Insomniac Hedge Fund Guy

The Cost of Being Poor

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As if the current job market and economy didn’t make it hard enough for low income households in America to make ends meet, it turns out that living below the poverty line is actually more costly in many respects as well. It not only takes money to make money, it also takes quite a bit of money to live in poverty. This graphic illustrates how expensive it is to be a poor American… Source: Onlinesociologydegree.net

‘s Left With The Bill for the Eurozone Bail-out

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The latest chapter in Europe’s never-ending sovereign debt crisis comes about a year after Greece received a 110 billion euro ($158 billion) bailout package from the EU and IMF. That bailout was supposed to buy time for Greece to adopt austerity measures without having to tap the public debt markets. Lets take a look at exactly where funding is coming from for the various PIIGs bailouts. The total €865 billion ($1.2 trillion) pot available for euro-area rescues is rather enormous. (Whether it will be sufficient to cope with Greece, Ireland and Portugal’s needs is yet to be determined). The sources … Read more

Some very interesting insider buys today

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Finally the CEO at GM stepped up and bought $900,000 worth of stock on 5-11.  I originally posted on GM on March 12th.  GM and the Japan earthquake disaster present a compelling opportunity.  We’ve traded in and out of the stock a couple of times mostly sucessful.  Today we stepped up again.  I’m not crazy about the chart but we took a major position anyway.  It was very interesting listening to hedge fund legend, Leon Cooperman opine on CNBC today about the merits of investing in GM.  I’m sure I’ve made more money it on than Leo but I dont’ … Read more

Analysis of New High Beta and Low Volatility ETFs from PowerShares

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Invesco PowerShares brought out two new and unique ETFs last Thursday (5/5/11).  PowerShares S&P 500 High Beta Portfolio (SPHB) and PowerShares S&P 500 Low Volatility Portfolio (SPLV) are innovative products that employ quantitative beta-weighting and volatility-weighting as part of the underlying index construction.  As with any new investment strategy, you need to understand how these new ETFs will function before putting them in your portfolio.

– PowerShares S&P 500 High Beta Portfolio (SPHB) (SPHB overview) tracks the new S&P 500 High Beta Index, which consists of the 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past 12 months.  The 100 stocks are weighted proportional to their 12-month beta coefficient at each quarterly rebalancing.

– PowerShares S&P 500 Low Volatility Portfolio (SPLV) (SPLV overview) tracks the new S&P 500 Low Volatility Index, which consists of the 100 stocks from the S&P 500 with the lowest realized daily volatility over the past 12 months.  The 100 stocks are weighted inversely proportional to their 12-month realized volatility at each quarterly rebalancing.

Beta & Volatility

Beta is one of the most misunderstood investment terms, and it is often incorrectly assumed to be a word that is interchangeable with volatility.  However, that is not the

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Global Markets Declare War On Speculators: Shanghai Gold Exchange Follows CME Hiking Silver Margins

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According to Mr. Durden at ZeroHedge, the Fed has now ordained Japan to carry out the global reliquification scheme in the form of a new, and powerful batch of QE, so the regional war on (Fed liquidity engorged) speculators has just gone global. Following 5 consecutive silver margin hikes by the CME (which oddly did nothing on yesterday’s price collapse even as the silver vol surged to near record levels) at which point it would appear silly for the exchange to continue its speculator eradication campaign, the memo has now been sent to foreign bourses. Sure enough, the Shanghai Gold Exchange … Read more

Commodity Flash Crash Part II – Senators Demand Immediate Position Limits In Crude Oil

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Feeling the fury of this bipolar market, the liquidation surge has arrived, right at the front door of the commodities family, with an emphasis on crude oil, gas, and silver. What started off as a sharp correction in silver is quickly turning into a sell-off of historic proportions.  With a four-day decline of almost 30% the selloff in silver is one of the most severe selloffs in the history of the metal’s futures contract. Sheer panic at the CME, 5 margin hikes in 8 days on Silver futures, is unheard of!!

