Tag Archives: first-look

Wall Street ‘Preparing For Panic’

By Tim Maverick The Wall Street Journal put it succinctly: “Wall Street is preparing for panic on Main Street.” Or, more accurately, panic among retail investors. You may recall how money managers like John Paulson made a reputation betting against sub-prime mortgages. This time around, some hedge funds think they’ve found a weakness in high-yield bond mutual funds and exchange-traded funds (ETFs). Apollo Global Management (NYSE: APO ) and Oaktree Capital Group (NYSE: OAK ), for instance, are buying credit default swaps and put options on junk bond ETFs. Those instruments will rise in price if junk bonds fall. Indeed, warnings about these junk bond funds seem to be growing. Everyone from activist investor Carl Icahn to the Bank for International Settlements (BIS) is sounding the alarm bells. In its latest annual outlook, released in June, the BIS warned that “investors have increasingly relied on fixed-income mutual funds and ETFs as sources of market liquidity.” For his part, Icahn has been a frequent target of criticism from the world’s largest money manager, BlackRock (NYSE: BLK ), and its CEO, Larry Fink. But at CNBC’s Delivering Alpha conference in New York, Icahn turned the tables. He said, “BlackRock is an extremely dangerous company.” Icahn warned of a bubble in high-yield bonds fueled, at least in part, by BlackRock bond ETFs that continue snapping up assets. The bond ETFs continue buying as investors, in an endless search for higher yields, keep pouring money into the funds. Today, BlackRock’s iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Barclays High Yield ETF (NYSEARCA: JNK ) are the two biggest junk bond ETFs, with combined assets of nearly $25 billion. Overall, high-yield bond ETFs have about $38 billion in assets. Meanwhile, the BIS reports that bond funds have received $3 trillion in investor inflows since 2009 alone. So what’s wrong? Investors are buying funds in search of higher yield and these funds are providing just what they need. The problem, in a word, is liquidity. More specifically, thanks to BlackRock and its peers, a portion of the underlying securities in bond funds rarely trade. That’s a major problem if something triggers a selloff in the high-yield market, like the Federal Reserve raising rates at a quicker-than-expected pace. Retail investors would be looking to get out, but what the heck would the fund or ETF sell to meet redemptions? The BIS put it this way: “The growing size of the asset management industry may have increased the risk of liquidity illusion : market liquidity seems to be ample in normal times, but vanishes quickly during market stress.” Bond guru Bill Gross, now of Janus Capital, largely agrees. He wrote in June that “the obvious risk – perhaps better labeled the ‘liquidity illusion’ – is that all investors cannot fit through a narrow exit at the same time.” In other words, liquidity in the high-yield market is largely a mirage. The funds are only as liquid as their underlying assets. Consider yourself warned – and make sure you know where the exit is before someone yells, “Fire!” Original post

India Small-Cap ETFs: Best Of Emerging Markets Now?

