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All posts for the month March, 2016

Some company directors and shareholders can have significant influence over share price performance or possess particularly astute market timing when transacting in shares. The real value add is knowing which insiders you should follow and those you shouldn’t.

But how do you quickly formulate such a view from a simple insider trade news headline ? Is it enough to simply look at the position of the insider, trade direction and transaction size to predict what effect this will have on the equity price ?

We’d argue no…..and that’s why our unique Insider transaction analysis uses methods that eliminate noisy trades and can spot a “prescient” insider by focusing on trades that are both followed by price changes and are also well-timed.
By providing real-time insider transaction alerts and presenting individual success ranking scores we give you the ability to immediately establish what effect they have historically had on the stocks you care in.

Consider the following observations for the Chief Financial Officers of two large cap US stocks…you know…the guys who manage the financial risks of the company ! You would assume that being privy to the company accounts any discretionary transaction would be jumped on by the market and an immediate directional inference made, but we prove here that that is not always the case and should be considered on a individual basis as the results can prove vastly different.

Martin Ellen, CFO of Dr Pepper Snapple recently sold $1.45m worth of stock which follows a number of other sales over the last 5 years. We award him a 1 Star Ranking. As the chart suggests, the resultant price performance(post transaction) over the short and medium term coupled with his timing attribution suggests he offers little in the way of negative signalling risk for the stock.
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Compare him to fellow CFO, Michael Hartshorn at Ross Stores. He is awarded a 3 Star Ranking and sold $820k worth of stock last week. Supporting evidence from the accompanying chart suggests that both directionally and timing-wise Mr Hartshorn’s transactions posses equity moving information. His recent sale should therefore not be dismissed.

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Example Live Insider Alerts Feed with Historic Star Ranking Score
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To set up Live Insider Alerts for your Portfolio or Watchlist please get in touch at otassales@otastech.com

The oil price has been a primary focus this year with three main schools of thought about its importance and impact on markets. The first sees falling prices as a negative for equities, because falls reflect weakening demand for commodities as a result of a coordinated global slowdown in economic growth. The second views energy prices as a quasi-tax and expects stronger economic growth as a result of price falls, with the overall impact on equities beneficial despite the carnage in the energy and basic materials sectors. The third school sees most things as a function of excessive global debt, exacerbated by central bank policy and treats an oil price fall as a consequence of the inevitable over-capacity that results from mispricing credit.

Whichever camp you are in, OTAS tracks the indicators that foretell of any recovery in equities linked to energy and commodity prices, whether this has to do with suppliers going bust, improving demand or tighter monetary policies (okay, maybe not the last one). The oil producers considered most at risk are the shale field producers of North America, where production costs are high and leverage even higher. The median credit default swap for North American companies is 280 bps (remember European banks are around 105 bps).

NA Energy CDS 2 yr view

Credit risk remains high in the US

Option market implied volatility, a measure of uncertainty, has reduced from a peak five weeks ago, but remains elevated compared to recent history and suggests that the average energy share could rise or fall 25% over the next three months. Investors are asking whether they can afford that volatility, but also whether they can afford to miss out if the sector were to rally so much.

NA Energy IV 2 yr view

One way or another, the shares are going to move

There are some very small stocks impacting the analysis above, but the median large cap stock is still predicted by those with skin in the game to move +/- 20% by mid-June. Companies such as Williams, Continental Resources and Baker Hughes are expected to move at least 50% more than average. Exxon, Chevron and Schlumberger, in contrast, should be relatively sedate.

Short interest provides a third risk indicator for the sector. While short interest is back at the average level of the past two years overall, for the large caps there is a clear upward trajectory, in spite of the recent pullback. This is in keeping with broader market reports, such as CFTC data, that short covering has not been a feature of the recent equity market rise.

NA Energy SI 2 yr view

Short interest is trending upwards year-to-date

In Europe, the risk indicators for Energy are more benign. This is because there are fewer wildcat operations listed and as Europe lacks the deep option, CDS and short interest markets that define the US. Credit risk among Europe’s energy giants is a little over a third of the North American average and barely differentiated from Europe’s banks. Short interest is at relatively low levels and implied volatility suggests stock moves of +/- 15% in the coming three months.

European energy stocks should move around thwo thirds as much as the US

European energy stocks should move around two thirds as much as in the US

All of this suggests that acute problems in the Energy sector are a peculiarly US trait, as a function of the high borrowing and extraction costs of multiple smaller oil producers. Both sectors yield a similar amount at around 4.3% 12 months’ forward, although US large caps promise only 2.8% as a reflection of their haven status within a troubled industry. European energy equity investors are happy to ride out low oil prices, comforted that the income from their holdings is a rare bonus in an environment of ever-lower interest rates.

