Category Archives: etf

Bank ETFs Surge: Will The Momentum Last?

Finally, the battered banking stocks found reasons to turn around. As soon as the April Fed minutes hinted at a June rate hike possibility, banking, along with many other financial stocks, rallied on May 18. The going was tough for bank stocks and ETFs for quite some time, mainly due to the twin attacks of a delay in any further Fed rate hike after a liftoff in December and the energy sector slump. But things are now falling in space for this woebegone sector. Hawkish Tone in Fed Minutes Citing plenty of positive drivers in the market, including a healing labor market, a bullish inflation outlook, strong retail, consumer sentiment and housing data, the Fed minutes brought back the sooner-than-expected rate hike talks on the table. The yield on the 10-year U.S. Treasury note jumped 11 bps to 1.87% on May 18, while the yield on the 2-year U.S. Treasury note rose 8 bps to 0.90%. This steepening of the yield curve was a tailwind for banking stocks, as these improve banks’ net interest margins. This is because the interest rates on deposits are usually tied to short-term rates, while loans are often tied to long-term rates. Revival in Oil Prices U.S. banks have significant exposure to the long-beleaguered energy sector, where chances of credit default are higher. In February, the S&P cut its outlook on several regional banks with substantial energy sector exposure, citing a likely increase in non-performing assets. Among the biggies, Wells Fargo (NYSE: WFC ) reported around $42 billion oil and gas credit in February. The situation was the same for JPMorgan (NYSE: JPM ), whose energy loan accounts for 57% of the investment-grade paper . JPMorgan’s $44 billion energy sector exposure was a cause for concern given the below-$30-oil-per-barrel mark a few months back. However, those days of crisis seem to have passed, with oil prices showing an impressive rally lately and hovering around a seven-month high on falling supplies and the possibility of rising demand. Political imbalance in countries like Nigeria and Venezuela and expected moderation in the shale boom should put a brake in the supply glut. This increased hopes for a revival in the energy sector, which, in turn, is likely to benefit the banking sector too. JPMorgan Ups Dividend This leading financial firm announced a dividend hike on May 17, 2016, after the market closed. The company declared a quarterly cash dividend of $0.48 per share, representing a more than 9% rise over the prior payout. Per analysts , the strength in its consumer businesses helped the bank to opt for this. JPM shares jumped about 3.9% in the key trading session of May 18, benefitting the ETFs that invest heavily in the company. Notably, JPMorgan’s first-quarter 2016 earnings of $1.35 per share beat the Zacks Consensus Estimate of $1.26. Net revenue of $24.1 billion was also ahead of the Zacks Consensus Estimate of $23.9 billion. Needless to mention, this announcement uplifted the big banks’ financial image. All these showered ample gains in banking stocks on May 18. Below, we highlight a few (see all Financial ETFs here ): SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) – Up 4.24% SPDR S&P Bank ETF (NYSEARCA: KBE ) – Up 4.15% PowerShares KBW Regional Banking Portfolio ETF (NYSEARCA: KBWR ) – Up 4.14% First Trust Nasdaq ABA Community Bank ETF (NASDAQ: QABA ) – Up 3.87% PowerShares KBW Bank Portfolio ETF (NYSEARCA: KBWB ) – Up 3.76% iShares U.S. Regional Banks ETF (NYSEARCA: IAT ) – Up 3.73% Apart from banking sector ETFs, other financial ETFs also shined on May 18. Among the lot, the iShares U.S. Broker-Dealers ETF (NYSEARCA: IAI ), up 3.11%,deserves a special mention. Notably, this ETF is also a beneficiary of the rising rate environment. Going Forward Since all the drivers are likely to remain in place for some time, the road ahead for banking ETFs should not be edgy. Even if the Fed does not act in June, it should act by September. Moreover, after two years of struggle, tension in the oil patch is likely to take a breather, as supply-demand dynamics look favorable for the near term. However, if bond yields decline on risk-off trade sentiments emanated from global growth issues, financial ETFs might come under pressure. Original Post

The Sweet Spot Of Zero Leverage Equity?

Global economic momentum is modest at best, equities and bonds are overvalued, and while allocating your funds entirely to gold, cash and shorts is enticing, it isn’t possible for the majority of money managers. What are investors to do then? The ranking of creditors and equity in the capital structure suggest that high-grade corporate bonds – and sovereigns – is the optimal allocation. When the going gets tough, the equity is wiped out, but as creditor, you are at least assured a recovery on your investment – even if it may be a slim one. This time could be different, however. As an alternative, I propose equities with zero leverage. There aren’t many around, and those that do remain unlevered are looked upon with suspicion by the market. After all, if the CFO hasn’t jumped on the bandwagon and issued debt to finance dividends and buybacks, she must be an idiot. But if you believe – as I do – that corporate bonds is the new bubble, being overweight equities with no leverage isn’t a bad idea. These securities won’t be immune to a crisis, but they offer two key advantages. Firstly, they likely will decline less than their overlevered brethren, and the risk of a bankruptcy is smaller. If a repeat of 2008 really beckons, capital preservation may turn out to be the key metric of survival, no matter the drawdown. Secondly, buying equities with zero, or very low, leverage is also a free option. If we are wrong, and the debt finance buyback and dividend party goes on, a portfolio of equities with zero leverage eventually will join the party too. In all likelihood, that means excess returns for your stocks. Once leverage has increased, you can sell and go looking for another batch of firms with no leverage, primed to lever their balance sheet to hand out money to shareholders. We concede that this latter rationale partly is a contradiction. But we would rather buy firms with a clean balance sheet than the alternative of buying equities that have already maxed out their potential for debt-financed shareholder gifts. Confusing charts; no directional clarity Meanwhile, looking at the macro, strategy and technical charts has left me confused – a bit like Macro Man , I suppose. Macroeconomic leading indicators have stabilised based on the most recent data. The year-over-year rate in the U.S. and EZ headline indices have climbed marginally, and have risen strongly in China. In Japan, however, the message from the headline index is grim. Global money supply growth has turned up further, helped by the U.S. and China. It is particularly encouraging to see that M1 growth has accelerated slightly in the U.S. On the contrary, my short-term charts of the market are sending a very unclear message. In the U.S. put-call ratios point to further upside despite the recent rally, while the advance-decline ratio continues to roll over. My equity valuation scores point to a slow grind higher in coming months, before a sell-off takes over towards the end of the summer. On sovereign bonds I remain bearish.