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First Energy: The Hidden Gem Of Marcellus Shale?

Summary Electricity companies are the major beneficiaries of growing investment in the Marcellus and Utica Shale. First Energy is making investments in order to take advantage of the growth opportunity in the region. Cracker plants will substantially increase the demand for electricity in the region. The U.S. shale boom has come under threat due to the consistent fall in crude oil prices. And fracking was already controversial due to the environmental hazards — the state of New York has banned the practice due to the environmental issues. The fall in crude prices, however, has really impacted companies with oil-heavy portfolios while companies with gas-heavy portfolios continue to grow production. The main reason behind the increase in production is that the demand for natural gas, natural gas liquids, and the components remains high. Marcellus and Utica shale are natural gas rich areas and companies continue to invest in these natural gas rich areas to grow their production. These natural gas players have gained a lot from this boom in production. However, there are some other players that have been benefiting from this boom and have been relatively anonymous. First Energy (NYSE: FE ) is one of these players. The company has been providing electricity to the facilities in the region and it has been growing impressively. Over the last year, the stock has gained about 22%. First Energy has changed its strategy and the company is now focusing on transmission and regulated distribution business. The company has become a major supplier to the oil and gas companies operating in these regions. Drilling is still done through the diesel generators, but the gas processing plants use electricity and their demand is constantly increasing. The process of separating liquids and the natural gas process needs a lot of electricity. As the investment in natural gas drilling has been increasing, the demand for electricity has also been increasing. Since July 2011, First Energy’s usage for shale-related activities has increased by 70 megawatts. By 2019, this region is expected to create further demand of about 1,100 megawatts due to the increased developments in the area. In order to capture this growth opportunity, the company is planning to invest in a number of transmission projects. First Energy is going to invest $100 million in new transmission projects to increase supply to the operators in the Marcellus shale. Natural gas processing is a multi-stage process, and the rising demand for polyethylene and other feedstock components for the petrochemical industry have prompted the natural gas players to invest in cracker plants. These plants turn liquid ethane in polyethylene and other feedstock components. As the natural gas and natural gas liquids production continues to rise from the Marcellus shale, it is likely that these companies will want to build cracker plants in order to manufacture these feedstock components from liquids ethane and natural gas. As a result, demand for electricity will further rise as these cracker plants need substantial electricity to operate. First Energy will stand to benefit from this rise in demand, and the investment in better transmission will pay off for the company. First Energy is currently serving 12 natural gas processing plants in Pennsylvania, Ohio, and West Virginia. The company previously announced a $4.2 billion project, which will run through 2017. Most of these investments are focused in these states and the Marcellus shale area. One of the planned cracker plants is the project by Royal Dutch Shell (NYSE: RDS.A ) — the company is going to build a plant in Monaca Beaver County and this facility will process over 100,000 barrels of liquid ethane every day. The plant will use between 300 and 400 megawatts of electricity. The Bottom Line A growth opportunity is present for First Energy and it is already making efforts to capture this opportunity. Timely investment in the transmission network will position the company nicely to provide electricity to the new natural gas processing plants as well as cracker plants. Despite the overall poor conditions of the energy industry, the demand for natural gas liquids and feedstock components remains high, which bodes well for the company. Natural gas players will continue to grow production of natural gas, natural gas liquids and other feedstock components in order to meet the rising global demand for these products. As a result, demand for electricity will continue to grow. In my opinion, First Energy is well-positioned to grow and the company’s investment is targeted at a high-growth area of its business mix. I believe that despite a healthy gain (22%) during the current year, First Energy will continue to grow and will have a solid 2015. Disclaimer : This article is for informational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

