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Still Believe In Goldman’s $20 Oil? Go Short With These ETFs

Oil has become the most perplexing commodity this year with wild swings in recent weeks. The latest and worst culprit is the China meltdown with global repercussions that is weighing heavily on demand. Further, ever-increasing production and a large supply glut are tempering its appeal across the board. As the Fed kept the rates on hold at its latest meeting on Thursday, oil price tumbled about 5% the next day. This is because the Fed’s decision of no rates hike led to further worries over the health of the global economy and will likely put more pressure on the price of oil. Notably, both U.S. and Brent crude have plunged about 15% in the year-to-date time frame with some forecasting a bigger drop in the days ahead. In particular, Goldman predicts that crude price could slide to $20 per barrel if production cuts fail to clear supply glut and new investments in the oil shale industry are not reduced (read: ” Oil ETFs Slide Again: More Pain in Store? “). Behind the Lower Forecast The demand and supply dynamics for oil is becoming worse by the day. This is especially true, as the Organization of Petroleum Exporting Countries (OPEC) has pumped out maximum oil in more than three years to maintain market share. Iran is looking to boost its production once the Tehran sanctions are lifted and inventories continue being built up. Additionally, oil production in the U.S. is hovering around its record level and crude stockpiles remain about 100 million barrels above the five-year seasonal average. However, the International Energy Agency (IEA) believes that the recent oil slump would force both the U.S. and other non-OPEC producers like Russia and the North Sea to cut their production sharply next year. It expects non-OPEC supply to reduce by 0.5 million barrels per day, the biggest decline in more than two decades, to 57.7 million barrels per day next year. Meanwhile, shale oil production in the U.S. will drop by 385,000 barrels per day. On the demand side, the agency expects global oil demand to climb to a five-year high of 1.7 million barrels per day this year and moderate to an increase of 1.4 million barrels per day next year (read: ” Positive News Flow Sparks Off Rally in Oil ETFs “). Though reduced output from non-OPEC and higher demand could check the global supply glut, the oil market will still remain oversupplied. As a result, Goldman lowered its 2016 price target for Brent and crude (WTI) to $49.50 per barrel and $45 per barrel from $62 and $57, respectively. Further, it also warned of crude hitting as low as $20 per barrel. How to Play? Given the bearish fundamentals, the appeal for oil will remain dull in the months ahead. This might compel investors to make a short play on the commodity, especially if they believe in Goldman. For those investors, while futures contracts or short-stock approaches are possibilities, there are a host of risk inverse oil ETF options that prevent investors from losing more than their initial investment. Below, we highlight some of these ETFs and the key differences between them: The United States Short Oil ETF (NYSEARCA: DNO ) This is an unpopular and liquid ETF in the oil space with an AUM of $24.7 million and average daily volume of 32,000 shares. The fund seeks to match the inverse performance of the spot price of light sweet crude oil WTI. It charges 60 bps in fees per year from investors and has gained about 28.2% in the trailing 13-week period. PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) This is an ETN option and arguably the least risky choice in this space as it provides inverse exposure to the WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil futures contracts. The note is unpopular as depicted by an AUM of $28.5 million and average daily volume of nearly 35,000 shares a day. Expense ratio came in at 0.75%. The ETN gained 30.2% over the last 13-week period. ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $152.7 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 1.7 million shares in hand per day. The ETF returned about 56% over the last 13 weeks (read: ” Oil Tumbles to Six-Year Low: ETF Tale of Two Sides “). PowerShares DB Crude Oil Double Short ETN (NYSEARCA: DTO ) This is also an ETN option providing 2x inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude, which tracks the short performance of a basket of oil futures contracts. It has amassed $47.7 million in its asset base and trades in a moderate daily volume of roughly 103,000 shares. The product charges 75 bps in fees per year from investors and is up 28.3% in the same time frame. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) This product provides 3x or 300% exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. The ETN is a bit pricey as it charges 1.35% in annual fees while average daily volume is good at over 1.8 million shares. It has amassed $222.6 million in its asset base and delivered whopping returns of nearly 72.2% in the same period. Bottom Line As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures. Still, for those ETF investors who believe in Goldman and are bearish on oil, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is a friend” in this corner of the investing world. Original Post