None of this should provide grounds for complacency and OTAS continues to track individual names to see where risk is hiding. One particularly powerful analytical tool is divergence, a bespoke measure of by how much equity prices are divorced from the other risk indicators of credit, option volatility and short interest. Do you have a holding that is becoming riskier faster than its peer group; contact us to find out.

Within OTAS we use many metrics to keep an eye on risks for equities. Credit default swap (CDS) spreads have been a coincident and occasionally leading indicator of trouble, especially for the bank sector. And when the bank sector is in trouble, the rest of the market tends to follow.

The median CDS of European banks spiked of late. A rise in value happens when debt investors become concerned that their bonds will not be honoured in full, while a fall back indicates that those concerns have eased. The latest reassurance was rapidly forthcoming.

Banks CDS 2 yr view

A quick round-trip for bank risk

It is worth pointing out that risk remains elevated relative to the average level over the past two years. A couple of years ago 100 bps of risk was the point at which we might start worrying about corporate credit, but in a world of zero and negative interest rates, 100 bps seems pretty high (I’d like it on my savings account please, Mr. Banker). The risk however, remains well below the peak of nearly 350 bps reached in 2011 and was put back in the box pretty quickly over the past two weeks.

Once again the ECB rode to the rescue, with another promise of saving the financial system (read the Euro and the politicians whose entire careers depend on it), with what once was quaintly referred to as unconventional monetary policy. Of course, for prices of CDS to fall as they have done in the last couple of weeks, someone has to become much less risk averse. That someone is anticipating unloading all unwanted bonds onto the ECB at sometime between now and expiry.

The consequence of a central bank buying corporate debt is that corporate debt no longer carries the same signalling quality for equity investors. It may be that we need to pay much more attention to far smaller moves in the median CDS, for it is by pushing up the price that investors signal they need another intervention from the ECB. These investors are hungry offspring, nuzzling mother, until she rolls over to uncover her teat.

There remain other measures of risk. Short interest is one that has had mixed benefits, because the authorities are prone to interfere in this market pretty rapidly. The steady rise in short interest on the average European bank year-to-date however, would appear to be sending a message.

Banks SI 2 yr view

Short sellers home in on banks

It is noteworthy that Nordic banks are among the most shorted names listed in OTAS, with the highest days-to-cover and loan fees.

A third measure of risk is the implied volatility in the options market. This both follows the underlying move and is an indicator of by how much investors believe shares could move. Within OTAS, we measure this over the upcoming three months.

Banks IV 2 yr view

Rising volatility indicates greater uncertainty

Option volatility is a measure of uncertainty about the future. You should pay a higher price for something that you are more sure about, which is why the favourite in a horse race has the lowest odds. Low implied volatility typically suggests that investors believe the good times will keep rolling.

Investors predict, using money not words, that the average bank will move in a range of over 36% by mid-June. This is either up or down by more than 18%. Follow the CDS and short interest for European banks within OTAS  in order to gain a better understanding of whether investors believe that move will be up or down.

OTAS also provides in depth analysis of risks for individual equities, as well as easy to access summaries of sectors and markets, which highlight the individual companies most expected to face difficulties.

 

 

Last year, the share price of Hong Kong Exchanges and Clearing (388 HK) surged up to higher than HK$300 within a short period of time but it fell back down nearly 50% in just 4 months. The share price is now trading at the level of HK$175 and we still see negative elements concealed in the stock as revealed from OTAS.

Not much positive catalyst is expected to come ahead for Hong Kong Exchanges and Clearing, one that the market is anticipating is only the possible launch of the stock trading link between Hong Kong and Shenzhen in the second half of 2016 which is expected to trade CHINEXT names.

We will continue to see much macro headwind this year: significantly low turnover of the Hang Seng Index, the declined IPO pipeline, the corporate earnings being generally weak, and the global economic growth slowing down.

Earnings Momentum

The EPS momentum of Hong Kong Exchanges and Clearing is among the bottom 10% of all the negative performers in the industry group, with 12m Fwd EPS down by 9.6% and 19.7% over one and three months respectively.

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Divergence

Even though the price of Hong Kong Exchanges and Clearing has risen 3.6% in the past month, its EPS momentum has actually fallen largely by 9.6%

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Valuation

The stock is trading at a high levels compared with other diversified financials. The 12 month forward P/E valuation of 29.3x is very high relative to valuations over the past two years.

