Tag Archives: government

Time To Short The VIX?

Summary Historically, we haven’t reached breakout status for the VIX. Many global factors are at play. This is possibly an economic event leading to longer periods of backwardation. The last week in volatility has been very exciting to say the least. The VIX Index logged the highest ever one week gain in percentage terms. Again, we immediately had the pundits out yelling short the VIX. I saw posts on Thursday around the web urging readers to short the VIX. Someday, this will end poorly for them and the people that heed their advice (Friday should have been a good sign). Below we will examine whether this really is a good opportunity to short in terms of risk verses reward. I am always analyzing my risk and reward in a trade. Once the reward begins to outweigh the risk, then I will begin planning my entrance. I believe risk and reward are currently the same. Essentially giving you a 50/50 chance of profiting right now. More to come on that later. Let’s start by reviewing the past month for the Proshares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) and the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ). You can clearly see the effect of last week in the chart. Similarly here is a chart showing the front-month VIX futures contract. As you know (or should know), UVXY does not track the VIX Index, which is currently at 28. This is a large divergence from the front month futures contract. Remember futures trade independent of the market and the VIX Index. This, in my opinion, means that investors aren’t that concerned yet over a crash in the markets. U.S. economics continue to be neutral to positive. However, global economic fears are beginning to spillover. Just six months ago analysts were touting emerging markets, now look at them. For more on how UVXY profited during the 2008 and 2011 VIX events, check my library here on Seeking Alpha. UVXY will benefit from the current levels of backwardation if they can hold for a longer period of time. See below: (click to enlarge) Backwardation at 6.5% roughly means that UVXY will increase 13% in one month’s time if futures stay the exact same price, minus any fund fees. Now we know futures never stay the same, but this is just an easier way to think about contango and backwardation. Backwardation hit over 20% in 2011 and over 40% in 2008 (backtested). Backwardation is the only way UVXY will hold profits over longer periods of time. Again, check my library for articles on backwardation if you are unfamiliar with the term. Historical Numbers I know many of you are very excited about this spike. However, let’s compare this event to past events. Backwardation: (click to enlarge) At 6.5%, this puts backwardation higher than a normal political event. If you remember in my last article we discussed the differences between an economic and political event. This event, so far, is leaning towards an economic event. Economic events are usually much more drawn out. I told you earlier in the year I was looking for a backwardation event higher than 10%. I believe this could become that event. More about this in the conclusion. Futures Levels Futures levels directly impact UVXY. Here is a longer-term chart of those futures levels: Yes, futures are towards the higher end of what they have been over the past three years. However, this is nowhere near breakout status. Futures generally trade lower than the VIX Index during a spike. For reference however, here is the VIX Index dating back to 1990: Conclusion The best entry points in the VIX futures, for shorting UVXY or going long XIV, occur during periods of prolonged economic turmoil. Yes, we logged the highest ever one week rise (by percentage) in the VIX Index. However, I feel we still have room to rise. Those pundits that are shouting short the VIX may be right or may be wrong, that is not the point of this article. I like a lot of reward for the risk I am taking. I don’t see the VIX returning to 12 anytime soon. We are in a prolonged period of slower economic growth. Eventually that was going to catch up to valuations and the U.S. stock market. We have recessions in Brazil and Chile. We have slowing growth in China, which should be your biggest concern. The Greek drama is off the table for now but you still have a case of many countries within the Euro that have very high debt levels and growth that isn’t high enough to sustain it. Here in the U.S. we also have unsustainable debt levels but can print however much money we desire. Ultra low rates have helped lower the burden of interest payments but the lack of decent inflation has backed The Fed into a corner in regards to raising rates. A September rate hike would spook the markets. The fact we don’t see higher inflation even given the ultra low interest rates is a realization and confirmation of the slow growth era. For now, I will remain on the sidelines and hope conditions continue to worsen. If I miss the opportunity, I am certainly okay with that. My total VIX portfolio is up a healthy amount YTD and I am fine with locking in those gains instead of gambling it away. This is not to say that I am not salivating at the mouth for a chance to short the VIX. Here is what I am currently watching, in order of importance: The Fed (what’s going to happen with rates, I view any delay as a negative confirmation