Swiss Franc

The Swiss Franc continues to grind along.

On June 5, long positions were first initiated in the Swiss Franc at 102.22 on the Swiss Franc Currency Shares (FXF) for the following reasons.  Back in September 2011, the Swiss National Bank (SNB) established a currency peg to the Euro.  This was done in order to reverse what was at the time a rapid strengthening of the Swiss Franc, which was perceived as a safe haven against a euro currency crisis but was serving to choke off growth in the Swiss economy.  The SNB strategy targeted a minimum exchange rate of 1.20 Swiss Francs per Euro.

While the SNB had successfully defended the peg through early June, the thesis for buying the Swiss Franc at the time was the notion that the ability to maintain the peg through the summer could come under heavy pressure as crisis conditions continue to mount in the Euro Zone.  The SNB had already polluted its balance sheet to maintain the peg, and an accelerating depreciation of the Euro would eventually induce the SNB to reset the peg to 1.10 Swiss Francs per Euro or to abandon the peg altogether, both of which would likely result in a sharp and sudden rise in the value of the Swiss Franc.

Image

While the Euro currency did depreciate from as high as 126.74 euros per U.S. dollar in early June to as low as 119.73 euros per U.S. dollar by mid July, the SNB was able to hold its ground on the peg and the euro has since reversed higher back to the 124 euros per U.S. dollar range.  Thus, the SNB survived this latest round and any immediate pressure on the peg appears to be off for the time being.

While the peg of the Swiss Franc to the Euro is likely to come under renewed pressure at some point again in the future, the interest in maintaining the FXF position in portfolios until this next episode has diminished.  This is due to the fact that the SNB continues to further pollute its balance sheet in order to maintain the peg.  As a result, the longer this peg is held in place under stressed conditions, the greater the potential that such policy resolve could eventually lead to unintended negative consequences for the Swiss economy and its currency.

For these reasons, positions in the Swiss Franc were closed on August 27 at 102.62 on FXF for an incremental 0.4% gain during the brief three month holding period.   

Utilities

It has been a chilly month of August for Utilities stocks.  After peaking on July 30 at 38.23 on the Utilities Select Sector SPDR (XLU), the sector has declined by -4.7%.  This performance strikes a stark contrast to the broader stock market, which is up +2.5% over the same time period as measured by the S&P 500.

Since the outbreak of the financial crisis several years ago, Utilities stocks have played a meaningful role in core portfolio strategies.  This is due to the fact that unlike most sectors in the stock market, Utilities shares tend to travel their own path and with far less volatility.

As a result, the recent pullback in Utilities stocks has provided an attractive entry point to reestablish positions in the sector.   Not only do Utilities provide a lower risk way to capture stock market gains associated the potential for more balance sheet expanding monetary stimulus from global central banks, but they also provide downside protection in the event of another outbreak in volatility for the broader market.  Moreover, the XLU in particular offers an attractive 3.8% yield that provides a 120 basis point premium over the 10-Year U.S. Treasury yield.  Lastly, because Utilities stocks have shown the propensity to behave independently of other asset classes including the broader stock market, an exposure to the sector also helps enhance overall portfolio diversification.

For these reasons, positions in the XLU were reestablished to portfolios on Monday, August 27 following the most recent pullback.

Double Top?

The stock market has enjoyed an impressive run during the summer of 2012.  After bottoming at 1266 on the S&P 500 Index at the beginning of June, it has since bounced steadily higher.  What has made the summer stock rally particularly notable is that it has occurred despite mounting signs of a weakening global economy, the uncertainty associated with the U.S. fiscal cliff at the end of the year and the ongoing threat of full blown crisis in Europe.

So what then has propelled stocks higher in recent months?  It has been hopes that either the U.S. Federal Reserve (the Fed) or the European Central Bank (ECB) would launch another major balance sheet expanding monetary stimulus program to address these concerns.  Whether either the Fed or the ECB actually implements such a program in the coming weeks remains to be seen and will continue to be the subject of extensive debate.

In the meantime, the stock market appears to be showing some signs of fatigue following it’s recent “hope and sugar” rally over the summer.  Most significantly, stocks as measured by the S&P 500 finally arrived this Tuesday at the previous peak of 1422 it had set back in early April.  But from the moment this level was reached, stocks have since been in retreat, falling by roughly -2% through the remainder of the week. 

Image

This latest development in stocks is notable because it is starting to resemble what is known from a technical analysis perspective as a “Double Top”, which is a bearish reversal pattern where a price trend begins to move sustainably lower after hitting resistance at the previous peak.  This can occur in part as those last investors that purchased at the first peak have the opportunity to at least break even if not lock in incremental gains on their trade upon the arrival at the second peak.

It will be important to monitor whether this indeed is a double top in the stock market or simply a long overdue consolidation of recent gains.  It should be noted that the stock market does enjoy a variety of strong technical support at current levels including its 20-day, 50-day and 200-day moving averages as well as several upward sloping trend lines.  And many technical readings remain solid including Relative Strength and Momentum.  But if we experience unexpected developments on the geopolitical, economic or policy fronts in the coming weeks, all of these readings could quickly come under heavy pressure.  And whether such a downside sell off would present a fresh opportunity to establish new long positions in stocks or would instead suggest standing aside until conditions stabilize would depend on the specific catalysts driving the stock market lower.

