Tag Archives: greece

The IQ Merger Arbitrage ETF: A Unique ETF With A Built-In Downside Hedge

Summary I conducted a review of the IQ Merger Arbitrage ETF. I found that the IQ Merger Arbitrage ETF has significantly outperformed its peers because of the underlying strategy the ETF uses. In addition, the IQ Merger Arbitrage ETF has outperformed stocks on bonds during big down days. In this article, I will be reviewing the IQ ARB Merger Arbitrage ETF (NYSEARCA: MNA ) as an option for investors looking for a fund that is not highly correlated with stocks or bonds. I believe MNA is an ETF that investors can hide out in when the market panic sells like this past week with the crisis flavor of the week Greece, Puerto Rico, etc. MNA fits well into most portfolios because of the low correlation it has to stocks and bonds. The table below shows MNA is inversely correlated to the iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) and only has a 36% correlation to the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). With the bond market and the stock market in significant bull markets, there is a real possibility that both stocks and bonds could fall at the same time, which means non-correlated funds have the potential to be an intriguing addition to portfolio for diversification. MNA AGG SPY MNA 1 AGG -0.07 1 SPY 0.36 -0.11 1 Fund Investment Strategy MNA invests in companies that have been publicly announced as acquisition targets and hedges those positions with a broad market short hedge. When a deal is announced, there is a spread between the current trading price and the actual deal price. For example, stock XYZ is acquired for $50/share and after the announcement, XYZ is trading at $49/share. MNA would invest in shares of XYZ and capture the $1 difference between the acquisition price and the current price. As I will detail below in the performance section, MNA has a vastly different return profile than its competitors because it uses a broad market hedge instead of shorting specific stocks, which the competitors for MNA do. This is extremely important given current market conditions, because many companies that are making the acquisitions and thus the companies in the ProShares Merger ETF ( MRGR) and the Credit Suisse Merger Arbitrage Liquid Index ETN ( CSMA) are shorting increasingly along with the acquired company. The following chart shows a real-life example with CSMA having a long position in Time Warner Cable (NYSE: TWC ) and short position in Comcast (NASDAQ: CMCSA ). I assumed that CSMA purchased TWC on the day the deal was announced and showed the performance until April 24th of this year when the deal was called off. As you can see, this was a losing trade for CSMA because Comcast had a better performance than Time Warner Cable, which means that CSMA shorted the better performing company. (click to enlarge) Competition The three main competitors that MNA has are MRGR, CSMA and The Merger Fund (MUTF: MERFX ), which is a mutual fund. Costs: Below is a table, which shows that MNA is only 1 basis point more expensive than MRGR, which is a miniscule difference and is significantly cheaper than CSMA and MERFX. A low expense ratio does not mean that the performance will be better than its more expensive competitors; however, in this case, MNA has significantly outperformed its competitors because of the unique strategy that MNA uses. Expense Ratio MRGR 0.75% MNA 0.76% CSMA 1.05% MERFX 1.27% Performance The following charts show the total return performance of MNA compared to MRGR, CSMA and MERFX, with the charts and data coming from Dividend Channel’s total return calculator . MNA vs. Competitors As you can see in the chart below, MNA has significantly outperformed MRGR since December 2012, which was the start date for MRGR. The performance is not even close, and the funds are going in opposite directions, which shows the strategy MNA uses is superior to MRGR. (click to enlarge) The next chart shows MNA has significantly outperformed CSMA as well since CSMA started trading in October 2010. Up until the start of 2014, MNA and CSMA performed very closely; however, since then, the performance has diverged, because the stocks of the acquiring companies have rose significantly once a merger or acquisition was announced. (click to enlarge) The final chart shows MNA compared to MERFX, which is the widely held $5.3 billion in assets Merger Arbitrage mutual fund. Once again, the same pattern repeated itself with the performance of MNA diverging from the performance of MRFX over the last two years. (click to enlarge) MNA vs. SPY & AGG on worst days Using my ThinkorSwim platform, I looked at the five worst trading days for stocks [SPY] and bonds [AGG] and found that MNA performed well on those days when the broad stock market or bond market was down significantly. As you can see in the table below, the data clearly shows that MNA performs quite well during big down days in the market. SPY MNA AGG MNA 1/15/2015 -1.80% 0.33% 2/6/2015 -0.58% -0.03% 3/6/2015 -1.40% -0.31% 3/2/2015 -0.67% 0.10% 3/10/2015 -1.62% -0.10% 3/6/2015 -0.65% -0.31% 3/25/2015 -1.46% -0.34% 5/11/2015 -0.63% 0.20% 6/29/2015 -2.10% -0.33% 6/22/2015 -0.49% -0.17% Average -1.68% -0.15% Average -0.60% -0.04% Closing Thoughts In closing, I believe MNA is a quality choice for conservative investors who are looking for a non-correlated fund that can be a place to hide out in the event of some foreseen or unforeseen adverse market conditions. MNA is superior to its competitors, because it does not short the stocks of acquiring companies, which has been an excellent strategy in this market, and MNA performs well on days when stocks or bonds are declining significantly. If you are looking for income, MNA is not the fund for you, because MNA only pays an annual dividend if/when they do pay a dividend. Disclaimer: See here Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MNA 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. Additional disclosure: I may initiate a position in MNA in the next month or two.

