Appaloosa 1st quarter changes in its portfolio

The other day  I read an interesting article on ZeroHedge (http://www.zerohedge.com/news/2018-05-18/tepper-trounces-competition-outperforms-peers-600-ytd). It was related to the portfolio changes on the Appaloosa’s portfolio. Appaloosa Asset Management is outperforming its peers, this is why I decided to investigate what they are doing differently from the rest. Reading the 13-F from the biggest hedge funds can help you understand how they take the investment decisions. However, you won't be able to know the price in which they entered or exited the positions.

I´ve only focused on the new positions:

Lam Research Corp (LRCX)

    Lam Research Corp, source: TradingView

The strong fundamentals and the high margins will help the stock to go up.

Lam Research Corp ratios, source: TradingView                               

Wells Fargo (WFC)      

    Wells Fargo, source: TradingView

This company has been punished in the markets due to the regulatory constraints. However, it showed earnings that beat expectations. I think Wells Fargo is capable to provide good returns for investors via earnings growth, dividends. The net margins are good and the P/E ratio is better than its sector peers.

UBS Group AG (UBSG)

    UBS AG Group, source: TradingView

This investment brings geographical diversification. It’s the largest global wealth manager and has a large exposure to Asia.  It offers a 4% dividend plus buybacks. It showed the best quarterly results in 3 years on the 23rd April. The lower revenues and rising cost are one of the main concerns. I think investing long term in this company is not a bad idea. However, I would prefer to buy under 15CHF.

Applied Materials (AMAT)

    Applied Materials, source: TradingView

The strong fundamentals are driving the price of this stock higher. The sound financial situation allows the company to increase the investments. The biggest concern at the moment is that the makers of displays and chips to store data in high-end phones are slowing some projects. (The best example is the disappointing sales from the iPhone X)

SMH semiconductor ETF (SMH)

    SMH semiconductor ETF, source: TradingView

This chart shows the incredible performance of this semiconductor ETF. I would like to remind you that I am not an expert on this sector. I can understand the growth from 2013 until now, basically, it has been driven by a strong demand for this devices. When something becomes popular there is two ways of making money:

                -Mass production with the smallest cost possible

                -Limited production of high performance devices

At this point is up to the clients. Will we see strong demand in the best devices out there? (We have seen disappointing sales in some of them) Will the price of these devices decrease ? If so, the net margins will do as well and their rating will be downgraded. I’m not saying that is a bad investment, I have only expressed my point of view.

ALPS ETF

There are 16 ETFs listed under this asset management. I believe that they use for diversification purposes. 

Knight Swift (KNX)

    Knight Swift, source: TradingView

This company has great fundamentals. The financial leverage is really small. The main concern is to hire and retain truck drivers as the company said when the 1st quarter earnings were released.

Boyd Gaming (BYD)

    Boyd Gaming, source: TradingView

It has good fundamentals for a short-term investment. The resistance is around 40 so it doesn’t have a lot of upside potential (in the short-term). The analysts think that this kind of business has one of the lowest growth prospects.

Platform Speciality Prods Cor (PAH)

    Platform Speciality Prods Corp, source: TradingView

It has an attractive P/E ratio and upside potential. I believe that Appaloosa bought under 10. One of the biggest problems is the financial situation.

United Contl Hldgs Inc (UAL)

    United Continental Holdings, source: TradingView

The enterprise value to sales under 0.80 and the P/E under 10 make it attractive for investors.

Nvidia (NVDA)

    Nvidia, source: TradingView

Nvidia is a successful company that its share price can continue to rise in the following year. The sales growth forecast is positive for the next years and if we consider that the margins are high, we will see this stock higher.

Sum Up

Today’s article has been different from the other ones. I haven’t analyzed all the stocks properly but I’ve given a quick overview. In the case of the stocks above, they have good fundamentals and some of them are down around 20% from the last max. If the market continues rising, Appaloosa will deliver a strong performance.

