGs, and international flights make up about 65% of that number, per the source . These emissions do not come under the territory of any specific country and thus is out of the COP21 treaty. In fact, greenhouse emissions are estimated to rise exponentially by 2050. However, International Civil Aviation Organization (ICAO) has indicated to that it will plan a global market-based measure to lower carbon emissions. The agency has vowed to perk up fuel efficiency by 1.5% each year until 2020 and ‘to halve 2005-level emissions by 2050’, per citylab.com. International Maritime Organization also “has set an energy efficiency requirement for ships built in 2025, but not an overall carbon emissions target.” Needless to say, technological advancements are being tested rigorously in the aviation and shipping industry for decarbonization, but it has a long way to go. As of now, these two sectors are not as vulnerable as the fossil-fuel related sectors from Paris climate summit. Investors can safely play or dump airline and shipping stocks and ETFs on their inherent sector strength or weakness. Below we highlight two sector ETFs in detail. Airline – U.S. Global Jets ETF (NYSEARCA: JETS ) This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 34 securities with double-digit allocation going to Southwest Airlines, Delta Air Lines, American Airlines and United Continental. Other firms hold less than 4.44% share. The ETF has a certain tilt toward large-cap stocks at 62% while small and mid caps account for 24% and 14% share, respectively, in the basket. The fund has gathered $48.4 million in its asset base while sees moderate trading volume of nearly 40,000 shares a day. It charges investors 60 bps in annual fees. The fund added 13.2% in the last six months (as of December 15, 2015). Guggenheim Shipping ETF (NYSEARCA: SEA ) The $30.2 million fund tracks the Dow Jones Global Shipping Index and holds 26 securities in its basket. The index reflects high dividend-paying companies in the global shipping industry. As far as the sector breakdown goes, the fund is concentrated on the industrial sector with about 58.8% exposure while the rest is attributed to the energy sector. In terms of geographic distribution, the U.S. takes the top spot with more than 36% of focus, followed by Denmark (19.1%), Japan (13.5%) and Greece (9.5%). The product charges 65 bps in annual fees for this diversified exposure. However, the fund was off about 31% in the last six months (as of December 15, 2015). Original Post

Should You Be A Passive Investor These Days?

Passive investing is over-rated. Robo-investing just rebalances passivity. Do your own due diligence. It pays better. Investors in 2015 may be forgiven if they feel like bobbleheads. The volatility of the markets, the speed with which opinion-holders dispense information about any event (some of it even accurate) and the sheer volume of too much data can make our head, and our thoughts, swing too rapidly hither and yon, leading us to trade wildly, making brokers richer and investors poorer. Of course, there are investors who claim they do not care one whit where the markets are or at what price their securities are selling. They take pride in spending no time studying the ways of the market but, rather, seek only to match the long-term performance of the market they choose to invest in and let the chips fall where they may when there are corrections. Many such investors are adherents of John Bogle’s approach to investing and delight in calling themselves Bogleheads . Whenever I disagree with the premise of that thinking, “the phones are sure to light up” and the comments section will be filled with righteous indignation or derision from these acolytes. The idea of buy-and-hold passive investing and holding a broad brush of securities is hardly new – but its popularity waxes and wanes with the market itself. For instance, whenever the US stock market is doing well as (until this year) it has since March of 2009, people who invest with a rock-steady eye on the rear-view mirror will pound the drum for passive investing via the cheapest ETF. (click to enlarge) But how many of these investors, or their predecessors, really did hold on to their portfolio from Oct 2007 to March 2009 – and if so, what in tarnation were they thinking? As you might recall seeing the chart below, that was a particularly terrifying slide of a minus 53.5% in less than a year and a half. Buying passive index ETFs and holding is popular yet again, looking at the rear-view mirror back only as far as 2009, but those looking backward in March of 2009 abandoned this strategy in droves: (click to enlarge) There has to be a better way of investing than either day-trading between biting one’s fingernails to the nub, or stubbornly clinging to the notion that its OK to hold on during a 53.5% rollercoaster decline because after all, “the market always comes back.” (It’s true that the market came back after 2009 but it took 5 years, 4 months and 15 days to break even, not allowing for inflation. Not very helpful if you plan to retire in 5 years!) My strategy is different. While I would “like” to be able to buy ETFs that do all my thinking for me and spend my time skiing, diving, hiking and traveling, at my age I really can’t afford to see my portfolio decrease 53.5%. Can you? That’s why my approach is an active one. I may tactically employ index ETFs, ETNs or mutual funds to realize my investing goals, particularly in areas in which I do not have the technical knowledge to differentiate among the contenders. In biotech, for example, I’m happy to own a basket of health care firms that includes pharmaceuticals, biotechs, hospitals, etc. I will also, at those times when I see a short-term opportunity for the entire market, use index funds because their greater liquidity allows us to be nimble without paying too much in bid/ask spread to do so. So my overarching strategy, of necessity, is to be an active participant. I use far more actively-managed mutual funds and closed-end funds to populate the foundation of my own investing pyramid, while selecting individual companies’ stocks that are sector leaders for the very top (and relatively smaller square footage!) of that pyramid. With this approach my firm, and I as Chief Investment Officer, has to be better at picking winning companies than those who merely mimic the averages. In doing so, we seek the best companies in the best sectors as measured by growth in revenue; growth in real (as opposed to merely per share) earnings; honest and capable management, preferably with skin in the game; companies that reinvest earnings in capex, R&D, or other avenues of enhancing future value (versus, say, borrowing money to buy their own stock to goose earnings per share 😉 a rate of return that exceeds its primary competitors within the sector; and, finally, companies that represent good value for the price we pay. In my experience all sectors go through periods of price contraction. Assuming the above factors are met, if the sector encounters short-term headwinds, that’s the time we like to buy. Of course, this often means we might be early in our buying. This doesn’t bother any of us if our analysis of all the above suggest there is unlikely to be a better time to nibble, or buy, or buy in size. An example today might be the energy sector, down a whopping 21% year to date. Another would be the content creators and distributors, down because the assumption made by many is that, with the Internet, entertainment and content will become more distributed, lessening the value of creative offerings by the best in the business. When the entire sector declines, that’s the time we like to pounce on the best of the best; companies with the strongest balance sheets will pick up the pieces of firms more highly leveraged and, in so doing, will concentrate even more talent under their roof. Our goal is to pay a fair price for a good-to-great company, not a priced-for-infinite-growth price for a great company. There is no doubt that Amazon (NASDAQ: AMZN ) is a brilliant company. I respect the company but it simply isn’t part of our strategy to pay a massive premium for assumed eternal growth. Sooner or later, success breeds competitors, some with very deep pockets. I remember when University Computing, Polaroid, Xerox, and so many more were alleged to have first-mover advantage “unassailable” moats. The funny thing about moats is they can dry up or be forded. Somehow I don’t see deep-pocketed Wal-Mart, Target, and others rolling over forever in the online world. Give me a solid company at a fair price any day… I’ve written extensively about energy firms before and will again. For all the years I’ve been in this business, I’ve listened to people saying that oil and natural gas or done for. Never happened. Won’t in our lifetime. If somebody wants to sell me Chevron (NYSE: CVX ) at 75 (it’s August low was 70) I’ll back the truck up. If someone wants to sell me their Exxon (NYSE: XOM ) at 72 (its August low was ~69) I’ll back the truck up. Will I hold them forever? No, but I believe I’ll make a fine return until the next time investors panic out of a basic need like energy. So, to answer the question I posed in the headline, “Should You Be a Passive Investor These Days?” my answer is: absolutely not. I am out of sync with the current black box, quant, and robo-advisor thinking so much in vogue today, but I am in sync with the likes of Benjamin Graham, John Templeton, Warren Buffett and Peter Lynch, all of whom sought the best companies at the best price and held them until they no longer offered exceptional value. I’d rather be in the company of such as these any day over the current “You can’t beat the market so don’t even try” crowd! In my next article, I’ll answer the questions, “Who are the best entertainment and content providers?” and “Are any of them worth buying?”

