Strategies for Increased Market Volatility

When traders and investors turn largely bullish, they decrease buying protection to hedge their bets against market declines. They become 'complacent' and market volatility falls. A visible account of this complacency and lack of volatility can be seen in the VIX - generally considered a 'fear index' on the US S&P 500 stocks. Reviewing the slightly downward sloping support line for the VIX on the five year chart below, we see the VIX recently traded at levels not seen since before 2007. Although a very bullish sign for the equity markets, these levels are unsustainable. Therefore, we are currently interested in providing our clients exposure to a positive move in the VIX representing higher volatility and lower equity prices.

We have three trade opportunities in development. The lowest risk, longest term play is a 'managed certificate' that trades the moving average of the VIX with either a long or short bias. In general, this is a great way to hedge a bullish (or 'long') equity portfolio. This certificate trades the VIX 'short' almost 80% of the time, so its value increases as volatility falls. However, when the 4-day moving average of the VIX moves higher, the certificates allocation changes from a short bias to a long bias. This means that spikes in the VIX would be captured as gains also.

A more aggressive and timely opportunity would be selling a VXX put (within an decreasing autocall note). VXX is an index ETF that aims to track the movements of the two front months of VIX futures. Selling a put is a bullish position that enables investors to get paid a premium as long as the price of VXX does not close below the strike price of the put option. With VIX and VXX at all time lows, a timely sale of far out-the-money puts on VXX can yield an easy 15%+ annualised rate of return. This is a not a long term holding strategy to hedge a bullish portfolio, but a rather safe bet at making a good short term trading return.

Finally, we are evaluating a 2X leveraged mini-future March 2013 contract with a stop-loss. With VIX extremely low now for an extended period, we are consciously practicing patience while we wait for the first signs that SPY is about to roll over. We find this strategy enticing for investors who want a direct play on the VIX with a leveraged move. Again, looking at the graph above, when the VIX moves up it moves in leaps and bounds! Today alone the VIX was up over 5% on a flat trading day in the markets. Imagine what would happen if market volatility really returned with vigour. Trade size is especially important with this type of product, so we are working to get this product to clients for as little as USD 10,000, with daily liquidity, transparent pricing and the ability to scale into and out of this product.

For information on this note, and others that can hedge a bullish equity portfolio, follow us on Facebook or sign up for our structured product mailings.

Author: Chris Davies  

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A Golden Opportunity in this Structured Product

Almost daily we receive Structured Product offers in our emails from various brokers and banks, such as EFG, UBS, RBC, Commerzbank, Deutsche Bank, and Nomura. As we discussed on our Facebook page, we advise clients when the can achieve the best prices and the highest probabilities of a positive outcome on their investments into structured products by using the CBOE SKEW and VIX measures. Currently, we do not see compelling reason to enter into bullishly oriented structured notes with equity underlyings, but we do see opportunities to hedge our clients' bullish equity bets in the market.

One interesting and timely structured product note focuses on the out-of-favor gold-mining sector (mainly represented by the two ETFs GDX and GDXJ). This sector has not participated in the recent equity bull run that has taken place since mid-November of 2012 which now seems a bit overbought in the near term.

Four stocks make up the underlying investments in this note. The 1-year charts below show these stocks are treading water as the market has risen lately.

Possible bottoming pattern if this makes a high low on this pullback

Flat base pattern with oversold momentum and price oscillators

Weak down trend with bullish divergences in the oscillators

Flat base at support from March 2012

Obviously, we expect further declines in these 4 stocks if the market continues to go higher. So why would these be interesting to own in a structured product note?

As we previously mentioned, we view this opportunity as a hedge of our bullish equity posture in today's market environment. If the equity market does start a pullback, the gold miners could rally. These stocks are are correlated with the movement of gold prices (represented best by the ETF GLD), which is viewed as an anti-inflation and, more generally, a "risk-off" trade.

How this note is structured also makes it an interesting opportunity. Investors will get paid even if these stocks fall! The note pays a coupon as long as none of the 4 stocks fall more than 35% in any quarter. Looking at the charts above, we know that all these stocks would have to trade lower than they did anytime in the last 12 months to put the investors coupon at risk. From a pure statistical perspective this is highly unlikely to occur. Unless these stocks fall to new 52-week lows, investors collect a quarterly income.

