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Heading Into Winter, Propane Sales Look To Repeat 2014 Results

Summary Propane distributors like Suburban Propane and AmeriGas Partners count on the next few months for substantially all their income. With propane supply near all-time highs, wholesale prices have fallen through the floor. Consumers look to benefit this year, but pricing spreads indicate a repeat of 2014 results. The early indicative data for propane distributors such as Suburban Propane (NYSE: SPH ) and AmeriGas Partners (NYSE: APU ) is a mixed bag heading into the incredibly important winter season. This period running from November-March of each year is an incredibly stressful time for these propane distributors, who derive substantially all of their operating income during the winter heating season. The first hurdle for these companies is the weather. The chance of a deep winter chill currently looks decent for some areas of the United States and mediocre for the rest . Most meteorologists forecast above average temperatures for the Northeast, with below average temperatures for much of the Southeast and East Coast. As the South and Midwest form the largest markets for propane, these forecasts end up being a mixed bag and are hard to call as solidly favorable in one direction or another. (click to enlarge) * Source: EIA.gov From a market perspective, available supply of propane continues to peak well above long-term historical averages, due to the significant bounce in production of the commodity from ever-increasing domestic production. Shortages that were widespread in many markets in 2014 seem unlikely to repeat themselves this time around. This excessive supply has brought wholesale and residential propane prices down, yielding what should be solidly lower prices going into this year’s heating season for consumers. This is a bright spot for those that count on propane to heat their homes, but what does it mean for propane distributors? Fixed Margin Pressures Usually, low propane prices provide a boost for propane distributors like Suburban Propane and AmeriGas Partners. All else equal, low propane costs increase the demand for their products and protects against customers switching to alternatives, such as heating oil or electricity. With propane and other alternative heating fuels more commonly used among rural homes with lower annual incomes, these consumers are much more cost sensitive to price changes than the heating markets served by traditional utilities. Propane distributors, while keeping that fact in mind, still try to maintain a fixed spread between the wholesale and residential cost of propane. This is where they can derive their profit, and we can see the results of that in a comparison from 2014 to 2015 below. (click to enlarge) Trying to protect this fixed margin per gallon is why we see the current market situation in propane today with resiliently high residential propane prices. While wholesale propane prices are down 46% from a year ago according to EIA data, skirting along at $0.50/gallon in 2015 from $0.93 gallon in 2014. Residential prices have remained stubbornly high in the meantime, and are only down 19% year/year. In my opinion, wholesale prices in the U.S. cannot fall much further, so this year will be as good as it can get for propane consumers. At these prices, it is barely worth it for producers to ship, store, and market it for sale. Look for propane exports to increase, as unlike natural gas, propane is more easily shipped abroad for sale, and these price declines make exporting increasingly attractive. (click to enlarge) Heating oil, a chief competitor of propane, looks more profitable going into the winter of 2015/2016. The profit spread is up, but heating oil is primarily used in the Northeast , where it heats nearly 30% of all households. If we remember our 2015 weather forecast data, this area is at this point expected to be a little warmer than usual. The demand may not simply be there for the product compared to 2014. Conclusion With margin spreads down and supply up, propane producers are counting on a chilly winter to drive some additional demand to make up the difference. Without old man winter swirling up some unexpected cold, investors should expect operating income flat to slightly down from 2014 levels. Suburban Propane has the most opportunity for surprise earnings upside over 2014 due to its heating oil exposure, but only if the Northeast comes in much colder than expected. Heating oil is set up to be better currently year/year, and with supply running at long-term averages, a cold shock in the Northeast could drive significant demand for the company.