Why Exelon Remains A Buy

Summary EXC has increased its presence in the regulated segment, with a focus on acquisitions. The EPA’s decision works in favor of Exelon. The company has a low valuation and good performance with a regular dividend payout. I have long been bullish on Exelon Corp. (NYSE: EXC ) given its clean energy portfolio, major presence in the U.S. utility market, low valuation, and dividend growth. The company has a market capitalization value of $27 billion and delivered revenues of approximately $27.4 billion in 2014. The company is engaged in the production, sales, and transmission of energy. The stock declined in line with other large U.S. utilities like Southern Company (NYSE: SO ), Dominion Resources (NYSE: D ), and Duke Energy (NYSE: DUK ). However, what gives EXC an edge when compared to the other utilities is its large fleet of green assets. Exelon Nuclear operates the largest nuclear fleet in the nation and the third largest fleet in the world. With the utility industry coming under increasing EPA pressure to reduce carbon emissions, EXC is set to outperform as its nuclear plants emit zero greenhouse gases. Furthermore, the company’s focus on regulated markets, its increased infrastructure improvements, increasing renewable energy asset base, and low valuation make it a buy in my view. Why I Like Exelon 1. Large, Clean Asset Base — The company operates a large low-cost and low-carbon generation fleet across the U.S. Exelon owns more than 35 GW of power generating capacity with less than 10% of its capacity coming from thermal power plants. The other utility companies are predominantly dependent on coal for their power generation. What I like about Exelon is its large clean asset base, which in my view is one of the biggest strengths of the company. It has one of the largest portfolios of solar and wind energy farms. Other than its large nuclear energy fleet, the company also owns and operates the following: More than 1.2 GW of the wind energy portfolio Exelon City Solar, the largest urban solar installation in the United States Four hydroelectric power plants 2. EPA Decision Taxing on Dirty Coal — The U.S. has already finalized its clean power plan , which focuses on cutting carbon emission from power plants. By 2030, the clean power plan will reduce carbon emissions by 32% below 2005 levels. All 50 states have utilities working toward establishing a cleaner and efficient power system using renewable energy. This decision by the EPA will be problematic for utilities relying on coal for their power production. 3. Good Dividend Yield — The company declared a regular quarterly dividend of 31 cents per share. Utility stock owners are mostly interested in a high, stable and growing dividend yield. Utilities attract investors for their stable dividend. If utilities’ stock prices fall, the dividend yield goes up. EXC has a dividend yield of 4.18%. 4. Focus on Regulated Markets — In the wake to overcome current weakness in the energy market, the company is slowly shifting its focus toward the more regulated segment of the market. The company has plans to invest $15 billion in BGE, ComEd and PECO (Exelon’s utilities) between 2014 and 2018. This will ensure stable earnings. Exelon is also expanding its footprint in the natural gas business. The company acquired Integrys Energy Group , with regulated natural gas and electric utility operations. 5. Lower Valuation — EXC stock has a P/B of 1.2x and P/S of 0.9x , which is lower than the industry average of 1.7x and 1.3x, respectively. The lower valuations are due to its lower operating ratios, compared to the general utility industry. Its operating margin at 15.5% is lower than industry average at 21.6%, while its net margin at 7.9% is also lower than the average. The reason for the lower margins is the company’s dependence on wholesale markets where prices have been low over the past few years. Its nuclear power plants have suffered from the low prices. The valuation multiples are also lower than the bigger utility companies. Market Cap ($ billions) P/S P/B Exelon 27 0.9 1.2 Dominion Resources 41.3 3.4 3.3 Duke Energy 48 2.1 1.2 Southern Co. 39.5 2.2 2 Source: Figures from Morningstar. 6. Good Recent Quarter Performance — The company reported a quarterly EPS of 59 cents per share, exceeding its guidance for Q2 2015. The company expects Q3 2015 earnings of $0.65 to $0.75 per share and has narrowed its full-year guidance range from $2.25 to $2.55 per share to $2.35 to $2.55 per share. Exelon has shown considerable improvement across all segments in quarterly revenues and net income when compared to Q2 2014, as can be seen below. (click to enlarge) (Note: Figures in millions.) 7. Exelon & Pepco Merger — In April 2014, Exelon announced its merger with Pepco Holdings, Inc. (NYSE: POM ) in an all-cash transaction. This would have led to the emergence of a leading Mid-Atlantic electric and gas utility. This was a good move by Exelon, as it would expand its regulated holdings and thus strengthen its earnings stability. It was a win-win situation for both companies. This merger recently faced heat from D.C. regulators. However, the companies will appeal the decision and analysts believe there is a 50-50 chance of the merger taking place. I think the merger should go through given its financial benefits for customers . Risks — Nuclear Base Risk While nuclear energy has its advantages in the form of no carbon emissions and low costs, it is still facing a lot of criticism worldwide given its danger of radiation accidents. However, Japan has recently restarted its nuclear power four years after Fukushima. Exelon spends nearly $1 billion annually on its nuclear plants to keep them operating safely and reliably. — Increasing Bond Yields Utility stocks can lose their attraction to yield investors as long-term bond yields rise. With the Federal Reserve expected to raise interest rates this year, bond yields are likely to increase. This will pressurize utility stocks that have benefited from the zero rate interest environment in the past few years. Stock Performance The stock is currently trading at $31.5, which is higher than its 52- week low. The company has a market capitalization value of more than $27 billion. The stock has lost 17% of its value since 2015 . Conclusion Exelon will benefit from the increasing demand for clean electricity in the near future. Though the company is facing various economic challenges in the form of low natural gas and power prices, it is trying to cover up its weaknesses through investments and M&A opportunities. The new EPA rules will improve EXC’s competitive position as compared to other utilities. I remain bullish on the stock given its growing commitments in the regulated markets, its large, clean asset base, its low valuation, and its good dividend yield. 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.

