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Profitable Trades Based On USD Changes

Summary A strong USD will affect the value of commodities. Commodities are traded in USD and will therefore be more expensive for non-USD countries when the USD goes up. Changes in commodity prices will affect countries that are highly dependent on export/import of commodities. Many asset classes are affected by changes in the USD, and therefore great investing opportunities. During the last year, the USD had a massive rally. The USD Index hit a multi-year high in March 2015 of 98.66, up 23.6% from the 79.81 level in June 2014. Why did the USD have this strong rally? To answer this question, it is good to look at the USD Index breakdown. The Euro has a weighting of 57.6%, and is therefore able to move the USD Index very easily. One of the reasons why the USD rallied is the fact that the Fed started tapering. It stopped doing POMOs (Public Open Market Operations). During the taper phase, traders and investors expected the ECB to do QE. This would put double pressure on the EUR/USD. Fed tapering lowers the money growth rate of USD in the markets, and the ECB’s QE would push the EUR even lower. The BoJ is doing stimulus too. The main target: devalue the JPY to stimulate exports. QE from both BoJ and ECB means that the two biggest components of the USD Index are too high according to BoJ and ECB. The fact that the USD soared was therefore not really a surprise. Of course, it is easy to predict things after they happened. So that is not the reason I write this article. I want you to understand which asset classes are affected by the USD, so you can avoid “stupid” mistakes and make trades to profit from central planning and major macro changes. Rising USD When the US Dollar rises, commodities, which are priced in USD, will get relatively more expensive. Therefore, demand will decline, which will put downward pressure on commodities. The chart below shows the correlation between USD and commodities. I used the iShares S&P GSCI Commodity-Indexed Trust ETF ( GSG) to display the Goldman Sachs Commodity Index (GSCI) and the PowerShares DB USD Bull ETF ( UUP) for the USD Index. (click to enlarge) Commodities have a high correlation with the USD as shown above. With this info in mind, it makes sense that commodity-related countries and companies have a high correlation too. A country which highly depends on commodity exports will suffer when commodity prices decrease. Most of the commodity-dependent countries are emerging markets. The emerging market is therefore a good tool to trade an USD impact. Not only do many emerging markets export commodities, but they also have a part of their debt in USD because it is cheaper to borrow. If the USD gets more expensive, their debt will weigh heavier and put pressure on their balance sheets. If you want to trade emerging markets, it is very important to know where to invest. Not all emerging markets are the same. If you look at the correlation vs. the USD, you will see huge differences. Brazil, Russia, Malaysia and Poland have by far the highest (negative) correlation vs. the USD. It would not make sense to short an ETF like EWT when you are bullish USD. In fact, it is all about leverage and volatility. Let’s say you expect the USD to rally. Therefore, you want to short emerging markets. There are a few options you can choose from (and many more): Trade the i Shares MSCI Emerging Markets ETF (NYSEARCA: EEM ) By shorting EEM, you short an emerging markets ETF. By doing so, you are shorting all emerging markets, in particular China, because the weighting of 23% is by far the heaviest. Why would you want to short? You have less volatility because the ETF contains many countries, and therefore a huge amount of companies. On the other side, you are shorting countries that have a low correlation vs. the USD. Trade the iShares MSCI Brazil Capped ETF ( EWZ)/the Market Vectors Russia ETF ( RSX)/the iShares MSCI Malaysia ETF ( EWM) As mentioned in option 1, by shorting, you short countries that have almost no correlation with the USD. You solve this problem by shorting a country like Brazil or Russia. The volatility is higher, but you get way more momentum in case of bigger changes to the USD. Trade single stocks If you have a strong feeling about a certain USD move, i.e. a rally, you can choose to short a single stock. This can be a component of one of the most affected ETFs like EWZ/RSX/EWM or stocks from developed countries that are affected by the USD changes. The table below shows a few options: (click to enlarge) As you can see, most of the companies in my list are oil and gas drilling related. Most of them offer drilling services or provide drilling equipment. These companies are more dependent on a high oil price than the actual drillers. Since drillers can cut production easily when oil prices decline, the actual providers of the services and drilling products however lose a tremendous amount of business. With this in mind, you can short oil drillers in a USD rally or choose to short a Brazilian company for example. Itau Unibanco Holding S.A. (NYSE: ITUB ) has a weighting of almost 10% of EWZ and a 24-month correlation of 90% ( Sources: iShares, TradingView ). ITUB data by YCharts To summarize everything, I made an easy overview: (click to enlarge) On top, you see USD. That’s what it is all about. When the USD rallies, commodities and emerging markets are likely to dip since the correlation is negative. US Bonds and real estate however will profit when the USD goes up. Hence the positive correlation. The table above gives you an overview of possible trades. The higher the position in the table, the lower the volatility. For example, shorting commodities can be done by shorting GSG. If you do so, you are shorting an entire basket of commodities, and have therefore lower volatility. The next step is trading a single commodity. By doing so, you increase not only the potential returns, but also the volatility. If you want to maximize returns, trading a single stock gives the highest potential returns. The chart below confirms the table above: EEM data by YCharts This article gave you an overview of the different asset classes that can be traded in case of an expected USD change. Both the long- and short-side deliver interesting choices that can be trades as outright long/short trades as well as spread trades. Of course, there are way more options than I discussed in this article, but these are the basics of understanding price changes and researching profitable trades.

