•  
Fri, 26th May 2017

Anirudh Sethi Report

  •  

Archives of “Investment” Tag

How Hedge Funds Play The OPEC Deal Extension

We’ve had a good two-way crude oil market since the first of the year which has helped hold crude oil in a relatively narrow range as aggressive traders continue to play the long side, in anticipation of a balance between supply and demand.

This year began with an oversupplied crude oil market, but with a bullish tone set by OPEC when they decided to start reducing output in an effort to trim supply and stabilize prices. On paper, the idea seemed bullish. What they didn’t expect, however, was the surge in U.S. production that skewed their forecasts and timetables for global supply and demand to reach a balance.

For nearly six months, traders have been pelted with stories nearly every day telling them about OPEC supply cuts and increased U.S. production. The stories seem to have neutralized the markets to a point where crude oil prices have become range bound.

In order for a market to become range bound, some major market player has to be selling enough crude oil to stop a rally and some major market player has to be buying enough crude oil to stop the decline.

However, inside the trading range we’ve seen several pockets of volatility and these moves can only be blamed on the speculators and namely, the hedge funds.

If you’ve traded speculative markets, I’m sure you’ve noticed that markets come down faster than they go up. Essentially, this is because speculative buyers tend to be very careful about where they buy or enter the market, but when it’s time to sell, they don’t care what they pay to get out.

China banks’ shadow assets exceed Mexico’s economy

It may be too soon to say that glimmers of hope can be seen in the quality of Chinese bank assets, considering they have off-balance-sheet assets that are collectively larger than the world’s fifteenth-largest economy.

The country’s six biggest commercial banks revealed this week that their off-balance-sheet assets — likely held through trusts and wealth management products — were worth 7.78 trillion yuan ($1.13 trillion) as of March — more than Mexico’s 2016 nominal gross domestic product of $1.06 trillion, or about a tenth of China’s economy.

 Bringing these previously hidden assets to light immediately boosts their already substantial balance sheets by 7-9%, and smaller banks’ by 11-13%.

The six are Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications, and Postal Savings Bank of China.

Yet these “second” balance sheets also prompt questions on the significance of banks’ reported declines in nonperforming loan ratios as well as the sufficiency of their capital, since they were all under pressure to set aside more provisions for losses on impaired loans.

Peter Lynch’s Rules

Find your edge and put it to work by adhering to the following rules:

  • With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
  • Pay attention to facts, not forecasts.
  • Ask yourself: What will I make if I’m right, and what could I lose if I’m wrong? Look for a risk-reward ratio of three to one or better.
  • Before you invest, check the balance sheet to see if the company is financially sound.
  • Don’t buy options, and don’t invest on margin. With options, time works against you, and if you’re on margin, a drop in the market can wipe you out.
  • When several insiders are buying the company’s stock at the same time, it’s a positive.
  • Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
  • Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
  • Enter early — but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you’re taking an unnecessary risk. There’s plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
  • Don’t buy “cheap” stocks just because they’re cheap. Buy them because the fundamentals are improving.
  • Buy small companies after they’ve had a chance to prove they can make a profit.
  • Long shots usually backfire or become “no shots.”
  • If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
  • Investigate ten companies and you’re likely to find one with bright prospects that aren’t reflected in the price. Investigate 50 and you’re likely to find 5.

French election results soothe investor fears

Investors breathed a sigh of relief following the first-place showing of centrist and pro-European Union candidate Emmanuel Macron in the first round of France’s presidential elections Sunday, sending the Euro to a five-month high relative to the dollar. Populist Marine Le Pen ranked second in the voting.

Why it matters: The results make it more likely that Macron will be France’s next president, keeping France in the EU. That should have a positive impact on both French stocks and the U.S. economy.

 Paris rising: High Frequency Economics’ Carl Weinberg predicts that French stocks will rally in trading Monday, and that interest rates on French government debt will fall. France isn’t out of the woods, however. Weinberg writes that Macron will have a tough time corralling a divided Parliament to implement pro-growth reforms.

Domestic affairs: A Blackrock Investment Institute note to clients calls Macron a “business friendly” candidate that will not get in the way of Europe’s improving economy. The U.S. economy has seen the benefits of faster growth in Europe—political stability across the Atlantic is good for business here.

Caveat: David Zahn of Franklin Templeton Investments warns that “it’s not a done deal yet,” and that the push and pull of a high profile election will cause “markets to remain volatile in the run-up to the final round of voting on May 7 and potentially even beyond.”

Chinese shopping spree for NYC properties could end in bust

Chinese investors are gobbling up Manhattan office towers at sky-high prices, fueling speculation that they eventually will get burned — just like Japanese buyers who snapped up U.S. real estate in the 1980s and later were haunted by those properties.

Chinese conglomerate HNA Group will acquire a prime Park Avenue skyscraper for a whopping $2.21 billion, it was reported in late March, in one of the most expensive deals ever for a New York office building. The news follows HNA’s October announcement of a $6.5 billion purchase of a 25% stake in Hilton Worldwide Holdings from investment firm Blackstone Group. The Chinese group has snared other office buildings in midtown Manhattan as well.

