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The latest cry for attention by the Palestinians likely to be in vain


Recently, President Mahmoud Abbas of the Palestinian Authority renounced the Oslo Peace Accords, signed in the 1990s, that pointed toward a two-state solution. Perhaps not coincidentally, an Israeli couple, Eitam and Na’ama Henkin from the West Bank settlement of Neria, were murdered in a drive-by shooting by terrorists in front of their four children. Hamas has praised the attack but has stopped short of claiming responsibility.

The latest cry for attention by the Palestinians likely to be in vain

A subsequent stabbing to death of two Israel adults in Jerusalem and the wounding of a toddler has only served to heighten tensions.

Taken together, these acts have to be considered a cry for attention. The drive for Palestinian statehood has taken a backseat in recent years thanks to more important matters arising in the Middle East. Between Al Qaeda, ISIS, Iran’s drive for a nuclear bomb, and the migrant crisis that is upending European politics, the plight of the Palestinians has lost the importance that Abbas believes it is due.

When the Palestinian Authority wants to draw attention to its concerns, violence almost invariably ensues. Much of the public face of the violence consists of rock-throwing youths causing chaos in the streets. Just for variety’s sake, the occasional drive-by shooting and suicide bombing are undertaken. While these things are happening, Abbas will foreswear responsibility, claiming that the violence is a result of the “brutality” of the Israeli occupation, He will then press his demand that Israel retreat to the pre-1967 borders, freeing up the West Bank and East Jerusalem for a Palestinian state. These demands, as always, will be unacceptable to Israel since those borders would be all but indefensible.

One reason that Abbas may believe that this strategy may make some headway is that the current American administration is not as supportive of the State of Israel and its position as previous ones have been. President Obama has made no secret of his disdain for current Israeli settlement policy or of his desire that Israel come to a final agreement with the Palestinians, even if that agreement is disadvantageous to Tel Aviv.

However, Abbas’ hopes may be in vain, ironically, because of the nuclear weapons deal the Obama administration has made with Iran. The deal was consummated over the strenuous objections of Israel and its supporters since they believe, rightly, that it is really a license to Iran to develop a nuclear bomb by cheating on the terms of the agreement. That Iranian troops are now operating in Syria, next door to Israel, does not help matters.

As a result, the Obama administration has found itself in the position of having to lavish unaccustomed support to Israel, in the form of weapons and assurances, to calm its concerns. A renewed drive to pressure Israel to cave to Palestinian demands would not fit well into this strategy.

Besides, because Russia has muscled the United States out of the Middle East, the United States is going to need every friend it can get in the region. The chief among those friends will be Israel. That is why Abbas and the Palestinians will have to live with disappointment once again.

Can ETFs protect your portfolio from volatility?


During the recent weeks, markets show significant price movements. In other words, investors are confronted with increased volatility. Whereas the recent years showed a steady rise and the first half of 2015 a more or less stagnant S&P 500 and Dow Jones Index, we saw heavy price drops in August and September, but also stellar recovery in between. This may cause some nervousness for long term investors. But there are ETFs who should benefit from increased volatility, for example iPath S&P 500 VIX ST Futures ETN (symbol: VXX). Does this instrument offer a good protection against increased volatility?

Complex factor

Volatility is for most (private) investors a difficult concept to grasp. Basically it measures the speed of market movements. When share prices move fiercely, we speak of volatile markets. Markets become more uncertain as volatility rises, since price movements become more unpredictable. When a share price can change drastically in both directions over a short period of time, the volatility is high. For option traders, volatility is one of the, if not the, most important factors in determining a strategy. But also for stock investors the speed of price movements is important. As a rule of thumb, bear markets tend to be more volatile and bull markets show low volatility. A decline in share price is mostly sharp and an upward movement more steady. As the saying goes, risk happens fast. So one could argue that protection for volatility is more relevant if one expects a bear market or wants to protect profits in portfolio. But how can we protect our portfolio from volatility?

Range of instruments

One of the most used benchmarks for volatility is the VIX, the S&P Volatility Future, as traded on the Chicago Board Options Exchange. For most investors this instrument is quite difficult to use, since futures need to be rolled over and one needs margin. But in today’s world, there are of course ETFs which track the development of the VIX. As mentioned in the introduction, the VXX is the most commonly used ETF. But do these instruments offer good protection? Chart 1 shows that the VIX shows an excellent negative correlation with the S&P 500 Index (SPX). Therefore it would offer great protection.

