Tag Archives: management

Fed Rate Hike Wait May End Today: ETFs To Gain And Lose

After keeping the interest rates at near-zero levels for seven years, the Fed is expected to exit the historic loose monetary policy era at the FOMC meeting to be concluded later today. Per the latest Wall Street Journal poll, about 97% of the economists believe that the Fed will raise rates today while the rest expect the Fed to wait until next year. The probability of a lift-off today is 87% as per private economic forecasters and 83% according to CME Group. Since the Fed has indicated a gradual path for rates hike, the market is speculating at least a quarter percentage point increase in interest rates today. The Fed officials gave strong signals of a December lift-off in recent months. This is especially true, as the U.S. economy has now emerged from the financial crisis and the Great Recession, and is on a firmer footing. With back-to-back months of solid jobs growth, unemployment rate at a seven-year low and moderate inflation, chances of the first rate hike in almost a decade is now looking more real. Additionally, stepped-up economic activities, rising business and consumer confidence, increasing consumer spending, and recovering housing fundamentals will continue to fuel growth in the world’s second largest economy. Further, major headwinds that have plagued the financial market seem to have faded with substantial positive developments in the global economy. In particular, the Chinese economy is showing signs of stabilization while the Japanese and European central banks have ramped up more stimulus measures to revive their economies. Given the improving fundamentals, the historic turn is widely expected, but a collapse in oil prices, which is raising fears of deflation, is weighing heavily on the Fed action. That being said, several ETFs are in focus on the upcoming Fed decision. A few ETFs will be rewarded if the Fed raises rates or signals a hawkish outlook while a few will be severely impacted. Let’s have a look to those: ETFs to Gain SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) A rising interest rate scenario would be highly profitable for the financial sector as a whole. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. In particular, the ultra-popular KRE, having an AUM of $2.7 billion and average daily volume of 4.7 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 93 securities in its basket, the fund is widely spread out across each security with an equal-weight approach of around 1%. The product has a Zacks ETF Rank of 2 or “Buy” rating with a High risk outlook. PowerShares DB USD Bull ETF (NYSEARCA: UUP ) Rising interest rates will pull in more capital into the country and lead to an appreciation of the U.S. dollar. UUP is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long U.S. Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro while 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $1.2 billion while it sees an average daily volume of around 2.1 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 3 or “Hold” rating with a Medium risk outlook. Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) The diverging policy in the U.S. and the rest of the world will definitely compel investors to recycle their portfolio into the currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE U.S. Dollar Hedged Index and holds 931 securities in its basket, with none accounting for more than 1.92% share. The product is skewed toward the financial sector with one-fourth of the portfolio while consumer discretionary, industrials, consumer staples and healthcare round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 24%, closely followed by the United Kingdom (18%), Switzerland (10%) and France (10%). The ETF has an AUM of $13.0 billion and trades in solid volume of more than 4.1 million shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank of 3 with a Medium risk outlook. iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) As yield rises, bonds and the related ETFs fall. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays U.S. Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in two-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF with an AUM of just $2.6 million. ETFs to Lose SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold will continue to remain under immense pressure as higher interest rates would diminish gold’s attractiveness since the yellow metal does not pay interest like fixed-income assets, and the product tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with an AUM of $21.6 billion and average daily volume of around 6.1 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) Mortgage REITs could be in more trouble if the Fed starts raising rates as short-term rates would rise faster than the long-term rates, thereby leading to a tight spread and lower profits for mREIT companies. REM is the most popular mortgage REIT ETF with an AUM of $819.2 million and average daily volume of less than 1 million shares. The ETF tracks the FTSE NAREIT All Mortgage Capped Index and holds 38 securities in its basket with large allocations to the top two firms – Annaly Capital (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ). These firms collectively make up for 26.4% share while other securities hold no more than 8.5% share. The fund charges investors 48 bps a year in fees and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) The high-yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because the exit from the rock-bottom interest rate policy would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in the high-yield bond space with an AUM of over $14.4 billion and average daily volume of around 9 million shares. It charges 50 bps in fees per year from investors. The fund tracks the iBoxx $ Liquid High Yield Index and holds 1,009 securities in the basket. Effective duration and average maturity came in at 4.340 and 5.44 years, respectively. The ETF has a Zacks ETF Rank of 4 or “Sell” rating with a High risk outlook. iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) The end of a cheap and an abundant dollar era would pull out more capital from the emerging markets, stirring up concern for most nations. Additionally, a prolonged weakness in commodities has been dampening the appeal for these markets. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. Holding 846 securities, the product is widely spread out across various securities with none holding more than 3.51% of assets but is tilted toward the financial sector at 27.5%, followed by information technology (21.2%). Among the emerging countries, China takes the top spot at 26.3% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. Original post

