Archive | Investing

Is the Short Yen / Long Japanese Equities Trade Over?

By Charles Lewis Sizemore, CFA on May 24, 2013 in Investing

In volatility we haven’t seen since the Fukushima disaster, Japanese shares dropped by 7% on Thursday before bouncing off of those lows later in the day. Ouch!

The ostensible cause? Fed Chairman Ben Bernanke indicated that QE Infinity might—just might—come to end if U.S. economic data improve, and China’s PMI came in lower than expected. A more likely explanation is the recent surge in Japanese government bond yields; the 10-year yield briefly jumped above 1% before falling back into the 80-basis-range.

Japanese stocks were definitely due for a breather; the Nikkei had been up by more than 50% year to date. But does Thursday’s action point to something bigger? Could it be that the short yen / long Japanese equities trade is over?

We’ll see. I expect that the yen still has much further to fall, and this may or may not mean a short-term rally in Japanese equities.

The real trading opportunity here, however, is in Japanese bonds. This is a trade where the risk and potential reward are asymmetric; your downside is modest while your upside is enormous.

Japanese 10-year yields cannot go much lower than current levels. At time of writing, the yield was 0.86%. The all-time low was hit last month at just under 0.50%.

Could yields retest those old lows? Of course, anything is possible. But given the scale of the money printing involved, I wouldn’t bet on it.

A far more likely outcome is something akin to the Eurozone crisis whereby the bond vigilantes mercilessly punished the countries with high budget deficits and debt loads. Japan’s total debt is roughly 100 percentage points of GDP higher than that of Italy and its yearly budget deficit is substantially bigger, yet it pays a yield that is more than 75% lower. Given that Japan is no longer a high-savings-rate country, they cannot depend on their citizens to bail them out this time. And if the Bank of Japan steps in too aggressively, they run the risk of undermining confidence in the yen and turning its orderly decline into a rout…which would almost certainly cause yields on Japan’s debt to soar.

To take advantage of this, I recommend investors short Japanese debt. The easiest way to do this is via the Powershares DB 3x Inverse Jap Gov Bond ETN ($JGBD). Be careful here because this is a leveraged ETN that also happens to be somewhat thinly traded.

Give this trade a little room to run. I would use a stop loss near the old lows $17.50. Your risk here is manageable. If I’m wrong, you have lost roughly 8%. But if I’m right, and the bond vigilantes finally turn on Japan, we might be able to double our money in a matter of weeks or months.

Disclosures: Sizemore Capital is long JGBD. This article first appeared on TraderPlanet.

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Want Dividend Growth? Go for Big Tech Over Utilities

By Charles Lewis Sizemore, CFA on May 17, 2013 in Investing

Investors are starved for yield. It’s not exactly breaking news. With traditional savings vehicles such as savings accounts, CDs, and bonds yielding next to nothing, investors have been flocking to dividend-paying stocks for years.

On the surface, this makes all the sense in the world. Unlike fixed income investments, dividend-paying stocks tend to enjoy rising payouts over time (or at least they do if you choose them well).

There‘s just one problem with this. Defensive, dividend-paying sectors are, as a group, expensive relative to the broader market. Investors are paying a premium for slow growth…which is not exactly a recipe for long-term investment success.

As an example, consider the utilities sector. The Utilities Select Sector SPDR ($XLU), a popular ETF proxy for the sector, trades for 16 times earnings and yields just 3.7%.

Utilities have had good multi-year runs. In the 2003-2007 bull market, utilities were actually one of the best-performing sectors. But it’s hard to get excited about them at current prices.

Surprisingly, some of the best dividend deals on offer are in the tech sector. Microsoft ($MSFT), Intel ($INTC) and Cisco Systems ($CSCO) yield 2.8%, 3.7% and 3.2%, respectively, and all trade at very modest valuations. All have also been aggressively raising their dividend in recent years. Cisco has nearly tripled its dividend in the past year and a half, and Microsoft and Intel have raised their dividends by 15% and 7%, respectively, in the past year. Not bad for boring “old” technology companies.

If you are building an income portfolio, you have a choice. You can load on slow-growth utilities. Or, you can build a portfolio of solid technology companies with dividends not too much lower that offer far great potential for growth in the dividend stream over time. The choice should be obvious.

Action to take: Buy “Big Tech” for dividend growth. Use a stop loss appropriate for your risk tolerance; I recommend something in the ballpark of a 20% trailing stop.

This article first appeared on TraderPlanet.

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And the Masters of the Universe Say…

By Charles Lewis Sizemore, CFA on May 16, 2013 in Investing

In my last article, I noted that “Big Money” managers was wildly bullish on U.S. stocks—74% were bullish and only 7% were bearish.

But what about those legendary masters of the universe—the global macro hedge fund managers who, if their reputations are to be believed, hold the fates of companies and even entire countries in the palms of their hands?

At last week’s Ira Sohn Investment Conference, we got to hear the latest investment themes from some of the biggest names in the business, including Bill Ackman, Jim Chanos, Stanley Druckenmiller, and David Einhorn, among others.

Some of these “smart money” guys haven’t been looking too smart of late. Ackman has taken enormous losses in JC Penney (NYSE:JCP); at one point, his losses on the investment were over $500 million. He also appears to be on the wrong side of a very large short position in Herbalife (NYSE:HLF).