As I said, we can learn a lot with the 13 F even if we don’t know the prices in which the trades were executed.  Obviously, we should do our own research but we can compare if some of the biggest funds are taking the same positions. Another thing to consider, that I haven´t mentioned, is the type of investor, maybe they are looking for a short-term investment while you can be considering a longer time frame.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Most important moves of the week

Introduction

We have seen interesting moves this week in the financial markets. The most important was the ECB decision to cut the monthly asset purchases but extend them until September 2019. The market considered this decision very supportive and dovish by the ECB. The euro was hit by this decision and the problems in Spain. The UK released a better than expected product that helped the British Pound to hold its value versus other currencies. On the other hand, the energy markets have moved a lot. The Crude Oil Brent closed the week at 60.44, the 2 year high.

Crude Oil Brent

    Source: TradingView, Crude Oil Brent Dec17 future, daily

The Crude Oil Brent has broken key levels and has risen like a rocket in the last two days. I fell on Monday and I questioned my bullish idea as it could keep raising and break the 58.20 level. On Tuesday it closed at 58.33, above the key level formed the week before.  The selling pressure wasn’t strong enough on Wednesday at this contract closed flat at 58.45. The big movement was in Thursday and Friday. After Wednesday support, it tested the 59.54 on Thursday. It continued the bullish trend on Friday. It closed at 60.44, which represents the 2 year high.

US Dollar Index

      Source: TradingView, US Dollar Index futures, daily

As you can see it’s been a tough year for the USD. In June, and due to the interest rate hike by the Fed, seemed that the US Dollar Index could go up. But it didn’t. The weakness in the energy markets and the geopolitical problems didn’t allow the USD to rise. The market expected more hikes in 2017, unfortunately, with the hurricanes, the Fed officials were obliged to delay this decision. We have seen good economic data this week in the US:

Macroeconomic indicator	Reading	Expected
Core durable goods orders (MoM)	0.7%	0.5%
New home sales	667K	557K
GDP	3.0%	2.5%

The Fed is showing confidence and a hawkish approach because they have confirmed that the interest rate hikes will continue in the next year and they will reduce the asset purchases. 

     Likelihood of December Rate Hike, CNBC, https://www.cnbc.com/2017/09/18/traders-are-getting-ready-for-another-fed-hike.html

       December FED rate hike probability, Bloomberg, http://uk.businessinsider.com/markets-almost-certain-fed-hiking-interest-rates-in-december-2016-11?r=US&IR=T

These charts show how the likelihood of a rate hike in December is increasing, and the dollar has done the same movement since September. Is anyone building a big position?

All of these facts were the key to help the USD. Technically the most important thing is that the downtrend was broken 1 month ago. The most important levels for me are 92.63 (as a key support) and 96.585 (as a resistance)

Another interesting fact is that Janet Yellen won´t continue as a Fed president.

Euro

    Source: TradingView, EURUSD Dec17 future, daily

The Euro has fallen this week due to the dovish speech by the ECB this week and the USD strength. This is always the same if you don’t deliver what the market participants expect, the value of your assets decline. As I said in my last article, I understand that the ECB prefers to be cautious with the QE cuts. Having a weak currency in a growing environment can help the inflation to peak. It has broken 2 key levels this week as you can see in the chart. I think it can keep going down and test the 1.1530 level. In part, the last decrease was due to the issues in Spain.

British Pound

    Source: TradingView, GBPUSD Dec17 future, daily

Surprisingly for me, the GBP is holding its value vs the dollar. We have seen a better than expected GBP in the UK. It’s difficult to know what will happen in the Brexit negotiations. There are a lot of doubts and speculation about what will happen. The biggest investment banks confirmed that thousands of employees will be relocated to Europe. 

    Source: TradingView, GBPUSD Dec17 future, daily

We have seen the same down movement than in the EURUSD. We can see a double top that indicates that the GBP will rise vs the Euro. The 0.8733 level is a very important support that has been tested several times.