Although we saw signs of a recovery early this week, it was Deja vu in the commodities markets today, with another flash crash similar to the one last Thursday. Crude-oil futures settled below $100 a barrel Wednesday, and gasoline plunged nearly 8%, after the CME Group briefly halted trading in oil, heating-oil and gasoline futures on the New York Mercantile Exchange after the June gasoline contract hit its daily price limit. The CME also boosted daily price limits for crude oil to $20 and for heating oil and gasoline to 50 cents. According to James Williams, an economist at WTRG Economics “A short trading halt only occurs when there is high volatility in the price to give the market a little breathing space.”

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Advanced Cloud Computing Report: What To Do Now?

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    The potential benefits of cloud computing includes promoting economic growth, creating employment and enabling innovation and collaboration….This report presents eight action areas for providers of cloud computing services and government agencies. it is intended to set the agenda for further engagement among all stakeholders, ensuring the healthy future development of the cloud computing industry. [scribd id=54138441 key=key-p4iyprbb4jkipzai145 mode=list]   Source: World Economic Forum via Scribd

Profits From New Global X Food ETF Will Help Fight Hunger

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Global X introduced a new ETF targeting the global food industry on May 3, and said it will donate all profits to help fight world hunger.  The Global X Food ETF (EATX) tracks the Solactive Global Food Index, consisting of the 50 largest global firms with significant business operations in the food industry. The index targets companies that derive the majority of their revenue from the production, development, or distribution of food or food ingredients.  Stock weightings are determined by free float capitalization, but to ensure diversification, positions are capped at 4.75% at each 6-month rebalancing. There are seven stocks … Read more

New IQ Global Oil Small Cap ETF Is A Viable Alternative

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Index IQ launched IQ Global Oil Small Cap ETF (IOIL) last Thursday (5/5/11), the first ETF to target small cap stocks in the global oil industry.  The underlying index defines small caps as stocks in the bottom 10% of the entire oil industry’s market capitalization.  The sub-sector breakdown shows Refining & Marketing at 40.5%, Exploration & Production 36.9%, and Equipment, Services & Drilling 22.6%.

The fund’s 61 holdings are weighted by float-adjusted market capitalization.  While no stock is supposed to exceed a 10% allocation at the quarterly rebalancing, presently no holdings need to be capped.  The largest position is Sunoco Inc (SUN) at 6.2%, followed by Oceaneering International Inc (OII) 5.3%, Core Laboratories (CLB) 5.2%, Tesoro Corp (TSO) 4.5%, Petrominerales Ltd (PMGLF) 4.3%, and Alliance Oil Company Ltd (ALLZF) 3.9%.

The IOIL portfolio currently spans 14 countries, including both developed and emerging markets.  I was somewhat surprised to see Thailand with the third largest allocation but Russia and Mexico not represented at all.  My guess is that this reflects the large size of oil-related companies in those places.  The rest of the list was no surprise with the U.S. at 45.1%, Canada 11.7%, Thailand 7.5%, Colombia 4.3%, Japan 4.0%, Sweden 3.9%, U.K. 3.9%, Finland 3.0%, and six others combining for 13.5%.

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Fun with Dick (AGQ) and Jane (ZSL) and Spot (SLV)

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Seventeen years ago we saw the first leveraged mutual fund with daily reset.  Now we have dozens of them along with ETFs that work the same way.  Yet after all this time, many investors still don’t understand what leveraged funds can and cannot do.  Even professional investors ignorantly called these products “failures” because the long-term performance is not a multiplicative factor of the unleveraged performance.

Numerous hypothetical examples attempt to “prove” that leveraged funds will lose money over time.  To paraphrase a famous line: “Hypos?  We don’t need no stinkin’  hypos.”  Why use hypothetical examples when we have real-life actual examples right in front of us?