5 Lessons Learned From VIX ETFs

The CBOE VIX Volatility Index is an interesting animal that has grown to become one of the most heavily watched indicators of fear and greed in the market. There are currently 20 dedicated exchange-traded funds and exchange-traded notes that attempt to track this index with varying degrees of success. By their nature, VIX funds are a non-correlated index that is essentially a way to measure when the stock market starts to get shaky. The CBOE VIX Volatility Index is an interesting animal that has grown to become one of the most heavily watched indicators of fear and greed in the market. This index functions by measuring near-term volatility expectations from options activity on the S&P 500 Index. It’s calculated on an intra-day basis, so investors are able to watch as implied volatility expands or contracts in real time. The CBOE has a nice primer on how this is accomplished that you can read here . As many ETF investors know, you can’t invest directly in an index. So the forward-thinking asset managers at Barclays, ProShares, and VelocityShares set out to create several products to help you invest in the movement of the VIX Index. According to data from ETF.com, there are currently 20 dedicated exchange-traded funds and exchange-traded notes that attempt to track this index with varying degrees of success. The two largest funds in this space are the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) and VelocityShares Daily Inverse VIX Short Term ETN (NASDAQ: XIV ). Both of these funds currently have over $1 billion in assets under management. VXX is a bet on the expansion of volatility, which typically comes during a correction or choppy stock market action. Conversely, XIV is an inverse play that rises when volatility contracts. This fund is intended to move higher as stocks move higher and greed takes a more prominent position in investor sentiment. There are also many other flavors of VIX funds that offer varying degrees of unique tracking and index construction methodology. Nevertheless, XIV and VXX work well as benchmarks to understand this unconventional asset class. I have been watching and even invested small amounts in these funds for my personal accounts at one point or another and these are the lessons I have learned from the experience. They aren’t for the faint of heart. By their nature, VIX funds are a non-correlated index that is essentially a way to measure when the stock market starts to get shaky. It’s difficult to use these as a forecasting tool and they are often susceptible to VERY fast swings in price . They should truly only be used by disciplined traders, investment professionals, or those who understand their unconventional nature. In my opinion, they should only be held for very short periods of time with a tight stop loss to guard against significant downside risk. They don’t track all that well. These VIX funds work by tracking futures contracts similar to a commodity fund like oil or natural gas. That in itself causes problems in accurate price movement over long periods of time as complicated forces like contract rolls, contango, and expenses work against these products. The chart below depicts an overlay of the actual CBOE VIX Volatility Index and VXX. The movements are certainly correlated to a degree, but you can see how over time the price of the exchange-traded product continues to decay versus the spot price of the index. They aren’t cheap. The listed annual expense ratio of VXX is 0.89% and XIV is 1.35%. It should be expected that a fund investing in futures contracts will naturally generate higher expenses because of the complicated nature of the process. Nevertheless, it’s important to understand that these funds are going to eat into your pocketbook as well. Some come with tax headaches. Most of the investable VIX funds are structured as exchange-traded notes, which do not experience adverse tax consequences. However, if the fund is structured as an exchange-traded fund, it may be susceptible to tax consequences in the form of a K-1 that must be accounted for as well. The K-1 is generated because you are participating as a shareholder in a partnership rather than a trust. It goes without saying that you carefully read the prospectus before investing in any of these funds. They are entertaining to watch. Regardless of whether you use these vehicles, they can be entertaining to watch and also offer some insight into the market’s fickle machinations. VIX ETNs allow individual investors the ability to monitor in real time the current sentiment towards stocks and may provide a piece of the puzzle for short-term traders. They also offer a technical dynamic that may be useful for investors who are fans of relative strength or other momentum indicators. Sharp inflection points in the VIX may point towards a turning point in the market that precedes a big move (up or down). The bottom line is that these products are primarily geared for advanced users with a high tolerance for risk and sophisticated knowledge of the markets. Those that choose to dabble in these funds should only do so with a well-defined risk management plan that protects your capital in the event of a reversal.