I hope you like it.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#Trading #fx #euro #gbp #USD #energy markets #brent #macroeconomics #UK #US #Europe #fundamentals, #Bloomberg #FED #interestRate #qe #Assetpurchases #ECB

Why is the European Central Bank dovish? Interest Rate strategies

The European Central Bank is very conservative at the time of taking decisions on economic policy. And this fact has been confirmed again today. As expected, the ECB will cut asset purchases to 30 billion euros from 60 billion euros. This will start in January and it will last for nine months to September. One of the reasons why the ECB remained cautious is the weak inflation.

What did the EURUSD?

After the decision, the Euro plunged. 

     Source: TradingView, EURUSD Dec17 Future, 30 min

The market didn’t expect a hawkish decision and it was reflected in the movement of the euro. I started the day falling. You can see how the volumes got bigger around the interest rate decision and the ECB conference. Draghi was optimistic about the eurozone growth but he signaled that is concern about the inflation. Technically, the EURUSD futures has broken 2 important levels (1.1793 and 1.1729)

What is the real reason behind this decision? My opinion

Economics is a social science and predicting the individuals' behaviour is really difficult. Let me make an example to show my thoughts about this dovish decision.

Let’s imagine an ideal world in which the most important economies keep performing like the last couple of years, China’s GDP growth meets the 7%, the commodities keep rising, the Federal Reserve raises rates and makes substantial cuts to the asset purchases and there isn´t any economic shock. In this context, the US dollar will rise vs the euro. The conservative ECB policy will support a weak euro, and with the conditions mentioned, it will help Europe to keep growing and the inflation will peak.

On the other hand, applying the economic policy in Europe is difficult due to the differences between the strong economies and the peripheric economies. So whatever is applied needs to be good in general terms without affecting in a negative way to certain economies.

As a theory, it’s valid but it’s very difficult that all of these will happen.

What can we see in the Euribor futures?

Euribor futures are the interest rate futures in Europe. You will see in the following charts that an improvement of the European economy is not discounted.

Euribor Jun18 future

     Source: Barchart, Euribor Jun18

As you can see it fell at the beginning of this year, showing an improvement of the economy. At this time the inflation was growing and it hit 2% in March. The euro was weak in this period, the EURUSD was trading around 1.06. Since then, the Euribor jun18 has been rising due to the low inflation, the Brexit, the lack of change in the economic policy. Considering the uptrend, the market participants don´t expect changes in the economic policy neither a big improvement of the European economy.

Euribor spreads

Euribor March 18 – June 18

    Source: Barchart, Euribor Mar18-Jun18

Euribor March 18 – December  18

     Source: Barchart, Euribor Mar18-Dec18

These spreads show the same as the outright explained before. A falling spread means that the difference between the two futures is decreasing. Talking about the interest rate curve, we can see that the yield curve is flattening. The main difference between both spreads is the volatility. Obviously, the 9-month spread moves more than the 3-month spread. They are in lows of the year, I would consider buying if I expected an economic improvement. At the moment, I wouldn’t buy because I don’t  see any sign of reversal.

Another strategy to consider is a Euribor butterfly. 

     Source: Barchart, Euribor butterfly Jun18-Sep18-Dec18

The butterfly is in a support and it´s trading at the lows of the year. I think it´s a better choice than the spreads at the moment.

Euribor spread June 18 – June 19

     Source: Barchart, Euribor Jun18-Jun19

The main difference with the other spreads is that the overall trend is bullish. This means that the traders expect that the economy and the inflation will be better in 2019 than 2018. The main problem is that the triangle is one of the most dangerous figures in technical analysis and I wouldn´t trade it until it breaks. If you like interest rate futures you should add to your watchlist. There is a strong support at 0.1550.

Conclusion

First of all, I hope you enjoy this article. The interest rates market is my favourite. You should consider the macroeconomic indicators and follow the central bank meetings. It’s a fundamental market and less volatile than other markets. There are strategies such as spreads and butterflies that are listed at the exchanges so you won’t have execution problems in the different legs. Thanks.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#Trading #ECB #Euribor #Euro #EURUSD #fundamentals #InterestRates #Macroeconomics #opinion #Spread #trading #TechnicalAnalysis  #butterfly #creatingValue

USDCAD, fundamentals and technicals

Introduction

I’m going to compare the USD with the Canadian Dollar. These two economies are performing well. Each one has its own problems. Both central banks, Fed and BoC, are rising interest rates. 

