Tag Archives: opinion

Portfolio Diversification Strategy During The Fed’s Rate Hike Cycle

Summary Where the Fed, analysts and the market see the Fed funds rate and when. What we’re trading and how to capture the move higher in the Fed Funds rate. How to experiment with any potential outcome for this fully disclosed Fed Funds Trade. HCB Stocks & trading strategy, which I believe will offer a superior return on risk during the rate hike cycle. I believe diversification and objective risk control will be essential during the next 36 months as the Fed gradually hikes rates. My objective of this report series is to introduce new sectors and strategies to capture the major market moves being generated by current extreme economic fundamentals. As opportunities develop in metals, energies and currencies I’ll share what I’m doing in these sectors and how. I encourage your comments on sectors and trades your in with similar or higher returns on risks. The goal of this report series is generating POSITIVE dialogue among fellow TRADERS who share the objective of finding the most effective solutions to the problem of making money. It’s not set up for tradeless academic master debaters who can subjectively criticize but can’t offer objective facts to support their opinion or a solution. In this report I have provided strategy to capture the move higher in the Fed Funds rate over the next 13 months . I’ve also included 11 HCB stocks (high cash buffers) that could benefit from higher rates and included defined risk strategy on how to trade them during the rate hike cycle. The first rate hike in 10 years is on deck in 5 days (16 December 2015). Using this fully disclosed strategy even if the Fed is wrong about the Fed Funds rate the Fed sets, there is no hike on 16 December 2015, this position is structured to maintain and capture any future rate hikes over the next 9 FOMC meetings through 31 December 2016. Last objective guidance where Fed Chair Yellen sees the Fed Funds rate and when (video 1:59) Source Federal Reserve What the move is worth Current contract value = $552 (cash market 0.1325%). Fed projection by December 2016 = $7,500 (1.8000%). Fed projection by December 2017 = $13,125 (3.1500%). Probability = 85.30% for 16 December 2015 . Source Chicago Mercantile Exchange Click here for more information on what this rate is and how it’s set. One simple trade to capture the move higher in the Fed Funds rate through 31 December 2015 . Trading the Fed Funds rate higher requires establishing a short position in the underlying futures contract . To convert the contract price into the rate it represents Take 100.00 – the contract price = the rate. Example 100.00 – a contract price of 99.46 = a rate of 0.54%. Each 0.01 change in price = $41.67 change in contract value. Position Short at 99.46, the December 2016 CME futures contract (ZQZ16) Trading this rate higher from 0.54% Contract value = $2,250 Objective The Fed’s target by 31 December 2016 Contract price = 98.20 Rate = 1.80% Contract value = $7,500 Click here to enlarge the rate, price, valuation chart below Current chart and quotes To experiment with any potential outcome for this trade. Click here and open the interactive risk reward spreadsheet Watch the 5 minute video linked below on how to use it As this position appreciates we’ll update its performance and share hedging strategy/updated spreadsheest showing you how we’re locking in gains. This trade was originally posted on Seeking Alpha 12 October 2015 . Federal Open Market Committe meetings schedule & Fed statements The last tightening cycle from 1.00% June 2004 to 5.25% June 2006 Stock diversification strategy during the rate hike cycle Below are 11 companies that have built sizable cash buffers and links to monitor them on SA moving forward: Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ), Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Pfizer (NYSE: PFE ), Cisco (NASDAQ: CSCO ), Goldman Sachs (NYSE: GS ), Moody’s (NYSE: MCO ), Oracle (NYSE: ORCL ), AT&T (NYSE: T ), AbbVie (NYSE: ABBV ) and JPMorgan Chase (NYSE: JPM ). From past ratios and what I’m seeing between interest rate hike expectations through December 2018, relative to stock price change, it appears rate hikes might actually fuel these stocks higher. I’m trading these stocks using “collars” to define my risk on all trades and for the duration of every trading period. Example of a “collar” to define risk: Own 1,000 shares of GOOGL at $745 Write the $800 call collecting premium (1,000 shares) Using the collected premium buy the $700 put (1,000 shares) Trade outcomes 1) The market stays the same, if you set the trade up right you should be collecting approximately as much time value on the $800 call you’ve written against your $745 long position as you’ve spent on the purchase of the $700 put to hedge the position. In some scenarios you’ll actually have a credit. 2) Market sells off hard to $500, your loses below $700 are negated by the put you’ve purchased at $700. At $500 you can offset the put for a $200 profit and reestablish a new hedge by buying a new put at $500 lowering your entry cost by $200. Your new average entry price has now dropped from $745 to $545 making recovery more obtainable. 3) The market continues to move higher and the position is called away at a profit at $800, you can always reestablish it. Click here for more on Seeking Alpha on why we’re trading these high cash buffer (HCB’s) stocks and how.

