Tag Archives: etf-long-short-ideas

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.

SPHB: Is This The Right Time To Go Risk On?

Summary One highly contrarian trade right now is to go high beta. Beta, or β, displays the level of volatility in the price of an asset compared to a certain benchmark. There are several of these ETFs with the PowerShares S&P 500 High Beta Portfolio being the sole high beta ETF that is focused on U.S. stocks. The PowerShares S&P 500 High Beta Portfolio appears quite attractively valued compared to the Russel Mid Cap Index. One highly contrarian trade right now is to go high beta. This theme appears to be unmarketable with ETFs built around it having little to no assets under management. The reverse theme: low volatility or low beta is extremely popular. This tells me it’s probably a good place to look for value and there is no easier way than just buy exposure through an ETF. There are several of these ETFs wit h the PowerShares S&P 500 High Beta Portfolio (NYSEARCA: SPHB ) being the sole high beta ETF that is focused on U.S. stocks. SPHB data by YCharts What is high beta? Beta, or β, displays the level of volatility in the price of an asset as compared to a certain benchmark. The volatility of the benchmark is equal to 1. A more volatile asset has a beta above 1 and a less volatile asset has a price below 1. Whether the price moved up or down doesn’t matter much, it’s movement in either direction that is measured. Bet’s are based on past price data so by definition it’s a form of investing while looking in the rear view mirror as Buffett likes to call it. Portfolio High beta stocks are the race cars of the indexes. These issues can really move and while they will leave your more pedestrian holdings far behind them when going on a run they also are the ones that can crash and burn at every turn. Just take a look at the hair-raising top 10 holdings of this ETF: Freeport-McMoran (NYSE: FCX ) Cameron International Corp (NYSE: CAM ) Marathon Oil Corp (NYSE: MRO ) Newfield Exploration Corp (NYSE: NFX ) Avago Technologies (NASDAQ: AVGO ) First Solar (NASDAQ: FSLR ) Qorvo (NASDAQ: QRVO ) Mallinckrodt (NYSE: MNK ) Harman International Industries (NYSE: HAR ) Vertex Pharmaceuticals (NASDAQ: VRTX ) Price moves lower tend to happen fast and I suspect that is why there are lots of beaten down stocks in this ETF. The energy sector that’s getting crushed in the multi-year bear market is heavily represented taking up 20% of the ETF’s allocation. A stock’s weighting is based on its beta so higher beta stocks are weighted more heavily. The ETF is rebalanced on the third Friday of February, May, August and November. There also is a minimum required volume which excludes really thinly traded issues. Valuation From a valuation perspective it’s quite an attractive basket of stocks, scoring well on a forward earnings basis, price/book ratio, price/sales ratio and especially on a price/cash flow basis. Even on yield it beats the Russel Midcap which is somewhat surprising. PowerShares S&P 500 High Beta Portfolio Russell Midcap Price/Forward Earnings 16.47 18.22 Price/Book 1.37 2.09 Price/Sales 1.2 1.34 Price/Cash Flow 5.14 9.09 Dividend Yield % 2.78 2.05 Data: Morningstar Expenses The ETF’s expense ratio is about 0.25%. Not particularly high and it compares favorably with many mutual funds and thematic ETFs bu t if you are planning to hold on for decades it will not be negligible. Why is this interesting? I started looking at this ETF myself because Murray Stahl’s recent market commentary , which dealt with high beta ETFs made a lot of sense to me. His thesis basically being market flow toward low volatility strategies help to further stabilize their prices and so a virtuous cycle has been born. With high-volatility stocks, the exact opposite virtuous cycle leads to their undervaluation. As a bottom-up stock picker I noticed many of the companies I analyze lately have a lot of debt or have some kind of volatile earnings profile due to cyclicality or something else. I had no idea why, but the explanation of volatility is out of favor makes sense to me. This means two things: 1) High-volatility stocks are fertile ground to search for undervalued securities and 2) it may be possible to benefit from this observation simply by buying an ETF that is relatively attractively valued. If you compare the PowerShares S&P 500 High Beta Portfolio to the Russell Midcap it is clear you are buying a lot more cash flow for your dollar. The downside obviously being that you will need an iron stomach to sit out the ride.

