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2015-05-26 15:30:40

Posted by
Andre Rouillard
New Constructs, LLC
Contributor
Stocks

Why You Can't Judge a Fund by its Cover

This week we’re putting RidgeWorth Mid Cap Value Fund (SAMVX), which has $4.6 billion in assets under management, in the Danger Zone for a number of reasons:

  1. Poor stock picking
  2. Very high total annual costs with high front end load and transaction costs
  3. A misleading “Mid Cap Value” tagline
  4. A “value” designation despite investing in heavily overvalued companies

As a result of its poor portfolio and high costs, SAMVX earns our Very Dangerous rating. SAMVX is a perfect example of why investors need to do their own diligence on the funds they allocate to. We think that SAMVX wouldn’t be nearly as large if more investors knew what was going on under of the cover of this fund.

Bad Stock Picking No Matter How You Spin It

We rate each of the ETFs and mutual funds under our coverage based on the quality of stocks they hold. SAMVX gets our Dangerous Portfolio Management rating primarily because 46% of SAMVX’s holdings earn our Dangerous or Very Dangerous ratings while only 16% of SAMVX’s holdings are allocated to Attractive or Very Attractive stocks.

Compare these holdings to those of SAMVX’s benchmark, the iShares Core U.S. Value ETF (IUSV). We rate only 39% of IUSV’s holdings as Dangerous or Very Dangerous, while almost 20% of its holdings earn Attractive or Very Attractive ratings.

Figure 1: SAMVX Stacks Up Poorly to Its Benchmark

Sources:  New Constructs, LLC and company filings.

Don’t Be Fooled by the Low Expense Ratio

Investors would have a right to expect mediocre stock picking from SAMVX if it were a cheap fund. However, this isn’t the case.

Despite the fund’s stated expense ratio of 1.59%, SAMVX actually has Very Dangerous total annual costs of 4.02%. The reason for these high costs is SAMVX’s high front end load of 5.75% and its high transaction costs of 0.23%. The reason for these transaction costs is the fund’s high turnover rate of 108%.

What do these high costs mean? Consider that IUSV has total annual costs of just 0.10%. To justify the additional costs above its benchmark, SAMVX must outperform IUSV by 3.92% annually over three years. What’s concerning is that this outperformance hasn’t happened. Over the past three years, IUSV has delivered an 18% annualized return while SAMVX has delivered just a 16% annualized return. In addition, any outperformance going forward doesn’t look likely due to SAMVX’s inferior stocks relative to IUSV.

In short, investors are paying higher fees for inferior performance.

What Style Are Investors Getting in SAMVX? (Hint: It’s Not Mid Cap Value)

SAMVX bills itself as a “Mid Cap Value” fund. If you look closer though, SAMVX more closely resembles an All Cap Value fund with a blend of large and small cap stocks mixed in with the mid caps.

For example, SAMVX’s top equity holding is SanDisk (SNDK), a $14 billion company. Its fifth largest holding is NetApp (NTAP), an $11 billion company, and its seventh largest holding is the $17 billion Hartford Financial Services Group (HIG). You know how the saying goes: never judge a book by its cover.

A look at SAMVX’s Morningstar page would not help either, as Morningstar does not actually include the “All Cap” designation. Rather, the firm averages SAMVX’s holdings’ market caps, which yields a “Mid Cap Blend” classification — which is clearly inaccurate based on the market cap of some of SAMVX’s top holdings above.

No matter SAMVX’s actual style, both the Mid Cap Value and All Cap Value styles earn a Neutral rating in our 2Q15 Style Ratings report. It’s disappointing that SAMVX cannot earn at least a Neutral portfolio management rating despite selecting from so many large cap stocks outside of its supposed “Mid Cap Value” constraints.

About That “Value” Focus…

Last on our list of concerns with SAMVX is the fund’s misleading “value” investing style. For more on SAMVX’s selection methodology, we’ll turn to the fund’s prospectus, which states that the fund intends to “key in on those companies that are in the lower third of their own historical valuations.

We think that this valuation methodology is weak and subjective. It is certainly not comparable across companies and gives little weight to the underlying health of the businesses it invests in. Let’s use an example from SAMVX’s own portfolio: its second largest holding Omnicare (OCR). This aforementioned methodology wouldn’t take into account the $877 million in deferred taxes that Omnicare (OCR) owes (10% of market cap).

