Tag Archives: seeking-alpha

What’s Behind The Recent Rally Of SLV?

Summary The silver market heated up in recent weeks. What’s behind the recent rally in the price of SLV? A weaker U.S. dollar and falling long-term yields are part of the story behind the latest recovery in the silver market. The silver market has heated in recent weeks, which has also pushed up the price of the iShares Silver Trust ETF (NYSEARCA: SLV ). What’s behind the recent rally of SLV? Let’s examine what is keeping up the price of SLV, and what does it mean up ahead for the silver market? Is it just because of the weaker U.S. dollar? It’s hard to consider the rally in the price of SLV without taking into account the recent depreciation of the U.S. dollar. The chart below presents the traded weighted U.S. dollar index (normalized to 100 for the end of March) and the price of SLV over the past several months: (click to enlarge) Source: FRED and Google Finance As you can see, the U.S. dollar lost some ground since the beginning of the month after several U.S. economic reports came below expectations including the NFP report, retail sales, and JOLTS. And since the core CPI came a bit higher than expected – the annual rate reached 1.9% – the market has become even more suspicious as to whether the FOMC will actually move forward and raise rates anytime soon, let alone this year. But the chart above also shows that while the depreciation of the U.S. dollar may have slightly contributed to the rally of the SLV, it still did fall by much to explain such a spike in SLV’s price. It’s worth noticing, however, that this week’s ECB monetary policy could have an impact on the foreign exchange markets including the euro/USD. And if the ECB were to convey a dovish sentiment that may include plans to expand or extend the current QE program, this news could actually pull back up the U.S. dollar – something that could curb down the recent rise in SLV and perhaps even bring it back down. If we also look at the recent changes in the long-term treasury yields relative to SLV, we could see that haven’t plummeted and only slowly came down in the past few weeks, which could have also helped boost up precious metals prices. (click to enlarge) Source of data: Bloomberg and U.S. Department of the Treasury Based on the CME Group 30-Day Fed Fund futures prices, the market has lowered the implied probabilities for the Fed to raise rates in December to only 30% and for March 2016 to 52% – only a month ago, the odds were close to 50% for a December hike. The drop in probabilities, mainly due to weaker-than-expected economic data – mostly in the labor market – has provided backwind to the silver market. And although from the fundamentals point of view, the market continues to slowly tighten, there haven’t been enough new developments to warrant such a rise in the price of SLV. Bottom Line The last time the price of SLV rose so fast in a single month was back in January of this year. Back then, long-term yields also dropped and the U.S. dollar fell against major currencies. And the Swiss National Bank decided to end the pegging of the Swiss franc to the euro. These events boosted volatility and helped pull up SLV. This time around, we also see falling U.S. dollar and lower LT yields, and volatility may have subsided in recent weeks, it could still erupt as there are growing concerns over the progress of China and even the U.S. This current climate could change and drag back down SLV especially if other central banks (ECB and BOJ) continue to move forward and devalue their respective currencies and the Fed pull its rate hike. But as long as these central banks don’t move forward – the Fed by raising rates, and ECB and BOJ in expanding their QE programs – the price of SLV is likely to continue to remain its current level. For more please see: Is SLV about to change course?

The Global X Uranium ETF Is Useless For Uranium Investors Right Now

Summary URA share price doesn’t reflect uranium price development. URA is much more impacted by the overall energy sector sentiment over the last couple of months. Although uranium price increased by 9% since May, URA declined by 30% over the same time period. URA is useless for short term uranium investors and speculators right now, although it provides exposure to the uranium market for long term investors. The Global X Uranium ETF (NYSEARCA: URA ) reached a new historical low of $6.75 per share in late September. Although the share price recovered to $8.01, it is down almost 30% year-to-date. A bigger part of the decline was recorded during the June-September period when URA declined by more than 40%. The important thing is that URA experienced a significant decline while uranium prices were in a side-trend. Moreover, uranium prices have been in an uptrend since May. During this uptrend, uranium’s price increased by approximately 9%. URA’s share price declined by 30% over the same time period. Readers should note that URA doesn’t invest directly in uranium, it holds shares of uranium producers and explorers. Logic says that as uranium price grows, share prices of uranium producers and explorers should follow. But the recent developments show that this relation has been disturbed. Source: futures.tradingcharts.com The divergence between URA and uranium prices has been enormous over the last couple of months. The coefficient of correlation between the URA share price and uranium futures price for the last 5 months (May 11 – October 15) is -0.423, which is a surprisingly high level of negative correlation. The chart below shows the 10-day and 40-day moving correlations between URA and uranium prices. The chart shows that the correlation is highly unstable and that there are some long time periods of negative correlation. Moreover, the 10-day moving correlation approached extremely high levels of negative correlation close to the -1 level twice over the last 5 months. Source: Own processing, using data of Yahoo Finance and futures.tradingcharts.com The chart below shows 40-day moving correlations between URA and oil prices (represented by the United States Oil ETF (NYSEARCA: USO )), energy sector (represented by the Vanguard Energy ETF (NYSEARCA: VDE )) and S&P 500. 40 trading days equal approximately 2 calendar months. As the analysis shows, URA is strongly correlated with VDE. The moving correlation between URA and VDE is far more stable compared to URA-USO and URA-S&P 500 correlations. Especially over the last 5 months the URA-VDE correlation was very stable; it moved in the 0.8 – 1.0 range. There was much higher correlation between URA and VDE and between URA and USO than between URA and uranium prices over the last couple of months. Source: Own processing, using data of Yahoo Finance The data confirm that share prices of uranium producers are heavily impacted by the overall energy sector sentiment. The uranium prices don’t affect URA share price as much as they should. The chart below shows share price development of URA and VDE over the last three months. The similarity of the two price curves is striking. This situation will change and share prices of companies from the uranium industry and URA’s share price will start to reflect uranium price development again, but it is hard to predict when the normalization will happen. For now, the overall energy sector sentiment is the main factor affecting share prices of companies from the uranium industry. Conclusion Over the last couple of months, URA’s share price hasn’t reflected uranium market developments. There is actually a relatively high level of negative correlation between URA share price and uranium futures price. URA is much more impacted by the overall sentiment in the energy sector than by uranium prices. It means that it is useless for the uranium investors right now. If uranium prices increase, it will be reflected by share prices of uranium producers and explorers and by URA in the end, but it is questionable how long it will take for the relations to normalize once again. URA still provides exposure to the uranium market for long term investors, but it is useless for investors with short time horizon and for uranium market speculators right now.