Bearish GLD Trend After Greece Won Its Gamble

Summary The sudden Greek referendum and capital control gave the impression that events would spiral out of control and GLD spike up. U.S. and China intervened to keep the status quo and even the IMF which was defaulted on by Greece considered debt relief. Even the EU backed away from its demands and prepared to spend $35 billion euros to keep Greece within the EU. Still Greek PM wants a ‘No’ vote to increase negotiation leverage for greater concession. In short, Greece called the EU’s bluff and won the gamble. Financial stability concern had subsided but the world would still flock to USD. Bearish trend for GLD is now in place. The value of gold in our current fiat monetary system would be to serve as a hedge against inflation and financial instability. Inflation remains subtle today and major Centrals Banks only expect inflation to return to the 2% target in the next 2-5 years. Hence there is no reason to purchase gold from an inflation perspective. The financial stability argument is now in vogue with the whole Grexit saga that is playing out in real time. This has been expected after the Syriza government seized power back in January 2015 with the conflicting mandate of overthrowing austerity imposed by its European partners and to stay in the Eurozone at the same time. This is doomed for failure because the internal devaluation (cutting of wages and pensions, etc) would still go against the constraint of the strong euro in Greece’s competitiveness. Hence the Greek economy had shrunk year after year which would increase the debt to GDP ratio and make its debt untenable. Greek Referendum Card Therefore the only way forward would be for the Syriza government to play with the only card they have to force debt relief. That is the card of brinkmanship. It is only when Syriza threaten to burn the Eurozone apart with its default and the threat of leaving the European Union, then would the creditor nations be willing to grant them the much needed debt relief. It is important to understand this whole dynamics because it would in Greece’s interest to keep pushing Europe to the brink of collapse but at the same time maintain its membership in the Eurozone as long as the mandate of the Greek sways towards staying in the Eurozone. The Syriza government had to keep pushing the envelope to scare its creditors and it did a big scare on June 27. Greek Prime Minister Alexis Tsipras called for a sudden referendum on July 5 when the deadline for the EU bailout package on June 30. This worked wonders and was broadcasted worldwide for its sudden and irrational nature. At that point in time, shocked EU finance ministers expressed their angry clearly and closed the negotiations with Greece. On the next working day of June 29, Greece installed capital controls and limited the withdrawals of ATM cash to $60 euros per day. Banks were closed as the ECB refused to increase its emergency lending to deal with the bank run. Ratings agency such as Fitch and Standard and Poor downgraded Greeks banks and sovereign debt respectively. For a while, it would appear that things are rapidly spiraling out of control. I was shocked too and I wrote an article about the irrational nature of the Greek government as seen here . As the SPDR Gold Trust ETF (NYSEARCA: GLD ) chart below would show, gold prices actually spiked up that day as the threat of unconstrained disaster of Grexit appears imminent. The risk was that it would move out of Europe to the wider global economy. USD weakened as it was exchanged for gold. However this extreme extrapolation was a result of shock rather than a comprehensive assessment of the global economy. Foreign Intervention It turned out that the global will to keep the status quo was underestimated. Global leaders such as U.S. President Barack Obama, China’s