As a result of senior claims on cash flows like these, OCR has a price to economic book value ratio (PEBV) of 3.6. In fact, SAMVX’s holdings have a weighted average PEBV of 3.7. This number implies that the market’s average expectation for the profits of this portfolio’s companies is for profits to increase by 370%. Does this sound like value investing to you?

So in Summary:

SAMVX has poor portfolio management relative to its benchmark and style and high total annual costs despite underperforming its benchmark. Its self-classified style is also misleading based on a brief look at its top 10 holdings and its “value” focus is simplistic and flawed. These conclusions are perfect examples of what just a little diligence can tell you about whether or not a fund’s name is backed up by its substance.

Disclosure: David Trainer and André Rouillard receive no compensation to write about any specific stock, sector or theme.

Click here to download a PDF of this report.

 

About New Constructs

We find it. You benefit. Cutting-edge technology enables us to scale our forensics accounting expertise across 3000+ stocks. We shine a light in the dark corners of SEC filings so our clients can make safer, more informed decisions. Our stock rating methodology instantly informs you of the quality of the business and the fairness of the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to. Learn more about New Constructs. Get a free trial. See what Barron’s has to say about our research.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a "Buy" rating, Very Dangerous and Dangerous correspond to a "Sell" rating, while Neutral corresponds to a "Hold" rating.

 

This article is from New Constructs, LLC and is being posted with New Constructs, LLC’s permission. The views expressed in this article are solely those of the author and/or New Constructs, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:52:35

Posted by
Neil Azous
Founder & Managing Member
Rareview Macro LLC
Contributor
Macro

The World is One Trade - US Buybacks Under-Performing

The below illustration is the S&P 500 divided by the S&P 500 Buyback Index and overlaid with the US Treasury 5-30 year yield curve.

Capital redeployment is made up of share repurchases and dividends. Historically, during an interest rate hiking cycle stock buybacks are the first to be adjusted as a dividend cut generally requires a decision at corporate board level whereas a buyback can just be slowed or postponed.

Additionally, when the yield curve flattens to a certain point – and it is slightly different in each cycle – it is reflective of market participants becoming more reluctant to invest further out on the risk curve as they pull forward their expectations of the next recession. If you think of a risk curve simply as T-bills being the least risky asset and penny stocks being the most risky, during easy monetary policy and strong growth, investors move “out” on the risk curve into equities and lower-quality credit instruments, and when monetary conditions tighten and growth peaks, the opposite occurs. The end result is that credit spreads will start to widen across high grade and high yield, and equities tend to slow their ascent.

We have mentioned previously in Sight Beyond Sight that we view the next US monetary policy tightening cycle as one that will look very different from every other one in the past. As a result, we don’t look at the first 25 bps increase in interest rates by the Federal Reserve as the “first” hike, but more like the sixth or seventh in terms of how tight policy will be at those levels. What that means is we are more sensitive to how tight policy will be at a Fed funds rate of 0.5%, and what the collateral impact will be on other parts of the market, such as corporate issuance and investor risk appetite.

We realize a lot of noise is being made about corporate buybacks as the largest marginal buyer of US equities and to be clear we are not calling for them to stop. What we are saying is that while buybacks may still provide an inherent put option in a company’s stock price, that theme is no longer out-performing the broader market as it has done for the past three and a half years. That is important to recognize as that buyback under-performance would only accelerate if interest rates rose and credit issuance slowed. This under-performance is already happening despite the breathless pace of corporate issuance to buy back stock.

 

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

 

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:39:36

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor
Technical Analysis

Waverly Advisors Summary Stats

%Chg: percent change from the previous day’s close

SigmaSpike: the day’s change expressed as a standard deviation of the last 20 trading days. Values inside +/- 1.0σ are generally insignificant, +/- 2.5σ are large (for the volatility of the particularly instrument), and +/-4.0σ are very large.

C/DayRng: the current price as the pipe “|” within the day’s range. Can easily see at a glance if trading near high or low of the day. The day’s open is “:”. You can read more about this indicator in my book.

For sectors: analysis is done using the State Street Sector SPDRs (XLE, XLF, etc.) %Chg is the day’s change for the SPDR, and Excess is the Excess Return for the day (the SPDR’s return – the S&P 500 return).

 

For more information about Waverly Advisors please click here.