Chart 1: SPX (candlesticks, left axis) compared to VIX (purple line, right axis) Source: Interactive Brokers


But let’s view the topic from an ETF investor’s point of view, since an index is not traded. The most common ETF, the SPDR S&P 500 ETF (SPY) is for a backbone in a lot of portfolios. Would the VXX ETF offer a good protection for an investment in SPY? Chart 2 shows that this is only partly true.

Chart 2: SPY (candesticks, left axis) compared to VXX (purple line, right axis) Source: Interactive Brokers


During more calm periods, or sideward price development, the decline in VXX is above average and does not track SPY very well. This means in the long run, the protection becomes less effective. Investors have to add additional shares of VXX to be fully protected. Therefore, investors should be careful with using VXX as protection for their portfolios. One has to time the market, and that’s something long term investors do not prefer to do. Buy and hold and sleep tight is not working here.

There’s an alternative for the VXX, the ProShares Ultra VIX Short-Term ETF (UVXY). This ETF tracks the VIX to two times of the daily performance. Let’s take a look what that means:

Chart 3: SPY (candesticks, left axis) compared to UVXY (purple line, right axis) Source: Interactive Brokers


The protection becomes even worse if time advances, which is considering the development of the VXX logical. As a speculative instrument, the UVXY may be interesting, but as an instrument for protection for buy & hold investors certainly not.

Living with volatility

So what should long term investors do to protect their portfolios? There doesn’t seem to be a clear answer. Although VIX offers the best coverage of volatility, the need to periodically roll over and margin requirements make it less useful for most private investors. The ETF alternative is not attractive. However, if one has a more clear expectation of volatility ahead, VXX could be an option. There are option strategies which could offer some form of protection, however this is a more complex topic and only suitable for more experienced investors. In the long run, it may be unavoidable having an exposure to volatility…

Indian Rate Cut Surprises, Bull Case Reaffirmed (Buy IFN, INFY)


We continue to remain optimistic on the outlook for India’s financial markets. India, unlike most of the emerging markets, has held up reasonably well so far in 2015.

Of the BRIC countries, India has had the strongest stock market performance in recent months, and with China’s struggles, India’s economy is now the fastest growing of the BRIC countries as well.

India, unlike Brazil and Russia, is not a major commodity producer and as such has benefited substantially rather than taking a hit from falling petroleum and metals prices.

Indian shares are down roughly 20% since last year’s peaks. That’s not a great performance, but compared to wipeouts in places like Brazil and Russia, the decline has been manageable. And it offers a better entry point for new investment dollars.

Over the past month Indian shares have been weak, in line with the global bout of fear driven selling. Unlike many other markets Indian shares even made new lows recently falling below the August flash crash lows.

However, the falling tide reversed sharply this week. India’s central bank made an unexpected decision to cut interest rates by a full 50 basis points in their most recent meeting. This surprised the market; most analysts had only been expecting a 25 basis point cut in the rate.

With the 50 point cut, the central rate has fallen to 6.75%. This marks the fourth cut on the year with the rate dropping from 8% at the start of the year down to under 7% now.
Inflation recently came in at a 9-month low, falling to 3.6%, and food prices generally remain stable despite some meteorological issues causing localized food shortages. With inflation not presenting a significant problem, the bank decided to take the initiative and cut aggressively to try to front-load a stronger economic upswing.

The country is growing GDP at 7% this year, an admirable rate for certain. However this is down from 8% or greater expectations. And parts of Prime Minister Modi’s economic plans are looking less certain. In particular, efforts to make India a manufacturing hub that can compete with China seem less vital with global growth falling so sharply. Who is able to buy the goods India is looking to produce?

Not surprisingly, Indian shares turned sharply higher following the unexpected stimulative boost. The India Fund (IFN) leapt 6% off recent lows.

The country’s currency, the Rupee, has risen four consecutive days now. Strong capital inflows from foreign investors are helping to boost both the country’s currency and its individual stocks. Infosys (INFY), one of the country’s tech company giants, has bucked the recent negativity and just put up a new 52-week high.

