Tag Archives: seeking-alpha

Adoption Of VXUP As A Hedging Instrument Could Transform Investment Management

VXUP is revolutionary. VXUP could become a key hedge for non-correlated portfolios. VXUP deserves to become a billion-dollar ETF. Spot CBOE VIX Up Class Shares (NASDAQ: VXUP ) could transform investment management. While I am very empathetic to the notion put forth in yesterday’s article that the daily movement of the ETF currently lags the responsiveness of the raw VIX index, the recognition, appreciation, and acceptance of VXUP’s benefits should dramatically increase its trading volume. In turn, the increase in VXUP’s trading volume should make it much more responsive to changes in the raw VIX index. And this increased responsiveness to the raw VIX index will further increase the ETF’s value as a hedging tool, in a virtuous cycle. The general acceptance and adoption of VXUP as a hedging instrument should transform investment management in a variety of ways which I will specifically illustrate. Indeed, I believe that the investment community will quickly realize the immense profitability of promoting a very healthy level of liquidity and AUM in VXUP. Yesterday’s article did an excellent job of explaining VXUP’s mechanics, along with that of its inverse ETF VXDN (NASDAQ: VXDN ). I will not recreate the wheel here. However, I will point out numerous examples of strategies which could be vastly improved by the use of VXUP as a hedging component. Indeed, as a hedging instrument, it is totally irrelevant whether VXUP is perfect. What matters to the investor is whether or not VXUP is a drastic improvement over every other ETP hedging alternative currently available. I will argue forcefully that VXUP is vastly superior. The ZOMMA Index Master Sheet is an exhaustive list of ETP strategy indices and their variations that we have published on seekingalpha and sometimes in books. I forcefully argue that for any of the strategies which use iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA: VXZ ), iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ), or ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) as a hedging component, that the performance of those strategies could be vastly improved over multi-year periods by replacing the use of VXZ, VXX, and UVXY with VXUP. Theoretically, there are very short, discrete time periods where backwardation could benefit the use of VXZ, VXX, or UVXY. However, it has been definitively illustrated by dozens of studies that over longer times frames, persistent contango tends to cause an uncomfortable amount of performance drag when using these instruments as hedges. On one hand, I have argued that all of the strategies illustrated in the master sheet should no longer be used due to their correlation to long bonds. On the other hand, reducing the size of TMF, and making VXZ, VXX, or UVXY larger percentage allocations in an effort to reduce the strategies’ long bond correlation and diversify hedging sources kills upside performance due to contango lag–equally unacceptable. VXUP would solve this problem elegantly, allowing larger volatility-related hedges, which could reduce the correlation of the strategy indices to both stocks and to bonds, while eliminating contango lag. I have argued forcefully that the nightmare scenario for the financial markets is for both stocks and bonds to crash simultaneously. On 3/11/2015 , I wrote: The sad joke of financial markets is that they are driven by long term interest rates, which set the discount rate for all other asset classes. And indeed, dropping interest rates have made speculators of every stripe look brilliant. Imagine a high jumper who is constantly buoyed by a dropping force of gravity. His athletic prowess appears to be improving, but instead, the force of gravity is becoming weaker. And conversely, rising gravity, or interest rates, cause moving objects to drop to earth more quickly. Moving objects like stock prices, bonds, real estate, and even gold. Every asset class will be affected by rising rates. Since then, the TLT ETF has dropped from $127 to a touch below $117. Imagine a nightmare scenario is which both stocks and long bonds dropped by 50%, due to a spike in interest rates. In such a scenario, it is almost facile and axiomatic to point out that volatility would skyrocket. A hedge like VXUP would be absolutely essential to reduce a portfolio’s correlation to both stocks and to bonds during such a nightmare. Moreover, if stocks and bonds do not simultaneously collapse, a lower correlation to both asset classes will not hurt the investor seeking an authentically non-correlated return stream during more normal regimes. So returning to the issue at hand, the use of VXUP as a hedging tool potentially allows the serious investor to reduce a portfolio’s correlation to both stocks and to bonds without the continuous contango that a VXZ, VXX, or UVXY position would entail. And without contango, the new VXUP volatility hedge could be comparatively larger without the associated drag of pre-existing alternatives. So it is largely irrelevant to the serious investor whether or not VXUP perfectly mirrors the raw VIX index. No hedge is perfect. There are merely hedges which are far better than any available ETP alternative! And VXUP is that far better hedge. As the investment community realizes it and volume in the VXUP increases, ironically, the VXUP should better mirror the raw VIX and even further outpace the competition as the most serious tool in the hedger’s toolbox. The portfolio manager’s dream has always been a continuously traded put option of sorts, which can serve as a shock absorber to a portfolio, without the drawbacks of a put option’s time decay or a volatility future-based instrument’s contango (which some would call synthetic time decay). The VXUP should become that continuously traded put option. Nothing else which has been introduced in the ETF world comes close to the VXUP in achieving that goal. I am not an expert in ETF design, but the goal that VXUP seeks to achieve is exceedingly shrewd. I would argue that increased volume, AUM, and acceptance will make the instrument more robust, useful, and demanded. Disclosure: I am/we are long VXUP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