 

This article is from Waverly Advisors and is being posted with Waverly Advisors’ permission. The views expressed in this article are solely those of the author and/or Waverly Advisors and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:37:07

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor
Technical Analysis

Waverly Advisors Update: Largest Advances / Declines

The individual stock tables are simply ticker lists showing the largest values for the following criteria:

SigmaSpike: Largest volatility-adjusted moves. (Note that this measure, though we might call it a “standard deviation spike”, does not assume that anything is normally distributed. You’ll see a handful of +/-4.0σ moves on many days, and +/- 10σ do happen.)

GapOpen: The stock’s opening gap, expressed as a SigmaSpike.

FromOpen: Stocks often reveal stronger trending character by their relationship to their opening print, rather than to the previous day’s close. This screen evaluates the move off the open as a SigmaSpike.

 

For more information about Waverly Advisors please click here.

 

This article is from Waverly Advisors, LLC and is being posted with Waverly Advisors, LLC’s permission. The views expressed in this article are solely those of the author and/or Waverly Advisors, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 14:32:44

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor
Technical Analysis

Waverly Advisors Afternoon Update

Largest Rel Volume: Stocks with the largest multiple of their 20 day average volume. Note that the “average” value for this number will change as the trading day progresses, but the relative position of a stock within this list should show some persistence. These are likely stocks in the news, or stocks experiencing a sharp flow of new information.

Largest Rel Ranges: First, we express each stock’s daily range as a % of the 20 day average range, and then choose the 10 with the largest values of that measure. These are the stocks with the largest daily ranges, relative to their own typical daily ranges.

Gap Analysis shows stocks with open gaps (today’s high < yesterday’s low or today’s low > yesterday’s high) remaining.

Stocks with Open Gaps (for the Day): ACM, ADSK, AEM, AGCO, AIG, ALB, ALL, AME, AMGN, AMZN, ASHR, AZN, BA, BEN, BERY, BP, BUD, BWA, CA, CAM, CAT, CB, CENX, CHK, CHRW, CNQ, CNX, COH, COP, CSC, CTSH, CVC, CVX, DB, DK, ECL, EOG, ETN, FCX, FIS, FLR, FLS, FNF, FOSL, FSLR, GG, GMCR, GOOG, GOOGL, GSK, HOG, HON, HSBC, IBM, INTC, IR, ITW, IYE, JEC, JPM, LNC, LVS, LYB, MA, MAC, MDT, MET, MMC, MON, MOS, MPEL, MXIM, NBR, NCR, NEM, NTRS, NVS, OI, OMC, ORCL, PAYX, PM, POT, PSX, PTEN, PWR, RDS.A, RDS.B, RES, RIO, ROK, RY, SDRL, SGY, SLW, SM, SNY, STO, STT, TCK, TD, TEX, TJX, TMO, TOT, TRV, TS(E), TTM, TWC, UCO, UN, UNM, UPL, VTV, WMT, WPZ, WYNN, XLE, XOM, YHOO, YOKU

 

For more information about Waverly Advisors please click here.

 

This article is from Waverly Advisors, LLC and is being posted with Waverly Advisors, LLC’s permission. The views expressed in this article are solely those of the author and/or Waverly Advisors, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 13:45:38

Posted by
Singapore Exchange

Contributor
Futures

SGX MSCI Taiwan Futures Offers Opportunity to Ride Taiwan Stock Rebound

  • Taiwan equities saw strong inflows in May. According to the Financial Supervisory Commission, flows from foreign institutional investors into Taiwan stocks reached a record of US$203.6 billion as of 4 May.
  • SGX MSCI Taiwan Index Futures demonstrates high correlation with the top 5 Taiwan ETFs, which makes it a suitable tool for hedging. Its quanto feature is an advantage which protects investors from currency fluctuations.
  • The island state’s export-oriented economy should benefit from robust demand for Apple iPhones. GDP growth numbers were revised upwards by the government in February.

Taiwan Stocks Revive

After a year in the wilderness, Taiwan equities saw a revival in November after the municipal elections, as the rally in China ignited institutional investor interest in China-related companies.

“Investors looking for North Asia exposure should now consider Taiwan, a market that is unique in Asia in that it is the only one trading at a discount to its five-year history. All other markets trade at a premium,” HSBC wrote in a report.