Fundamentals

Let’s start with the fundamentals.  As you know I like to have a big picture where I can highlight the risks.

United States

Its economy is showing strength. The GDP has been growing since June 16. It´s not as high as someone would like but considering that it’s a developed economy is very good. The US CPI is surging as well and this with the strong labor market can lead to more interest rate hikes in the near future. The last unemployment rate reading was 4.2%. The ISM Manufacturing PMI is really high. Some fund managers and traders would prefer to sell some assets considering the high level in the ISM PMI, and statistically speaking I agree (always with a good risk management and considering the size of their portfolios).

    Source: Investing, ISM Manufacturing PMI historical

The Federal Reserve is ready to hike interest rates and stop the asset purchases to support the economy. The election of a new FED president can help to do it quicker. On other hand, if the tax proposal is successful, the stock market could continue the upside trend.

Canada

It’s been a busy year for the members of the Bank of Canada. The housing bubble and the high household debt made it even more difficult. All of these facts with the good macroeconomic data obliged the central bank to raise the overnight rate to 0.75% from 0.50%. This was very significant because it was the first hike after the financial crisis. This helped the Canadian Dollar. The BoC raised interest rates in early September for the second time this year. Canada’s economy is dependent on the heavily indebted household sector to support economic growth. According to some BoC employees, we can see more hikes in 2017, but I have my doubts about it. I understand that they need to hike interest rates to cold the housing market but the main problem is how to do it without affecting the economic growth. The property sales have decreased but the valuations are still high. It’s expected that the Canadian overnight rate will be around 1.75% by the end of 2018.

USDCAD

USDCAD year to date

     Source: TradingView, USDCAD FXCM CFD, daily

The most part of the year has been falling. It was bouncing from 1.3023 and 1.35169 in the first four months.  It broke the resistance at 1.3517, and it set up the highs of the year, but this movement finished around 1.3800. The BoC raised the overnight rate in July, it was the first time in seven years, this was a boost for the CAD. It fell until September, the last downside move was due to the second interest rate hike of the year in Canada. It´s been a tough year for the dollar. One of the reasons is that there is a high probability that the Federal Reserve will hike interest rates before the final the year.

The most important levels, in my opinion, are the following:

Resistance 4	1.3516
Resistance 3	1.3321
Resistance 2	1.3023
Resistance 1	1.2764
Support 1	1.2437
Support 2	1.2110

Relevant levels, own elaboration

I think that the USD will keep raising and test the resistance 1 (1.2764)

USDCAD daily from the middle of July

    Source: TradingView, USDCAD FXCM CFD, daily

Here, we can see how the dollar lost its strength in the middle of August. The probability of an interest rate hike in Canada increased. As a result of the speculation of a rate hike and the performance of the economy, the Bank of Canada rose the 0.25% the interest rate at the beginning of September. The CAD strength was temporarily boosted but it didn’t last for long. Since then, the USD has been rising. The reasons are: the high probability of another rate hike in the United States before 2018, the possibility of electing a hawkish Fed president and the tax proposal. As I said I think the USD will rise vs the CAD at least in the short term. It hasn’t crossed the support at 1.2437 and it´s above the 20 and 50 exponential moving average.

Conclusion

This is a good example of two economies in which their central banks are tightening for different reasons. We have seen one of the longest bullish markets, because it had the support from the central banks around the world. I think that the USD will be stronger than the CAD in the short to medium-term. I hope you like the article. 

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Fed Funds futures, different trading strategies

Today I´m going to focus on the trading piece. I will explain the Fed Funds, the futures characteristics, the different trading strategies that you can use. If you are experienced in trading, you can jump to the third section.

What is the Fed Funds Rate definition?