Clean Energy Fuels – Time To Go Long

Summary CLNE is set for another disappointing year as weak natural gas prices have curtailed the company’s growth despite an increase in its volumes, but investors should not lose hope. CLNE achieved positive EBITDA last quarter on the back of its cost-reduction efforts, which is commendable if we consider the challenging end-market situation. The registered number of medium and heavy duty vehicles running on natural gas in the U.S. is expected to increase from 0.25% in 2012 to approximately 3.8% in 2023. As CLNE’s end-market grows, it will see an increase in its addressable market that will lead to growth in gallons delivered and help it post better financial results going forward. Natural gas refueling company Clean Energy Fuels (NASDAQ: CLNE ) had started the year with a lot of hope and was trading at 52-week highs at the beginning of May. But, the second half of 2015 ensured that Clean Energy is set to post another disappointing year as it has lost half its value in the past six months. The weakness in the company’s stock price can be attributed a declining financial performance due to weak natural gas pricing. For instance, in the third quarter, Clean Energy’s revenue was down 11% from last year, while it also posted a loss due to a decline in the value of gallons delivered. But, in my opinion, investors should not ignore the improvements in Clean Energy’s performance as the company seems to be on track for long-term gains. In this article, I’m going to take a look at the various reasons why Clean Energy can come out of its slump. Cost reductions indicate that Clean Energy is moving in right direction Though Clean Energy posted a loss last quarter, the company was able to reduce the quantum of its loss. Clean Energy’s loss was down 21% sequentially and 15% year-over-year in the previous quarter. The decline in its loss can be attributed to Clean Energy’s cost reduction efforts and volume growth. For instance, the company has reduced its SG&A expenses by over 20% in the past five quarters and increased its volumes by more than 24%. These are commendable numbers, especially considering that weak oil prices have created an adverse impact on natural gas vehicle conversions. In fact, Clean Energy improved its volume by 17% to 80.6 million gasoline gallon equivalents in the third quarter. What’s more important is that Clean Energy, for the first time, reported positive EBITDA of $3.1 million last quarter despite the low pricing environment. This represents an improvement of $5.7 million over the second quarter of 2015 and an improvement of $8.7 million over the first quarter of 2015. In fact, for the first nine months of 2015, Clean Energy has improved its EBITDA by a whopping 62%. The following table clearly indicates the improvement in Clean Energy’s EBITDA performance. Source: Press Release Hence, as far as operational improvements are concerned, Clean Energy Fuels is moving in the right direction by reducing costs, which is why it has been able to improve its EBITDA remarkably. But, apart from cost reductions, there is another positive about Clean Energy Fuels, in the form of a booming end-market opportunity, which investors should not ignore Growing end-market opportunity strengthens the bull case Looking ahead, Clean Energy Fuels will benefit from a growing number of natural gas vehicles in the U.S. According to a report published by the Fuels Institute, natural gas vehicles are expected to grow substantially in the coming five years, particularly in the medium and heavy duty market. It is expected that the NGV share of registered M/HD vehicles will grow from 0.25% in 2012 to approximately 3.8% in 2023. The following chart shows the expected increase in natural gas vehicles on U.S. roads going forward in both base and aggressive cases: Source The report states that the majority of vehicles using CNG systems will be found in the class 8 category of heavy duty vehicles. This is because these vehicles will benefit from lower fuel costs, combined with significantly higher fuel consumption annually, which will provide returns on vehicle investment quickly. In fact, Clean Energy has already penned a number of agreements with fleet operators, which is an indicator of the fact that the company is already gaining traction for its business. For instance, last quarter, Clean Energy expanded its relationship with Raven Transport. Raven Transport deployed an additional 40 LNG trucks last quarter, and these trucks will refuel at Clean Energy’s stations on interstate corridors throughout the southeast. All in all, Raven now operates 223 LNG trucks in its fleet. Likewise, Clean Energy is also expected to benefit from its relationship with Saddle Creek Logistics, which recently announced that it will be adding 50 CNG trucks to its existing fleet of 200. These new contracts indicate that Clean Energy will see an increase in its natural gas volumes going forward, and as the overall market expands, the company will see better opportunities to expand its volumes. Conclusion Despite the downturn in the end market, Clean Energy has managed to improve its EBITDA performance this year. At the same time, its volumes have also increased, indicating that the demand for natural gas vehicles is still there despite low diesel prices. In the long run, as the number of NGVs on the roads increases, Clean Energy Fuels will see an increase in its addressable market and will be able to improve its financial performance. So, in my opinion, investors should go long Clean Energy Fuels and take advantage of the drop in its stock price for long-term gains.