These are the opportunities and issues that will merit close attention in the coming days and weeks.   I will be posting more on these topics and others as events unfold along the way.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

 

 

Capturing Oil Opportunities With Occidental

The stock market is seemingly convinced that another round of monetary stimulus will soon be on its way.  Since the most recent European Central Bank (ECB) meeting on August 2, the stock market as measured by the S&P 500 Index has gained in 9 out of the last 11 trading days.  And the nature of the recent advance is very similar to past monetary stimulus melt up phases.

Whether the U.S. Federal Reserve (the Fed) or the ECB end up delivering more balance sheet expanding monetary stimulus is still subject to debate.  But if they do, stocks are not the only asset class that stands to benefit, as a variety of other categories stand to benefit just as much if not more.  This is particularly true given the fact that stocks have already begun aggressively pricing in more stimulus while many of these alternatives have not.

Oil has ranked among the main beneficiaries from monetary stimulus.  In short, oil prices soar when central banks are applying stimulus and falter when they are not.  And to date, oil prices have vastly underperformed stocks in pricing in more stimulus.  Thus, oil offers a favorable relative investment opportunity at present.

Gaining a direct exposure to Oil can prove challenging, however.  This is due to the fact that the exchange traded products (ETFs and ETNs) designed to track oil prices either do a poor job of tracking underlying oil prices or are synthetic products that subject investors to the credit risk of the underlying issuer.

Fortunately, the stock of Occidental Petroleum (OXY) has demonstrated itself to closely track spot oil prices in recent years.  As a result, it represents a solid alternative to establish exposure to oil prices.  Adding to its appeal is the fact that Occidental also provides a variety of valued added characteristics that justify consideration for a core long term position that may be worth holding through any further market volatility in the months and years ahead.

Selected characteristics are listed below:

  • High Quality – Occidental is among the most financially healthy and best managed firms not only in the energy space but the overall market.
  • Attractive Growth – Occidental is a strong free cash flow generator that has a proven track record of increasing its dividend at a double-digit annualized rate. It has also been consistently expanding production and increasing reserves.
  • Future Opportunity – Occidental has a favorable business mix with operations in the established oil industry as well as attractive growth potential in domestic natural gas through its various shale properties.  Thus, Occidental provides lower risk exposure to what may be among the most attractive growth opportunities in the coming decades.

Portfolio allocations to Occidental were established on August 17 based on the above themes.  As mentioned, while the Occidental position is designed to capture potential near-term upside associated with any potential monetary stimulus program, it may also remain in portfolios as a core long-term holding.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Trading Opportunity In High Quality Stocks

Despite a weakening global economy and a lackluster corporate earnings season, the U.S. stock market has been in rally mode ever since the European Central Bank completed its latest meeting on monetary policy late last week.  Although ECB Chairman Mario Draghi did not deliver a new stimulus program that so many in the market had been anticipating, the mere suggestion that something was likely to be implemented in the coming weeks has been enough to help send the S&P 500 Index higher in each of the last six trading days.

What has been most notable about this most recent stock market advance has been its composition.  In short, it has been a “garbage” rally.  In other words, the companies that rank among the lowest in terms of quality and highest in terms of stock price volatility have been the almost exclusive drivers of the advance.  Overall, these stocks have gained nearly +5% in the past week as measured by the S&P 500 High Beta Index.  Conversely, the companies that rank among the highest quality and lowest price volatility have hardly participated at all.  In fact, these stocks are collectively lower by roughly -0.5% over the past week as measured by the S&P 500 Low Volatility Index.

If we indeed see additional stimulus from the ECB or the U.S. Federal Reserve, the fact that lower quality higher beta stocks are leading the market thus far does not come as a surprise, as they are the typical leaders in the very early stages of these types of rallies since they are usually the same stocks that were sold off the most during any prior sell off.  But it does not take long for the higher quality low volatility stocks to begin accelerating in their own right to begin closing the initial performance gap.

This is the basis of the trading opportunity currently associated with high quality low volatility stocks.  They have yet to participate in the recent rally, but if it continues to look increasingly probable that the major central banks will end up delivering more stimulus as anticipated, these higher quality stocks will begin advancing to close the performance gap.  However, if it turns out that central banks fall short of the market’s stimulus expectations, high quality stocks will benefit from the downside protection not only from the fact that they have yet to move higher on stimulus hopes to this point but also from their inherently more defensive characteristics.

A position in the S&P 500 Low Volatility ETF (SPLV) was initiated on August 10 with the design to capitalize on this potential trading opportunity.  And depending how events unfold in the coming months, this position is also viewed as a potential longer term holding to potentially provide continued lower risk equity exposure in various market scenarios.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

 

Follow

Get every new post delivered to your Inbox.

Join 2,359 other followers