Today we will examine the performance of leveraged performance over more than one day.  This is not rocket-science.  It is elementary school math.  So in our real-life example I will call on some old friends from elementary school: Dick and Jane, and their dog Spot.

Being just a dog, Spot doesn’t know much math so he just follows the prevailing price, which is why it is called the “Spot” price.  We will use silver to illustrate.  The iShares Silver ETF (SLV) doesn’t buy stocks; it holds actual bars of silver in an attempt to track the spot price.  Therefore, SLV will represent our Spot.

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Weekend Read with an Eye to Profits

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One reason I’m a news addict is that I like to game the news. What I mean is can you make money off a headline, can you get insight into a macro trend? So here are my eye catching reads of the weekend and a way to profit from it. I’d love to hear your comments. Number of the Week: Class of 2011 most indebted ever. WSJ May 7th : The article states, “The Class of 2011 will graduate this spring from America’s colleges and universities with a dubious distinction: the most indebted ever.”.    The reason the class of 2011 … Read more

Chinese recycling and US interest rates

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I mentioned in last week’s blog entry that during my trips to New York, Washington and Hangzhou in the past two weeks one of the common themes was concern about rising debt levels and weaknesses in the banking sector.  Another theme – one which I want to discuss in this entry – was the possible impact of China’s rebalancing on US and global interest rates.  A lot of people were very concerned that if China does indeed rebalance, US interest rates will soar.

The argument runs like this.  If China raises the consumption share of GDP faster than investment declines, this will result in a reduction in China’s current account surplus.  Clearly if China’s current account surplus drops, the amount of capital it exports must drop in tandem – since a rising share of consumption means a declining share of savings and so a declining excess of savings over investment which must be exported.

But because it is recycling the world’s (and history’s) largest current account surplus, China is one of the world’s largest purchasers of US government bonds.  If China’s current account surplus declines, and so China sharply cuts back on its purchases of US government bonds, this should automatically cause US interest rates to rise.

In at least half the meetings I attended this was the argument.  Fortunately for me, just after I returned to Beijing Martin Feldstein made the same argument in a Project Syndicate blog entry.  He starts out;

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ETF Stats for April 2011: 1,216 and Counting

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A barrage of product introductions in April resulted in 23 new ETFs and 20 new ETNs coming to market.  The number of launches matches the 43 in June 2008 while falling short of the record, 50 in January 2007.  The month-end quantity now stands at 1,216 (consisting of 1,053 ETFs and 163 ETNs).  Actively-managed ETF listings remained unchanged at 34.

April became the fourth month in a row without any closures.  However, the streak ends there as BXDD, Barclays’ 3x no-reset inverse S&P 500 ETN, becomes the first casualty of 2011 later this week.  The four-month stretch of no closures is the longest since 2007.

Trading activity plummeted in April, with total ETP dollar volume declining 30% to less than $1.3 trillion.  There were only 13% fewer trading days than March, so daily trading activity was down as well.

The number of ETFs in the Billion Dollar Club, those averaging more than one billion dollars in daily trading activity, dropped from eleven to just seven.  However, those seven funds accounted for more than 56% of all ETP dollars traded.  New to the list this month was iShares Silver Trust (SLV), which saw unprecedented trading activity of $67 billion due to the strong rally in silver.  SLV was the third most active ETF behind SPDR S&P 500 (SPY) at $374 billion and iShares Russell 2000 (IWM) at $84 billion.

Products averaging more than $100 million of trading per day numbered 67, a decrease of eight from March.  Those 67 funds, just 5.5% of all ETPs, accounted for 89% of all dollars traded.

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Reforming the banks

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I just got back from a very interesting but hectic week in New York and Washington, followed by two days at a conference in Hangzhou.  During my meetings I noticed that much of the discussion, and many of the questions I was asked by both government officials and investors, focused on debt levels and reforms in the Chinese financial system.  I have written a lot about rising debt in China and am glad that analysts and policymakers seem to be spending a lot more time thinking about balance sheet issues.  Every case of rapid, investment-driven growth in the past century, as far as I can make out, has at some point reached a stage in which debt levels rose to unsustainable levels and precipitated either a debt crisis or a long grinding adjustment period.