Meanwhile, if these stocks all trade at 95% or greater (at the end of any quarter) than where they are priced today, the notes also pay a coupon, Further, the note has an autocall feature meaning the note returns the investor's principal along with the coupon.

This note is an example of how structured products can make investors money when stocks go up, go sideways, or even go slightly down. With a capital guarantee on this structured product as long as none of the 4 stocks trade below 50% of their current price at the end of four years (on that single date only), investors should feel comfortable that the probabilities of success in this investment are extremely high.

For information on this note, and others that can hedge a bullish equity portfolio, follow us on Facebook or sign up for our structured product mailings.


Author: Chris Davies  

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India and China

Indian economic growth may rebound in 2013 while falling short of the government’s 8% target, as inflation risks limit the extent interest rates can be lowered to spur consumption and investment.
Gross domestic product in Asia’s third largest economy will rise 6.5% in the year through March 2014, according to the median of 30 estimates in a survey by Bloomberg News. That compares with a 10-year average of 7.8% and the Finance Ministry’s projection of 5.7% to 5.9% in 2012-2013.

Prime Minister Manmohan Singh revived stalled policy overhauls in September to stem a slowdown in expansion, steps that helped send stocks to a two-year high this week on bets that a recovery has begun. While inflation eased to a three-year low of 7.18% in December, it remains the fastest among the biggest emerging markets. A record current account gap is threatening to damp the rupee, adding to price pressures. We continue to see higher prices ahead for Indian equities, although a pullback from the recent highs would be wise for an entry with new money.

China's economy is showing signs of a rebound that could help it emerge from its worst economic period in 13 years. According to the latest government figures, growth picked up to almost 8% in the final three months of 2012, from less than 7.5% in the previous quarter. This was driven by state investment in infrastructure projects and efforts to get consumers and companies to spend. Economic stability is seen as vital for China as its new leaders take over. Similar to India, we see a strong uptrend since the summer of 2012. In contrast to India, Chinese equities has overcome their previous highs set in February of 2012. We expect this trend to continue, but for any new money allocations, we would wait for a pullback to create a 'higher low' on the chart.

Author: Chris Davies

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Размер государственной пенсии в разных странах

Как в старом анекдоте, европейский пенсионер после выхода на пенсию отправляется по мИру, а наш - пОмиру!

Кроме государственных пенсий, что на рисунке, большинство иностранных пенсионеров имеют корпоративные или/и личные пенсионные планы.
А какую пенсию имеет каждый из нас?

Автор: Вероника Тишкова    

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До чего дошел прогресс…

Медицинские технологии развиваются стремительно: проконсультироваться со специалистом из любой точки планеты через Интернет или доверить операцию роботу – уже не фантастика. Локомотивом развития медицинской науки и практики выступает высокотехнологичная медицинская помощь (ВМП), подразумевающая  применение  современных медицинских технологий, как в диагностике, так и в лечении заболеваний. Но, несмотря, на постоянно увеличивающееся финансирование этого направления в России, далеко не все нуждающиеся могут рассчитывать на получение такой помощи бесплатно.

По данным Минздрава РФ на оказание ВМП в прошлом году было выделено больше 50 млрд рублей, что в пять раз больше по сравнению с аналогичными затратами в 2006 году. Прогресс на лицо – если в 2006 году в среднем расходы на одного пролеченного больного составили 74 тыс. рублей, то в 2011 году – 138 тыс. рублей. И тем не менее…  Министерство предполагало, что в 2012 году ВМП получат порядка 350 тысяч россиян. По сравнению с численностью населения страны, этот показатель не выглядит впечатляющим. А ведь порой ВМП – единственный шанс на сохранение жизни и качества жизни пациента. В число операций подпадающих под эту категорию входят хирургические вмешательства высокой степени сложности: неонатология и детская хирургия в период новорожденности, ЭКО, нейрохирургия, онкология, сердечно-сосудистая хирургия, травматологии и ортопедия, включая эндопротезирование, трансплантации.