When To Rebalance Your Portfolio

It’s that time of year again. Time to look at your portfolio and decide on your rebalancing strategy. Most investors know they should rebalance but many don’t do it or they get hung up on the detailed mechanics of rebalancing. In this post I’ll present a quick summary of rebalancing approaches and share my approach as well. We rebalance portfolios to improve risk adjusted returns over the long haul. In general, if portfolios are not rebalanced then the equity portion of the portfolio grows to dominate the overall portfolio and its risk. This is usually not something investors want especially as they age. After the decision to rebalance, the next question is how often. The frequency of rebalancing has to be traded off with the costs of rebalancing, transaction fees, commissions, etc… We also need to consider if we should rebalance if there is any difference at all in our target percentage allocations or wait until there is a significant enough difference to trigger an allocation decision. Say your target is 60% stocks and at the end the year you end up at 61% stocks. Does the benefit of rebalancing outweigh the costs? Probably not in this case. So, how does an investor choose the best approach? Fortunately, the great folks at Vanguard have done all the heavy lifting for us in this paper. Here is the summary table. (click to enlarge) As the above table shows basically there is not a big difference in rebalancing approaches, outside of never rebalancing. Even a monthly rebalance with a 0% threshold does not increase portfolio turnover and costs as much as you would expect. The last column also shows the results of never rebalancing – higher returns but with significantly higher volatility which leads to portfolio outcomes that most investors cannot stick with over time. These results also hold for quant portfolios. Whether implementing the IVY portfolios, the Permanent portfolios, Quant portfolios, the timing and threshold of the rebalance does not make a significant difference to long-term portfolio returns, e.g. see the IVY portfolio FAQ question #4. However, it is important to point out that there are periods where rebalancing does not work. Let me give you an example. The table below compares the returns of 60/40 stock bond and 70/30 stock bond portfolios with yearly rebalancing and no rebalancing over the last 5 years (2009 to 2013). (click to enlarge) As the table shows, yearly rebalancing increased returns for the 60/40 portfolio but yearly rebalancing actually decreased returns for the more aggressive 70/30 portfolio. This is typical in strong bull markets when stocks consistently outperform. This is maybe one of the reasons investors abandon rebalancing. But it is important to focus on the long term and more importantly on risk adjusted returns and stick to a rebalancing strategy. Personally, I rebalance once a year with a 1% threshold across all my portfolios regardless of strategy. But that is what I have found works for me. The best advice I can give anyone is to paraphrase the Vanguard advice – choose a regular periodic rebalancing approach that fits your investment style and that you can stick with over the long haul. This is most likely my last post for this year. Hope everyone has a Happy New Year! Here is to a great and prosperous 2015. At the beginning of the year I’ll be focusing on updating all the yearly returns for all the portfolios and strategies I track. I’m looking forward to sharing the results with everyone.

What Do 2014 Winners Say About 2015?