Premier Li Keqiang and even IMF Christine Lagarde were not willing to rock the boat too hard. On June 30, the New York Times reported that President Obama intervened in the talks to urge creditors to soften their stance and come to a resolution. Obama was concerned over the financial stability concerns as the situation unfolded as described above. The U.S. President had grounds to believe that the unraveling of Europe could easily cause the contagion to spread not only in weaker European countries like Spain and Italy but also to the global economy including the U.S. In addition to the economic damage, there would also be geopolitical damage as Greece is part of NATO which is used to actively counteract the influence of Russia in Europe. This is especially after Russia annexed part of Ukraine in 2014 and this is still an existing concern. Obama was concerned enough for him to dispatch a senior Treasury officer to Europe to follow the status of the talks. For China , they had substantial investments in Greece and want Greece to stay within the EU framework for the safety of their investment. When the new government came into power, they tried to tear apart signed infrastructure contracts which unnerved Beijing. Things would only worsen if Greece were to leave the EU under desperate circumstances. Lastly we have the IMF which was at the losing end of Greece’s struggle with the EU. Greece failed to pay the $1.6 billion euros due on June 30 as the bailout negotiations failed. However the IMF had not taken action against Greece. Instead IMF Managing Director Christine Lagarde is entertaining the option of debt relief in exchange for reforms. Calling The EU Bluff Meanwhile the EU President Jean-Claude Juncker urged the Greeks to vote yes on the July 5 referendum and to stay within the Eurozone. This indicated that the EU would bend over backwards to accommodate the Greeks. In fact, the EU had already backed away from its proposal to rise the Value Added Tax from 13% to 23% and was prepared to give away another $35 billion in bailout. This is despite their doubts over the ability of the current Greek government to implement any reforms as demanded for the creditors. In fact even with these concessions on the table, the Greek PM is still urging his people to vote ‘no’ so that they can have more leverage on the EU for even more concession. The creditors are losing ground step by step with the negotiations with the current Greek government. The recent referendum, flawed as it is, is not used to primarily as a means for the Greek people to express their opinion. It is used as negotiation tool. In short, Tsipras had called the EU’s bluff. Even if the EU was willing to let go of Greece and go against its strong political will to unite the European nations on the frustrations of the creditor nations, international pressure would not allow it to happen so soon after a major recession and with the ongoing Russian aggression. In short, Tsipras took a gamble politically and he won. We can now expect to see more debt relief for Greece even if its record for implementation of reforms are doubted. Tsipras had won and Greece can stay within the Eurozone and not pay its debt. Conclusion The GLD chart below shows the recent impact of the Grexit drama. It spiked on June 29 as pointed out in the chart but it softened shortly after. It is clear that the financial stability concerns had faded and what is left is the rush to safety which would benefit the USD. (click to enlarge) Hence we should continue to sell GLD on any spikes in prices but we should not push it too far as there will be residual demand for gold in case events escalate beyond control suddenly. In other words, there will be a gradual weakening of GLD with periodic strength which should be sold. 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.