Is This The Worst Time For MLP ETF Investing?

The double whammy of the recent crash in crude oil price below $40 and the Fed’s hawkish stance on interest rate hike are causing mayhem in the master limited partnership (MLPs) business. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. However, U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Oil drilling companies have idled over half their rigs from last month. The latest data from Baker Hughes Inc. (NYSE: BHI ) revealed that rigs engaged in the exploration and production of oil and gas totaled 767 for the week ended November 13, 2015, a decline of 4 from the prior week’s count and the lowest level seen since April 2002. The nationwide rig count is still less than half the prior-year level of 1,928. Despite a marginal rise to 574 last week, the oil rig count continues to be on the low end of the five-year range and is significantly below the previous year’s level of 1,578. International Energy Agency (EIA) has also reduced U.S. production outlook for 2016 by 1% to 8.77 million barrels per day. Some might think that the oil price is hitting its bottom but in reality it might head further south. This is because EIA has indicated that the global supply glut could get even worse as global stockpiles have reached the record level of 3 billion barrels owing to abundant supply from the OPEC countries as well as Iraq and Russia. Secondly, a strengthening U.S. dollar supported by the possibility of an interest rate hike weakens the demand scenario for greenback-priced commodities such as crude. A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. Firstly, higher interest rates lower the appeal for high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. The adverse developments in the oil and gas sector and the threat of a looming interest rate hike are heavily weighing on MLP stocks and ETFs and indicate the worst may not be over yet. Below we highlight three MLP-based ETFs that have witnessed double-digit fall so far this year and may continue to experience a downspin in the near future as well. Alerian MLP ETF (NYSEARCA: AMLP ) This is the most popular MLP ETF with AUM of $7.3 billion. It tracks the Alerian MLP Infrastructure Index, measuring the performance of 25 energy infrastructure MLPs. The fund’s top three holdings include Enterprise Products Partners LP (NYSE: EPD ), Magellan Midstream Partners LP (NYSE: MMP ) and Energy Transfer Partners LP (NYSE: ETP ), together accounting for 25.4% of assets. The ETF trades in a solid volume of 7.1 million shares per day and is very expensive with 5.43% in expense ratio. It offers a robust dividend yield of 9.3% and has lost around 27% in the year-to-date timeframe (as of November 18, 2015). Credit Suisse X-Links Cushing MLP Infrastructure ETN (NYSEARCA: MLPN ) MLPN follows the Cushing 30 MLP Index, measuring the performance of 30 mid-stream stocks in North America. The note is well distributed with its top 10 holdings comprising around 35% of the assets. It has an AUM of $505 million and exchanges roughly 192,000 shares in hand per day. MLPN charges 85 bps in annual fees and has a dividend yield of 6.8%. The note tumbled nearly 34% so far this year. iPath S&P MLP ETN (NYSEARCA: IMLP ) IMLP tracks the S&P MLP Index measuring the performance of MLP stocks that are classified in the GICS Energy Sector and GICS Gas Utilities Industry. Enterprise Products Partners, Energy Transfer Equity LP (NYSE: ETE ) and Energy Transfer Partners are the top three holdings in the fund with a combined exposure of nearly 35%. The product has amassed around $413 million in assets and trades in a moderate volume of roughly 97,000 shares per day. It charges 80 bps in investor fees and offers a dividend yield of 7%. IMLP shed 31.6% in the year-to-date timeframe. Original post .

Small-Cap Value ETFs: Key To Win In Post Lift-Off Era?