Summary The yield curve flattened in 2014 as short-term rates increased and long-term rates declined. Utilities benefited from lower long-term rates and is set to finish the year as the best performing sector. The U.S. dollar rally in 2014 looks like the early stage of a much larger rally. One of the biggest trends in 2014, for both length of time and the size of the move, was the bull market in long-term government bonds. The 30-year U.S. Treasury bond will finish the year near its highest level in decades. The 10-year treasury yield of nearly 2.2 percent is off the lows set in 2012, but near the levels reached at the depth of the 2008 financial crisis. There may even be room to move lower because that yield looks plentiful next to German and Japanese 10-year government bonds, which yield a paltry 0.55 percent and 0.33 percent, respectively. Investors who purchased iShares Barclays 20+ Year Treasury (NYSEARCA: TLT ) at the start of the year would be sitting on gains of more than 26 percent as of December 29. That is competitive with the best performing S&P 500 sectors in 2014 and gives it a better than 10 percent lead on both the S&P 500 Index and the Nasdaq this year. As for those best performing sectors, utilities and healthcare are set to grab the top two spots. (click to enlarge) In the currency market, a bull rally in the U.S. dollar kicked off in mid-summer against the yen and euro, and this extended to emerging market currencies by the start of autumn. The U.S. dollar heads into 2015 in a widespread bull market against all major currencies, with even the Chinese yuan showing signs of weakness. A Look Back At Interest Rates In 2014 This year started with investors expecting a rise in interest rates after the Federal Reserve began tapering its asset purchases in December 2013. The Fed ended its third round of quantitative easing (QE3) in October, but history proved superior to expectations: each time the Federal Reserve has exited quantitative easing, interest rates moved lower, not higher, and this time was no different. Rates peaked at the start of the year and never looked back, beginning an almost uninterrupted slide that has yet to finish. (click to enlarge) Economic growth failed to spur general rate increases. GDP growth dipped in the first quarter, then picked up strongly in the subsequent quarters, eventually climbing to 5.0 percent annualized growth in the third quarter. Despite these robust growth numbers, long-term bonds will close out 2014 at or near their highs for the year. Interest rates didn’t fall across the board though. The 2-year treasury yield has been rising since the Federal Reserve announced the taper in May 2013. The 5-year treasury yield didn’t gain in 2014, but it didn’t fall either. (click to enlarge) (click to enlarge) Rising short-term rates and stable or falling long-term interest rates makes for a flatter yield curve. A flat yield curve usually occurs in the middle of an economic expansion, when the economy is firing on all cylinders. Sector Performance Utilities and healthcare are the best performing S&P 500 sectors by a wide margin in 2014. Utilities last delivered a sector topping performance in 2011, when long-term interest rates sank to their lowest point in decades and stocks generally struggled-the S&P 500 Index gained only 2.1 percent that year. Going back further, utilities topped the list of S&P 500 sectors in 2006 as well. Investors with good memories will remember many early recession calls at that time due to a flat yield curve. Healthcare and utilities get lumped in with consumer staples as “defensive” sectors, but the strength seen in these sectors doesn’t indicate a weak market ahead. Healthcare has benefited mightily from the performance of the non-defensive biotechnology sector. SPDR Biotechnology (NYSEARCA: XBI ) is up more than 44 percent this year, for example, well ahead of the healthcare sector. If investors were looking for defensive plays, the sector would be led by pharmaceuticals or healthcare providers rather than biotechnology. Utilities are generally a conservative choice for investors, but the utilities sector was in a downtrend from 2009 to 2014. Working in the sector’s favor is a strong economy and lack of exposure to foreign markets. (click to enlarge) Currency Markets The U.S. Dollar Index broke out to a multi-year high in 2014 and will finish the year near its highs. The greenback was aided by six factors. First, the Federal Reserve tightened monetary policy with its exit from QE. Second, the European Central Bank is moving towards loosening monetary policy with its own version quantitative easing. Third, the Bank of Japan did a surprise expansion of QE on Halloween. Fourth, the collapse in oil prices dragged emerging market currencies lower. Fifth, China’s rebalancing has weakened emerging markets by reducing commodities demand. Sixth, the U.S. economy is among the strongest of the developed economies. The chart below is a price ratio of PowerShares DB U.S. Dollar Index Bullish Fund (NYSEARCA: UUP ) versus SPDR S&P 500 (NYSEARCA: SPY ). It shows that since July, investors could have earned more by investing in the U.S. dollar (going short a basket of foreign currencies that make up the dollar index) than from stocks. This is surprising for a bullish phase of the market-since 2008, U.S. dollar rallies have typically come along with stock market corrections. (click to enlarge) There is a lot of positive sentiment around the U.S. dollar, but structurally the global economy is still short the U.S. dollar. Well into 2014, for instance, Chinese property developers were borrowing in U.S. dollars . An extended U.S. dollar rally could be the only fuel needed for an even bigger and longer U.S. dollar rally if borrowers in emerging markets are forced to hedge their dollar exposure or repay debt. Rising interest rates in the United States, a bias towards rate cuts in China, plus easy money in Europe and Japan, puts the greenback in a strong position in 2015. What It All Says for 2015 Although sector performance in 2014 flashes a caution light, the yield curve is flattening, not flat. The yield curve would need to flatten much more before it would signal a possible recession, but the Federal Reserve isn’t going to raise rates enough to flatten out the yield curve in 2015. The U.S. economy continues to expand and the political situation is favorable for stocks. The Republican Congress and President Obama are unlikely to agree on much, but they do agree on trade deals and possibly even some tax reform. If the U.S. dollar rally continues into 2015, the macro environment will bear a striking similarity to the late 1990s. A continued rise in short-term interest rates is coming, at least until the Federal Reserve signals otherwise. It remains to be seen how long-term interest rates behave, but they could remain low whether short-term rates rise or fall. Far lower interest rates in Europe and Japan, in addition to the rising U.S. dollar, could keep a lid on interest rates if foreigners move capital into the U.S. bond market. Weakness in high yield debt, the fallout from low oil prices, will also work in favor of government bonds. Among S&P 500 sectors, utilities are most affected by the 10-year interest rates. This chart shows the 10-year treasury bond yield versus the price ratio of SPDR S&P 500 and SPDR Utilities (NYSEARCA: XLU ). The falling black line indicates XLU beating SPY, which has occurred for most of 2014 as interest rates declined. Utilities are unlikely to lead again in 2015, but as long as the rate environment isn’t a drag on returns, the strong economy and relatively high yield of the sector could keep it among the better performing sectors next year. (click to enlarge) If both short-term and long-term interest rates increase, the sector that stands to benefit the most is financials. Any broad ETF such as iShares US Financials (NYSEARCA: IYF ) or SPDR Financials (NYSEARCA: XLF ) delivers good exposure. The strong dollar and strong economy work in its favor, and if the dollar rally is a major trend in 2015, financials will benefit as foreign capital flows into the U.S. through American financial institutions. Under performing sectors such as energy and materials could rebound in 2015 after a dismal 2014, but if the global economy doesn’t pick up, a rally could be short lived. A major issue that could affect healthcare stocks in 2015 is the Supreme Court ruling on Affordable Care Act subsidies. The law as written does not allow subsidies for states without exchanges and if the Supreme Court were to rule against them, the history of the Obama Administration’s handling of the law suggests a period of confusion will follow. A Republican Congress doesn’t make the administration’s job any easier – if a fix requires Congressional approval, they may not get it. Finally, an important test for the euro will come in January. The European Central Bank meets in January and Greece’s election is at the end of the month. Sentiment is negative right now because the market expects the ECB to implement some type of QE policy and Greece to elect an anti-austerity government. If one or both of those things don’t occur, the U.S. Dollar Index, which has nearly 58 percent of its basket in the euro, could run out of steam at least temporarily. Barring such an outcome, the strong U.S. dollar will continue to weigh on stocks denominated in foreign currency. A QE policy in Europe would likely boost equity markets though, so funds that hedge away currency exposure, such as WisdomTree Europe Hedged Equity (NYSEARCA: HEDJ ), will do better than their unhedged competition.