Spain Is The Next Greece – Avoid EWP

Summary A political push is underway in Spain that appears to me to have a lot in common with Syriza’s rise to power in Greece. Leftist politicians have won a majority of Spain’s municipal elections and taken control of key cities including Madrid and Barcelona, and they have their eyes on national control. If Spain is going to be the next Greece, then its future actions and direction are not likely to sit well with its Eurogroup partners. The investment community is likely to see this as “contagion,” and that does not bode well for the euro, European equities, and judging by the developments in Greece, Spanish equities. Thus, no matter what happens between Greece and its creditors, it would seem wise to avoid Spanish stocks and the iShares MSCI Spain Capped ETF. Some pundits believe that any sort of closure for the Greece issue is a plus for Europe, whether Greece stays in the eurozone or leaves it. But there is one European market sector that I do not see a positive outlook for either way. Spain looks to be the next Greece because of a political circumstance similar to what occurred in Greece before the current crisis heated up. Thus, I suggest investors sell the iShares MSCI Spain Capped ETF (NYSE: EWP ) and Spanish stocks generally. A succession of leftist political victories in Spain too closely resembles what happened in Greece before it raised issue with its creditors. I believe it will lead to division between Spain (perhaps emboldened now by Greece’s display of strength) and more progressive economies to the North. While Spain is not in the same situation as Greece, its political policies and direction moving forward are likely to trouble investors. Before Syriza, a decidedly left wing party, was elected into power in Greece, everything seemed to be improving, at least from our perspective over here. The economy was growing and the budget was operating at a surplus. Yes, there was still extremely high unemployment and unbearable taxation for a people suffering in strife, but from the perspective of those on the outside Greece was doing better. It was, in the end, the pain and suffering of the people that allowed the political candidate (Tsipras) calling for an end to austerity to overcome the reigning government’s plea for patience. Guess what’s happening in Spain today? The Leftists are Coming! This month, a wave of leftists (not my description) won victories in municipal elections across Spain. The political push in Spain sure resembles the same movement that took control of Greece and led Europe and relative investors into today’s turmoil. In the comment section of the article I linked to here, the first comment says something like, “This must be the Greek contagion they were all afraid of. This won’t end well.” I agree, but would add, this won’t end well for European stocks and debt and the euro, and especially Spanish equities. The newly elected municipal leaders in Spain easily overcame their predecessors with popular campaign pleas. For instance, one new mayor is working to put the victims of foreclosure (that’s how they see it) into homes foreclosed upon and held by banks. Back in Greece, Syriza won with promises to hire back laid-off public sector workers, reduce taxes and to restore old pension norms. But what the so-called leftists in Greece and Spain will have in common is an aversion to German inspired austere budgeting. So then the leftists in Spain are likely to cause a fuss, and I suspect they’ll stare their national intentions now that the Greeks are on the marquee. Opportunistic politicians with plans to take control of Spain this year should find opportunity now to organize gatherings in support of the Greek people. I would be surprised if it doesn’t happen. It will draw global investor attention to the contagion they all feared might spread across the PIIGS (Portugal, Italy, Greece, Spain – I’ll leave out Ireland) of the eurozone periphery. And when the leftists unseat the ruling power atop the Prime Ministry in Spain this year as I expect, we will all have to take note. 10-Year Chart of EWP at Seeking Alpha Just like it played out for Greece, none of this weighs well for Spanish stocks. It portends rather that this 10-year chart of the iShares MSCI Spain Capped ETF , which seems to show stocks going up and down before ending up at the same place, will continue to do so while sporting a new leg lower. Indeed, EWP was one of the poorest performers of the eurozone on Monday, as this secret seems to be leaking. EWP fell 5.2% on Monday, while the iShares Europe ETF (NYSE: IEV ) dropped just 3.4% and the iShares MSCI Germany ETF (NYSE: EWG ) fell 4.0%. The Global X FTSE Greece 20 ETF (NYSE: GREK ) fell 19.4%, since it was the star of the show. Take note that the German ETF was doing quite well this year, but EWP had a negative year-to-date performance record heading into the black day for Europe. Things just got worse for Spain. The political change overtaking Europe is a problem for the euro, but the Swiss National Bank (SNB) and the European Central Bank (ECB) have managed to manipulate the currency well enough to turn a 1.9% overnight loss into a sharp gain by Monday afternoon. The SNB flooded the market with Swiss francs (the safe haven for capital running from the euro at the time) to weaken the franc unnaturally against the euro and support stability (or illusion) in Europe. It’s going to get harder to hide this mess, though, when the Spaniards hit the streets in solidarity with Greece or when these new party candidates win national elections. I found a CNBC report interesting today, as I watched Sarah Eisen report that currency traders believe the euro has not yet given way because of no sign of Greek contagion. Well, I agree but I’m saying that is exactly what is about to change. So, friends, I would keep this in mind when venturing investments in European shares and especially when considering the iShares MSCI Spain Capped ETF, which I would avoid. 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.