Tag Archives: seeking-alpha

AMLP Shareholders Beware

By hidden design, the ALPS Alerian MLP ETF (NYSEARCA: AMLP ) robs shareholders of 37% of their upside gains. It was the first ETF do this, and when I revealed AMLP’s dirty little secret to owners and potential buyers, many did not seem to care. “It’s all about the dividend,” they emphatically stated. “Plus, in a down market, AMLP will only fall 63% of the underlying index,” they crowed. AMLP clips 37% of performance because it is a C-corporation that is liable for federal and state taxes, estimated to be about 37% of any capital appreciation and taxable income. The supposed “benefit” of this horrendous tax drag is that it would act as a buffer during down markets, limiting declines to just 63% of those experienced by the underlying index. However, AMLP is failing to live up to those expectations. The fund has been falling like a rock the past ten weeks. Shareholders missed out on the lion’s share of gains on the upside, and now they are getting screwed again as the fund loses more than its underlying Alerian MLP Infrastructure Index. The promise of smaller losses in a down market is now history. Evidence of this can be found on AMLP’s website , where the one-month performance of the fund was -7.96% for November, while the underlying index is showing a 7.95% loss. The problem began in mid-September, so the three-month performance of -13.36% doesn’t reveal this discrepancy, yet. The performance table also shows that since inception, AMLP has had a cumulative return of +14.63%, while its index returned +34.56%. AMLP has returned less than 38% of the underlying index return. The other 57% has been eaten up by taxes and fees. Owners of AMLP are blinded by the yield. Based on its fourth-quarter distribution of $0.299 and Friday’s (12/4/15) closing price of $10.91, this C-corporation disguised as an ETF has a seductive yield of 10.96%. What many owners do not comprehend is the degree of principal being robbed in order to support the illusion of a high yield. Fortunately, the UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) tracks the same Alerian MLP Infrastructure Index, making it easy to see AMLP’s shortcomings. Using data and software from Investors FastTrack , I was able to produce charts making a revealing comparison. Please note that MLPI uses an exchange traded note (“ETN”) structure with its own drawbacks , but its performance helps to understand the flaws of AMLP. Here is a long-term performance graph comparing the two. AMLP is in red, MLPI is in green, and the light-blue line in the lower half shows the relative strength of AMLP to MLPI (a rising line indicates AMLP is performing better than MLPI). From AMLP’s inception on 8/25/2010 through its performance peak on 8/29/2014, it had a total cumulative return of 67.4%. During the same period, MLPI had a total cumulative return of 110.5%. During this rising market, AMLP only returned 61% of what MLPI captured. (click to enlarge) During that up market, MLPI’s price went from $26.74 to $46.22, resulting in 72.8% capital appreciation. Meanwhile, AMLP’s price went from $14.98 to $19.31, resulting in just a 28.9% capital appreciation, or only about 39.7% of what MLPI delivered. One of the unwritten promises of AMLP was that while it lagged on the upside, it would shine in down markets because its deferred tax liabilities would become assets, greatly reducing the downside impact. However, AMLP’s price fell 43.5% from 8/29/2014 through 12/4/2014, while MLPI’s price fell 48.6%. The ratio of AMLP’s price decline to MLPI’s was 89.4%-much worse than the “promised” 63% and nowhere near the 39.7% of the upside it captured. From a total return perspective, AMLP fell 43.5% to MLPI’s 48.6% decline. For the entire cycle, AMLP’s price went from $14.98 to $10.91. This principal erosion of 27.2% is the cost of supporting the 10.96% current yield. Since inception, AMLP has returned 3.8% (0.71% annualized), and MLPI has returned 15.4% (2.75% annualized). AMLP had an upside capture of 61% (39.7% based on price) and a downside capture of 89%. It won’t take too many cycles like this to completely obliterate AMLP’s principal. Zooming in reveals AMLP’s most recent problem. During falling markets, AMLP is supposed to fall much slower than MLPI. That was true from mid-May through mid-September of this year, and it can been seen in the rising light-blue relative-strength line. However, beginning around September 11, that changed. The relative-strength line went flat as AMLP plunged 19.54% between 9/11/2015 and 12/04/2015. Over this same period, MLPI dropped slightly less-19.49%. (click to enlarge) AMLP’s touted downside buffer has disappeared. Presumably because it used up all of its deferred tax liabilities/assets, exposing the more than $6 billion of shareholder assets to the full brunt of the MLP market decline. History has shown that AMLP investors don’t care. They only care about the yield. The erosion of principal helps to exaggerate the current yield while robbing long-term holders of principal. Owners who bought their shares on in 2014 at $19.31 per share do not receive the new 10.96% yield. They are getting a 6.2% yield on their initial investment, and it has cost them 43.5% of their principal. Maybe now they will start to care. Note: In early trading today (12/7/2015), AMLP plunged another 9% to a price of less than $10. Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Managements Leading Companies Off A Cliff