Конечно, ВМП показана не всем больным, но часто, такая помощь может оказаться необходимой и провести ее надо незамедлительно. При этом, в российской практике ее получение за счет бюджетных средств предполагает наличие квот у местных лечебных учреждений на проведение того или иного вида операций. И возможности получения ВМП иногда приходится ждать какое-то время или ехать за ней во вполне определенную клинику. Всего в России ВМП за счет средств федерального бюджета оказывают 250 медицинских учреждений. Согласитесь, в масштабах страны это не много.

Впрочем, есть способ обезопасить себя на случай возникновения непредвиденных проблем со здоровьем и обеспечить себе доступ ко всем арсеналу современных средств диагностики и лечения – качественная медицинская страховка.

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Прогноз развития мировой экономики на 2013

По прогнозам МВФ темпы роста мировой экономики в 2013 году будут слабыми.

Экономисты Кредит Свисс прогнозируют небольшой подъем мировой экономики на уровне 3.4% в 2013г по сравнению с 3.1% в 2012г.. В прогнозы заложен сценарий, при котором США сумеют избежать фискального обрыва, а кризис в еврозоне ослабеет. Темпы роста США являются скромными, Японии и Европы – слабыми. Главными двигателями мировой экономики являются развивающиеся государства, которые могут показать рост в 5.2% по сравнению с 4.7% в прошлом году.

В каких странах и секторах инвестору искать рост в 2013 году? Мы будем публиковать прогнозы на 2013 г от ведущих финансовых институтов, инвестиционных банков и профессионалов рынка.

Автор: Вероника Тишкова    

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Investment Banks' Forecasts for 2013

After a year that saw news of hesitant growth, signs of further European integration, ECB and Federal Reserve monetary stimulus, continuing austerity, recovering equity indices, an impending fiscal cliff in the United States, and a hearty amount of political drama, 2012 has come and gone.  As each new year looms, financial writers of every stripe offer their predictions of what the new year will bring.  Amid the cacophony of lay and journalistic pronouncements of what the future holds are the reputable and insightful yearly outlooks assembled by major investment banks.  While the authors of these reports are usually the first to tell us that their analyses are far from concrete prophesy, their predictions give us insight into what some of the brightest minds in finance are anticipating in 2013.  Below are brief summaries of these outlooks from four major institutions. 

Goldman Sachs

            Goldman Sachs’ outlook for 2013 is markedly bullish.  The bank’s equity strategies team is anticipating a 12-month target of 1575 for the S&P 500 index, which implies a potential return of 12%.  They are expecting returns on equities to far surpass treasuries, especially equities which have exposure to demand in the BRIC nations.  Further recovery in the US housing sector is also expected as the excess supply endemic to the previous decade’s housing market has been assuaged. 

Interestingly, the bank’s chief researchers are looking at the revolution in shale gas extraction as a potential boon to economic growth.  Prior to the development of technology capable of releasing previously untapped fossil fuel, energy constraints had been a constraint upon economic growth.  The cost reduction to production that an increased supply of energy heralds offers the possibility of “tailwind” to economic growth over the course of the next decade.  In the words of head of commodities research, Jeff Currie, “at the very least, it removes the headwind.”

            Goldman’s outlook on gold places the metal at the intersection of two opposing economic forces: central bank balance sheet expansion and improvement in the global economy.  As noted multiple times on this blog, the price of gold is largely a function of perceived global risk and the supply of money.  Although the Federal Reserve’s stimulus activity will not fully subside in 2013, Goldman Sachs anticipates that the relative effect of a stronger economy and the myriad alternative low-risk investments that such an economy offers will outweigh the expansion of central bank balance sheets.  The bank is anticipating a peak gold price in March of $1825 an ounce followed by a gradual decline toward $1750 in 2014. 

             

  

Credit Suisse

            Credit Suisse’s outlook for 2013 is more measured than that of Goldman Sachs.  Rather than anticipating a bullish emergence from relative stagnation, Credit Suisse has labeled 2013 a year of “subsiding pessimism.”  The general outlook is that 2013 will be more or less a continuation of 2012: a slowly strengthening economy and stabilizing political circumstances.  Geopolitical risk, particularly in the Middle East remains comparable to 2012.  Political cooperation in the EU and Eurozone is welcome for future growth but Europe in 2013 will still see negative growth in peripheral countries.  The Eurozone will rely heavily upon Germany for regional growth.  Credit Suisse expects US markets to be heavily conditioned by the government’s final agreement with regards to the fiscal cliff. 

