Tag Archives: faith

Will Volatility ETFs Rule In May?

The start of May has been tumultuous for the global stock market with volatility levels flaring up once again. The sluggish manufacturing numbers from China and U.S., a bout of softer-than-expected economic readings out of Europe and a weaker-than-expected April ADP jobs report in the U.S. have data cast a pall over the market all over again (read: Manufacturing Churns Out Slow Growth in US–ETFs in Focus ). This is especially true as the major U.S. benchmarks nosedived in last two days (as of May 4, 2016). The S&P 500 has reached the lowest level since April 11 . In fact, the ongoing earnings recession, tepid economic readings along with global growth worries have rattled the faith of investors. They have taken somber economic growth on the chin for long and sent the S&P 500 rallying as much as 15% from a February low. However, investors should note that signs of stability in the oil patch have done a lot to cool jittery investors’ nerves in this timeframe (read: MLP ETFs–Time to Invest on Oil Rebound or Too Risky? ). Now with growth worries back on the table, volatility levels have heightened and exchange-traded products designed to track the market volatility have received a shot in the arm. Volatility level is best represented by the CBOE Volatility Index (VIX). This fear gauge measures investors’ perception of the market’s risk and tends to rise during a downtrend or when investor panic starts to set in. As U.S. equities faltered, the volatility index climbed 9.3% in the past two trading days (as of May 4, 2016), suggesting that risks are rising and investors could definitely benefit from this trend. There are several ETF/ETN options available in the market that can provide some exposure to volatility. These products have proven themselves as short-time winners in chaotic times. Below we have highlighted short-term volatility products that will likely spring higher as long as growth issues continue to unsettle the global markets. As a caveat, investors should note that these products are meant for short-term trading: Regular Volatility ETFs A popular ETN option providing exposure to volatility, the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) . The ETN focuses on the S&P 500 VIX Short-Term Futures Index Total Return. The index gives exposure to a daily rolling long position in the first and second month VIX futures contracts and replicates ‘ market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index’. There are other products like the ProShares VIX Short-Term Futures ETF (NYSEARCA: VIXY ) and the VelocityShares Daily Long VIX Short-Term ETN (NASDAQ: VIIX ) . Leveraged Volatility ETFs Investors seeking to earn exorbitant gains in a very short time frame could tap leveraged volatility ETFs. Currently, there are two options available in this category – the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) and the VelocityShares Daily 2x VIX Short Term ETN (NASDAQ: TVIX ) . Both products track the S&P 500 VIX Short-Term Futures Index. Link to the original post on Zacks.com

GeoInvesting’s Dan David: 6 Things You Can Learn From My Shorting Mistakes

By Dan David, Co-Founder and VP of GeoInvesting Shorting stocks is rarely easy. In keeping with our practice to not only bring investors quality research, but also educate them, I wanted to run down some of the top mistakes I have made in the past when shorting stocks. If you are considering short selling or are already short selling, perhaps knowing the mistakes I’ve made in the past will help you become a better investor. Over the last seven years, our research-based, on-the-ground due diligence has led to over 10 U.S.-listed China-based stocks delisted or halted. In addition, we have exposed over 10 pump-and-dump stocks that have resulted in 90%+ gains for those who shorted them. Shorting U.S.-listed China-based companies can be grueling, mostly due to the fact that the companies you are up against can make up or fabricate information to combat your allegations. Many times I have opened a short position and have been immediately greeted by the company announcing a buyback or issuing a dividend in hopes of driving the short position out of the company. This happened when I shorted China Green Agriculture (NYSE: CGA ) in 2014, and management declared a special dividend. The issue is that some of these companies have stolen so much money from the capital markets through stock offerings that they have money to play with even when their companies are not generating real revenue. Shorting Stocks Opens You Up To Infinite Losses Shorting stocks is a far more inherently dangerous practice than going long companies, and there is more risk in being short. The most you can make when going short is 100%, but your loss can be infinite ( Remember KaloBios (NASDAQ: KBIO )?). Even if you are right, your short position can be forced to be closed. Furthermore, you can pay ridiculous amounts of interest, sometimes 100% per year, on the shares you have shorted. Apparently usury is not illegal in the stock market. As such, we wanted to lay out that risk here today. Here are some of the top mistakes I have made over the years short selling that hopefully you can avoid. Leave Your Emotions For Your Romantic Life, They Will Kill Your Portfolio This is a universal shorting rule, but must be said; take emotion out of it. It’s also one of the hardest rules. If you know you are right, dig deep inside and realize that when fraudulent stocks rally, they will likely eventually come down. One of the sickest feelings I have had is when I cover a rallying stock out of fear, only to see shares come right back down. Assuming That Insiders Will Not Lie Is Naive Failing to pay attention to insider ownership, which includes funds that have “special” relationships with management, is a mistake I made early in my investing career. The bigger the ownership, the more the chance that management will try to pump its stock by issuing false press releases in response to a short report. This has taught me to keep some powder dry for the pump. Know The Risks Of Being A Hero Be careful shorting shares of a state-owned enterprise (“SOE”). Accusing an “SOE” of fraud is accusing the China government of fraud. From my experience, the SOEs I have run into are frauds or at least have some material accounting misrepresentations, but the government will crush you before it ever admits that fact. Always have a second or third account to play the “PR pump.” Remember, a fraud can say anything since they have nothing to lose once they are exposed, so more often than not they will put out a PR pump to squeeze you and dump their shares. I learned the hard way that if you just cover and try to short again at the top, you will never find the borrow again. Go long in an alternate account to box your short. Putting Too Much Faith In The System Will Cost You Money Do not count on the exchanges to halt a security. In my view, as a matter of policy, both the NASDAQ and NYSE are hard pressed to halt. They have come to realize that the risk of a suit by the halted company is much greater than the risk of any individual investor – and lest we forget, the exchanges themselves are for-profit companies that are paid by companies they list. You also can’t count on the SEC to halt a U.S.-listed China-based company. The SEC has no power or resource to investigate inside of China. ‘Nuff said. Not Covering Enough Shares Ahead Of A Halt Trading halts have gone from a desired outcome for shorts to a nightmare for all. As I already touched on, brokers are now known to raise interest rates from the high teens to over one hundred percent during a halt on borrowed shares! This gives the halted company insiders the ability to collect on the majority of that interest from their broker on shares they lent out to be short, which acts as an incentive to insiders of halted companies to prolong a halt as long as possible. This new trading dynamic is causing chaos on both sides of the trade. Remember that shorting stocks is a volatile enterprise, and even experts have to expect the unexpected in situations where they are short. So, if you plan on involving yourself with this kind of investing, I hope that these tips and tools help you out going forward. This article originally published on geoinvesting.com on 3/29/16. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Achieving 16.7% Returns With The Value Score

Summary What is the OSV Action Score? What is the OSV Value Score? How was the Value Score created? The Quality Score produces 16.8% CAGR in the tests that I’ve performed for the upcoming “Action Score” that I’m implementing into Old School Value. Next is the Value Score. Here is the full table of results again. stocks are bought at the beginning of the year held for one year rebalanced after 1 year commissions and fees are not included into these results If you followed this strategy, the 16.74% is the max return. After fees, it likely comes down to 13-14% range annualized. Here’s How I Created the Value Score When you create a ranking system (or even a screener) the higher the number of criteria, the worse the performance becomes. When picking individual stocks, making sure a stock passes lots of checks is a good strategy because you allocate based on your conviction. However, when you try to employ any sort of quantitative strategy, it is not a good idea to list 20 different criteria that must be passed. Of all the tests I’ve performed, a strategy with lots of checks consistently lose to the market by a wide margin. I mention this because people ask me whether I’ve tried combining several of the best performing value screeners on display. I have. And the results are pathetic. It severely handcuffs the number of stocks that pass and the screen ultimately fails. When you pick stocks individually, you have to be precise and picky. For anything quant based, it needs to be looser as you are buying a bunch. As I mentioned in the Quality Score article, instead of blindly coming up with metrics for each Q, V and G, I already had a list of metrics for each methodology based on previous research papers and proven results. Then the theory was tested and confirmed via backtesting. In its purest form, the Value Score is based on the following 3 factors: P/FCF – best range is less than P/FCF of 10 EV/EBIT – best range is less than 11 P/B ratio – preference for P/B to be less than 3 Here’s the initial backtest to confirm the theory for a 20 stock holding portfolio. Eliminating OTC stocks, financials, energy, mining or utilities and the results continue the outperformance. Great. Backtest works with the selected metrics. It now comes down to how well the same idea can be applied when creating a ranked database. To further clean up the results, additional weightings were applied to each of the above ratios. Then all the stocks are further ranked with the Piotroski score again to eliminate low quality stocks. P/FCF has the biggest impact on the results and receives the highest weighting EV/EBIT does a great job of identifying cheap stocks and receives the second highest weighting P/B acts as a “cleaning” filter to remove stocks where you overpay for assets. Also a way to remove bad stocks you wouldn’t want to own no matter how cheap it looks The Piotroski score is assigned a fairly high weighting so that the list removes “lotto” stocks and potential black swan stocks The Value Rank Results Even if I did follow this strategy, it’s not an easy one to follow. There is a LOT of volatility. If you can’t stomach big moves and have faith in the process, you are doomed. If you focus too much on beating the market each year instead of an absolute long term return, you are doomed. When buying and holding the top 20 ranked Value stocks each year for the entire universe of stocks, the scoring system achieves 16.74% CAGR. If you start with $10k, you’d end up with $138k after 16.5 years. Eliminate OTC, financials, miners, utilities and energy again and the results are shockingly great at 19.4% CAGR. $10k becomes $203.6K after 16.5 years. But what I don’t like about the Value Rank on its own is the lack of downside protection in 2008. Cheap stocks and growth stocks get hammered the most during severe bear years. But a -40% return is a huge blow and a can easily shatter your faith in the system and process. Something to think about. Top 20 Value Stocks from 2015 Here is the list of top 20 stocks that make up the Value Score portfolio starting from Jan 1, 2015 so that you get a sense of what type of stocks the Value Rating is selecting. Disclosure No positions in any stocks mentioned.