This year Ackman is recommending Procter & Gamble (NYSE:PG), even though it is sitting near 52-week highs and is trading at a substantial premium to the broader market…after a long run in which consumer staples have outperformed. Ackman is agitating for management change. We’ll see how Ackman’s recommendation plays out, but I wouldn’t expect market-beating returns here.

Most of the speakers focused their comments on individual stocks, but there were some “big picture” themes worth noting as well. Kyle Bass of Hayman Capital reiterated his bearish call on Japan, saying that “the beginning of the end has begun.” I agree with Bass’ view on Japan and recently called it “the short opportunity of a lifetime” here on the Trading Deck. I can’t say I agree with Bass in his bullish defense of gold, however.

Stanley Druckenmiller, a legendary investor and a former top trader under George Soros, had perhaps the most interesting macro perspective. Druckenmiller argued that the commodity supercycle—the massive decade-long bull market enjoyed by most commodities—is over. The primary culprit? A slowdown in commodity demand from China.

I would take Druckenmiller seriously here. This is a man who enjoyed a 30-year run without losing money and who is one of the best managers alive today. Druckenmiller sees the slowdown in China—coming at a time when commodity production is being ramped up globally—resulting in a supply glut and sharply lower prices. This is good news for companies with large raw materials costs and for countries that import large volumes of commodities, but it is very bad news for Brazil, South Africa and Australia, among other resource-rich countries.

Still, you might want to take the words of all of these masters of the universe with a grain of salt the size of their egos. 88% of hedge fund managers underperformed the S&P 500 last year.

Disclosures: Sizemore Capital has no positions in any security mentioned. This article first appeared on MarketWatch.

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Marijuana Stocks: You Would Have to be High to Buy Them at Current Prices

By Charles Lewis Sizemore, CFA on May 14, 2013 in Investing

I’ve been a big believer in vice investing—and particularly tobacco stock investing—for a long time. I turned bearish on tobacco stocks late last year, but this was based purely on price. In my view, tobacco stocks had simply gotten too expensive relative to other dividend-paying options—and I would reiterate that view today.

But if ol’ tobacky stocks are unattractive at current prices, what about wacky tobacky stocks?

With marijuana slowly becoming legalized in the United States (at least on a state-by-state basis), manufacturers and vendors of cannabis are evolving from enterprises of dubious legality into mainstream and regulated purveyors of vice.

So, if Big Tobacco has been a profitable investment despite its social stigma, might Big Weed get a haircut and get to work for investors?

Maybe, but I wouldn’t count on it.

To start with, there is no “Big Weed.” All of the players are small companies with names that few investors have ever heard of. Tobacco and marijuana are also vastly different industries with vastly different competitive dynamics. Yes, both could be lumped into the category of “sin stocks,” but not all sin stocks are created equal. This requires a little explaining.

I recently wrote that Coca-Cola and Pepsi were the “New Big Tobacco.” By this I meant that sugary drinks were evolving into a stigmatized industry that is regulated in the interests of public health in the same way that cigarettes are. But I also noted that the stocks of companies operating under that kind of scrutiny can still be wildly profitable to own under the right set of conditions:

There should be substantial barriers to entry for new competitors (what Warren Buffett likes to call “moats.”)
The company should be financially healthy (strong balance sheet, manageable debt, etc.)
Management should be committed to rewarding shareholders with rising cash dividends and, to a lesser extent, share repurchases.
The stock must be cheap.

Big Tobacco names like Altria (NYSE:MO), Philip Morris International (NYSE:PM), and Reynolds American (NYSE:RAI) easily pass the first three criteria. They just happen to bomb the fourth.

So, how do marijuana stocks look in comparison?

The first point is in a state of limbo. There were arguably barriers to entry under the old medical marijuana regime due to the legal hoops that growers and vendors had to jump through. But none of the existing players were big enough to crush new competition, and none had any real name recognition.

Virtually every human being alive today is familiar with Altria’s Marlboro brand or Anheuser-Busch InBev’s (NYSE:BUD) Bud Light, regardless of whether they smoke tobacco or drink alcohol. But how many have heard of Medical Marijuana Inc (Pink sheets: MJNA), one of the largest suppliers of medical marijuana? Or Cannabis Science (Pink sheets: CBIS), one of its biggest competitors? Or for that matter, how many have heard of Growlife (Pink sheets: PHOT), a leading seller of hydroponic equipment?

I’m betting the answer is not too many. At this stage in the game, there is no real brand recognition to speak of.

What about the other criteria? Are these companies at least financially sound, and do they reward shareholders via dividends and share buybacks?

Not exactly. All three companies are high-risk penny stocks, and none pay a dividend. Of the three, Medical Marijuana, Inc., the “blue chip” of the group, has the healthiest balance sheet, but you’re talking about a company that generated only $5 million in revenue last quarter.

And price? Medical Marijuana, Inc. trades for 14 times book value and 24 times sales. To pay those prices for any stock…well, let’s just say you’d have to be heavily under the influence of the company’s products.

At time of writing, Medical Marijuana, Inc., Cannabis Science, and Growlife trade for $0.17, $0.05 and $0.04 per share, respectively. But a young analyst I interviewed on the matter told me he had a price target of $4.20 on all three.

I think there was a joke in there somewhere at my expense.

Bottom line: while marijuana stocks may indeed be vice investments, they have none of the qualities that have helped tobacco generate such fantastic returns over the past 50 years. Treat them as a risky speculation and nothing more.

Sizemore Capital has no positions in any stock mentioned. This article first appeared on InvestorPlace.

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