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All posts for the month April, 2016

Short VIX positions are at an all-time high, while net shorts are at an eight month high. For those not versed in financial speak, this means that investors are expecting a low level of volatility, or uncertainty, and that share prices are not expected to change much in the short to medium term.

Low levels of uncertainty are traditionally associated with gradually rising stock prices, because investors pay more when they are confident about the future. Central banks have attempted to crush volatility precisely to boost investor confidence, in the hope that this would spread to the broader economy. Whether this has happened is fiercely debated, but a leading investment bank tells us that more than 60% of US large companies are buying back shares, a similar level to the 2007 peak. This certainly helps offset any weakness in share prices when earnings disappoint.

US large co. implied volatilityThe chart above shows that option traders expect US stocks to rise or fall by 12% over the next three months. There is no bias towards rising or falling in this analysis, but the chart clearly shows that implied volatility is at the low end of the average range over the past eight years. This is down by a third since February, when economic woes and earnings concerns were at their recent peak.

The February top had briefly exceeded the June 2012 high, just before Mario Draghi’s (in)famous “whatever it takes” speech. Since then, markets have been calmed once more, chiefly due to Draghi promising to buy up any piece of debt that investors in Europe can produce for him. The impact on volatility in Germany has been much the same as in the US.

German large company Implied Volatility

Investors expect German stocks to rise or fall by 13% over three months, which is in lock step with US shares. This level of volatility is also at the low end of the long-run average range and has fallen by a little under a third since February. The February peak level also exceeded, briefly, the early summer 2012 jump in volatility that did much to trigger ECB action back then (the US having already acted long before to crush the extraordinary volatility of the financial crisis).

The chart tells us that volatility can fall further, in both the US and Europe and still be within the average long term range. At implied volatility of between 19 and 20 (+/- 10% three month share price moves) the US chart would be back at levels that were sustained from March to July last year. This was a period of high and stable values for the US stock market, but critically indices did not break through to new highs.

Once again, under the captive eye of the investment world, central banks have poured oil on troubled water and may succeed in coaxing markets back towards record levels. If so, this will have been achieved by creating copious amounts of money and having it buy back stock. The accumulation of debt for this type of investment, which has no obvious productive purpose, will do nothing for earnings growth other than create a dependency on even more buybacks next year if companies are to beat their earnings.

Once again, an extended period of low volatility is likely to be interrupted by a panic about economic growth and sustainability of earnings, and the investment world will turn to the central banks and demand another shot in the arm. By using OTAS to follow EPS Momentum changes and movements in implied volatility, traders and investors can expect to gain advance warning of impending moves.

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HSBC will release their 1Q16 earnings result on May 3rd. The stock has been up 10%+ in the past 10 trading sessions mainly driven by news of the CEO who said that the company is looking to buy back shares once capital requirement is met and better macro environment. In OTAS, we can find a few indications to take profit on the recent rally. Market seems to ignore the concern of revenue outlook and ability to maintain the dividend payout ratio which was a huge topic at the beginning of this year.

The EPS momentum chart has been on down trend in the low interest rate environment. EPS momentum is among the bottom 5% of all the negative performers in the industry group, with 12 months forward EPS down by 3.4% and 16.1% over one and three months respectively.

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The share price has been on a downward trend ever since the unexpected loss incurred in 4Q15, and has been underperforming its region and sector since the beginning of this year.

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In terms of the option market, the implied volatility for HSBC is exceptionally high, as you can see how it relates to its own banking industry in the Divergence chart below. It indicates that there will be a +/- 13% trading range over the next three months.

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Recent commentary of consolidation within the steel industry to address the current overcapacity/slowing demand dynamic has buoyed the sector and seen ThyssenKrupp shares rally by around +23% over the last month. Such event risk has not been overlooked by the credit markets where there has been a considerable reduction in the cost of credit protection(debt default) over the last two months, now pricing well below its long term average at 175bps.

Whilst this potentially positive catalyst is reflected in the current share price and credit costs, there are a number of other OTAS market observables highlighting a degree of risk still remains which could impact the shares…..