on the U.S. economy) Economic data out of China (can the government stop the decline this time?) U.S. employment data (weekly) Devaluation of the Yuan (will it continue?) Economics in South America Political/debt situation in Europe (Greece drama is on the back burner for now) I am not backing up the truck to short this spike. We may get a bounce in the U.S. next week but economic problems always take a while to resolve themselves. I would short the VIX with caution if you feel that is the right thing to do. Call spreads (more info on my blog), stop losses, and not jumping all in help to limit your risk/reward. Risk management is needed here, otherwise you are just gambling. I wish you the best this week and know that I will be following the situation and posting updates when needed. It will be an interesting week! Should conditions deteriorate even more, I might begin shopping for a small position. With school starting, I would only be looking for a more long-term position since I am busy during the day. I just need more reward for the current level of risk. Donate to my classroom! I am trying to create a 360 degree mathematics classroom. Much of the money I make here on Seeking Alpha is donated back into public education, something I really believe in. My students come from the highest area of poverty where I live. They are truly great students with a desire to better themselves. My job is to level the playing field and give them a chance to succeed. One tool I used last year at a different school was a 360 degree mathematics classroom. It is a great tool for math teachers. A lot of what I teach lays the foundation for financial literacy and success in post-secondary education. Here is the link if you would like to help fund my 360 degree boards. Use the code SPARK at checkout (until 8/27) and your donation will be matched 100% up to $100. Currently they are running another promotion from The Gates Foundation that will also match 100% up to $1,000 (which would be more than what is needed). That code is JUMPSTART but will only be available for a limited time. You can’t use both codes. All donations are tax deductible and will make an actual difference in the education of some great kids. We are getting close to funding. Thank you! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in UVXY over 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.

Exelon’s Time Is Coming

Summary Exelon is becoming attractive for traditional utility investors. Exelon is embracing regulation and withdrawing from nuclear power. Three new events are expected. Any single event could change the company. Two events take place within weeks. Management does not control the last event. Equity investments should be coordinated with announcements. Exelon (NYSE: EXC ) could become one of the nation’s most valuable utilities. It’s not there yet. Before jumping in, wait for some important announcements. After the market digests the news, consider adding Exelon to your portfolio. Exelon’s management is in the process of making significant changes to their company’s profile. If successful, Exelon’s revenues will become less volatile, their earnings more manageable and their debt more attractive. Exelon will be able to attract lower cost of capital to help them expand and grow. Today, Exelon is one of the nation’s largest utilities. With an enterprise value near $50 billion, only four investor-owned utilities are larger. Known by the investment community as a nuclear power producer that also owns a few local distribution utilities, their objective is to be known as a regulated utility that also owns some merchant power assets. To transform the company, Exelon wants to own more regulated assets and less nuclear. To accelerate those changes, Exelon will orchestrate three major events. Any single event could trigger a change in the company’s profile and valuation. In the end, management expects smoother revenues, cash flows and earnings. Event 1: Pepco Holdings Exelon currently owns three regulated utilities. The first is Commonwealth Edison Company (ComEd), which serves metropolitan Chicago. The second is PECO Energy Company (OTC: PECO ), which serves metropolitan Philadelphia. The third is Baltimore Gas & Electric (BGE), which serves metropolitan Chicago. Exelon is attempting to acquire their fourth. It is Pepco Holdings (NYSE: POM ), which in turn owns three regulated utilities. Pepco’s three utilities surround Exelon’s BGE and touches PECO. Pepco’s territory includes the District of Columbia, Maryland, Delaware and New Jersey. Before any merger can be completed, Exelon requires approval from those same states, the District of Columbia and other regulators. Exelon’s approvals are almost complete. They have won approval from all federal and state regulators except one. It is waiting for the District of Columbia. Within the District, several constituent groups support the merger while several vocal groups strongly oppose. The DC Commission must make a decision that could upset some groups. For Pepco’s shareholders, DC’s announcement will provide either relief or disappointment. While it is widely expected that DC will approve the merger, there is a small probability they will not. Should DC reject the deal, Exelon’s shareholders would face a bumpy road and Pepco Holding’s stock would likely tumble. DC’s decision is expected within