You Could Short China At This Point, But It’s Not For The Fainthearted

Chinese stock markets could be set to fall by 50 percent. Given concerns of a stock market bubble in China, I take a bearish view on Chinese equities at this point in time. The ProShares Short FTSE China 50 ETF could potentially provide an opportunity to take advantage of a downturn. However, this strategy carries high risk given the degree of volatility inherent in Chinese stock markets. Once a booming economy at which a growth rate of below 8 percent annually was unheard of, things have certainly been changing for China in the past five years. Stock markets in China have certainly seen periods of abnormally high returns. However, such returns have come with significant volatility and sustained growth has remained elusive. For instance, the Shanghai Composite Index (000001.SS) has seen significantly high returns in the past year, up over 100 percent from the beginning of 2014 to May of this year. However, the trend now appears to be reversing, with the index having lost as much as 12 percent since the beginning of June, along with various experts predicting that the index could in fact fall by 50 percent. While I had previously commended China’s rise in stock prices and was optimistic on its continuation, I am less so in light of the recent volatility. Firstly, high stock market returns have not been matched by correspondingly high growth. China’s stock markets appear to have been taking a similar course as that of Europe, where quantitative easing and lower interest rates have forced investors to seek higher returns in the stock market. Moreover, this situation is being exacerbated in China given that returns from the property sector have been significantly lower than in previous years. In this context, I take a bearish view on China at this point in time. Given the historical nature of volatility across Chinese stock markets, the market appears to be at a significant risk of correction. This is especially possible given that stock returns are increasingly being driven by margin; i.e. investors are now borrowing to fund their positions. Should contagion develop in China and investors pull out their funds, then it is quite conceivable that a 50 percent drop would be possible under such circumstances. While a 50 percent drop seems rather drastic, it would not be that unusual when taking into account that the Shanghai Composite has already appreciated by over 100 percent in the past year. Moreover, China’s stock markets have precedent for demonstrating that they are not immune to contagion, with the Shanghai Composite having dropped almost 60 percent between 2007-08 in spite of higher economic growth rates above 8 percent at the time. Additionally, with China trading at a cyclically-adjusted price-earnings ratio of 20.5, this is significantly higher than the overall emerging markets ratio of 16.5. In this regard, China’s stock markets are likely overvalued and could be due for a pullback. While China’s quantitative easing has spurred increased investment in the stock market due to lower borrowing costs, this is unsustainable and there is always a risk of a sharp pullback in response to a rise in US interest rates, as investors seek more stable returns elsewhere. For investors wishing to take advantage of a specific short position on Chinese stock markets, one way of doing so is through the ProShares Short FTSE China 50 (NYSEARCA: YXI ), which has returned over 7 percent since the beginning of May. This ETF corresponds to the inverse of the FTSE/Xinhua China 50 Index and has succeeded in capturing a broad downturn in the Chinese market over the past two months. However, a significant risk remains in that investors would likely have to time the trade very well; returns on the ETF as a whole have been negative. Moreover, 5 of the 10 largest companies on the index originate from the financial sector. In this regard, it is likely that stock performance would move down in response to a broader economic downturn in China. However, with Chinese banks gaining traction internationally, it could be the case that this in fact lifts stock market performance higher. To conclude, I take an overall bearish view on the Chinese stock market at this point and a short opportunity likely exists. However, investors would likely endure significant volatility in doing so which would make this quite a risky trade. Disclaimer: Investing in emerging markets carries a high degree of volatility and as such, the above strategy is not recommended for conservative investors. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Duke Energy: Dividend Increase Coming – What Investors Should Expect