            Despite its more cautious outlook, Credit Suisse expects 2013 to be a positive year for the global economy.  According to Head of Investment Strategy and Asset Management, Anja Hochberg, the “worst is over for the economy.”  The order of the day remains prudent diversification.  In 2013, the bank will be focusing on corporate bonds while keeping a keen eye on emerging market bonds in the event that local currencies begin to appear more attractive.  The bank holds that the biggest investment challenge of the new year will be the persistence of low interest rates. 

            As far as gold is concerned, the Credit Suisse outlook breaks from that of Goldman Sachs.  Geopolitical risk, anticipation of inflation, bank balance sheet expansion, low interest rates, and a weaker dollar are all cited as reasons to expect the price of gold to continue to appreciate. 

           

Morgan Stanley

            Morgan Stanley’s expectation of growth in 2013 is perhaps the most pessimistic of major investment banks.  The bank expects global growth of 3.1% with a negative growth rate in Europe and sub-2% growth in the US, Japan, and UK.  The only point of optimism comes from emerging markets, with the greatest output expected from China and India.  Several of the bank’s economists have gone so far as to expect a mild recession in 2013.    

            Morgan Stanley’s equity markets research team has forecasted an S&P 500 price target of 1434; today’s index is 1426.  The team’s leader, Adam Parker, emphasizes China exposure as the key strategy for 2013.  This is consistent with bank’s expectation of further demand in China despite its relatively lower rate of output compared to previous years.    

            A glimmer of optimism appears in Morgan Stanley’s forecast for the US housing market.  It expects a gradual increase in property values over the course of the next year.  More than any other issue however, the bank’s 2013 outlook is contingent upon the result of the US fiscal cliff negotiations, now in the process of concluding.

UBS

            UBS’ forecast, like that of Credit Suisse, lies in between the pessimism of Morgan Stanley and the optimism of Goldman Sachs.  UBS expects greater stability in 2013 thanks to the conclusion of precarious political situations in the United States, Europe, and China.  The pending fiscal cliff solution, of course, remains a point of uncertainty. 

            The bank anticipates global growth of around 3%, with 2% growth in the United States due to active Fed policy in 2012 and expected improvements in the housing market. Its outlook for the Eurozone is mixed.  The regional bloc will narrowly escape recession with a majority of growth coming from Germany and, somewhat surprisingly, Italy, as it moves beyond the peak of its austerity program.  2013 will likely be a rough year for Spain, especially for its banking sector.  UBS expects that Spain will be forced to request support from the European Stability Mechanism early this year as bond yields rise due to unsustainable debt-to-GDP and loan-to-deposit ratios.  Because of German hesitancy to support fiscal transfers to troubled Eurozone countries prior to September elections, a permanent solution to the seemingly endless European crisis will be further delayed.  The probability of a Greek exit from the Eurozone in the next three years is estimated to be 50%.

            In emerging markets, UBS expects 2013 to be a strong year for the BRIC countries.  Investment strategists prefer corporate to sovereign debt in emerging markets and plan to diversify with emerging market currencies due to their solid appreciation potential.  Inflation in emerging markets is expected to be relatively tame next year thanks to relaxed energy and food prices.    

            UBS’ general recommendation for 2013 is that investors seek yield in asset classes beyond government securities.  Like Credit Suisse, emphasis has been placed upon corporate debt, especially in emerging markets.  Diversification must be a hallmark of investment strategy in 2013 as the world economy continues to deleverage and grow sluggishly. 

Looking Ahead

            If anything can be gleaned from the variety of predictions presented by the experienced experts who have compiled the above reports, it is that the coming year will be marked by no less uncertainty than we have grown accustomed to in the post-2008 economy.  While there may be more cause for optimism than in years past, investors should remain cautious and seek the advice of financial professionals before investing.  General outlooks on the state of the world economy and areas where yield can be sought are no substitute for the personal attention to specific investment goals and strategies that AVC Advisory’s experienced financial consultants provide for their clients. 

             

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