SGX MSCI Taiwan Futures’ Notional Turnover

Source: Bloomberg

According to the Financial Supervisory Commission, foreign fund flows into Taiwan equity markets reached a record of US$203.6 billion as of 4 May. The numbers represent cumulative totals from January 1991 when the government first released foreign institutional funds flow data after lifting its ban on foreign institutions investing in Taiwan's stock market at the end of 1990.

On the back of strong foreign institutional buying, the weighted index on the Taiwan Stock Exchange repeatedly breached the 10,000 point mark on 27 and 28 April before profit-taking set in.

Year-to-date (30 April 2015), the Taiwan Stock Exchange Weighted Index (TWSE) and MSCI Taiwan IndexSM chalked up 5.51% and 5.29% total returns respectively.

Taiwanese equities are starting to offer value versus South Korean equities again, HSBC said in its report.

Taiwan’s benchmark stock index may rally 15% to approach a record this year as earnings prospects and a presidential election in January lure foreign funds, Tony Chen, vice president at Schroder Investment Management (Taiwan), said in a report.

But if the Federal Reserve kick-starts an interest rate hike cycle later this year, a stronger US dollar may prompt foreign institutional investors to move their funds out of the region, which could affect the performance of Taiwan stocks.

Growth Revised Upwards

Taiwan revised its 2015 economic growth target to 3.78 %, highest since 2011, from a preliminary growth estimate of 3.5%, the Directorate General of Budget and Accounting Agency said in a statement on 16 February. The economy expanded 3.5% the previous year.

The island’s trade balance stood at US$4.76 billion in April 2015, up from US$2.53 billion in January 2014.

Taiwan Trade Balance

Source: Bloomberg

For the moment, Taiwan's top-notch technology companies will benefit from the frenzied demand for Apple’s newest smartphones, as well as the upcoming iWatch. Taiwanese companies produce components that make up the bulk of Apple's iPhones, from semiconductors to camera lenses and home buttons and casings.

Apple, probably the biggest single customer of Taiwan’s tech suppliers, posted record quarterly revenue of US$74.6 billion and record quarterly net profit of US$18 billion. The company guided for revenue between US$52 billion and US$55 billion in the second quarter.

What is good for Apple should benefit electronics makers such as Taiwan Semiconductor (“TSMC’) and Hon Hai, which presently account for more than 30% weighting in the MSCI Taiwan IndexSM.

Although Taiwan’s economic data is not as strong as in the late 1990s, it does appear relatively firm compared with its regional peers, said Jefferies in a report.

High correlation between Top 5 ETFs and MSCI Taiwan IndexSM

The top Taiwan ETFs – IShares MSCI Taiwan ETF and Yuanta/P-shrs TW Top 50 ETF – have a combined capitalisation of more than US$5 billion as at end of March. Both ETFs demonstrated a weekly correlation of more than 0.70 with the MSCI Taiwan IndexSM over the past year.

Correlation between Taiwan ETFs and MSCI Taiwan IndexSM

Price Performance of Taiwan ETFs and MSCI Taiwan IndexSM

Source: Bloomberg

The iShares MSCI Taiwan ETF tracks the MSCI Taiwan IndexSM, while the Yuanta/P-shrs TW Top 50 ETF attempts to replicate the performance of TSEC Taiwan 50 Index. As the TSEC Taiwan 50 Index shares the top 10 constituents of the MSCI Taiwan IndexSM and their respective weightings, the correlation is fundamentally sound. In addition, the MSCI Taiwan IndexSM also shares nine of the top 10 constituents of the TAIEX Index.

Taiwan Indices

Source: Bloomberg (11 May 2015)

As the SGX MSCI Taiwan Index Futures uses the MSCI Taiwan IndexSM as the underlying, it has a strong correlation with the ETFs, which make it suitable as a hedging or trading instrument.

The SGX MSCI Taiwan Index Futures recorded a daily traded notional of  US$2.3 billion, out of which 15% is transacted during after-market hours. Trades are at an average bid-offer spread of 2.9 basis points during onshore trading hours, and 3.5 basis points during after-market hours.

The T+1 hours cover a good portion of the ETF trading hours, which makes the contract  an ideal tool for arbitrage or hedging against the cash portfolio.

Settled in US dollars, the SGX MSCI Taiwan Index Futures is a quanto product – a type of derivative in which the underlying is denominated in one currency, but the instrument is settled in another currency at some fixed rate. In other words, this quanto feature removes the FX exposure by settling all profits and losses in US dollars.

