Tag Archives: green
Risk Asset Update: Vast Majority Agonize Since The S&P 500’s August Lows
The fact that lower energy prices are not providing the anticipated windfall to economic sectors that should benefit from lower oil prices continues to confound analysts and economists alike. Rapidly falling oil and commodity prices have hampered energy stocks, materials stocks and resources-dependent exporting countries. Yet investor trepidation has spread to other risk assets as well. If risking one’s capital in non-U.S. stocks, small-cap U.S. stocks, high yield bonds, foreign bonds commodities, and a wide range of U.S. sectors is proving detrimental, what’s left? Weren’t lower oil prices supposed to act like a “tax cut” for U.S. households? If families spend less at the gas pump, then they will spend more of their dollars at the mall. At least that’s what mainstream media cheerleaders like CNBC’s Jim Cramer have insisted throughout the year. In contrast, the S&P SPDR Retail Index (NYSEARCA: XRT ) demonstrates that investors are not particularly impressed by the prospects of American retailers. The current price for the exchange-traded fund tracker is lower than the price during the summertime stock market correction. What’s more, XRT is trading 14% below its 2015 high. Well, okay. Maybe consumers are pocketing some of their gasoline savings. Maybe they’re choosing to pay down some of their debts. No matter. Lower energy costs surely must boost bottom line profits of transportation companies – truckers, airlines, shippers, railways. Maybe not. The iShares DJ Transportation Average ETF (NYSEARCA: IYT ) shows that investors see big troubles for American transportation corporations. The current price on IYT is near a 52-week low and sits approximately 10% below a long-term 200-day trendline. Equally troubling, IYT is trading near the lows of the August-September sell-off and it remains down 16.5% year-to-date. The fact that lower energy prices are not providing the anticipated windfall to economic sectors that should benefit from lower oil prices continues to confound analysts and economists alike. For one thing, most of them have completely missed the cons of of commodity price depreciation; that is, gains for commodity users would be offset by losses for the producers (e.g., energy, materials, natural resources, etc.). Second, if the losses by the producers become bad enough, the number of resources-dependent exporters crimping global world product (GWP) can play into the notion of worldwide recessionary pressures. In other words, the U.S. is not an island; the well-being of the global economy matters more for risk taking in market-based securities than a simplistic assessment of oil savings benefiting retailers and/or transporters. Just how bad do resource-dependent exporters have it? The second largest non-OPEC provider of oil to the world is Canada. The iShares MSCI Canada ETF (NYSEARCA: EWC ) is in a bear market with price depreciation in the realm of 32%. Myopic S&P 500 bulls dismiss the bear market in energy stocks and energy-dependent producers like Canada. Yet the problems extend far beyond the oil patch. There is a 46% bearish decline across the entire commodity complex via the GreenHaven Continuous Commodity Index ETF (NYSEARCA: GCC ) due to weakening demand for “stuff” in the developing world and a surge in the U.S. dollar. When China, the world’s second largest economy and the world’s largest trader of goods witnesses year-over-year import declines of 18.8%, something’s not quite right. Rapidly falling oil and commodity prices have hampered energy stocks, materials stocks and resources-dependent exporting countries. Yet investor trepidation has spread to other risk assets as well. The demise of appetite for high yield bonds in the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) has been blamed on everything from energy company debt woes to the collapse of the mutual fund, Third Avenue Focused Credit. However, an in-depth look at the high yield bond space shows that “Ex-Energy” high yield bonds have been diverging from the S&P 500 throughout the year . In other words, people want out of junk bonds because they are lowering their overall risk profile, not simply because of the asset class association with the beleaguered energy sector. It is worth noting, then, that a wide range of risk assets are trading at prices that are in the same shape or in worse shape as they were back when the S&P 500 hit 52-week lows (1867). Energy stocks, retail stocks, transportation stocks, oil exporting countries, high yield bonds, commodities – each of these asset types are struggling mightily. And that’s not all. The iShares MSCI ACWI ex-U.S. Index ETF (NASDAQ: ACWX ) is more or less constrained. Small-cap U.S. stocks via the iShares Russell 2000 ETF (NYSEARCA: IWM ) are timid. In fact, both ACWX and IWM are below respective long-term moving averages and both are more than 10% off 52-week peaks set back in the first half of the year. If risking one’s capital in non-U.S. stocks, small-cap U.S. stocks, high yield bonds, foreign bonds commodities, and a wide range of U.S. sectors (e.g., energy, materials, utilities, retail, transports, etc.) is proving detrimental, what’s left? Large-caps via the S&P 500 and the NASDAQ . Even here, though, some of the leadership in biotech names have yet to recover former glory. The SPDR Biotech ETF (NYSEARCA: XBI ) trades lower today that it did when the S&P 500 hit its 1867 bottom; it is 25% off its 2015 pinnacle and well below its long-term trendline. In sum, leadership across risk assets is so narrow, risking one’s capital in anything other than the large-cap indexes may not be worth it. Indeed, one may wish to keep in mind that while the S&P 500 has been resilient in 2015, it has remained below its May record (2134) for close to seven months. More resilient? Long-term treasury bonds in the face of a Fed that intends to hike overnight lending rates. The iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) is 5% higher than it was in the heat of July. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.
Can Airlines Funds Take Off On Profit Outlook, Low Fuel Cost?
