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HACK Surges With Rise In Cyber Crime

Though more than 15 dozen products were launched last year, one that surely deserves a special mention in the ETF world is the ISE Cyber Security ETF (NYSEARCA: HACK ). The fund has been a darling among investors thanks to a recent slew of cyber security breaches that have prompted companies to step up security spending. Cyber security breaches have been witnessed in almost every industry, with some of the big shot companies such as JPMorgan Chase (NYSE: JPM ), eBay (NASDAQ: EBAY ), Apple (NASDAQ: AAPL ), Starbucks (NASDAQ: SBUX ) and Adobe (NASDAQ: ADBE ) been among the victims this year. In fact, the U.S. government’s Office of Personnel Management, which stores data for more than 30 million people, witnessed a breach in April 2015, which itself explains the severity and extent of cyber crime. According to a report by McAfee, cyber crime cost the world economy $400 billion in 2014. Per KPMG, a professional services firm, cyber crime is expected to cost the world an enormous $560 billion per year . “In addition to financial losses, cyber attacks have the ability to shut down or manipulate energy infrastructure, weapons defense systems, medical devices, financial markets, transportation networks/vehicles, or harvest highly personal or secret information and a constantly growing amount of other potential threats,” as explained by Pure Funds . This menace has prompted companies to commit billions of dollars annually in hopes of preventing future attacks which in turn is acting as a major tailwind for the U.S. cybersecurity industry. Rampant cybersecurity breaches and the success of cybersecurity stocks have led to a massive inflow of assets into HACK, with the product having recently crossed the $1 billion threshold. In fact, the success of HACK has prompted other issuers to come out with funds focusing on this niche space. Below, we have lighted HACK in detail for investors willing to try their hands in this ultra popular ETF. Launched last November, the fund tracks the ISE Cyber Security Index. The index tracks the performance of companies actively engaged in providing services for the cybersecurity industry. These cybersecurity services are designed to protect computer hardware, software, networks and data from unauthorized access, vulnerabilities, attacks and other security breaches. The equal weighted fund presently holds a basket of 31 stocks, with Intralinks Holding (NYSE: IL ), Vasco Data (NASDAQ: VDSI ) and Proofpoint Inc. (NASDAQ: PFPT ) being the top three holdings, each holding a little more than 4% of total fund assets. As far as the sub-industry breakdown is concerned, the fund allocates nearly 60% of its assets in Systems Software, 16% in Communications Equipment, followed by 8.4% in Internet Software & Services. Also, more than two-thirds of the fund’s holdings belong to U.S. companies, followed by 13% from Israel, 5% from the Netherlands and 4.7% from South Korea. The fund charges 75 bps in fees. It trades in solid volumes of more than 800,000 shares a day resulting in a narrow bid/ask spread. HACK has returned a solid 24% this year and roughly 30% since its inception. Originally published on Zacks.com .

RSX: The Bear Thesis

Summary Ruble will continue to weaken. The economy is in bad shape, and production was not helped by the weak ruble. The oil is looking weak too, which is very dangerous for the Russian oil producers and the economy. Despite recent weakness, the Russian Stock Market (NYSEARCA: RSX ) is still up almost 25% year-to-date. The wild moves seen in last December are almost forgotten. However, I see several reasons why RSX can go lower. The Russian Ruble The Russian currency has somewhat stabilized after falling to as much as 80 rubles per dollar in December of 2014. Currently, you can buy a dollar with 55 rubles. However, I see reasons why the ruble could go lower, hurting the dollar-denominated RSX. The first reason is the key interest rate. The key rate, which was increased to 17% by the Russian Central Bank at the height of the crisis, was recently lowered to 11.50%. This move helped the bank stop the rally in the Russian ruble. The Central Bank also started buying $200 million per day in order to bring the reserves back to $500 billion. At the end of May, international reserves stood at $356.8 billion. In my view, the key rate will be lowered further, because the economy is in a bad shape. In April, industrial production fell ( Google translate link ) by 4.5%. In comparison, industrial production fell by just 0.6% in March. This means that the ruble is not weak enough to help local producers, which will make the Central Bank more eager to bring interest rate down and push the ruble lower. The Economy As I mentioned above, production is stagnating. So is consumption. In May, real earnings of Russian citizens contracted ( Google translate link ) by 6.4%. According to official estimates, it would take three years to bring earnings back to the level of 2014. This fact means problems for the consumer-oriented part of RSX holdings like Sberbank ( OTCPK:SBRCY ), Magnit (retailer), VTB Bank, and Mobile Tele Systems (telecom). The decrease of consumer spending could especially hurt Magnit, which has been growing very fast and opened 1,618 new shops last year. The budget is stretched, and the Russian Ministry of Finance is even ready to cut the sacred cow – military spending. Oil Russia is still overly dependent on oil prices, and I’m bearish on oil. Brent oil managed to make a spectacular run from under $50 per barrel to almost $70 per barrel. The decline in the number of U.S. rigs and conflicts in the Middle East help oil gain ground. In my view, oil has run out of upside catalysts. The conflicts in Yemen and Iraq are very far from being resolved, but this does not lead to an upside in oil. The number of working rigs in the U.S. has dropped by more than 50% compared to 2014, but this fact no longer helps oil. Despite recent cuts, supply still exceeds demand, and this means more pressure on oil prices. Pressure on oil hurts the economy, and hurts Russian oil producers, like Surgutneftegas, Lukoil ( OTCPK:LUKOY ) (and Tatneft ( OTCPK:OAOFY ), which are heavily represented in RSX. Bullish Argument The eternal bullish argument for the Russian market is its undervaluation based on different metrics. Interestingly, in Russia, this argument, which was widely used five or ten years ago, is now stated with sarcasm. Yes, you can still choose the metric that you like, choose the peers and find out that Sberbank, Gazprom ( OTCPK:OGZPY ) and others are relatively undervalued. In fact, they have always been. This undervaluation is chronic and, in my view, nothing will change on this front unless the country goes through serious structural changes. Bottom line I am bearish on RSX. I believe that the combination of weaker oil, sluggish economy and falling ruble will send RSX closer to lows seen in December of 2014. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in RSX over 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.