We believe the decisive action by the central bank shows that the country is prepared to take the steps necessary to maintain and stabilize economic growth. The country has performed well despite this bearing a most terrible of bear markets for emerging economies in general.

The long-term trajectory for India is great. The country is rapidly improving education, providing a way to lift much of the country into the middle class. And unlike China, India has not taken measures to severely stem population growth.

As such, India has a much brighter demographic future, with more population growth in general, and working age population in particular to look forward to. India has a long growth trajectory ahead of it and is still at a fairly low level now offering more potential to investors.

For long-term investors, this is a market you’ve got to be in. While a bumpy ride should be expected, the path is upward.

The relatively stability of the rupee and freedom from concerns about commodity prices put India into a class of its own in the emerging markets world. India offers a unique package and is a key piece in any diversified portfolio.

Time To Buy American Airlines Stock?


The airline industry is enjoying the best of times, at least for the American-based operators. The price of their main input costs are all flat or falling.

Time To Buy American Airlines Stock?

Plunging commodity prices make the cost of their main piece of equipment, jets, decline. Labor costs are being held in check with inflation muted.

And most importantly, the price of jet fuel has absolutely collapsed. As recently as last fall, jet fuel cost more than $3 per gallon. It gets barely half that today, recently quoting around $1.55 per gallon.

This is a huge savings – the type that is hard to overstate. For a typical airline in operation, jet fuel accounts for 30% of their overall cost structure. Or at least 30% at last year’s prices. You’re looking at 15% of the average airline’s expense line of the budget disappearing overnight. A real bonanza!

The airline industry has enjoyed near-record profitability. From an income sheet perspective, airlines are simply rolling in dough.

And yet, airlines, as a sector of stocks, are faring less well than you’d anticipate. Sure, certain airlines are seeing their stocks perform well. Jetblue (JBLU), European discounter Ryanair, and Mexican upstart Volaris (VLRS) have all been hitting new 52-week highs recently.

But the major American airlines have not really joined in the party. American Airlines (AAL) in particular has hit turbulence. Shares are down 10% year-to-date, and are merely flat since the price of oil starting plunging. So what’s going on?

There’s three main reasons for airlines performing so poorly. First, investors just tend to hate the industry in general. And with good reason, airlines are among the worst long-term investments out there. As the saying, goes, if you want to become a millionaire you should start as a billionaire and then start an airline.

Airlines are a highly cyclical industry with high fixed costs, limited ability to adapt to changing economic conditions, and deep vulnerability to labor relations problems. Add the occasional oil spike and terrorist event, and airlines have a rough climate to deal with.

That said, for savvy investors, there are often great opportunities caused precisely by the sector’s turbulence. This is one of those times, as we’ll see.

At present, American Airlines is trading at roughly 6x both 2015 and estimated 2016 earnings. That screams cheap, the market as a whole is trading at a level three times that high. Still given the above mentioned problem, it’s normal that airlines trade at a discount. However, that discount isn’t usually this steep – 10x or 12x earnings is a normal PE for this industry.

That brings up the second bearish point. Many skeptics think these current earnings aren’t going to last. The most obvious concern is oil prices going back up. A return to $100 oil would move American back up to a double digit PE ratio.

Of course, airlines can and often do hedge their fuel prices. But even with hedges eventually those roll off and the company will have to go back to paying higher fuel prices. Southwest (LUV) had effective long-term fuel hedges during the 2005-08 run-up in oil prices, allowing it to keep ticket prices lower than competitors, but when those rolled off, it had to hike prices like its competitors, severely dinging its reputation as the lowest cost American carrier.

Earnings can drop for other reasons as well. Price cutting to take market shares is an obvious concern. Despite complaints from frustrated passengers that airlines act as a cartel, the truth is that airlines often ruthlessly cut prices to take market share and damage their competition.

Thus far, fares have dropped about 5% on average since the oil bust started. This does hurt profitability, but a 5% average decline is far from large enough to negate the impact of a 50% drop in the price of crude. Assuming an airline spent 30% of its costs on fuel and that item is down 50%, they’re saving 15% of their costs on fuel and lost 5% of their revenues to cheaper tickets. That’s a good trade.

