Tag Archives: outlook

The V20 Portfolio: Week 33

The V20 portfolio is an actively managed portfolio that seeks to achieve an annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read the last update here . Note: Current allocation and planned transactions are only available to premium subscribers . Over the past week, the V20 Portfolio rose by 3.8% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) increased by 0.4%. Portfolio Update Conn’s (NASDAQ: CONN ) was responsible for most of the gains this week, rising 15.8% from $10 to $11.58. There were no major events other than a credit facility amendment on Friday, so much of this rally can be attributed to shifting sentiment in the market. Some of the amendments relaxed covenants while others were more restrictive. Let’s go over the restricting amendments first. Distributing restricted payments (e.g. dividends, buybacks) will now require a 2.5x interest coverage ratio for two quarters. Borrowing base was reduced by $15 million, which will be waived if interest coverage ratio exceeds 2x for two quarters. Finally, margin on the loan was increased by 25 bps (i.e. making the revolver a bit more expensive). While none of the amendments were crippling, the amendment concerning restricted payments will prevent Conn’s from making any share repurchases in the coming months, as the interest coverage ratio was less than 2.5x for Q4. The positive amendments included eliminating the minimum interest coverage ratio covenant for Q1 and lowering the total coverage ratio to 1x from 2x. Overall, this was a slight setback as buybacks will not be a possibility in the near future. Last week we discussed how Intelsat (NYSE: I ) was buying back bonds at a discount. For whatever reason (possibly the increased likely hood of a rate hike), the bonds in question declined in value from $70s to high $60s. As such, Intelsat lowered its consideration accordingly, lowering the offer by around 500 bps. Our helicopter company was the portfolio’s major laggard. There was no major development. As discussed in last week’s update, the oil and gas division will continue to battle industry wide headwinds, though the recent bounce in commodities may cushion the fall. However, it is unlikely that revenue will suddenly recover to its previous level as the oil and gas industry overall is still at a cost cutting stage. The medical segment should continue to generate profits, as it will not be affected by the commodity downturn. Risk Management Due to additional capital being allocated to Conn’s and its subsequent rally, the position now accounts for more than 10% of the entire portfolio. For a position to account for such a significant portion, it must fulfill two criteria: high expected rate of return and low probability of permanent capital loss. As we’ve seen with Dex Media, even though the shares were undervalued, 100% of the investment will likely be written off. But by allocating a small amount of capital to this speculative position, it only had a tiny impact on the overall portfolio. Conn’s on the other hand fulfills both criteria. It is not under any significant financial distress and is still growing its business. While short-term results have dampened its profitability, its long-term outlook remains bright. Performance Since Inception Click to enlarge Disclosure: I am/we are long CONN, I. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Should You Short S&P 500 With ETFs This Summer?

It seems that the S&P 500 has left its sunny days behind! This key U.S. index last hit a record high of 2,131 on May 21, 2015, and lost about 4.3% in the last one year (as of the May 19, 2016). As a matter of fact, the index suffered corrections ( down over 10% from previous highs) during this timeframe and could not really regain its lost ground. The hollowness of this one year becomes more prominent when you look at 45 record highs in 2013 and 53 in 2014, as per Wall Street Journal. Though the start of 2015 was equally grand with 10 highs till May 21, the journey afterward was simply lackluster. This makes it imperative to understand investors’ perception on the S&P 500 before it approaches its anniversary of highs on May 21, 2016. What’s Behind This Decline? There are plenty of reasons. One of the main factors is the global market crash that was induced by the Chinese currency devaluation and extreme plunge in oil prices last summer. Since then China and oil have been a pain in the neck. In addition to this, earnings recession, overvaluation concerns, Fed liftoff in December and ambiguity over the Fed’s next moves amid global growth issues challenged the broader market. If this was not enough, when market watchers were almost sure about a delayed policy tightening in the wake of threats to the stability of the U.S. economy, the latest Fed minutes hinted at the possibility of a June hike. As an instant reaction, the S&P 500 fell to its lowest level since March on May 19. The reason for this fall was the fear of shrinkage in liquidity in the stock market. Turbulent Times Ahead for S&P 500? A volley of upbeat data released lately on retail, housing, inflation and consumer sentiments may boost the Fed’s confidence that the economy can now digest an additional hike. Then again, the global market is still edgy and has all the power to derail the U.S. index if the Fed acts alongside. In today’s concept of an open economy, it is hard to bet on a large-cap stock index just on the basis of domestic market recovery. First, if the Fed strikes, the greenback will jump hurting the profitability of companies with considerable exposure in foreign lands. More than 30% of the S&P 500 revenues depend on international economies. Plus, investors should note that IMF, while slashing global growth forecasts recently, reduced the U.S. growth forecast for 2016 too from 2.6% to 2.4% . After all, though inflation is rising, it is yet to reach the level where it can digest further hikes comfortably. In April 2016, American inflation was at 1.13%. Notably, a rise in rates lowers inflation. Also, uncertainties regarding election in November flares up risk in the S&P investing. Earnings of the S&P 500 index are likely to decline 6.7% in the first quarter of 2016 while revenues are expected to fall 1% as per the Zacks Earnings Trends issued on May 18. Though the trend looks up from the second quarter onward with expected earnings reduction of 6% for the ongoing quarter, earnings growth of 0.4% in Q3 and again growth of 7.3% in Q4, it is less likely for the S&P 500 to jump before late second half. Analyst Bearish on S&P 500 In March 2016, Goldman commented that the index in overvalued. It recently noted that “the forward P/E multiple of the S&P 500 index ranks in the 86th percentile relative to the last 40 years. They note that the median stock in the index trades at the 99th percentile of its historical valuation on most metrics.” Goldman also noted that historically the S&P 500 index is fairly range-bound until November in a presidential election year. Bank of America believes that the S&P 500 could slip to its February lows, while Morgan Stanley has applied the famous maxim “Sell in May and go away” to stocks at least till November. All in all, no great news is expected from the S&P 500 in the coming summer. Short via ETFs? Going by the above thesis, the S&P 500 will likely see rough trading ahead, but investors could easily profit from this decline by going short on the index. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the index. Below we highlight those and some of the key differences in each: ProShares Short S&P500 ETF (NYSEARCA: SH ) This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index. ProShares UltraShort S&P500 ETF (NYSEARCA: SDS ) This fund seeks two times (2x) leveraged inverse exposure to the index. ProShares UltraPro Short S&P500 (NYSEARCA: SPXU ) Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index. Direxion Daily S&P 500 Bear 3x Shares (NYSEARCA: SPXS ) Like SPXU, this product also provides three times inverse exposure to the index. Bottom Line We would also like to note that the relative strength index of the S&P 500 based ETF (NYSEARCA: SPY ) is presently 43.92. This indicates that the fund is yet to enter the oversold territory. Original post