The NASDAQ 100: Pressured For All The Wrong Reasons, Buy QQQ

The NASDAQ 100 Index has been pressured of late along with the broader stock market. The catalysts have been the impending Fed action, lower energy prices and concern about high-yield debt and emerging markets. However, these catalysts are hardly direct risks for the 100 largest companies found within the NASDAQ 100 and QQQ. As a result, I see this weakness as a special opportunity to purchase these stocks at unwarranted discount via acquisition of QQQ. Fear has spread across the market. Major business media has raised the specter of a Fed rate hike that could stir trouble for emerging markets and high-yield debt. While it’s true that higher interest rates pressure borrowers on the margins, they should not immediately bankrupt them all. That is unless panic is pushed to the populace and investors immediately demand even greater yield for the debt that helps to sustain those fringe borrowers. Nevertheless, I see an opportunity here as the PowerShares QQQ Trust ETF ( NASDAQ: QQQ ) is being pressured for all the wrong reasons. The NASDAQ 100 has already been discounted by this issue and concern about lower energy prices, despite a lack of direct exposure to either. And there is a chance the NASDAQ 100 could sink further on these concerns this week. I would see any further decline as a very special opportunity, which I expect smart money would pounce upon, driving the QQQ to bounce higher not long thereafter. Indeed, the move higher may already be underway. Thus, I suggest using this wrongfully placed weakness as an opportunity to acquire the top NASDAQ stocks at discount by using QQQ. 1-Month Chart of QQQ at Seeking Alpha You can see in this 1-month chart of QQQ that the NASDAQ 100 Index has been under extraordinary pressure of late. The cause has been the same for all stocks, as evidenced by the moves of the SPDR S&P 500 Trust ETF (NYSE: SPY ) and the SPDR Dow Jones Industrial Average ETF (NYSE: DIA ). First, it is important to note the recent impact of lower energy prices. As America has charged toward energy independence, the energy sector has become a more important driver of American GDP. Thus, as energy prices have declined steeply and swiftly, the economies of the South and Midwest have been impacted. Energy stocks have been impacted as well, as energy producers and suppliers see smaller profit margins and are pressured to reduce capital spending. Some may be coming under financial stress as prices have fallen even further. But the NASDAQ 100 and our proxy for it, QQQ, are hardly exposed. Therefore this macro factor pressuring all stocks opens an opportunity to buy QQQ at misplaced discount. Looking to the factor of high-yield and emerging market exposure, the companies within the NASDAQ 100 are the 100 largest stocks mostly in the technology sector and including biotechnology. The largest of all firms are not usually fringe borrowers, and companies that fall out of economic favor tend to be replaced within the large stock market indexes composed of the blue chips before long. They are not borrowers on the fringe, and so the high-yield issue should not affect them. In fact, these larger companies may benefit from the failures and distressed asset sales of others as they gain market share and acquire strategic assets on the cheap. QQQ’s Top 10 Holdings % of Assets as of October 30 Apple (NASDAQ: AAPL ) 12.83% Microsoft (NASDAQ: MSFT ) 7.92 Amazon.com (NASDAQ: AMZN ) 5.51 Alphabet (NASDAQ: GOOG ) 4.60 Facebook (NASDAQ: FB ) 4.34 Alphabet (NASDAQ: GOOGL ) 4.02 Intel (NASDAQ: INTC ) 3.03 Gilead Sciences (NASDAQ: GILD ) 2.99 Cisco Systems (NASDAQ: CSCO ) 2.76 Comcast Corporation (NASDAQ: CMCSA ) 2.49 The top 10 holdings of QQQ are a who’s who of American technology, and also include a major biotechnology firm and e-commerce retailer. These are not companies starving for capital or finding it hard to come by. Thus, a quarter point rise in the benchmark interest rate should not burden them, nor should a full point increase over the course of the next year, should that result. Thus, as QQQ has come down, if these individual stocks have also fallen and are individually sporting strong alpha drivers, they should likely be purchased as well. The point is that we must study the details when macro drivers impact the broad stock market, because these broad moves in equities can open up opportunities in specific sectors of the market and in specific stocks. In this case, I suggest investors can benefit by taking stakes in the high-technology behemoths of America via QQQ. The security reflects a misplaced discounting by the drivers of fear and concern about oil prices, high-yield debt and emerging market risk. I cover the market and sectors of it regularly, along with other topics, and invite interested parties to follow my column here at Seeking Alpha .