The U.S. economy will probably experience a shift in era by this year end, if economic conditions remain unchanged. With the Fed now overtly referring to December as the timeline for raising interest rates after a decade and putting global growth issues aside unlike its prior meetings, investors may now have to rush to alter their portfolio and make it in line with the looming Fed rate hike. Though much of the impending shock has been priced in at the current level, gyrations are still expected in the stock market post lift-off. Though the Fed affirmed that the rate hike trail would be slower, investors know that this will be the beginning of the end of the rock-bottom rates era. Naturally, they will be hunting for the right equity investing strategy. Notably, years of cheap money fueled the U.S. growth stocks as evident from the 106% jump by iShares Russell 2000 Growth ETF (NYSEARCA: IWO ) in the last 10 years and its 75% surge in the last five years (as of November 18, 2015). But, value stocks underperformed, as indicated by iShares Russell 2000 Value ETF ‘s (NYSEARCA: IWN ) 45.3% gain in the last 10 years and about 44% rise in the last five years. Growth investing means buying those companies, which exhibit fast-growing earnings, indulge heavily in capital spending and are forecast to earn at an above-industry rate. This group of companies normally pays lesser dividend or no dividend and capital appreciation is the main motive. Quite understandably, this high-growth proposition requires more capital and lower interest rates to be executed. On the other hand, value strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – compared with their current market prices. These stocks trade below their intrinsic value and are undervalued by the market. This pool of companies normally pays sounder dividends too. Thus, it is historically seen that value stocks perform better than growth stocks in a rising rate environment, mainly due to the difference in their modes of operation. Then, as per analysts , the right time to tap value is when the market reaches its zenith and retreats on overvaluation. For fear of a horrendous sell-off, investors seek safety, which value stocks normally offer unlike growth stocks. Since the market is likely to be wobbly, value stocks can predominate. Moreover, in the absence of cheap money inflows, investors are likely to look for cheaper stocks with great potential rather than the pricey and glamorous growth stocks. All in all, there is a high chance that value stocks will rule the U.S. markets over the next few months. The global investment management firm Pimco also expects this trend to be established in the coming future. Analysts noted that: “During the periods when the Fed was raising interest rates, the value stocks had an average return of 1.2% a month, or 14.4% a year, versus the growth index’s 0.7% a month, or 8.3% a year.” Now with the U.S. economy taking root, job reports showing strength and inflation staying decent, small-cap value stocks should be the best bets ahead. Small-cap stocks are the best measure of domestic economic recovery as these are less exposed to foreign lands. Moreover, terror attacks in several parts of the globe and international growth issues can also be stripped out via U.S. small-cap valued ETFs. Below we highlight three such ETFs, which could be in focus in the coming days. S&P Small Cap 600 Value Index Fund (NYSEARCA: IJS ) The fund looks to provide exposure to U.S. small-cap value stocks by tracking the S&P SmallCap 600 Value Index. The $3.14-billion fund holds a total of 468 small-cap stocks. The fund appears diversified as no stock accounts for more than 0.92% of the basket. Among the different sectors, Financials, Industrials and IT occupy the top three positions with 24.36%, 19.75% and 16.59% of weight, respectively. The fund charges a premium of 25 basis points annually. This Zacks Rank #3 (Hold) ETF was up 1.25% in the last one month (as of November 18, 2015). WisdomTree SmallCap Earnings Fund (NYSEARCA: EES ) For a slightly different approach to the small-cap market, investors may want to consider EES, as it follows earnings-generating companies in the small-cap universe of the U.S. stock market. Furthermore, the fund looks to weight by earnings, giving bigger weights to firms that earn more, irrespective of market capitalization. This results in a portfolio of roughly 950 securities. No stock accounts for more than 1.1% of the fund. Financials (27.34%), Industrials (18.48%), Consumer Discretionary (15.68%) and IT (12.24%) are the top four sectors of the fund. This $382-million fund charges 38 bps in fees. The fund has a Zacks ETF Rank #3 (Hold) while it was almost flat in the last one month. Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) This fund provides exposure to the value segment of the U.S. small-cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 843 stocks, which is widely spread across individual securities as none of these has more than 0.6% of assets. In terms of sector exposure, Financials dominates the portfolio at 30%, followed by Industrials (20.5%) and Consumer Services (12.2%). The ETF is quite popular with AUM of more than $5.68 billion. It is one of the low-cost choices in the small-cap space, charging 9 bps in fees per year from investors. The fund added about 0.6% in the last one month. VBR has a Zacks ETF Rank #3. Original post .