By Tim Maverick The quickest and surest way for investors to lose money is to invest in companies where the management is, to put it politely, incompetent. Numerous instances exist throughout history. But we’re perhaps seeing the worst example ever, and it’s from the global mining industry . The level of incompetence being displayed is simply astonishing. Chinese Steel Collapse China has the world’s biggest steel industry, producing half of all steel. Crude steel output there soared more than 12-fold between 1990 and 2014. But now, thanks to overcapacity, the Chinese steel industry has shifted into reverse in a big way. Prices have fallen by nearly 30%. Steel rebar prices in China on the Shanghai Futures Exchange are at all-time record lows. Rebar prices are down 30% this year alone. As losses continue to mount for the industry, even Xu Lejiang, Chairman of giant steelmaker Shanghai Baosteel, said that the industry’s output will collapse by a fifth in the not-too-distant future. Forecasts are for a drop in production of at least 23 million metric tons (mmt) over the next year. The China Iron and Steel Association is in general agreement. It says that output probably permanently peaked in 2014 at 823 mmt. In effect, we’ve seen peak steel. Iron Ore Dreams That’s bad news for the major iron ore miners – Vale S.A. (NYSE: VALE ), Rio Tinto PLC (NYSE: RIO ), and BHP Billiton (NYSE: BHP ). China will cut back on its imports of iron ore, a key ingredient in steelmaking. The evidence is already there. The Baltic Dry Index, which includes ships that carry ore, hit its all-time low on November 20 at 498. Iron ore itself hit an all-time low – spot pricing began in 2008 – about a week ago at $43.40 per metric ton. Logic would dictate the miners cut back production. So does Economics 101. But the managements at the big three continue to live in a fairy tale. They continue clinging to their forecast – that Chinese steel output will rise 20% over the next decade – like drowning men to a life preserver. In fact, Rio Tinto still forecasts that annual Chinese steel production will hit a billion tons by the end of the decade. So the three blind mice (iron ore miners) continue raising output, using a scorched earth policy to eliminate the competition. In fact, next year, Vale will open the world’s largest iron ore mine (Serra Sul in Brazil). And the iron ore sector isn’t alone. Other mining segments – including copper, zinc, and nickel – continue to produce as if there’s no tomorrow. How to Spot the Bottom Eventually, the long nightmare for shareholders in mining companies will end. So how do you spot the signs that a bottom is coming and brighter days are ahead? Output cuts will help. But if Company A cuts its production, the dreamers at one of the big three miners will simply raise their output even more. A true signal will be the removal of one of these totally incompetent management teams. That should start the ball rolling towards real change. I then expect the big miner that made the change to finally say “uncle.” And I don’t mean just deciding to finally cut back on output. I mean throwing in the towel completely, walking away from a segment like iron ore, and permanently shutting down production. If a permanent shutdown doesn’t occur, miners will be in the same boat as shale oil producers. As soon as the price blips up a few dollars, a flood of supply hits the market. A commodities version of Sisyphus, if you will. That may happen sooner rather than later. In iron ore, for example, the price is quickly approaching the break-even level for some of the big miners. This is despite falling freight, oil, and currencies helping to lower miners’ costs. Until the permanent shuttering of mines occurs, the sector will remain in its downward spiral. Original Post