A Pioneering Approach To Earnings Season

Summary US Q2 earnings season was one of the most volatile ever. We present Pioneering Quantitative Approach focusing on prices and not on fundamental data. Our analysis provides a guide per sector and per capitalization. ABSTRACT “Qui sait le passé peut conjecturer l’avenir”, Jacques-Bénigne Bossuet As we are just about to enter in the Q3 Earnings Season in the US, Uncia AM decided to provide you some keys to understand the Q2 Earnings Season. Bloomb erg already gave some keys: US stocks got biggest earnings bang since 2012 . This empirical study emphasizes many things: 1/ It is not worthwhile to keep equity position over the earnings: earnings releases are a lottery. As difficult as it may be for our equity analyst friends to admit (note: the author is an asset manager) , all available empirical data shows that it is impossible to predict market reaction following an earnings release. We thus need to distinguish the fundamental component of the reaction which is less unpredictable (related to turnover, EBITDA and other hard data) from the “price signal” component. The latter has always been impossible to predict, even if we take into account the released fundamental data. From a statistical perspective, the specific movement linked an the earnings release is on average null, as can be seen from the highly leptokurtic distribution of the movement. For an asset manager seeking to optimize their Sharpe Ratio, it is therefore not worth maintaining a position in the equity over the release period (assuming transaction & liquidity fees to be marginal) (click to enlarge) Source: Bloomberg, Uncia AM, Alphametry. Read the entire article in order to make your own opinion : 2/ Information Technology sector behaved properly during this session, on almost all indices. 3/ The specific Russell 2000 – related stocks moved a lot on earnings: maybe more interest of investors for UScentric names, as a consequence of fear over the USD strength and the world/Chinese macro slowdown. As the article may be a bit technical, here is a brief takeaway: On average, stocks from Nasdaq Composite Index (NASDAQ: CCMP ) exhibit a null return over earnings, but with large volatility. Therefore, it justifies the strategy to cut positions over earnings. In addition to that, we can notice that signals were slightly better on large caps vs small caps, and quite good in a sector such as Information Technology. “Weekly speaking”, we experienced a sharp positive signal on CCMP, but on a “PEAD” perspective only few comonotony between Earnings Moves and Drift Returns. On average, stocks from Russell 2000 Index (RTY) exhibit a null return over earnings, but with large volatility. Therefore, it justifies the strategy to cut positions over earnings. In addition to that, we can notice that signals were slightly better on large caps vs small caps, and quite good on a sector such as Information Technology, same things as we notice on CCMP. There are a lot more “PEAD” signals on RTY than on CCMP, meaning that as there are many companies belonging to both indices, many companies belonging only to RTY exhibit large signals. This means that investor attention was largely focused on UScentric companies. “Weekly speaking”, since the beginning of the year, we had very positive signals on RTY, but the summer was very complicated as we can see a downside candle at the beginning of August. Stocks from S&P 500 (SPX) are less volatile over earnings than those of CCMP, RTY or Nasdaq 100 (NDX). It may be explained by the average size of capitalization, but this is not sufficient as NDX average capitalization is higher (58.0 vs 50.2) is higher than SPX. We make the same notification about earnings release volatility that is not rewarded, unless capitalization criteria is not worthwhile anymore, nor sector criteria (even if we can see a positive skew for Information Technology sector). In terms of “Weekly signals”, we can notice numerous negative signals, emphasizing an overreaction of investors about bad news versus good news. We have only few data, but first of all, we can notice that stocks from Nasdaq 100 (NDX) exhibits the largest average capitalization, and the largest absolute earnings moves. For more technical readers, should you be interested in the underlying philosophy, please go ahead: METHODOLOGY Our sample takes into account earnings that occurred between 2015, June 30th and 2015, August 31st. We only focus on companies whose market capitalization exceeds $1 billion, the day before the earnings release (ER)/call (NYSE: EC ). We focus on 4 main US indices: Nasdaq Composite , Nasdaq 100 (NDX), S&P 500 (SPX) and Russell 2000 (RTY). Our method to estimate the move due to earnings release/call is the following: We assume that the Management Call lasts one hour, and that ER had occurred just before, which is the standard case (hugely often- we consider it happens all the time). Therefore, thinking as of Paris time, with 6-hours delay with New-York, we can set the following table: Table of earnings category Source: Uncia AM. We use the earnings return by getting rid off the total return index to the idiosyncratic move, assuming a beta for each stock = 1. For more information, you can refer to the original paper by the author, Post Earnings Announcement Drift, a Price Signal? [1] Important: in the following development, return always refers to relative return of the stock versus its index (total-return). NASDAQ COMPOSITE – CCMP: average capitalization (