The Airline sector is witnessing improving trends right now, and the momentum is much needed to ensure profits for investors in this space. While much of the encouragement comes from fundamentals within the airline space, another key catalyst for the sector’s growth is the slumping oil price. Airline stocks will likely continue their bull run into 2016 as recently reinforced by the encouraging outlook provided by the International Air Transport Association (IATA). Separately, weakness in oil prices, which has lasted for well over a year now, is nothing short of a godsend for the airline space. Airline profits depend largely on fuel prices, which form nearly 30% of operating expenses and are also the major variable component in the industry. Operating expenses of airline companies have gone down considerably as fuel accounts for one of the major input costs for air carriers. Thus, it is time to focus on funds that have investments in the airline space. Please note that there is hardly any fund that focuses solely on airline stocks. However, the sector attracts heavy investments from many mutual funds that focus on the transportation sector. The funds we discuss may not carry a favorable Zacks Mutual Fund Rank at the moment, but an improving trend in the airline space demands attention on them. Airliners Fly High as Crude Hits Ground Stocks in the airline space soared following the Dec 4 decision by the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – to not curb output of crude. A blip came thereafter as Southwest Airlines (NYSE: LUV ) revealed a disappointing outlook with respect to its operating revenue per available seat miles (RASM) for the fourth quarter of 2015. Nonetheless, the low oil price environment makes airline stocks attractive. The drop in oil prices has reduced airline companies’ operating expenses significantly, thereby boosting the bottom line. OPEC’s decision not to curb output despite the slump in prices means that the oversupply will continue to haunt the energy space. This implies good times ahead for airline carriers. Weak oil prices have resulted in tremendous savings and improved bottom lines for carriers in the past quarters. The massive savings have certainly supported the financial health of carriers and prompted them to launch share buyback programs, hike dividend payments and significantly reduce their debt levels. Buoyed by their sound financial health, several carriers intend to invest heavily in upgrading overall facilities for better customer satisfaction. This is likely to result in greater travel demand, improved goodwill and eventually, a higher top line. Although it is true that most carriers struggled to post meaningful revenue growth in the third quarter of 2015 courtesy of a strong US dollar, their bottom lines benefited owing to low fuel costs. IATA’s Outlook Buoys Airliners Further The International Air Transport Association now expects profits in the aviation industry to touch $36.3 billion in 2016 with a net profit margin of 5.1%. IATA also projects profits of around $33 billion in 2015 with net profit margin of 4.6%, marking an improvement from the previous guidance of $29.3 billion, which was released in June 2015. Christmas holidays and summer vacations will contribute to traffic. IATA projects 6.7% and 6.9% growth in air traffic in 2015 and 2016, respectively, with load factor or percentage of seats filled by passengers pegged at 80.7%. IATA also believes that 3.8 billion passengers will travel in 2016. Moreover, increased fleet restructuring programs, retiring older and less efficient aircraft and new aircraft orders are anticipated to enhance the performance level of the company by trimming fuel and operating costs, and rendering a comfortable flying experience. Moreover, most carriers are focused on augmenting ancillary revenues by launching value-added services at affordable rates. Funds In Need of a Turnaround Although there is no airline-specific mutual fund category, the space represents a substantial portion of the transportation sector. Mutual funds from the transportation sector with significant focus on airliners are the ones to watch out for. Not all of them may be carrying a favorable rank right now, but the positives are much needed to turn the tide for them. Fidelity Select Transportation (MUTF: FSRFX ) seeks growth of capital. FSRFX invests the majority of its assets in common stocks of firms mostly involved in providing transportation services or ones that design, manufacture and sell transportation equipment. FSRFX is the only fund that carries a Zacks Mutual Fund Rank #2 (Buy). FSRFX has not been able to stay in the green in recent times, as its year to date and 1-year returns are -16.7% and -13.7%, respectively. The 3- and 5-year annualized returns are, however, respectively 19.2% and 11.8%. Annual expense ratio of 0.81% is lower than the category average of 1.14%. FSRFX carries no sales load. Among the top 10 holdings, FSRFX holds airline companies such as Southwest Airlines, American Airlines Group Inc (NASDAQ: AAL ) and Delta Air Lines Inc. (NYSE: DAL ). Rydex Transportation Fund Investor (MUTF: RYPIX ) invests a large chunk of its assets in domestically traded companies from the transportation sector and in other securities including futures contracts and options. RYPIX may allocate a notable portion of its assets in companies having market capitalization within the range of small to medium size. RYPIX may also invest in ADRs in order to gain exposure to non-US companies and may also invest in US government securities. RYPIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year to date and 1-year losses of RYPIX are 12.4% and 8.6%, respectively. The 3- and 5-year annualized gains are 19.4% and 11%, respectively. Annual expense ratio of 1.35% is higher than the category average of 1.14%. RYPIX carries no sales load. Among the top 10 holdings, RYPIX holds airline companies such as Delta Air Lines, Southwest Airlines and American Airlines Group. Fidelity Select Air Transportation Portfolio (MUTF: FSAIX ) seeks long-term capital growth. FSAIX invests the major portion of its assets in companies primarily engaged in providing air transport services all over the world. FSAIX focuses on acquiring common stocks of companies depending on factors such as financial strength and economic condition. FSAIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year to date and 1-year losses of FSAIX are 6.5% and 3.2%, respectively. The 3- and 5-year annualized gains are 23.1% and 15%, respectively. Annual expense ratio of 0.83% is lower than the category average of 1.14%. FSAIX carries no sales load. Among the top 10 holdings, FSAIX has airline companies such as Southwest Airlines, American Airlines Group, Delta Air Lines and Spirit AeroSystems Holdings (NYSE: SPR ), which is one of the largest independent suppliers of commercial airplane assemblies and components. Original Post