Beat U.S. Manufacturing Woes With These Industrial ETFs

The brisk momentum in the U.S. economy seemed to have taken a brief halt to start December as the economy’s manufacturing activity for November shrunk to below a six-year low. Contraction in manufacturing activity came after three years. Almost an eight-year high greenback and steep spending cuts in the energy sector to resist the stubbornly low oil prices were held responsible for this dropdown. However, other economic readings and solid auto sales confirmed that the economy is well on its growth path. The Institute for Supply Management (ISM) reported that the benchmark of domestic factory output declined to 48.6 from 50.1 in October. The data missed economists’ expectations of 50.5. Notably, a reading of below 50 indicates a contraction in activity. The measure for new orders slipped to 48.9, more than a three-year low level. The prices paid index dropped to 35.5 from 39 and fell shy of the expected 40. However, construction spending rose 1% to a seasonally adjusted $1.11 trillion rate, which is the highest level in almost eight years. Market Impact Since the offhand data sparked off concerns regarding the economic health of the U.S. to some extent, the dollar fell from its multi-year high level and PowerShares DB US Dollar Bullish ETF (NYSEARCA: UUP ) lost 0.5% on the day. The little confusion offered the gold ETF SPDR Gold Shares (NYSEARCA: GLD ) a short-lived respite as the fund added about 0.4% on the day. The benchmark U.S. 10-year Treasury note yield dropped to a one-month low of 2.15% as of December 1, 2015, giving iShares 10-20 Year Treasury Bond ETF (NYSEARCA: TLH ) a 0.7% nudge. The possibility of a slower rate hike trajectory (if the Fed shoots the lift-off this month) and a slimming manufacturing activity at the threshold of a rising rate environment left investors edgy. However, along with several other analysts, even we believe that this latest blow to ISM data is more the result of the soaring greenback, the one-and-a-half year long oil price rout that handicapped the entire energy sector and lower demand from abroad due to global growth issues. The underlying current in the U.S. economy seems pretty decent. ETFs to Watch Investors should also note that the stocks were fairly steady after the weak industrial data. Still, some investors may want to take a closer look at the industrial ETFs. Though industrial ETFs have underperformed so far this year, they’ve held their head high in the key trading session. Below, we highlight four ETFs which are still strong bets in an apparently-lagging sector. First Trust RBA American Industrial Renaissance ETF (NASDAQ: AIRR ) This fund provides exposure to the small and mid cap stocks in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. The index first eliminates the stocks from the Russell 2500 Index that aren’t connected to manufacturing or related infrastructure and banking. Then it eliminates companies with non-U.S. sales greater than or equal to 25% and positive 12-month forward earnings estimates. For the banking component, only banks in traditional manufacturing hubs will be included in the holdings list. The approach results in a basket of 37 securities, which are widely spread out across components with none holding more than 4.35% of assets. The fund is often overlooked by investors as depicted by its AUM of $44.9 million and average daily volume of about 19,000 shares. The Zacks Rank #3 (Hold) fund charges 70 bps in fees per year and has lost 1.3% so far this year, but was up 0.7% yesterday. ARK Industrial Innovation ETF (NYSEARCA: ARKQ ) This is an actively-managed ETF seeking long-term capital appreciation by investing in companies that benefit from the development of new products or services, technological improvements and advancements in scientific research. Autonomous vehicle is the top industry in the fund with 33% exposure followed by robotics (31%) and 3D printing (23%). This approach results in a basket of about 40 stocks. The product has accumulated $13.8 million in its asset base and charges 95 bps in fees per year. The fund is down 0.5% in the year-to-date frame but added over 0.2% on December 1, 2015. iShares U.S. Industrials ETF (NYSEARCA: IYJ ) IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to 212 U.S. companies that produce goods used in construction and manufacturing. The fund is heavy on General Electric (NYSE: GE ) (10.7%). The ETF manages an asset base of $605 million and trades in an average volume of 82,000 shares. The fund is slightly expensive with 43 basis points as fees. It rose 0.4% on December 1, 2015 and is up over 0.5% so far this year. The fund has a Zacks ETF Rank #2 (Buy). Vanguard Industrials ETF (NYSEARCA: VIS ) This fund follows the MSCI US IMI Industrials 25/50 index and holds about 345 securities in its basket. The fund manages nearly $2 billion in its asset base and charges only 12 bps in annual fees. Volume is moderate as it exchanges roughly 105,000 shares a day on average. Aerospace has the top sector exposure with 23.3% weight followed by industrial conglomerates (19.6%). The Zacks Rank #3 product has lost 1.6% so far this year (as of December 1, 2015) but advanced 0.6% in the key trading session. Original Post