The interest rate at which a depository institution lends funds to another depository institution overnight. These funds are maintained at the Federal Reserve.  As soon as the federal fund rate rises, borrowing becomes more expensive. You can consider these rates as the base rate that determines the price and the structure of the interest rate curve.

What are the characteristics of the Fed funds futures?

The futures contract has a face value of $5000000 for one month. This means that every time that you take a 1 lot position, you need to deposit $400 (this is an example) margin but it’s like you were trading $5M. The price quotation is 100 minus the average daily fed funds overnight rate for the delivery month.

 Example: Fed Funds overnight rate = 3.25, so the Fed Fund futures will be 100– 3.25=96.75

They have a monthly expiration. The tick value depends on the month we are looking at. If it's the nearest expiring month contract the tick value is $10.4175 because it´s quoted in ¼ of the interest rate basis point. The rest of the contracts are quoted in ½ of the interest rate basis point, so the tick value is $20.83 There are 36 months listed at the exchange.

This is the link to the contract specifications on CME:

http://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund_contract_specifications.html

You can check the margins as well. Please be aware that they can be different from the ones that your brokerage offers.

Why should we trade them?

They are stable and they don't have big daily changes, there is a lot of liquidity. You should be careful because there are important days in which they can move a lot If you don´t feel comfortable it´s better to be out of the market in FOMC meetings, and economic releases such as GDP, Unemployment rate, CPI, Industrial Production and Retail Sales.

How to trade the Fed Funds futures?

You can trade them based on economic fundamentals, technical analysis, and quantitative models. Let me start on economic fundamentals, if you see the macroeconomic fundamentals are improving, you can think that the Fed funds rate will rise so you need to sell the futures (remember the quotation, 100 minus the average daily fed funds overnight rate). If you think that the economy will deteriorate, you should buy the futures. Please do not follow these simple steps because you should consider more things before you decide to trade.

If you prefer to base your decision on technical analysis you know that you should look for trends, important levels (such as resistances and supports), the market profile provides these levels with the volume traded on them. 

    Source: TradingView, Fed Funds Dec17 Futures, daily

As you can see, it moves as the 3 month Eurodollar futures. It closed higher last week due to the FOMC meeting, lower than expected US CPI and US retail sales.

    Source: TradingView, Fed Funds Dec18 Futures, daily

This is the Dec18 contract. It’s more directional and the range is bigger than the Dec17. One of the differences between both contracts is that Dec 18 broke the support in 98.39 while the Dec 17 couldn´t even test the support made in July. This means that the traders expect more interest rate hikes in the following year.

Alternative strategies

If you don’t like to take excessive risk with the outrights you can do spreads or combination of spreads such as butterflies or condors. Let me summarize advantages and disadvantages.

Advantages:

• You take less risk
• You can hold the position more time
• The margin is lower than the outright
• The Fed funds spreads and butterflies are an Exchange traded contract, so you don´t need a specific functionality in your trading platform

Disadvantages:

• Your trading fees are bigger
• It moves slower than other instruments

Fed Funds Spread Dec17-Dec18 

    Source: TradingView, Fed Funds  Spread Dec17-Dec18, daily

This chart seems that is one of the above reverted, this is why it shows the differences between the Dec17 contract and the Dec18. If we compare all the charts above and this one, the last two months rounded in red, the Dec18 fell more than the Dec 17, which means that the spread is bigger between both contracts.

Fed Funds Butterfly, Dec17-Jun18-Dec18

    Source: TradingView, Fed Funds  Butterfly Dec17-Jun18-Dec18, daily

The butterfly is made up of three equidistant maturity outrights within the same product, so it contains 3 legs You need to buy the same amount of contracts in the first and third leg, and sell double of the contracts used in leg 1 in the second leg. The chart shows the following combination

                                                    +1 Dec 17 -2 Jun18 +1 Dec18

As you can see this product was in a range until September, and it’s been rising since then. This means that probably the traders expect an interest rate hike before Jun18.

I hope you enjoy this post. There are a lot of trading styles. You need to look for the one you feel comfortable with. 

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved