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ETF News, Global Macro Strategy, Strike Price

Global Macro Gut Trade: China ETF

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For those following global macro think tank Rareview Macro’s “Sight Beyond Sight”, you already know that the firm’s chief strategist Neil Azous is on a roll and the firm’s model portfolio is outpacing many who have an ax in global macro style investing. Today’s edition of the firm’s commentary caught the attention of MarketsMuse curators in our ETF and Strike Price departments when noticing a Gut Trade view re the top China ETF: FXI. Below is the extract from today’s edition of Sight Beyond Sight and reproduced with permission..

neil azous-global-macro
Neil Azous, Rareview Macro

Usually, we do our best to provide solid supporting evidence and some underlying insight for every trade we put forward in these pages.

It does not happen very often, at least for us, but sometimes this business is also about a gut feeling, instead of cold analysis, and nothing more. When it strikes, we act.Yesterday, we said that Monday was a top 3 performing day of the year in the model portfolio and that we are going to take that outsized performance for a spin and ramp things up a bit more directionally than normal. So you will see a subtle change in our tone and some of the things we do going forward. It will be a bit more aggressive.

Well, yesterday turned out to be even better than Monday and on account of again closing at a new high watermark for 2016, we feel it’s time to shift into a higher gear.

As we were walking out of a meeting yesterday afternoon we had a “gut feel” that the unwind related to all the voodoo we wrote in yesterday’s edition on a “mini-inflation scare” was going to accelerate and we were not big enough in the positions we had on.

New Position: Long iShares China Large-Cap ETF (FXI)

We make a living by entering trades when no one else is willing to, or by going places where no one else is willing to go. Today is no different.

Let’s go to China.

On March 30th, we added a long FXI position to our watch list.

Last night, the Hang Seng Index showed the largest positive risk-adjusted return across ALL regions and assets.For the avoidance of doubt, the FXI and the Hang Seng, in correlation terms, are virtually one and the same thing. While mainland China indices move and regularly make our risk -adjusted return monitor it is very rare to see the Hang Seng on that screen. We are well aware the data has stabilized in China, their political communication strategy is now more effective than last summer, and they have done a masterful job weakening their currency basket while holding steady vs. the US dollar. But what was missing was some action in the stock market following all that , especially the non-mainland such as Hong Kong.

Our interest is now piqued.

The structure we initially added to our watch list was to go long on the FXI August 38 call options. One structure we like even more is as follows:

1.Buy the FXI Aug 37.5 calls

2.Sell the FXI Aug 28 puts

After last night’s move in Asia, we doubt we will get the chance today as China is bid up.

At yesterday’s closing prices you could add this risk-reversal for even money on account of the puts trading 12 implied volatility points rich to the calls. Selling that expensive skew and knowing that the low in February was $28.44 (vs. the 28 put strike) is a better proxy for getting long than just buying the spot FXI outright. Besides, if we are wrong, and China implodes, we have massive convexity in our book overlays via being long on SPX puts and S. Korea credit default swaps (CDS).

We will see if we get the chance to put this on today for even money, or at least a similar structure. Otherwise, we may have to chase the bid and pay up if we want to participate. It is not going to help our entry point that JPMorgan raised MSCI China to overweight, but at least they downgraded Taiwan to neutral, which we are short of their currency.   Real time updates as to this position and all others are posted via our Twitter feed @NeilAzous

 

Neil Azous is the Founder and Managing Member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight®. Neil has close on two decades of experience across the financial markets, and is recognized as a thought leader in global macro investing. Prior to founding Rareview Macro, Neil was a Managing Director at Navigate Advisors where he specialized in constructing portfolios and advising on risk. His daily commentary was highly regarded by the institutional investing community and his success in delivering a forward-looking viewpoint on global markets helped lay the foundation for Sight Beyond Sight® to be built. On Wall Street, his career included roles at UBS Investment Bank and Donaldson Lufkin & Jenrette, where his responsibilities comprised of trading derivatives, hedging solutions, asset allocation and fundamental securities analysis. He began his career at Goldman Sachs in Fixed Income, after completing both the firm’s Analyst and Associate training programs, widely acknowledged as the pre-eminent and most coveted learning ground for undergraduate and graduate students. Neil completed graduate level coursework for a MS in Real Estate at New York University and received his BA in Business Administration from the University of Washington, where he is a member of the University of Washington Bothell Board of Advisors and was the recipient of the Bothell Business School 2013 Distinguished Undergraduate Alumnus Award. He is active in various charity and community organizations.

ETF News, Fixed Income, Global Macro Strategy

Its All Greek..A RareView View…

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As the events in Greece escalate to a frenzy, global macro strategists are lining up to opine on what might happen as the EU and the world calculate the impact of a Grexit. MarketsMuse tapped into one of the industry’s most thoughtful strategists and one who is notorious for having both ‘sight beyond sight’ and inevitably, a view that is rare when compared to those who position themselves as “opinionators.”  Without further ado, below is the extracted version of the 29 June edition of “Sight Beyond Sight“

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro
  • Key Talking Points…What People Are Watching…Major Asset Prices
  • US Fixed Income – Choke Yourself If  You Believe in 2 Rate Hikes in 2015
  • China – Correction Accelerates Government Learning Curve & Possibly IPO Reform

 

We started working early yesterday morning, spending time on the phone with as many risk takers as possible around the world and listening in on numerous bank conference calls on the unfolding events. Additionally, we felt compelled to watch our screens all night. At the time of writing, we have not actioned one item in our model portfolio and are nowhere near able to aggregate the thoughts of the risk takers we respect or the market commentary we received from anyone who writes research for a living. The fact is there is no coherent sentence to write. The dust has yet to settle, and until it does, no one can claim to know what will happen.