days or weeks. A politically practical time for an announcement would be around September 4 (Labor Day weekend). Any merger would be completed a few days later. DC’s decision could alter Exelon’s other plans. Specifically, Exelon intends to alter their portfolio of nuclear power assets. Exelon plans a major announcement about those assets soon after the DC Commission releases their decision about Pepco (assuming that decision is forthcoming). Event 2: Exelon’s Nuclear Power Plants While Exelon was never a pure play on nuclear, its revenues and earnings were dominated by their massive financial position in the nation’s largest fleet of commercial nuclear power plants. According to reports published by Washington-based Nuclear Energy Institute, Exelon owns 20,791 megawatts, or slightly more than 21 percent of the nation’s nuclear capacity. It is the operator for 17,509 megawatts of nuclear capacity, including 1,126 megawatts owned by Public Service Enterprise Group (NYSE: PEG ) and 455 megawatts owned by MidAmerican Energy, a unit of Berkshire Hathaway (NYSE: BRK.A ). Exelon is considering the early retirement of up to seven nuclear power stations in three states. The combined capacity of the seven is approximately 6,380 megawatts (electric). If all seven were retired, Exelon would shrink their $52 billion worth of property, plant and equipment assets by about $10 billion to 15 billion and their operating assets by almost 45 percent. Two nuclear units are already gone. Exelon previously announced plans to retire their Oyster Creek facility in 2019, ten years early. Located in New Jersey, Oyster Creek is one of the nation’s oldest nuclear plants. At 615 megawatts, it is also one of the smallest. Another old and small unit operates in Upstate New York. Exelon’s R. E. Ginna Nuclear Power Plant is losing money. Because Ginna is an essential resource for grid reliability, Exelon sought and won temporary approval for a boost in revenues. In “CASE 14-E-0270 – Petition Requesting Initiation of a Proceeding to Examine a Proposal for Continued Operation of the R.E. Ginna Nuclear Power Plant, LLC” (August 13, 2015), New York’s Public Service Commission issued an order that approves temporary rates to fairly compensate the local utility, Rochester Gas and Electric, who in turn would pay Exelon. That order keeps Exelon’s 581-megawatt facility running until September 2018, with a possible extension to March 2020. By then, the Commission expects Rochester Gas and Electric will complete transmission and distribution system upgrades, access other sources of reliable power and disconnect from Ginna. On or about 2019, Ginna will likely join Oyster Creek and retire. The other five nuclear plants are seeking a similar deal. All five are located within the State of Illinois and the Midcontinent Independent System Operator’s territory (with limited access to PJM Interconnection). All five struggle for adequate revenues. Unless there is relief from the power markets or policymakers, Exelon needs to cut their costs. The best way to cut costs is to retire uneconomic assets and move on. For months, Exelon has been working with federal and state officials. They have been seeking a level playing field with other power producers. They want to be paid for their plants’ derivative products. Currently, the state takes those products without compensation. The issue is clean energy. According to DOE-funded NC Clean Energy Technology Center, the State of Illinois has 71 policies and incentives, which help the state’s power producers deliver clean energy. Not one of those programs include the state’s 11 nuclear power plants, which are carbon free, produce no air pollution and produce no water pollution. Unlike wind and solar – which offer important benefits to the state – nuclear power also offers the grid incredible levels of reliability. Nuclear power plants operate 24 hours a day, 7 days a week, rain or shine, day or night, cold or hot. Not only do nuclear plants produce clean energy with incredibly levels of reliability, nuclear plants also provide another valuable attribute. When nuclear power plants operate – which is about 90 percent of the time – inefficient and more costly plants need not operate and they are pushed out of the market. Inefficient plants usually pollute more than efficient plants. Consequently, nuclear power plants displace air-polluting power plants watt for watt. Most policymakers understand nuclear power plants produce clean energy. Not as many understand the consequences of removing existing nuclear power plants. It turns out; the consequences are severe. If existing nuclear units are removed from the grid, air-polluting power plants must replace lost capacity. If Illinois wants clean air and clean water, they will need to keep as much existing nuclear power as possible. The fate of Exelon’s five nuclear facilities will be announced in September. While the number of plants to be axed is unknown, a guess would be three out of the five. However, the decision could be dependent on the Pepco decision. For Exelon shareholders, early retirement means the company will ultimately write down nuclear assets. Depending on the plants involved, the write down could be $5 billion to $15 billion. As such, management’s announcement could affect the company’s valuation – at least for the short term. Event 3: Government