IBB: Trees Don’t Grow To The Sky

Summary The collective market capitalization of the biotech index is disconnected from actual sales. Given the huge U.S. Federal deficit (now $18 trillion) and skyrocketing healthcare costs, the costs of biotechnology drugs are unsustainable. The U.S. spends far more than other developed nations for healthcare as a percentage of GDP and on a per capita GDP basis. Unless you are reading the children’s story, Jack and the Beanstalk, the last time I checked, trees don’t grow to the sky. Evidently, the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) didn’t get the memo. Let me be clear, I don’t have a science background. So my angle and perspective aren’t derived from actual industry experience or academically grounded. However, as an investor, I don’t need to be able to build the watch, I simply need to tell what time it is. Through a series of charts, common sense, and a general awareness of the world around me, I will lead the reader towards the notion that IBB is priced for perfection. That said, I am not discounting or doubting the remarkable innovation and scientific breakthroughs that are occurring in this gilded age of biotechnological. Rather, I’m simply suggesting the collective valuation is a disconnected sanity. Here are some high level statistics on U.S. healthcare spending. In 2013, U.S. healthcare spending was 17.4% of GDP, or $2.9 trillion. (click to enlarge) Here is a chart comparing per capital spending versus other major industrialized nations: (click to enlarge) Here is another chart depicting spending as a percentage of GDP. As you can clearly see, U.S. spending is off the charts: Source Here are the top holdings within IBB. I also added the rounded market caps. of each top holding (as of September 11, 2015). (click to enlarge) Source: IBB website Although I am much more concerned about IBB than big pharma, I included some of the major pharma names for perspective. The names below cumulatively have $1.7 trillion, that’s with a “T”, in market caps. This doesn’t include their debt as big pharma has been known to issue a lot of low interest rate debt to finance share buybacks and pay sporty dividends. (click to enlarge) Source: Google Finance Over the past five years, IBB has climbed 319% or $270 per share. Wow! (click to enlarge) Source: Google Finance Here is a detailed version of the U.S. healthcare spending: (click to enlarge) Here are the top global drug sales by specific drug and then ranked by the type of therapy area: Source: American Chemical Society Here is why IBB is overvalued and vulnerable to a sharp pullback. Essentially, there is a recognition and ground swell by members of the medical community that drug costs are unsustainable. Given that the government and private health insurers negotiate the prices for these drugs, I’m arguing there will be cost controls and regulatory risks. It is when not if in my mind. Lower-cost generic drugs are on the horizon due to the excessive costs charged by biotechnology companies. These companies have let their greed get the better of them and they may have killed the golden goose. (click to enlarge) Source: WSJ Remember, since 2000, U.S. public debt has grown from $6 trillion to $18 trillion in fifteen years. We have been running deficits every year since the dot-com bubble. Our healthcare costs are at least 600 bps points higher than other industrialized nations and higher on a per capita GDP basis. With the exception of the super-wealthy, the vast majority of people simply can’t afford to buy these expensive medications. (click to enlarge) Andrew Pollack’s NYT article “Drug Prices Soar, Prompting Calls for Justification” published on July 23, 2015, captures this theme poignantly. Here is a direct quote from the article: Pressure is mounting from elsewhere as well. The top Republican and Democrat on the United States Senate Finance Committee last year demanded detailed cost data from Gilead Sciences, whose hepatitis C drugs, which cost $1,000 a pill or more, have strained the budgets of state and federal health programs. The U.A.W. Retiree Medical Benefits Trust tried to make Gilead (NASDAQ: GILD ), Vertex Pharmaceuticals (NASDAQ: VRTX ), Celgene (NASDAQ: CELG ) and other companies report to their shareholders more about how they set prices and the risks to their businesses from resistance to high drug prices. The trust cited the more than $300,000 per year price of Vertex’s cystic fibrosis drug Kalydeco and roughly $150,000 for Celgene’s cancer drug Revlimid. Here is an NPR article with the same theme, “Doctors Press For Action To Lower “Unsustainable” Prices For Cancer Drug.” Here are two direct quotes: “A lot of my patients cry – they’re frustrated,” says Dr. Ayalew Tefferi , a hematologist at the Mayo Clinic. “Many of them spend their life savings on cancer drugs and end up being bankrupt.” The average U.S. family makes $52,000 annually. Cancer drugs can easily cost a $120,000 a year. Out-of-pocket expenses for the insured can run $25,000 to $30,000 – more than half of a typical family’s income. Lastly, written by Robert Pear , here is another NYT article “Health Insurance Companies Seek Big Rate Increases for 2015.” This was published on July 3, 2015. Here is a direct quote from the article: “Health insurance companies around the country are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected. Federal officials say they are determined to see that the requests are scaled back.” Conclusion Yes, I understand that 2014 was a great year for purveyors of prescription drugs , with sales climbing 12% at their fastest percentage growth rate since 2002. However, as a society, the political pendulum is tipping towards increased awareness and anger. Given the skyrocketing costs of healthcare, the federal deficits, and the nosebleed market capitalization of biotech stocks relative to sales, it would be prudent to take profits in shares of IBB. The risk greatly outweighs the benefits given the valuations. Remember, trees don’t grow to the sky and $300K drug therapies are unsustainable. 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.