Will The Supreme Court Alter Your Utility Investment Strategy?

An obscure legal case could impact several electric utilities in states where wholesale power pricing is controlled by Regional Transmission Organizations, such as PJM Interconnect. Demand Response technology is at the heart of the issue. Is the Federal Government overreaching into the territory of state’s rights? The US Supreme Court SCOTUS could be intruding into your electric utility investment strategy. In an obscure case entitled Federal Energy Regulatory Commission v. Electric Power Supply Association (FERC v EPSA), SCOTUS will settle a long standing dispute between the FERC and power producers. At the heart of the conflict is the implementation and impact of Residential Demand Response (DR) technology. Pricing for electricity and hence the profitability of several electric utilities hang in the balance. Demand Response is the ability of specific electric appliances to turn off during times of high cost power, also known as “smart” appliances. Stated more clearly: Conservation implies whether to consume energy; Efficiency deals with how to consume energy; Demand Response concerns when to consume energy. Oilprice.com offers an interesting recap of the issue: Demand-responders argue that a megawatt saved is financially equal to a megawatt produced by a power generator. The power generators who comprise EPSA recognize that DR will hurt them, reducing both power prices and their profitability, to the benefit of consumers. Adding DR to a power market is the competitive equivalent of adding more generators. Either way, added competition lowers prices. The issue before the court is whether the FERC can compel regional power producers to pay consumers who reduce their use of power at peak times and if so, at what price. An interesting analogy could be the government program to pay farmers for not planting crops. In this case, power companies would pay consumers not to use electricity from the grid during times of peak demand. Daily peak demand varies based on location. For example, in Arizona where air conditioning is a large portion of demand, Arizona Public Service bills customers the following schedule: The plans billed on an off-peak and on-peak basis, with a super peak period in the summer billing months of June – August. Off-peak hours are weekdays from 7 pm to noon and all day Saturday and Sunday, as well as 6 major holidays; on-peak hours noon – 7 pm weekdays are billed at a higher rate; super-peak hours (3-6 pm weekdays during June – August) are billed at the most expensive cost per kWh. Save money when you use more energy on weekends and weekday mornings before noon or evenings after 7 pm. From their rate card , APS off-peak hours are billed at $0.05517 per kWh while on-peak rates vary from $0.19847 in April and $0.24477 in May, with super-peak costing $0.46517 in June. FERC Order 745 implements a program where power producers pay retail customers the going purchase rate for power not consumed, if the demand response is economical and helps balance the energy load on the Grid. The power producers contend this overcompensates as the variable cost to generate electricity is less than the retail price. In addition, the power producers claim the Order is an over-reach by the FERC as retail power rates are set by individual state utility commission boards, some of which are elected by the general population. In May 2014, the DC Federal District Court of Appeals ruled in favor of the power producers, resulting in FERC’s appeal to the SCOTUS. The Circuit threw out FERC Order 745’s compensation calculation and found that FERC has no jurisdiction over Demand Response, placing jurisdiction back on the states. The amount of money Demand Response could represent are not insignificant. The table below is an estimate from GTM Research for the forecast of the U.S. demand response market – with and without FERC Order 745. Source In a review of Con Ed (NYSE: ED ), I discussed the implementation of the “Clean Virtual Power Plant” where ED is developing a network of solar panels and electricity storage to supply the Grid with power when the solar panels are ineffective. If this becomes a viable business model in connection with higher Demand Response expansion and the FERC Order 745 of paying the highest prices for DR, wholesale power prices controlled by Regional Transmission Organizations, such as PJM in the Mid-Atlantic and eastern Midwest, could alter profitability for power producers. Which electric utilities could affected? GTM Research offers the following map of the highest kW replacement from DR, by Regional Transmission Organization: (click to enlarge) As shown, 68% of the Demand Response reduction in MW demand comes from areas under the jurisdiction of PJM and MISO, and includes a large swath of 31 states. Utilities with power generation in these states affected include Exelon (NYSE: EXC ), FirstEnergy (NYSE: FE ), American Electric Power (NYSE: AEP ), Dominion Resources (NYSE: D ), and Duke Energy (NYSE: DUK ). More information can be found in an interesting article published by utilitydive.com. Investors should keep an eye out for the ruling by SCOTUS concerning FERC Order 745. The impact could affect the profitability of many utilities selling wholesale power in various RTO jurisdictions. Author’s Note: Please review disclosure in Author’s profile.