IMF Green Signal Put Yuan ETFs In Focus

The Chinese economy is telling us two different stories at a time. While on one hand, the economy is persistently delivering offhand economic numbers, and even raised hard landing fears at some point of time, on the other, its currency – yuan – received a privileged reserve status from the International Monetary Fund (IMF) recently. Notably, the inclusion of the yuan in the IMF’s reserve currency list gives the economy a cream-of-the-crop class, as this emerging currency will now sit beside the developed currencies like the U.S. dollar, pound, euro and yen. Also, the IMF nod indicates economic stability in China. The IMF’s executive board, which represents the fund’s 188 member nations, recently settled on the fact that the yuan now enjoys a “freely usable” status. The move marked the first change in the SDR’s currency portfolio since 1999, per Bloomberg . Not only this, China’s currency will have a weight of 10.92%, higher than that of the yen (8.33%) and the pound (8.09%), but lower than the euro (37.4%) and the U.S. dollar (41.9%) weight. The move will take effect in October 2016. Why the Move? Though several theories are doing rounds right now, both positive and negative, the IMF viewed it as the consequence of reformative measures presently being undertaken in China. However, one school of analysts addressed the decision as “political,” and is not counting on the easy accessibility of the currency, because the yuan cannot be transferred into other currencies without restrictions. The believer of this school also indicated that the IMF head “realized how bad things are in China, so what she (Christine Lagarde) decided to do was to throw China a lifeline.” This way, the IMF boss can press the Chinese government to launch a total convertibility for its currency. Notably, the Chinese economy is on its way to deliver a 25-year low expansion this year. Despite the roll-out of a flurry of measures, the economy has showed no signs of a steady recovery, and the financial markets remained highly volatile due to extreme risk-taking. Investors should also note that movements in the yuan market have been rampant this year. In August, China’s central bank devalued the currency by 2%, following which yuan posted the largest single-day decline since the historical devaluation in 1994, after the country arranged its official and market rates in a line. Notably, the Chinese authorities follow a trading band around the official reference rate it sets each day for the value of the yuan against the dollar. The Chinese government announced in August that the renminbi’s central parity rate would follow the previous day’s closing spot rates more closely going forward. This indicates China’s intent to make its currency more market-driven. As a result, a section of analysts believe that the actual motive behind this currency move was to prepare the yuan as a reserve currency. Most importantly, the Chinese central bank assured the market that it would promptly intervene in the currency market if depreciation crosses the 3% mark. Busy Trading in Yuan The yuan became the fifth-most active currency for global payments by value in October, with a market share of 1.92%, per the global transaction services organization SWIFT . Not only this, the Chinese currency beat the Hong Kong dollar and the U.S. dollar for payments between Japan and China/Hong Kong in October. Standard Chartered and AXA Insurance estimate that the IMF’s green signal will offer the yuan a minimum of $1 trillion of movement. Needless to say, this historic move makes it important to look at the Chinese yuan ETFs. WisdomTree Chinese Yuan ETF (NYSEARCA: CYB ) The most popular Chinese yuan fund is CYB from WisdomTree. The product invests in short-term, investment-grade instruments in order to be reflective of both money market rates in China available to foreign investors and changes in the value of the yuan against the dollar. The product charges investors 45 basis points a year, but sees decent average volumes of 50,000 shares a day on AUM of over $64.4 million. The fund currently has a Zacks ETF Rank #3 (Hold) with a Low risk outlook. It is down over 1.2% so far this year (as of December 1, 2015). Market Vectors Chinese Renminbi/USD ETN (NYSEARCA: CNY ) For investors seeking an ETN way to target the Chinese currency, CNY is the right option. This product tracks the S&P Chinese Renminbi Total Return Index, which looks to track the performance of the Chinese currency against the U.S. dollar, by rolling three-month non-deliverable currency forward contracts. The fee is a bit higher at 55 basis points a year, while volume comes in below 5,000 shares a day, suggesting a wide bid-ask spread and ever-increasing total costs. The product is down 0.6% so far this year. The ETN currently has a Zacks ETF Rank #3. CurrencyShares Chinese Renminbi Trust ETF (NYSEARCA: FXCH ) This product looks to track the price of the Chinese renminbi net of Trust expenses. The product has amassed about $7.7 million in assets, while it sees weak volumes of around 1,000 shares a day, suggesting a wide bid-ask spread. On the positive side, the ETF has the lowest expense ratio at just 40 basis points a year in the Chinese currency ETF space. The fund has lost 2.7% this year and carries a Zacks ETF Rank #3. Original Post