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  • Valuation – Trading on 5.59x 12m Fwd EV/EBITDA, Thyssen’s current valuation is at extreme highs in absolute and sector relative terms compared to the last 2 years.
  • Implied Volatility – Relative to sector peers, the options market is pricing in a large degree of short term share price risk in Thyssen shares. Current expectations are for a +/-19% move in the next 3 months. In terms of analysing positioning, the Put Ratio is flagging multi year lows suggesting little in the way of downside protection. A coincident factor historically but an extremely low Put Ratio has actually been a negative indicator for share price(see charts)
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  • Divergence – Recent positive price action has diverged from the negative change in EPS forecasts by analysts over the last month. Statistically, the relationship is one of the most dislocated in the sector.
  • TIM Indicator – Experts contributing to the TIM alpha capture platform still expect large underperformance from the shares. A ranking of 2 denotes a high distribution of sell vs buy ideas currently, typically a very reliable indicator performing better than 82% of stocks in Europe.

Using OTAS equity analytics, investment professionals are immediately drawn to those potential hidden risks which help them support trading decisions, identify market timing and uniquely maximise alpha.

The Hang Seng Index is on a tear this week with +1,000 points and up 7 days in a row, thanks to better China macro data and the IMF raising the 2016 China forecast to 6.5%. Much positive momentum was built for the large cap stocks this week. Tencent, one of the HSI Index heavy weighted stocks, surged nearly 4% this week. The market has been upgrading the stock after their earnings release in March based on strong growth in China Mobile games market, continuing growth in online advertisement activities in China, and the MSCI inclusion of ADR internet names, which are all positive to the China internet sector. Strong positive signals are flagged from OTAS:

Well-built EPS momentum

According to trends from the past, Tencent never disappointed investors and it usually outperforms more in the second half of the year. In the Core Summary of OTAS, we see that the EPS momentum of Tencent is among the top 10% of all the positive performers in the industry group, with 12 months forward EPS up by 3.4% and 1.9% over both one and three months respectively.

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Solid performance

The total return is up by 8.2% YTD and as you can see from the chart below, it almost always over-performs its region and sector in the past year:

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Break out on good volume and positive OTAS Signal

An OTAS Slow Stochastic (-) signal fired 4 days ago, which generated an average 3.7% return over the following 20 trading days and was successful 64% of the time since 2006. Given the result of the back test, this is an OTAS contra buy signal.

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This mornings Lingo report for the Top 250 UK companies is highlighting a large increase  in the short interest levels at Ashmore Group yesterday. With a sales release in 7 days the Core Summary provides an immediate risk overview for those currently positioned in the shares and highlights some interesting analysis across a number of factors.

Lingo
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Core Summary
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  • Performance – Strong relative outperformer in the last week, +4.68% vs sector and back towards top of recent range.
  • EPS Momentum – Analysts have raised their forecasts on average by +1.33% in the last month, putting Ashmore in the top 10% of its sector(for positive revisions) and reversing a negative 3 month trend. The 1 year EPS vs Price chart indicates the market has re-adjusted its view and is now pricing in a favourable shift in earnings whilst the 9 yr chart suggests the street tends to have been ahead of the curve historically (note current trough earnings level.)
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  • Valuation – On 20x 12m fwd P/E, Ashmore is flagging as having a high valuation relative to the sector over the last 2 years, whilst on a longer 9yr view it is mid-range.
  • Short Interest – Recent short interest moves have been quite volatile but despite this the percentage of free float on loan remains elevated at nearly 19%. This indicates there is still a high degree of negative positioning in the shares despite the recent move higher in the stock. With over 22 days of volume to cover the entire short base, directional short plays should note this risk and the aforementioned change in expectations for earnings. An inline or positive Sales release could see a significant squeeze higher.
  • TIM Indicator – Ashmore has an indicator of 1 denoting a high proportion of short vs long ideas from TIM contributors, i.e overwhelmingly bearish.
  • Rating –Currently Hold rated and trades at a  20% discount to the median price target.

The striking thing about European equity markets is how stable they are right now. EPS Momentum is mildly negative in most major markets, valuations are very similar and implied volatility is as expected, with Switzerland deemed least risky and Spain the most. More importantly, the country markets are trading relative to each other precisely as you would expect.

So where is the Brexit risk, the great fear that the UK will dive off a cliff should the population defy the European elites and vote to quit the European Union (note to editors, the UK would not be leaving Europe, which is not possible geographically). Equally, where is the fear that a UK exit after the June 23rd vote will lead to a tailspin for European markets. Answer; there isn’t any.