Wakes Up The decks will be cleared after a favorable Pepco decision and after Exelon’s nuclear announcements. The market should absorb all the news and adjust the company’s forward earnings. For equity investors, this could be the time to jump in. It turns out; there is a little surprise. After the nuclear retirements have been announced, there is a likelihood the company could reverse course. If they do reverse course, the stock could slowly recover and grow. While Exelon expects to announce their nuclear strategy in September, they will not retire any unit for at least 18 months. As Exelon’s President, Chief Executive Officer disclosed in the last quarter’s conference call : “We have requirements around notification to PJM of our intent to retire units. It’s an 18-month notification. We also have commitments around when we have to notify of our availability for the 2018-2019 auction in participation on that. And very importantly, we have to order and design cores [for] the 2019-2020 auction. We’ve been in consultation with the Board and we’ll continue to consult with the Board, and where management’s made their decision we’ll pass that to the Board for the final approval in that timeframe, and continue with the outreach to our stakeholders.” Another executive repeated the CEO’s strategy. William Stoermer, Exelon’s senior communications manager explained : “Exelon will delay a decision “as long as we can see that the legislation is continuing to move forward,” Mr. Stoermer said. He warned, however, that if the legislation doesn’t advance and Exelon doesn’t “get through the auction process,” company officials will “have to make very difficult decisions,” including the potential of closing the plant in 2017.” So, there you have it. The big announcement to close is not really a firm announcement to close. Exelon plans to keep all five units running for a year or more. They may not retire them for decades. As such, it appears September’s nuclear announcement is aimed mostly at policymakers. This suggests that investors have some upside potential. If government policymakers hold to their position and allow perfectly good nuclear assets to retire, their decision is already baked into the price of Exelon’s stock. If, however, policymakers yield, the company’s revenues and earning improve and Exelon’s stock should respond. Of course, there are always risks. The future is not certain and Exelon’s management has a history of surprising shareholders. However, this time management appears to be signaling their intentions. While their signals are not aimed at shareholders, they are public and they appear to be consistent with keeping assets. Nevertheless, the third event not controlled by Exelon’s management. It is in the domain of government policymakers, who are saddled with several large challenges. For them, allowing solid nuclear plants to retire early resolves nothing and only adds to their woes. Let’s look at a few of their challenges. If Exelon closes one or more nuclear plants, the state’s consumers will incur higher electricity costs and more air pollution. This is because Exelon’s five nuclear plants are deregulated and they earn most of their revenues from the power markets. Within the power markets, when a lower cost producer is removed from the bidding, higher cost participants fill the void at higher costs. Higher costs means higher prices for consumers. It also means more pollution, because higher-cost producers are usually less efficient and less efficient plants pollute more. In addition, a loss of large nuclear plants means the state loses a large tax base and reduced economic activity. At the local level, retiring large nuclear facilities means permanent loss of thousands of high-paying jobs. It means a permanent loss a huge tax base that pays for local schools, fire, safety and infrastructure. It also means a loss to local businesses and real estate. Losses at the local level could be severe. Those losses will put pressure on political leaders, who in turn will likley seek relief at the state level. The worst case is if the state does nothing. It will hurt localcommunities. It will also hurt the state. However, it is not a terrible outcome for Exelon’s shareholders. Should three or five nuclear plants retire and decommission, the company’s revenues will decline. Ongoing expenses will decline at a faster rate. However, the company’s long-term cash flows and earnings should improve. Exelon operates 11 nuclear power plants within the state. Should Illinois decide to include nuclear in their clean energy portfolio, it would not only improve financial results for Exelon’s five underperforming units, it could boost results for all 11 nuclear units. To prepare, investors should consider two strategies. First, wait before buying additional shares of Exelon. Wait until after DC and Exelon announce their first and second events. After the news has been digested by the markets, watch the charts and consider strategic buys of the stock. Second, consider Exelon’s other equity unit (NYSE: EXCU). Technically, they are convertible notes (Fitch BBB-). They currently pay a 6.5 percent dividend. On some screens, they appear as an equity (without much description). During the last six months, EXCU’s market values have been roughly correlated to EXC. 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.