 

This article is from Singapore Exchange and is being posted withSingapore Exchange’s permission. The views expressed in this article are solely those of the author and/or Singapore Exchangeand IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 13:06:21

Posted by
Barron's

Contributor
Options

Trades to Help Cope With Rate-Rise Fears

One strategist suggests buying puts on the Standard & Poor’s 500 if rates rise in the absence of growth.

 

The market consensus, at least for now, seems to be that the Federal Reserve won’t raise rates at the June meeting. Some investors think the Fed won’t raise rates until 2016 because economic data are so mixed. Many others are just confused.

Investor positioning suggests a trust-but-verify stance is emerging in case rates are hiked, even if economic conditions appear tepid. For example, Bank of America Merrill Lynch has advised clients to buy puts on the Standard & Poor’s 500 should rates rise in the absence of growth.

During the past month, 10-year rates rose by 30 basis points (a basis point is one-hundredth of 1%) but growth was disappointing, Priya Misra, the bank’s U.S. rates strategist wrote in an e-mail. Normally, stocks rise when rates rise, a correlation that’s the basis of many equity trading strategies. If the relationship snaps, or suffers a prolonged interruption, stock prices might move sharply. “The idea behind the trade is to protect against a situation where the rate rise hurts risky assets. We believe that would occur when growth hasn’t picked up particularly and term premiums (i.e., supply-demand dynamics) rise,” Misra said.

The CBOE Volatility Index, a blended measure of one-month S&P 500 volatility, is priced around a somnolent 12. This suggests expectations are that stocks will snooze for the next 30 days.

If you think investors are too complacent, straddling equities or rates—buying a put and call with the same expiration—is a way to gain exposure to higher volatility. Some investors share this view. During the previous week, an investor bought an iShares 20+ Year Treasury Bond ETF (ticker: TLT) straddle. With TLT around $118, the investor bought 10,000 June $120 puts and 10,000 June $120 calls.

The straddle indicates expectations the exchange-traded fund is poised to move 4%, up or down, before expiration, Susquehanna Financial Group recently advised clients. The central bank’s Federal Open Market Committee meets June 16 and 17.

Meanwhile, the SPDR Gold Trust (GLD) is experiencing a Lazarus-like moment with major investors. Building on last week’s nascent trend of buying big chunks of GLD options, an investor bought 38,000 June $123 calls and sold 38,000 June $125 calls. With GLD around $115, the spread expresses high conviction that GLD rallies up to $125 by expiration.

Why would gold surge so high in such little time? The answer may be simple, or it may be hidden among the mosh pit of the Street’s three big trades: the U.S. dollar, oil, and China’s deleveraging.

ELSEWHERE, THE STREET may be too morose for its own good. Expectations were dour at the start of first-quarter earnings season, but results proved better than expected. Of 487 companies in the S&P 500 that reported earnings, 66.9% beat analyst expectations, Thomson Reuters I/B/E/S reports. Since 1994, 63% of companies beat estimates. The postmortem offers an important look ahead for next quarter’s earnings trades.

JPMorgan’s Dubravko Lakos-Bujas is telling clients first-quarter earnings surprises were driven by better margins, but the quality of the beat is debatable. Still, Lakos-Bujas, the bank’s portfolio strategist, notes weak first-quarter U.S. economic surprises, and a strong dollar, pushed negative pre-announcement activity to levels last seen in the financial crisis. Naturally, that is good. “We believe this negative activity has recalibrated expectations lower and is setting up for positive earnings revisions and surprises for the coming quarters,” he says.

This means earnings and growth estimates are too conservative. Companies apparently agree. Stock buyback activity remains strong. Keep this in mind when considering second-quarter earnings trades, and thinking about volatility curves.

 

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This article is from Barron's and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron's and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 12:19:04

Posted by
Singapore Exchange

Contributor
Futures

MSCI India Index to Add Eight Companies in Latest Review

  • MSCI rebalancing could draw US$1 billion of additional inflows to Indian equities.
  • Robust correlation has been demonstrated between CNX Nifty and MSCI India Indices as well as their corresponding Singapore Exchange (SGX) futures products.
  • SGX’s Nifty Index and MSCI Index futures achieved record open interest on 28 April and 19 May respectively.

MSCI Rebalance May Aid Indian Equities and Related Futures Products

The quarterly rebalancing of the MSCI India Index on 13 May is likely to result in an increase of net inflows from passive foreign funds.