In OTAS we track three month implied volatility more than any other duration. We do this because there is plenty of liquidity at this point relative to at other times. As of April 11, we are less than three months from the UK vote and hence today’s numbers reflect perceptions about where markets will trade on the other side of the decision.

The strongest evidence of a Brexit effect

The strongest evidence of a Brexit effect

The chart above represents the strongest evidence of a Brexit effect, in that implied volatility (read uncertainty) for leading UK shares is slightly above the average range over the past two years relative to France. This, however, is a relative rating, and the implied volatility of the two markets is very similar. Option traders expect UK stocks to be +/-14% by July 8 and French ones to be +/-14.5%. So uncertainty is marginally greater in France.

Over the same time, traders expect Spanish stocks will be +/-18%, Italian +/-17%, German +/-13% and Swiss +/-11%. This is how these markets line up next to one another most of the time, except when there are perceived problems on the horizon. What is more, the current level of volatility is in the average range of the last two years, having been much higher in February, before the date of the UK vote was announced.

Uncertainty in France is in the normal range

Uncertainty in France is in the normal range

Stock market valuations are normal as well, safely in the average range, where you would expect relative to one another and at very similar levels. France, Italy and Spain trade on 15x 12 months’ forward earnings, the UK on 16x alongside Switzerland, and Germany on its typical slightly lower rating of 14x due to the composition of its more cyclical stock market. The UK has re-rated relative to Europe so far this year and not because EPS Momentum has fallen relative to elsewhere. If anything, the UK market is looking toppy.

The inverse Brexit effect

The inverse Brexit effect

What is behind the complete absence of Brexit panic in stock markets? One answer is concerted and coordinated central bank action to crush volatility. Another is that the world has bigger problems, in terms of an economic slowdown precipitated by nearly two years of falling global trade volumes, than the possible changes in an inward-looking Europe. A third is that those people who put money on these matters, day-in, day-out, do not think that anything very much will change whether the UK is in the EU, or votes to leave.

Fast Retailing (9983 JT) has been flagged as one of the priority names among the Asia large cap stocks  today. Indeed when we look at Japan Top 225, this top weight stock has dragged the index more than 100 points today with this stock being plunged in the past 7 days.  Yesterday after market closed, we saw Fast Retailing had lowered FY OP profit guidance as well as their FY dividend guidance. A few sellside who completely missed the collapse in profits was quick to come up with a narrative:

  • “Lack of any ground breaking new functionality has raised concerns that rivals have caught up with similar products in the summer range”, writes Nomura Securities chief researcher Masafumi Shoda in report
  • Earnings show “fresh evidence of the pitfalls involved in selling a limited range of items in mass quantities under a single brand” writes SMBC Nikko Securitites senior analyst Kuni Kanamori in report

You can easily gather the above latest news under the News List-view of the single stock screen in Core Summary, where we have displayed the top 3 topics. In the example below, Fast Retailing’s top 3 recent topics that we should pay attention to are Technicals, Downgrade and Forecasts.

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(One of the links under the News List if you are interested to read more: http://www.zerohedge.com/news/2016-04-07/asias-largest-clothing-retailer-plummets-after-slashing-guidance-third-blames-strong)

The downward price trend of Fast Retailing was opposite to the strong Yen, which is causing exchange loss for the name.

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In terms of its valuation , Fast Retailing’s PE and P/Book do not look appealing in comparison to other large Japanese peers. Its profit momentum seems to be slowing.

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With the falling knife signal and all RSI, Fast Stoch, Slow Stoch and Full Stoch revealing Oversold, does the stock still look optimistic or is it a good time to buy?

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Here’s a reminder of some of the ‘self-help’ functionality within OTAS which is available at your finger tips should you ever require additional assistance.

Password Reset
Users can now manage their own OTAS password (including manual password resets) from the initial login page. A direct Help link to OTAS support is also available.
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Simply follow the instructions on screen:

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Help Pages
Every component in OTAS has a dedicated Help Page which explains what each application does, documents what we are analysing and how it can be used. Just look for the ‘?’ icon at the top of each application.
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Example Help Page – Core Summary
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Dedicated Help Button
If you are still experiencing issues or have a question that the help pages cannot answer, the Help button (found on the Launcher bar) will direct your query via email to our dedicated support team who will be on hand to assist you further.
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