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Perhaps benefitting from a flight to quality in the face of the early year sell off, American Water Works has stoically outperformed the market by 15% and the sector by 4.5% since the start of the year. However, the stock began to underperform in the last week(-1.5%) and multiple factors in Core Summary may suggest risks lie ahead for the shares.

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There has been a huge move in Short Interest in American Water Works over the past week, having increased from around 1% of free float on loan on 2nd March to near 5% now, a change of around 360%.
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Company insiders have been selling shares in the Company, worth around c$80k, as the stock made new highs.
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The current valuation is beginning to look stretched vs history. On 11.3x 12m Fwd EV/EBITDA it is trading at its highest absolute level in 8 years and highest sector relative level for 5 years.
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And whilst some market professionals have been pushing the stock as a growth and income play, our analysis indicates the current yield on American Water Works is comparatively low to peers versus the previous 2 years.
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The aggressive moves higher this week in Norwegian shares Golden Ocean Group and Seadrill perfectly highlights why more investment professionals are turning to OTAS Lingo as a way of informing them when the risk landscape is changing for stocks in their portfolio/sector.
By analysing and reporting on unusual behaviour across a range of multi asset factors and market observables, Lingo users are given an invaluable ‘early warning‘ allowing them the opportunity to interpret, react and re-position to maximise performance returns.
For those invested in Golden Ocean and Seadrill, two distinct factors flagged in Lingo last week, which when analysed more closely in OTAS, may have predicated the significant moves we have seen since(Golden Ocean +27%, Seadrill +140% at pixel time).

The Lingo report on Thursday 3rd March for Norway’s OSE identified an insider bought shares in Golden Ocean Group the previous day.
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The link on the report takes you a highly detailed analytical overview of the stock(Core Summary) which provides more granularity across each factor.

Insider Chairman/CEO Ola Lorentzon bought 20k shares – he was the first company Director on record to purchase stock following a long period of underperfomance with the stock trading on it lows. Additionally, Golden Ocean Group had been the subject of strong analyst EPS upgrades, whilst short  interest was down 8% over the last week.
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Lingo also highlighted to the fact that beleaguered energy plays, Seadrill and Statoil had both seen a notable decrease in free float share on loan the previous day.
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These moves continued the theme observed in the last week on the Core Summary stamps for both stocks(below,) seeing a 31% & 6% decrease over the week. (N.B – the large move in Statoil short interest in part driven by recent dividend but the trend was still declining)
For Seadrill, the 5 day move in short interest was exceptional compared to history, suggesting a higher degree of short covering than usual. Also evident was the 30% of free float stock still on loan, equateing to around 12 days to cover suggesting there was still significant short squeeze risk potential. This latter point now seems to be playing out in the shares following the news-flow recently announced.

Statoil                                  Seadrill
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It is indisputable that Lingo would have helped identify these risks and opportunities well before the general market, offering the chance to maximise returns.

This is a short and completely non-technical post that outlines our view on how to hedge a portfolio.

Our view is very simple and has 5 parts to it:

      • A portfolio manager takes 2 kinds of risk: stock risk, which is when your stocks go down for their own reasons, and factor risk, when you might lose money because the market crashes.
      • Stock risk is minimized by having a well diversified portfolio with not too much weight in any one stock.
      • A lot of the factor risk can be eliminated by hedging the market using an ETF or index future.
      • If you don’t have access to a risk-management utility, then we’d recommend hedging about 70% of your net position. For example, a $75M long amd $25M short portfolio would be hedged with roughly $35M short in a market future.
      • Do not be tempted to completely net out your position: $75M long, $25M short, with a $50M short hedge in a market index is not a good idea at all (unless your position is entirely large-cap names that are actually consituents of the index). If you dollar-neutral hedge, you’ll probably lose money if the stock market goes up because your stocks won’t go up as much as the market does.

We have checked that this rule holds both when the market is calm and during crashes. There is some variation in the ideal way to hedge from year to year, but it’s not true that during a crash you should make sure you’re dollar neutral.

The value of 70% comes from lots of what-if analysis and beta calculations, and seems pretty robust. It does vary slightly depending on what’s in your portfolio, the investment time, and what you’re using to hedge, but as a rule of thumb, it appears to work well in a lot of situations.

howToHedge

 

This summarises the general view that OTAS Technologies has toward hedging.