PHK: Is It Time To Get Out While You Still Can?

Summary Pimco High Income Fund’s premium has fallen from over 50% to around 30%. The net asset value isn’t the issue, investor perception is. I strongly recommend investors reconsider their position here before it’s too late. Pimco High Income Fund (NYSE: PHK ) is a risky investment. Although the fund has a solid performance history and has steadily paid dividends through even the “worst of times,” it trades at an extreme premium over net asset value, or NAV. It’s easy to give short shrift to that little issue when times are good, it’s harder to ignore when the tide starts to shift. And just such a shift may be taking place right now. OK, it’s got a good record I’m not going to argue that PHK is a poorly run fund. Quite the contrary, it is a well run fund. For example, over the trailing 10-year period through May, the fund’s annualized NAV total return was around 11%. Total return includes reinvested distributions. That puts the fund in the top tier of its Morningstar peers. It’s performance over the trailing three- and five-year periods were even more impressive, at 19% and nearly 18%, respectively. Equally important, the fund’s distribution has been maintained through thick and thin. That includes through the disastrous 2007 to 2009 recession that led to distribution cuts throughout the CEF industry. I have concerns with the level of the distribution , at nearly 13% based on market price and 19% based on NAV, but that doesn’t diminish the consistency with which the dividend has so far been paid. So, yes, PHK has been a well run fund. If this were an open-end mutual fund the discussion would stop right there. But it isn’t, it’s a closed-end fund. Supply and demand Closed-end funds trade on supply and demand, which means their prices can vary from their net asset values. When investors are enamored of a CEF, they bid the shares up close to or above the NAV. When investors are less sanguine they push CEFs to discount prices – often very deep discount prices. This isn’t news to anyone who follows CEFs. PHK has been a market darling. It started the year with around a 50% premium over NAV. That’s massive and only exists because of investor sentiment. Investors at the start of the year were willing to pay $1.50 for $1 worth of assets. I have suggested a couple of times that this is a big risk. That stance had garnered a mixture of agreement and hostility. Those who disagree with my concerns basically suggest that the fund is so good that it deserves the premium pricing. Looking at more recent performance, however, suggests exactly why such a rich premium is a huge risk. Over the trailing three months through June 23rd, PHK’s market price return was a decline of over 18%. That’s a rough stretch to have lived through, even if the dividend has remained stable. And while investors can argue that impressive share price gains over the years means those losses are only taking back house money that misses the point. You see, PHK’s NAV return was a positive 5.5% over that same span. And since PHK’s NAV performance was positive during this span, it’s hard to suggest that the market price performance had anything to do with the fund’s NAV performance. It seems pretty clear to me that a significant number of investors have soured on the fund. Yes, there have been changes in the number of shares of PHK that are sold short . That, presumably, should ease negative sentiment. But, in the long run, this is noise. The short interest is a symptom of the bigger issue, which is the extreme overvaluation. A warning shot If you still own PHK, look at this swift reversal of fortune as a warning shot. Could the premium go right back up to 50%? Yes. Will it? Who knows. The drop, however, is clear evidence that investor perceptions are shifting. The value of a PHK share is still roughly 30% lower than where the shares trade today. In other words, there’s still plenty of downside left before it reaches NAV. Don’t underestimate that risk. 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.