RSX: My Prediction For 2016

The next year is around the corner, and it’s high time to look at RSX prior to the Russian holidays. Oil stays low and poses a major threat to the economy. At current oil price levels, RSX is overvalued. Those who follow the Market Vectors Russia ETF (NYSE: RSX ) closely probably know that I’ve been bearish on Russia the whole year. Lately, I’ve been commenting on the tensions between Russia and Turkey , the impact of the continuing oil price decline on the Russian economy and the exchange rate of the Russian ruble. As the year ends, it’s logical to make a prediction for 2016 and leave the topic to develop until the end of January. Why the end of January? First and foremost, the Russian Central Bank will announce its key interest rate on January 29, 2016. In its next meeting, the Central Bank won’t have the luxury of waiting and will have to either support the economy by cutting the 11% rate or choose the course of supporting the ruble and leave the rate or even increase it. I think that this will be the pivotal moment. Also, keep in mind that Russia has long New Year holidays that last from January 1 up to January 10. In practice, low volume trading and muted business life typically last from the last week of December up to the “Old New Year” on January 14. To those interested, the “Old New Year” date is the New Year date in Julian calendar, which was observed in Russia until 1918, when Gregorian calendar was implemented. Expect increased volatility and false moves during this period. It is clear that the main determinant for both the Russian market and the Russian economy is the oil price. If you believe that oil will go to $70 – $80 per barrel in 2016, then you should clearly buy RSX or other Russian ETF. I am in the bearish camp for oil, at least for 2016. My base-case scenario for Brent oil is $40 at best, and I think that oil will first go lower and could rebound only at the end of 2016. My main point is that if oil stays at current levels, the Russian market is significantly overvalued and will drift lower. Here’s why. We’ve yet to see more action from the Central Bank, but I think that at current oil levels we will not get to the ruble-denominated oil price of 3150 which is needed for the budget. This will lead to extreme devaluation of the national currency. For example, if this was to happen right now, the ruble would have dropped from 71 rubles per dollar to 85 rubles per dollar. This is too much, as Russia still depends heavily on imports (this statement was previously challenged by some readers, but I stand by my views and tried to explain them in more detail in the comments sections of previous articles). I think that the resulting exchange rate will likely be a compromise between the needs of the budget (and all the export companies, which are the majority of the Russian stock market) and the needs of curbing inflation. My prediction is that the ruble will settle in the area which allows 2900 – 3000 rubles per barrel of oil, implying 10.5% – 14% downside for the currency and for the dollar-denominated RSX. Also, I believe that constraints that low oil puts on the Russian economy are not fully reflected in the price of RSX. The Central Bank is predicting that GDP contraction will slow to 0.5% – 1.0%, but I think that these are optimistic figures. In the current oil price environment, there is no way to balance the interest of export-oriented companies, which are the majority of RSX holdings , and the economy. This problem will result in damage to every Russian company. All in all, I think that RSX is overvalued by 15% – 20% at current oil price levels. The downside increases if oil drops further, and such a drop will likely lead to a catastrophic liquidations of positions and a huge drop of RSX. On the other hand, if oil manages to deliver a major rally, the whole thesis will go bust. The next year is already behind the corner, so we will soon know how the thesis plays out.