Airline skeptics also say the industry will add too much capacity, buying new planes and launching new routes to take advantage of cheaper fuel. And this will undoubtedly happen, though it takes time. It’s not like an airline can order a plane today and start flying it tomorrow, there’s a long lead time. Airlines have enough time to make peak profits for a few years before overcapacity really sets in.

And on the plus side, the airlines have the opportunity to make shareholders happy during these good times. American, for example is aggressively retiring shares with a monster buyback. And since its shares are lower in price, they get more bang for their buyback buck.

At the current $40/share price, American can retire roughly 10% of the entire float this year. Think about that, every 100 shares you own this year will be the equivalent of 110 shares next year. This greatly benefits the companies earnings power per share going forward and also allows for higher dividends.

Airlines aren’t a great long-term investment, but in the short term, they are exactly the right place to be. American’s buyback in particular supports the stock with steady buying and provides a powerful catalyst for more upside in the intermediate term.

Vinyl vs Digital Music (Who Owns The Future?)


Vinyl vs Digital Music (Who Owns The Future?)According to mid-year figures by US recording association RIAA, music revenues from vinyl sales rose an astonishing 52.1% compared to last year, amounting USD 221.8 million. It’s successor the CD is facing tough times with revenues declining 31.5% to USD 494.8 million. CD album sales are now surpassed by downloads. So digital and analogue are gaining market share. Are consumers giving us mixed signals here?

Quality listening

The vinyl revival in the late nineties and early zeroes were once attributed to the dance scene, where DJ’s preferred the touch of the black gold on their turntables. The flexibility of CD’s in mixes, cuts and scratches wasn’t there so a lot of dance tunes were still pressed on vinyl. However, with the advance of digital audio, in mp3 and FLAC-format, and advanced DJ-software this argument became less valid in the recent years. So what is saving the vinyl? The answer is in the unmatched sound, according to audiophiles. Where a CD presents a clean sound, the vinyl offers more warmth. But also on a more technical level audiophiles say that vinyl, while analog, captures the sound waves better than the CD, as opposed to a digital recording which only takes snapshots (however at a very high rate). But before this turns into a technical debate, vinyl offers an unique sound whereas CD’s are nowadays matched by download formats. So the CD is experiencing much harsher competition.

The digital age

With the Apple Music launch earlier this year, another noteworthy music streaming service based on a subscription entered the arena. During H1 2015, paid subscription streaming services recorded revenues of USD 477.9 million, a 24.9% increase compared to last year. Combined with revenues for ad-supported services (USD 162.7 million, +27.1%), audio streaming has surpassed CD sales. Together with the sales of downloads, we can speak of a digital age. Music streaming and downloads are the mass market, but also audiophiles are discovering the digital market. Download sites such as HD-tracks.com and Qobuz.com are offering Hi-Res Audio. This standard offers higher bitrates and sample size and therefore come very close to the studio recordings. Qobuz is also offering a ‘lossless’-music streaming service and offers a package where customers can buy hi-res albums at a reduced price. It will be interesting to see if vinyl-sales can keep up the current growth rates, when arguably a digital alternative is available.

Streaming takes over

It seems only a matter of time before we see the CD disappear. In user comfort and quality there are better options. The trends are vinyl, streaming services and hi-res audio. The latter is probably only interesting as a niche market, since it takes experienced listeners to hear the difference, mostly due to the quality of hardware i.e. device the music is played on. With ear pods on a mobile phone it’s difficult to spot the difference between 320kpbs mp3, lossless cd-quality or hi-res audio. So music-streaming, basically 320kpbs mp3 or sometimes lossless, is the mass market with the highest potential. As previously reported, music-streaming service Deezer will be the first real option for investors to take advantage of this trend. Apple Music is not a major driver of Apple revenues, so we can’t consider that an investment opportunity.

An interesting development is the decline in single downloads, which decreased 9.4% to USD 687.6 million. This could indicate that downloads are losing market opposed to streaming services. Apple Music could be the answer to a possible decline in iTunes sales. It’s however early to tell. But it’s clear that in five years the music industry will have a complete different shape. There’s still a place for a physical format, but it will be probably vinyl which will survive the digital age. CD’s are history, as may be a large part of the download market which will lose their place to music streaming services. Hi-Res audio may acquire its own place. But in the end, since high quality formats are gaining more market share, the music listener will win.