Pampa Energía Is A Good Option For Normalization In Argentina

Summary Pampa Energía works in a highly distorted regulatory framework, where frozen tariffs have led to a critical situation for the utility companies. Even in this scenario Pampa Energía has managed to reach a price earning of 5 years. With a new government about to be elected, great improvements could be in the way. Pampa Energía S.A. (NYSE: PAM ) is the largest integrated electricity company in Argentina and through its subsidiaries participates in the generation, transmission and distribution of electricity, as well as natural gas transportation and production. (click to enlarge) Source: Pampa Energía. Pampa Energía owns indirectly: 84% of the generation assets. 26% of the transmission business (TRAN.BA). 52% of the distribution business with Edenor (EDN). 26% of the natural gas transportation business with Transportadora de Gas del Sur (NYSE: TGS )(pending government approval). 50% of the Oil and Gas exploration and production business with Petrolera Pampa (PETR.BA), associated with Yacimientos Petrolíferos Fiscales (YPF). As of August 17th, 2015 the market cap of the above mentioned: (click to enlarge) Source: Yahoo Finance Reminder: Transener and Petrolera Pampa stocks are only listed in the Merval Index, the market cap is expressed in Argentine Pesos -AR$-. Exchange rate as of August 17th: ARS/USD= 9.15. Updated quotes and market cap expressed in USD here . Scenario: Pampa Energía works in a highly distorted regulatory framework where frozen tariffs have led to a critical situation for the utility companies. From 2001 onwards the tariff was converted to AR$ and had practically no adjustments and no longer provides for a reasonable return on capital/assets. Full tariff reviews are pending. High inflation and regulated tariffs that took place since 2006 and 2001 respectively, have led to deep margin erosion for utility stocks. The Argentine utility stocks have underperformed their Latam and EM peers since 2001, these poor returns are explained by significant erosion in real electricity tariffs (frozen since 2001). Gross margin captured by utilities as a percentage of the GDP fall from 0.3% to 0.02%, setting the scope for a possible recovery in profits, if the upcoming political situation leads to a normalization of the current imbalances. For example, the comparison between the residential electricity cost in Argentina and regional peers shows clearly how distorted the public services tariffs are. (click to enlarge) Source: Pampa Energía. Subsidies for electricity and gas purchases cost the government around 4.5% of GDP, and the burden is growing. Some tariffs would need to triple or even be multiplied by seven times to reach market prices. With just a small correction, companies like PAM will perform better. A presidential election is coming in Argentina as of October 25, and the main contenders (Daniel Scioli, Mauricio Macri and Sergio Massa) have expressed its understanding about the need to lift some tariffs caps, in order to reduce the fiscal deficit, which is unsustainable at these levels. As the company’s aren’t capable of fulfilling the investment needs in electricity of the country, and several blackouts occur during the last quarters, the actual government is taking some measures to improve the situation. Two relevant facts take place during 2Q15 for Pampa Energía: 1) “SE Resolution No. 482/15: Increase in the Electricity Generation Remuneration Scheme On June 10, 2015, the Secretariat of Energy issued SE Resolution No. 482/15, in which it updates retroactively the remuneration for electricity generation as of February 2015 commercial transactions.” 2) “Gas Transportation Tariff Increase for Transportadora de Gas del Sur S.A. On June 8, 2015, the National Gas Regulatory Authority -ENARGAS- issued Resolution No. 3,347/15, which grants TGS a tariff increase for gas transportation and operation and maintenance fees of 44.3% and 73.1%, respectively, both retroactive to May 2015.” Source: Pampa Energía 2Q15. This and other measures have improved Pampa´s EBITDA and Profits. In the 2H15 : Consolidated sales revenues of AR$3,457.6 million ($378 million) for the six-month period ended on June 30, 2015, 18.4% higher than the AR$2,921.4 million ($319 million) for the same period of 2014. Adjusted consolidated EBITDA of AR$1,693.3 million ($185 million) for the six-month period ended on June 30, 2015, compared to AR$27.1 million ($9 million) for the same period of 2014. Consolidated profit of AR$1,365.1 million ($149 million) during the six-month period ended on June 30, 2015, of which a profit of AR$963.0 million ($105 million) is attributable to the owners of the company, compared to an AR$80.4 million loss (-$8.8 million) attributable to the owners of the company in the same period of 2014. With a market cap of $900 million, earnings per ADR in the 1H15 of $1.7, and foreseeable earnings of nearly $180 million a year, the forward P/E looks compelling. Just thinking about the replacement cost of its fixed assets, it´s easy to see how PAM is undervalued, and this is mostly caused by a regulatory environment which could improve soon. As a change in the government is approaching, it could be expected that some distortions will disappear, I´m not talking here about free market prices, as it´s “politically incorrect” to raise tariffs by 200% in a single move, but given the current situation, where PAM is trading at a forward P/E of 5, and making money under this difficult scenario, any improvement will boost earnings and improve the company´s situation. Risks: Currency risks are present since it’s widely expected that the new government will depreciate the local currency, but that depreciation will certainly include better tariffs for the utilities as the energy price is partly dollar linked as well as the importations of energy. Political risks are another factor to bear in mind, but as the current government deficit is unsustainable, some adjustments are needed. To conclude PAM is under the current conditions deeply undervalued, and that could increase if the pending integral tariff revision comes in place. If the Argentinean economy is going to improve, massive capex in the electricity sector would be needed, and PAM is in the better position to profit from that. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PAM over 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.