Global index provider MSCI has raised India’s weighting in the MSCI Emerging Index under its semi-annual review. From 29 May, eight new stocks will be injected into the MSCI India IndexSM, while one has been excluded.

The companies that will be included are Lupin, Bharti Infratel, Marico, Container Corporation, Bharat Forge, Eicher Motors, Shree Cement, and UPL, while Reliance Infrastructure will be removed.

Analysts expect inflows of up to US$1 billion following this revision, as passive fund managers rebalance their portfolios to follow the index. India's weighting in the MSCI Emerging Index is expected to increase by some 50 basis points from 6.7%.

As shown in table 1, the MSCI India IndexSM, exhibited a correlation of almost 94% with the CNX Nifty Index as well as SGX’s Nifty and MSCI India Index futures.

Table 1 : Average Weekly Correlation (7 May 2014 to 8 May 2015)

Source: Bloomberg

The announcement could not have come at a more fortuitous time for India’s equity market.

Indian stocks hit speed bumps in April as earnings disappointed and promised reforms stalled. Prime Minister Narendra Modi's victory last May had set the stage for fund inflows into Indian equities on hopes of much-needed reforms, but these efforts have been slower than expected. Parliamentary bills aimed at making conditions easier for businesses to acquire land and reforming taxes have been delayed.

With hopes of fast-tracked reforms fading, the ardour of foreign investors for Indian equities has cooled.

"India is one of the markets across the region to have witnessed the highest number of earnings downgrades," HSBC wrote in a report, noting consensus estimates for this year have fallen by more than 5% over the past three months.

"Weaker earnings growth expectations will, by definition, alter earnings-based valuations for the market. India's price-to-earnings (P/E) valuations therefore remain elevated. India is currently the second-most expensive market in Asia in terms of 12-month forward P/E," it added.

April Exports Slip 10.6% Year-on-Year

India’s trade numbers could also be a cause for concern. Exports in April 2015 fell 7.4% month-on-month, dragged down by anaemic global demand.

April exports were valued at INR138,400 million (US$22,054 million), 10.6% lower than INR 154,718 million (US$25,634 million) in year-ago-period. The on-going weakness in merchandise exports will weigh on GDP numbers due to be released on 29 May.

India Merchandise Exports Data

Source: Bloomberg

India’s exports have been rendered less competitive due to the relative strength of the rupee. Although the rupee has retreated against the US dollar over the past year, other currencies fell by a greater percentage.

Source: Bloomberg

Prime Minister Modi has placed exports and the augmentation of India’s infrastructure on the top of his to-do list. The Indian Premier hopes to almost double goods and services exports to US$900 billion in the next four years.

Reserve Bank of India’s Monetary Easing Policy

India’s central bank surprised markets with two cuts to its key lending rate during this year as it joined a world-wide trend of monetary easing, driven by the aim of boosting export competitiveness.

The Reserve Bank of India recently lowered its main repurchase rate to 7.5%, citing weakness in parts of the economy as well as favourable inflation figures.

Source: Bloomberg

Some analysts believe that more rate cuts are on the way.

In April 2015, India's Consumer Price Index (CPI) grew at 4.87% year-on-year, the lowest in four months, largely due to a decline in oil prices. The market expects inflation to continue slowing in May 2015, giving the Indian central bank more room to cut rates.

Source: Bloomberg

The second reason to expect an interest rate cut is declining exports. India's exports fell to 2013 lows in April 2015.

SGX India Futures Update

SGX’s CNX Nifty Index futures and MSCI India Index futures have been gaining traction. Both denominated in USD, these futures contracts represent a quick and cost-effective way to access the Indian equity market without the need for Foreign Portfolio Investor status.

The SGX CNX Nifty Index futures achieved a new record open interest of 561,067 contracts on 28 April, representing over US$9.2 billion in notional value. On 19 May, the MSCI India Index futures booked open interest of over US$36.7 million.

Margin offsets are available between SGX MSCI India and Nifty India futures. Please click here for latest margin details.

Contracts Specifications

 

This article is from Singapore Exchange and is being posted withSingapore Exchange’s permission. The views expressed in this article are solely those of the author and/or Singapore Exchangeand IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 11:45:05

Posted by
Heidi Richardson
Global Investment Strategist
BlackRock
Contributor
Stocks

The Strong Dollar's (Real) Toll on Tech Stocks

While the stronger dollar certainly did hurt technology sector earnings, the currency's impact wasn't as bad as predicted, and the case for US tech remains strong.