Summary Income investors flock to utilities for stable, high dividend yields. One of the most popular utility stocks is Duke Energy, which has paid dividends for 89 consecutive years. Duke should announce a dividend increase within the next few weeks. Management has a stated dividend policy relating to the company’s payout ratio, which can guide investor expectations. This article will outline what investors can reasonably expect when Duke Energy increases its dividend. Investors who buy utility stocks presumably do so for their strong dividend payments. Indeed, well-run utility stocks displayed a tremendous ability to pay dividends quarterly like clockwork, and even raise those dividends over time. They can do this because of their steady business models. After all, people will always need to heat their homes and keep the lights on, regardless of what the broader economy is doing. This results in a very reliable and consistent stream of profits, year after year. Within the next several days, it’s likely Duke Energy (NYSE: DUK ) will raise its dividend for shareholders. After yet another successful year, it’s that time once again for Duke to bump up its cash payout. The company typically increases its dividend in late June or early July, meaning another increase is coming soon. With all this in mind, here’s what Duke Energy investors should expect to receive in terms of a dividend increase. Slow And Steady Wins The Race Duke Energy fits the mold of a classic “widows-and-orphans” utility. It produces steady, albeit unspectacular, earnings growth, which then fuels modest dividend growth from year to year. Last year , Duke grew adjusted earnings by 4.3% year over year, to $4.55 per share. One reason for Duke’s earnings growth is that it is aggressively cutting costs in the aftermath of its acquisition of Progress Energy in 2012. Since then, Duke has realized approximately $550 million in operating and maintenance cost savings. Another key factor behind Duke’s success is that it operates a large regulated business. Among utilities, I favor the regulated operators, because regulated utilities frequently achieve favorable rate outcomes. This provides them with steady rate increases from year to year, which virtually ensures rising revenue. In fact, Duke’s regulated business was the major reason for its very strong performance in the first quarter . Duke grew adjusted EPS by 6% in the first quarter 2015, year over year, which represented a meaningful acceleration from its earnings growth in 2014. Duke’s regulated utility business led the way, with 5% earnings growth. This is a significant driver for Duke since its regulated business represents 85% of its total profits. Going forward, Duke expects to have another successful year in 2015. Management forecasts full-year adjusted earnings to reach $4.55 per share-$4.75 per share. This would represent as much as 4.3% earnings growth year over year. Last year, Duke Energy raised its dividend on July 1. The year before, the increase was announced on June 25. Therefore, investors should expect the company to increase its dividend very soon. Reasonable Expectations For A Dividend Increase Duke Energy has a long history of paying and raising its dividend. It has paid a dividend for 89 consecutive years and has increased its dividend for seven years in a row, since the spinoff of Spectra Energy in 2007. Duke Energy seeks to keep its dividend payout ratio at between 65%-70% of its adjusted diluted earnings per share. In 2014, Duke Energy raised its payout by 2%. The company projects a similar level of earnings growth this year as last year, so investors should reasonably expect a similar dividend increase as well. With all this in mind, I would expect Duke Energy to increase its quarterly dividend by 2% to $0.81 per share. Annualized, Duke’s dividend would reach $3.24 per share. This would represent 69% of Duke’s adjusted earnings per share expectations for 2015, at the midpoint of its forecast, and would fall right in-line with management’s stated dividend payout ratio policy. Duke Energy: Attractive Sector Pick Another 2% dividend raise this year, to $3.24 per share, would send Duke’s dividend yield up to 4.6% based on its recent $70 stock price. That’s a very attractive yield, both on an absolute basis, as well as in relation to many of Duke’s industry peers. For example, American Electric Power (NYSE: AEP ) yields 4%, while another close competitor, Exelon Corporation (NYSE: EXC ), yields just 3.8%. This makes Duke a very attractive pick within the utility sector. It’s true that Duke Energy’s payout still wouldn’t match up with all of its industry peers. However. Southern Company (NYSE: SO ) yields 5.2% right now. But I’ve written previously about why I believe investors should avoid Southern Company as it is encountering some significant fundamental business challenges. In conclusion, Duke Energy had a successful 2014, is off to another strong start this year, and if all goes according to plan, should pass along another dividend increase to shareholders very soon. For income investors looking for a stable, secure high-yield investment opportunity, Duke Energy should be on your radar. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.