 Industry giant China Life Insurance made headlines last year when it invested $2 billion in Starwood Capital Group’s hotels, while also getting stakes in other skyscrapers.

Anbang Insurance Group bought the iconic Waldorf Astoria Hotel in New York for some $2 billion back in 2015, and Chinese investors have remained on a shopping spree for U.S. properties ever since.

Chinese companies poured a staggering $33 billion into overseas properties in 2016, up 50% on the year, with $13.4 billion going to the U.S., according to real estate investment firm JLL. Though Beijing has tightened regulations to block capital from leaving the country, Chinese businesses continue to make big investments into office towers and hotels, a JLL officer said.

Bill Gross: “All Asset Prices Are Elevated To Artificial Levels”

 

Bill Gross’ latest monthly outlook is divided into two sections: in the first, the world’s former bond king provides a revealing glimpse into his mind courtesy of six brainteasers (with answers to questions such as “If forced to choose between killing your favorite pet or an anonymous human being, what would you do?”); in the second he goes back to his favorite topic: slamming the Trump growth narrative Can the Trump Agenda recreate 3% growth?

The answer: he cites an IMF study which suggests that “unless there is an unforeseen technological breakthrough, productivity growth is unlikely to return to the higher rates of the 1990’s for advanced economics or the early 2000’s for emerging economics. In other words, their warning speaks to a global productivity slowdown, not just a U.S. based phenomena. They warn that increasing tariffs and developing restrictions on immigration will only exacerbate the slowdown. Global growth, and of course U.S. growth, will be lower than average, they forecast.”

Which then leads to the following, not unexpected conclusion about assets prices:

 Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman. High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era.

Watching and waiting for China’s capital-control-induced bubble

Anyone in mainland China with a lot of money to move — companies foreign or domestic, or individuals — now seems likely to run into the capital controls that the authorities have thrown up in hopes of stopping a sell-off in the currency.

Real estate tycoon Pan Shiyi has given up on selling the Hongkou Soho, a striking Shanghai office tower whose tenants include Japanese electronics group Panasonic. Located just north of the Bund, the city’s iconic waterfront, the building was designed by Japanese architect Kengo Kuma. Pan had been looking to invest proceeds from the sale overseas but sees little hope of gaining approval for that.

 Similar cases of apparent official obstruction have surrounded other foreign deals. Online game developer Giant Interactive’s agreed-on purchase of an Israeli peer for 30.5 billion yuan ($4.42 billion) remains under review. Technology group LeEco and conglomerate Dalian Wanda Group have yet to complete their respective U.S. acquisitions of television maker Vizio and TV studio Dick Clark Productions.

Meanwhile, total social financing, China’s broad measure of credit and liquidity, continues rising by double digits. With limited outlets to overseas, Chinese money has nowhere to go but domestic assets.

SEC targets fake stock news on financial websites

The U.S. Securities and Exchange Commission is targeting stock rampers and scammers

And not too soon …
  • SEC to focus on stock promotion schemes “in which writers were secretly paid to post hundreds of bullish articles about public companies on financial websites”
  • Twenty-seven individuals and entities have been charged with misleading investors
    SEC says it found more than 450 problem articles

China’s A-shares have better shot at MSCI index

Shanghai and Shenzhen shares have a greater chance at joining a major emerging-market stock index after recent market reforms, though a smaller pool of issues under consideration means entrance will do less than investors and China’s government would like.

MSCI of the U.S. is soliciting institutional investors’ input on whether to include A-shares, or yuan-denominated shares listed on the Chinese mainland, in its Emerging Markets Index. Citigroup gives China’s bid a 51% chance of success, in light of recent reforms.

 These odds are a good deal better than when the question was first considered in 2014. A-shares have been kept out of the mix three years running amid concerns that China’s capital markets are insufficiently open.

The so-called Qualified Foreign Institutional Investor, or QFII, scheme was one key factor. This scheme was long foreign institutions’ only option for buying A-shares. Each entity’s dealings were subject to strict quotas, and the value of remittances was capped at 20% of net assets each month. MSCI naturally refused to include shares in its index that could not be freely bought and sold, and Beijing was slow to change the system to address those concerns.

The index operator has also looked askance at Chinese listed companies’ ability to halt trading of their shares at will — an option that, at one point, roughly 50% of companies had taken. A need for prior approval to create products incorporating A-shares also left MSCI leery.

UBS lowers gold outlook, now expects $1,300 in 2017

Gold prices have retraced most of their losses since the election, but strategists at UBS are now lowering their outlook on the precious metal.

Joni Teves, an analyst at UBS, lowered her gold price forecasts to an average of $1,300 a troy ounce this year, from their previous estimates of $1,350 and also knocked her projections for next year to an average of $1,325 a troy ounce, down sharply from $1,450 previously.

While she maintains her broadly positive narrative surrounding the precious metal, she cites three key reasons for re-calibrating her gold outlook.

“Conviction levels have remained low and investors continue to hesitate to take more meaningful positions despite an underlying positive bias, especially as gold hovers below key psychological and technical levels,” she said.