Chile As A Proxy For Copper

Summary Copper has fallen a great deal in recent months, which means a bounce in prices is likely. Copper is extremely important to Chile’s economy, which makes it very vulnerable whenever prices go down. Chile will most likely remain weak in the near future even if copper prices recover somewhat. Prices in the commodity sector have certainly been on the decline. Of all the commodities that have seen prices go down, one of the worst affected has to be copper (NYSEARCA: JJC ). Copper has in fact been on the decline the last four years and is now down roughly 60 percent from its highs in 2011. This decline has even accelerated the last six months with prices down by a third. The two charts below show how copper has behaved the last five years and the last 12 months: Such a big decline of more than 30 percent in such a short amount of time increases the odds of a bounce in copper prices. Copper is very much oversold, and there is a good chance that prices should go up somewhat at these levels. Those who are still negative on copper may therefore be interested in an alternative, and that alternative can be found in the country of Chile. Why Chile can be considered a proxy for copper Chile is by far the biggest producer and exporter of copper. For the whole of 2014, statistics show that Chile contributed 5.8 million metric tons of copper with global production at 18.7 million metric tons. Copper makes up almost half of Chile’s total exports, making its economy highly dependent on whatever happens to copper. If copper prices go down as they have been in recent times, Chile is bound to feel the effects. Economic indicators suggest that Chile is getting weaker as copper prices are sliding. For instance, exports have been shrinking, led by the decline in copper prices, as the chart below indicates. Both the government budget and the trade balance are now in a deficit, which seems to be getting bigger as time goes by. A sharp reversal from the sizable surpluses seen in recent years: (click to enlarge) Overall, growth in Gross Domestic Product (“GDP”) is slowing down, and the economy is struggling to avoid falling into a recession. The weakness in Chile’s economy is best reflected in the exchange rate between Chile’s domestic currency, the peso, and the U.S. dollar. The peso has already lost 17.5 percent of its value in 2015 and further devaluations are very likely, if not necessary, versus the U.S. dollar. The current trend certainly does not look good for Chile. (click to enlarge) Copper prospects While copper prices may witness a bounce in the short term, if only because of oversold conditions, a return to recent highs is highly unlikely. The strong growth of copper in recent years was primarily driven by China, which now accounts for almost half of the global consumption of copper. However, growth in demand for copper in China seems to be moderating and is now only in the low-single digits. Demand for copper outside of China is much weaker. The International Copper Study Group (“ICSG”) forecasts a flat market for copper with supply and demand evenly balanced. Much will depend on what happens in China or its economy, but there isn’t much demand for copper globally once you ignore China. There’s the possibility that there may be a slight deficit in copper supplies next year, especially if companies cut production more than expected, but nowhere near the levels seen in previous years. This should help keep a lid on copper prices, which is not good news for Chile. Chile relative to copper Since copper is oversold as a commodity, it’s realistic to expect a bounce in prices in the not-too-distant future. Initiating new shorts at these levels is therefore not recommended, at least for now. Those who are still negative when it comes to copper may instead want to look at Chile as an alternative or a proxy to copper. Exposure to Chile can be had through, for instance, ETFs such as the iShares MSCI Chile Capped ETF (NYSEARCA: ECH ). Chile could also serve as a hedge for any long or short positions in copper. For instance, a long position in Chile to offset a short position in copper or vice versa. This will remain the case for as long as Chile’s economy is heavily dependent on the export of copper and it does not diversify its economic base. The fact is that Chile is overly exposed to the prospects of a single commodity (“copper”), which in turn is highly dependent on the prospects of a single country (“China”). If copper prices go up by a lot, it’s boom time for Chile. But, if copper prices go down, Chile’s economy will get weaker. Not a very healthy situation to be in. The bottom line is that even if copper prices were to increase somewhat in the future, Chile will still not experience the windfall it received in previous years. For that to happen, copper would have to return to the very high prices of several years ago. A very unlikely prospect. Chile can be expected to remain relatively weak even if copper experiences a bounce in prices.