Riding The Petchem Boom With A Utility

Summary Entergy Corp. is a utility operating in the heart of America’s petrochemical boom. Entergy plans to steadily grow both earnings and dividends through 2018 at least. Shares are undervalued and I believe Entergy is a buy. The ‘shale boom’ just might be turning into the ‘shale bust’ as we speak, but the petrochemical boom is alive, well and durable. That’s because natural gas and natural gas liquids, inputs for the petrochemical industry, are now cheaper in America than anywhere else. This gives the U.S. a major advantage over other countries. The American petrochemical industry is really focused on the eastern Texas-Louisiana Gulf Coast. Not surprisingly, petrochemical plants and LNG export facilities are springing up all over the area. This boom is driven by demand, not supply, and so lower gas prices only help this growth trend. Investing in end-use chemical producers or LNG exporters is one way to participate in this trend, but utilities are also a low-risk way to be involved in this. Entergy Corporation (NYSE: ETR ) is the perfect company for this, in my opinion. Entergy generates power in New England from a handful of nuclear power plants, but the bulk of Entergy’s business is in generation and transmission of power in Mississippi, Arkansas, eastern Texas, and Louisiana. Louisiana is the largest piece of Entergy’s business, and, importantly, Entergy supplies much of the petrochemical industry along the Gulf Coast. Best of all, Entergy now yields over 5%, and has recently begun increasing its dividend as a result of the economic growth in its service areas. Solid growth and reliable income Some of Entergy’s industrial customers use as much power as a small city, and currently there are several plants being built along the Gulf Coast. This includes Cameron LNG in Louisiana, a Sasol cracker/chemical complex, two methanol plants under construction in Texas and Louisiana, and one steel mill under construction in Arkansas. (click to enlarge) Courtesy of Entergy Corp Investor Relations. The key ingredient to the industrial boom in this region is cheap, reliable energy. Louisiana and Arkansas have no renewable energy mandate. Texas does have one, but it’s not very big. Therefore, it’s no surprise that there’s three states have among the lowest electricity costs in the country. Low electricity prices entice these big industrial customers into this region and, as we will see, this in turn brings more residents and more efficient power distribution. It’s a virtuous cycle not often seen in the U.S. anymore. What does that mean for us? Well, it means 2% load growth for residentials and 4% growth for industrials, each year, through 2018 at least. (click to enlarge) Courtesy of Entergy Corp Investor Relations. Currently Entergy’s dividend is 57% of earnings, on a per-share basis. Over the last twelve months, Entergy has generated only $509 in free cash flow, but has paid $617 million in dividends. That, however, is because Entergy is building up its generation capacity with several power plants. Once the first new plant is up, St. Charles power station, Entergy will have much more financial flexibility. I fully expect Entergy to continue raising its dividend by low single digits through 2018, and perhaps even more in the following years. Valuation and conclusion (click to enlarge) Courtesy of Entergy Corp Investor Relations Is Entergy a good value right now? I believe it is. According to FAST Graphs, Entergy trades at 11.3 times earnings, which is quite a bit lower than the stock’s ten-year average valuation of 13.4 times earnings. That’s a 15.6% discount to its full-cycle average valuation, and there’s no reason Entergy shouldn’t achieve at least that average valuation. When you add a 5.1% dividend onto that, there’s a lot to like about this utility. Here’s what you’ll get with Entergy: A steady-growth utility in an economically strong area. As a utility, the barriers to entry in this industry are very high, which puts a lot of safety into this name. For these reasons, I believe Entergy is a buy right here.