After witnessing two months of lull, the Indian stock market finally belied cynics in July as it easily combated global issues like the bursting of the Chinese stock market bubble, nagging Greek debt deal negotiations, looming Fed rate hike and the strength in the greenback. Investors also rushed to capitalize on this grit and poured Rs. 5,300 crore (net) in Indian equities last month. Reduced worries over monsoon deficiency, a timely correction in the stock market and rising domestic investment led the key Indian bourse to bounce back from late June. Earlier, investors were unnerved by apprehensions of lower rains this monsoon which would take a toll on the all-important agricultural sector and push up inflation. The fear was not baseless either as RBI cut India’s growth forecast for fiscal 2015-16 from 7.8% to 7.6%. However, contrary to this apprehension, rain deficiency has not been as severe as predicted. The Indian market surged over 30% last year. While most of the gains were wiped out this year on Fed rate hike concerns and a spate of downbeat economic indicators including weak corporate earnings and political gridlock causing hindrance in intended reforms, the correction opened the door to further expansion. This was truer given the extremely muted levels of energy and gold prices. This was because India imports more than 75% of its oil requirements and accounts for about 25% of the global gold demand. This makes the country highly susceptible to these commodities’ prices. India’s foreign-exchange reserves are close to a staggering $355 billion, which gives the economy the power to fight the expected volatility post Fed tightening, per Bloomberg . Unlike taper tantrums in 2013, Indian rupee remains largely stable and shed only 0.6% in the last one month (as of August 5, 2015) relative to the U.S. dollar. In fact, the uproar in global markets, mainly in Greece and China, brightened India’s appeal as a safer bet in the high-risk emerging market (EM) pack. The economy expanded 7.3% in 2014-15 versus 6.9% in 2013-14, indicating that the Indian economy is taking root. Of course, it has its set of issues like political gridlock, inflation woes, and a still-muted investment backdrop, but the economy appears much more stable than other emerging markets. A Look at Other Emerging Giants At this point of time, India scores higher than its other EM cousins like China, Brazil, Russia and South Africa. Chinese stocks are now infamous for extreme volatility having experienced recurrent market crashes since June. The country’s economy has also been displaying offhand economic data for long, leaving expectations for further monetary easing as the only hope in the China Investing theme. Popular Chinese equity ETF FXI was 7.8% down in the last one month. Coming to Brazil , the condition is more worrisome. As much as a 7.4% fall in the Brazilian real in the last one month (as of August 5, 2015) against the U.S. dollar, a commodity market slump, spiraling inflation and raise in rates (presently as high as 14.25% , almost double that of India’s) have crippled the Brazilian economy. Analysts have raised the 2015 inflation outlook for Brazil from 9.23% to 9.25% while its GDP is expected to shrink by 1.8% from the prior forecast of 1.76% contraction. The largest Brazilian ETF EWZ was down about 13% in the last one month. Russia is yet another emerging market which turned a bear from once-a-bull country. An unbelievably prolonged and steep fall in oil prices, Western bans and an 11.7% one-month slide in the Russian currency clearly explain the pains for this oil-rich nation. The IMF now expects the Russian economy to skid into ” deep recession ” (down 3.4%) in 2015. The most popular Russian ETF RSX lost 4.7% in the last one month. The Indonesian currency was almost resilient to dollar gains but weak corporate earnings and a spate of soft economic data weighed heavily on investors’ sentiments. Dollar gained just 1.2% in the last one month against Indonesian Rupiah. The World Bank also slashed its projection for Indonesia’s 2015 economic growth from 5.2% to 4.7%. Indonesia ETF EIDO was off 3% in the last one month. South Africa’s currency shed about 3.3% in strength in the last one month (as of August 5, 2015) and growth prospects remain bleak. This is also a commodity-rich nation and will likely the bear the brunt of the commodity market crash. South African ETF EZA retreated 2.2% in the last one month. Turkish lira also slipped 3.3% last month (as of August 5, 2015). Along with this, political upheaval and still-subdued growth in the EM pack led the Turkey ETF TUR to shed about 9% in the past 30 days. Reasons to Cheer for Indian Small Caps Since small caps better reflect an economy’s strength and are largely unruffled by global shocks, Indian small caps should be the best-positioned EM options right now. Investors are advised to take a peek into our top-ranked ETFs, India Small Cap ETF (NYSEARCA: SCIN ), India Small-Cap Index ETF (NYSEARCA: SCIF ) and iShares MSCI India Small Cap Index Fund (BATS: SMIN ). Each carries a Zacks ETF Rank #2 (Buy). SCIN, SCIF and SMIN added 9.2%, 9.7% and 6.8%, respectively, in the last one-month period while in the past one-week frame, the trio advanced 5.5%, 4.7% and 4.8% (as of August 5, 2015). Original Post