 

It’s no secret that a large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand for software and hardware from many of the largest U.S. tech firms.

Based on the most recent earnings data, roughly 60% of the U.S. information technology sector’s revenue comes from abroad, a higher percentage than in any other sector.

Taking this into account, many market watchers had expected that U.S. tech companies’ first-quarter earnings would be especially hurt by the stronger dollar, and the potential dollar impact was likely a big drawback keeping many investors away from the sector.

However, now that most of the companies in the sector have reported their quarterly results,  it’s clear that while the dollar certainly did hurt earnings, the strong currency’s impact wasn’t as bad as many predicted it would be.

Case in point: 66% of companies in the technology sector actually beat analysts’ first-quarter earnings expectations and 39% of companies beat on revenue (source: UBS, FactSet, 5/14/15). In addition, the technology sector overall posted the second best revenue growth among all the 10 sectors despite the dollar headwind.

How were tech firms able to generate relatively good earnings results even with the currency exposure? Besides the fact that not all sales done overseas occur in foreign currencies, technology companies have robust currency hedging strategies that helped many firms somewhat mitigate the negative impact of the strong dollar, as evident in many of the companies’ quarterly earnings calls with analysts.

At the same time, companies also were able to use shareholder-friendly policies like share buybacks and dividend increases to help boost their share prices, largely a result of technology companies’ strong balance sheets and enormous cash positions

Looking forward, there’s a good chance the dollar headwind is going to let up a bit come second-quarter results. Last year, much of the appreciation in the dollar occurred during the fourth quarter, meaning companies were likely a bit behind the curve in putting their hedging strategies in place, and first-quarter results were negatively impacted as a result.

Assuming we don’t see a similar surprise quick appreciation in the near future, given that the dollar has weakened recently, the currency impact should be less this quarter. Indeed, when you strip out the dollar impact from many tech companies’ earnings, you get even stronger first-quarter results.

So what does this all mean for investors? Now may be a good time to consider  U.S. tech stocks. I still see upside potential for the sector and believe it’s one place to find value within the overpriced U.S. market.

Despite slightly outperforming the broader market index this year, technology stocks are still attractively priced, especially considering the sector’s decent first-quarter earnings. For instance, compared to the more defensive health care sector represented by the Dow Jones U.S. Health Care index, the technology sector, as measured by the Dow Jones U.S. Technology Index, is trading at a price-to-earnings discount of roughly 25% (S&P Dow Jones, 4/30/15).

In addition, the tech sector continues to provide some of the fastest rates of dividend-per-share growth among all the sectors, and we’re likely to see more share buybacks and dividend increases from mature established tech firms in coming months.

Exchange traded funds, such as the iShares U.S. Technology ETF (IYW), can provide access to the U.S. tech sector.

 

Sources: BlackRock, Bloomberg, Linked to Above

 

Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares. You can find more of her posts here.

 

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Index returns are for illustrative purposes only.  Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Investing involves risk, including possible loss of principal. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes than the general securities market. Technology companies may be subject to severe competition and product obsolescence.

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

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The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

©2015 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

iS-15627-05

 

This article is from BlackRock and is being posted with BlackRock’s permission. The views expressed in this article are solely those of the author and/or BlackRock and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-26 11:42:43

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor
Technical Analysis

Waverly Advisors Summary Stats

%Chg: percent change from the previous day’s close

SigmaSpike: the day’s change expressed as a standard deviation of the last 20 trading days. Values inside +/- 1.0σ are generally insignificant, +/- 2.5σ are large (for the volatility of the particularly instrument), and +/-4.0σ are very large.

C/DayRng: the current price as the pipe “|” within the day’s range. Can easily see at a glance if trading near high or low of the day. The day’s open is “:”. You can read more about this indicator in my book.

For sectors: analysis is done using the State Street Sector SPDRs (XLE, XLF, etc.) %Chg is the day’s change for the SPDR, and Excess is the Excess Return for the day (the SPDR’s return – the S&P 500 return).

 

For more information about Waverly Advisors please click here.

 

This article is from Waverly Advisors and is being posted with Waverly Advisors’ permission. The views expressed in this article are solely those of the author and/or Waverly Advisors and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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