The reason debt levels always seem to grow unsustainably, I suspect, is that in the initial stages of the growth model much if not all of the investment is economically viable as it pours into building necessary infrastructure whose profits and externalities exceed the cost of the investment.  The result is real growth.  At some point, however, the combination of subsidies, distorted incentives (in which investment benefits accrue to those making the investment while costs are shared broadly through the banking system), and very cheap financing costs leads inexorably to wasted investment and debt rising faster than asset values.  This is when the debt burden begins to rise in an unsustainable way.

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Is it time for the US to disengage the world from the dollar?

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The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency.  My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency.  Needless to say in the last few years these warnings have intensified to an almost feverish pitch.  In fact I discuss one such warning, by … Read more

New Wall St. Slogans to replace the aged “Sell in May & go Away”

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Check out this great clip of proposed replacement sayings for that old adage of “Sell in May and go away.” Here are a few of my favorites: “Buy today’s cause it’s early May“, “Buy tomorrow with funds you borrow“, “Buy all commodities without hesitation, but don’t dare we have inflation“, “Buy the REITs cause real estate is on fire, but don’t you dare become an actual home buyer” What is your favorite?   [youtube=http://www.youtube.com/watch?v=_FHWqIneWY4&feature=player_embedded&h=400&w=500]

Wells Fargo- How to Rob the Bank

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I originally alerted readers of the Sax Angle to a profitable trading opportunity on Wells Fargo stock.  See Two new insider buys today piqued my interest for the details of that post.  Since then we have nearly doubled our money on two options we purchased, the June 30 calls and the May 30 calls.  Both options looked cheap and after today’s move in Wells Fargo, they look even cheaper.  What we mean by that although the options are nearly twice the price, the chart of Wells Fargo is far more bullish than it was when we first invested.  Needless to say, we did not sell and actually are buying more.  We first noticed Wells Fargo after the new CFO picked up 10,000 shares following its recent earnings report.  When we bought it the stock was oversold and the technical picture hadn’t set up so well.  It now looks much stronger.

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‘s Changed Since the Flash Crash

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Summary Report of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues,February 18, 2011Do you feel lucky? Well… do ya?It has been nearly one year since the infamous Flash Crash of May 6, 2010 exposed the vulnerabilities in our USmarket structure.Steady and controlled selling gave way to a dangerous and precipitous plunge, as algorithmic proprietary traderstripped over each other to see who could hit the next bid the fastest. After a pause in one market center, the algo-bots raced to see who could take offers and cover shorts the fastest, and the 1,000 plus DJIA drop reversed just asfast. Phillip Morris fell from nearly $49 to … Read more

Barclays Offers New Variation of 19 Existing Commodity ETNs

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Barclays rolled out 19 new commodity-based exchange-traded notes (ETNs) last Thursday (4/21/11).  The 18 new Pure Beta products attempt to track the same commodities as 18 existing iPath ETNs, the primary difference being the process used by each underlying index to roll future contracts.  The iPath Seasonal Natural Gas ETN (DCNG) was also introduced, although it is not part of the new Pure Beta methodology.

Barclays new Pure Beta indexes intend to provide a more representative measure of commodity market returns by reducing the negative impacts of contango.  Instead of rolling futures contracts on a monthly basis, they may roll into one of a number of futures contracts with varying expiration dates.

Each index will attempt to provide the best proxy for the average price return of the front-year futures contracts for each commodity in the index, while avoiding parts of the futures curve that are subject to persistent market distortions.  A new Barclays’ special report, The Basics of iPath Pure Beta Commodity ETNs (pdf), provides additional information and background on the methodology.

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