Upcoming Political Risks For TransCanada Corp And The Keystone XL Pipeline

Summary Upcoming Canadian Federal Elections present significant risks for TransCanada Corp. The proposed Keystone XL and Energy East Pipeline projects will face strong headwinds if the NDP wins a minority. Expect increased short term volatility as these events unwind and the possible outcomes become more clear to investors. TransCanada Corporation (NYSE: TRP ) is a Canadian midstream oil and gas company operating in three main business segments: Natural Gas Pipelines, Liquids (crude) Pipelines and Energy. Its pipeline operations extend from Canada to the U.S and Mexico. Revenue breakdown for 2014 between these segments can be seen bellow: (click to enlarge) ( 2014 Annual Report ) TRP currently has two large proposed pipeline projects that have created a lot of public reaction recently and have become hot topic for the media and politicians from both the U.S and Canada. These projects are the Keystone XL and Energy East pipelines. With the Canadian Federal election to be held on October 19th, 2015, it is critical to evaluate each party’s stance on these two proposed projects. Keystone XL Pipeline Overview: The Keystone XL pipeline would transport crude oil for Alberta to Nebraska, expanding the current and operational Keystone Pipeline System. The proposed pipeline would measure 1,897 km long, possess a capacity of 830,000 barrels of oil per day and is estimated to cost $8 billion with $2.4 billion already invested. The pipeline faces a difficult regulatory environment. Since it crosses international borders between Canada and the United States, it is required to obtain a Presidential Permit from the Department of State. The Permit is awarded if the proposed Project serves the national interest, which is a very broad term and requires the consideration of many factors such as energy security, environmental, cultural and economic impacts. Energy East Pipeline Overview: The Energy East Pipeline would transport crude oil from Alberta and Saskatchewan to the eastern Canadian refineries as well as other export markets. In terms of length, this pipeline would span 4,600 km, have a capacity of 1.1 million barrels per day and is estimated to cost $12 billion. The regulatory environment for this project is administered by the NEB (National Energy Board) in Canada, which likely stands to approve the project providing the environmental requirements are met and political support remains. Upcoming Canadian Elections: The outcome of the upcoming Canadian Federal Elections slated for October 19th 2015 will have a significant impact on the likelihood of the Keystone XL and Energy East pipelines being completed. While both Harper’s Conservative party and Trudeau’s Liberals support both projects, the NDP led by Tom Mulcair is currently opposed. While the NDP has yet to win a federal election, this year may be its best chance yet. After a break through election in 2011 in which the NDP replaced the Liberals as the current opposition party. To add to the fact, the Alberta NDP recently won the Albertan provincial election, widely considered a Conservative stronghold and native land of Stephen Harper. The Tory’s have called an early election with the hopes of outspending their opponents. New rules introduced increase the spending limit for longer campaigns. The hope is that this will allow them to outspend the NDP and Liberals on advertising during the critical final weeks leading to the election. While still extremely early in the race, it is worth noting that the NDP currently holds a small but growing lead over the Tories. (click to enlarge) Source: CBC.ca . United States Political Front: As for the U.S political front, Obama has strongly opposed the Keystone XL project and it is extremely unlikely this position will change during the remainder of his term in office. TRP’s hopes lie with the next administration from which they can expect a better odds that they will receive support. Hillary Clinton recently refused to provide a direct answer to whether or not she supports the Project, stating that her current position and the potential for he involvement in a possible lawsuit prevents it. While she is unable to provide any comments at this time, her refusal to offer outright support for Obama on this issue signals that she may be more supportive of the project. As for the Republicans, Jeb Bush tweeted his support : “Keystone is a no-brainer. Moves us toward energy independence & creates jobs. President Obama must stop playing politics & sign the bill.” The economic benefits of the project throughout the U.S would make it difficult for any Republican candidate to oppose it. Conclusion: The impact of an NDP victory in the upcoming Canadian Federal Election presents a significant risk for TransCanada Corp. Two of TRP’s flagship pipeline projects, Keystone XL and Energy East, currently supported by the Tories, are strongly opposed by the NDP. While TRP appears to be a sound value play in the midstream O&G market, offering a juicy 4.31% yield and stable operating cash flows, the upcoming political risks should not be underestimated. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.