Bond ETFs To Play If Fed Hikes In June

With the U.S. economy on the mend after a lukewarm Q1, a Fed rate hike possibility in June is back on the table. At least, the latest Fed minutes suggest that. A spate of stronger U.S. economic data in the field of retail, consumer sentiment, inflation and housing must have boosted the Fed’s confidence. The labor market and the manufacturing sector also seem sound. However, the June hike possibilities came as a shock to investors as they grossly shifted back the timeline of a hike in the wake of moderation in U.S. growth. Whatever the case, further Fed rate hikes are likely to bring in changes in investing sentiments. Against this backdrop, those who have started speculating a sooner-than-expected hike in the Fed interest rates must be worrying about the stability of their fixed income holding. Investors should note that yields on short-term bonds started to move higher since the release of the minutes. The yield on three-month bonds was 0.31% on May 19, 2016, up 3 bps from the yield recorded on May 17, 2016. Fixed-income investing has enjoyed a great show so far in 2016, especially in the longer part of the yield curve. However, the prospect of rising rates and risks to capital gains of bond holdings have left investors jittery about the safety of their portfolio. Given the situation, many investors are definitely pulling their money out of the bond market. At a time like this when investors are extremely cautious about rising rate risks and stock market volatility, investments in the below-mentioned bond ETFs can be intriguing bets. WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration ETF (NASDAQ: HYND ) If investors are worrying about interest rate risks, negative duration bonds may come to rescue. Plus, this fund offers substantial yields which can easily beat out the benchmark yield. In addition, risks over junk bond investing are easing now with the ongoing energy sector recovery. This fund tracks the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Negative Seven Duration Index. The benchmark is a combination of the long and short portfolio. The long portfolio mirrors the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index, targeting non-investment grade corporate debt securities issued in the U.S. and maturing in five years. The short portfolio holds the short positions in U.S. Treasuries that surpasses the duration of the long portfolio, resulting in a targeted total duration of about negative 7 years. The fund puts heavy focus on junk bonds. It has a fee of 48 bps. The fund yields 4.55% annually (as of May 19, 2016). Sit Rising Rate ETF (NYSEARCA: RISE ) The ETF looks to track the performance of a portfolio comprising exchange-traded futures contracts and options on futures on two-, five- and 10-year U.S. Treasury securities weighted to attain the targeted negative 10-year average effective portfolio duration. Through this method, the ETF would see a 10% price appreciation with a 1% rise in U.S. Treasury yields. SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ) TOTL, an actively managed fund, has its foundation based on the principles of the DoubleLine’s sought-after investment research. The product seeks total return, while emphasizing income by investing in a global portfolio of fixed income securities of various maturities and ratings, though more-or-less 10% of the portfolio goes to the international arena. The fund looks to utilize various investment strategies in a broad array of fixed income sectors. It puts about 55% of assets in mortgage-backed securities. The fund charges 55 bps in fees. The fund has a modified adjusted duration of 3.90 years while its current yield stands at 2.58% (as of May 19, 2016). VanEck Vectors Investment Grade Floating Rate ETF (NYSEARCA: FLTR ) Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Investors can thus play the theme with FLTR. Effective duration of the fund is as low as 0.13 years. SPDR Barclays 1-10 Year TIPS ETF (NYSEARCA: TIPX ) The fund looks to track the Barclays 1-10 Year Government Inflation-linked Bond index. Since the inflation picture is improving in the U.S. and a solid inflationary outlook is a prerequisite of the Fed tightening policy, this TIPS ETF can be considered a good bet. The fund has moderate interest rate risk as noted by modified adjusted duration of 4.71 years. SPDR Nuveen Barclays Capital Build America Bond ETF (NYSEARCA: BABS ) Investors should note that the short-term bond ETFs would be under greater pressure if the Fed acts in June. The yield on the 10-year U.S. Treasury note actually fell 2 bps to 1.85% on May 19, 2016 from the earlier day while the yield on three-month treasury notes increased by one basis point. This pattern should help long-term bond investing. For this reason, we chose this muni bond ETF which yields about 3.15% annually (as of May 19, 2016). These bonds are safer than high-yield corporate bonds. Original Post