Despite all of this market plumbing being very visible, and even after the Greece referendum news on Friday, the probability of a disorderly financial reaction due to its consequences has only risen to ~40% from 20% or less based on what we can gather. Leaving last week many held the view there was a 50-50 probability for a resolution with a bias for a positive outcome.

Now let’s go through the asset classes and products, and ask how they will perform. For ETF players, our lens is on GREK, FXI, HEDJ and necessarily, SPY. For those looking for an immediate take-away trade with regard to the overwhelming Greek-infused chitter chatter and jibber jabber, think $GLD. In this case, our view, which we have espoused for more than 15 minutes, might or might not be  ‘rare’, but its one we can hang our hat on…

Prudent risk management says that the overriding exercise now is to take risk down regardless of your bias on the outcome. Resolution strategies are a distant second place and with US employment Thursday followed by a three day weekend that includes this Greek referendum, that makes this scenario that much more likely.

In terms of Greece, many are watching/waiting for the ECB reaction function to the Emergency Liquidity Assistance (ELA), which is scheduled to be revisited on Wednesday. As a reminder, the events in 2012, in which there was a large spike in the ELA program assistance as a result of Greece, was the catalyst for the now famous “do whatever it takes” speech by ECB President Mario Draghi. Ironically, the three-year anniversary of that speech is coming up shortly and there is no question professionals want to see Draghi re-ignite the European recovery trade. Our point is that faith in him being a steward of the market remains unwavering and he is still the only person perceived as the class act in this goat rodeo.

If we had to pick one asset that we all were led to believe mattered in the context of a “Grexit” over the last five years, and that was supposed to react to that event, it would be Gold. It should be up $50 at a minimum and yet it can barely hold a bid. If you feel bad for the citizens of Greece, then please save a little sympathy for the Gold terrorists at the failure of the yellow metal to respond today. Next week, if things get worse, and gold still fails to respond, that could be the final nail in their coffin. At least there will be one good outcome to the whole sorry saga. Continue reading →

ETF News, Fixed Income, Global Macro Strategy

Global Macro: Decomposing the Move in Yields-The Pendulum Swing

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Decomposing the Move in Yields…Global Fixed Income Coming Closer to Decoupling from German Bunds

MarketsMuse Global Macro and Fixed Income departments merge to provide insight courtesy of “Sight Beyond Sight”, the must read published by global macro think tank Rareview Macro LLC. Below is the opening extract from 10 June edition.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Firstly, please note this morning’s Model Portfolio Update: Crude Oil, XLU/SPY, IYR/SPY, FXI: As per yesterday’s edition of Sight Beyond Sight, we added to existing long positions in Crude Oil, XLU/SPY and IYR/SPY. The update was broadcast in real time via @RareviewMacro.

Now, on to the day’s primary talking points..

The confidence level in the professional community remains low. The attack on the Dollar-Yen (USD/JPY), which had its largest one-day drop since August 2013, was just another casualty of the search and destroy mission underway in overall asset markets. The fact is that there is no model–valuation, technical, or otherwise–that can handicap the speed and the degree of the backup in global yields. The overriding question remains: “When will global yields stop going up, and when can the rest of fixed income decouple from German Bund leadership?”

Risk-Adjusted Return Monitor Summary & Views Continue reading →

ETF News

China ETFs Seeming More Like The Year Of The Bear

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MarketMuse update courtesy of ETFTrends’ Todd Shriber looking at China related ETFs. 

In the Chinese zodiac, 2015 is the year of the goat, but a popular exchange traded fund tracking China’s onshore equities is getting bearish treatment.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S-listed A-shares ETF, had 6.3% of its shares outstanding sold short as of Feb. 23, reports Belinda Cao forBloomberg.

ASHR surged 51.3% last year, making it one of 2014’s best-performing non-leveraged ETFs. That performance was better than quadruple the showing by the iShares China Large-Cap ETF (NYSEArca: FXI), the largest U.S.-listed China ETF. However, the 2014 A-shares rally has those stocks looking richly valued relative to their Hong Kong-listed counterparts, encouraging traders to up bearish bets on ASHR.

“The number of shares borrowed and sold short to profit from a decline in Deutsche Bank’s A-share ETF was 1.8 million on Feb. 23. That’s close to the record of 2.4 million, or 8.2 percent of total shares outstanding, reached Feb. 13,” Bloomberg reports, citing Markit data.

However, another catalyst could be encouraging the increased bearish bets on ASHR. On Jan. 21, Deutsche Asset & Wealth Management (DAWM) was forced to limit creations of new shares in ASHR because increased demand for the ETF was forcing the fund o bump up against their respective Renminbi Qualified Foreign Institutional Investor (RQFII), which allows the funds to purchase A-shares equities. 

Creation limits often lead to ETFs, particularly those with exposure to markets that are closed during the U.S. trading day, trading at premiums to net asset value. Professional traders then look to profit from the gap between the ETF’s market price and lower NAV by shorting the ETF. Since the start of 2015, ASHR has traded at a premium to its NAV in 26 days, according to DAWM data.

Although the most recently announced creation limit for ASHR has not yet been lifted, it should be noted the ETF was affected by the same scenario twice in 2014 and DAWM was quick to get ASHR’s RQFII limit increased.

With ASHR’s 2014 surge, some money managers now prefer H-shares to A-shares, but that means they are also missing out on a notable rally in A-shares small-caps.

The Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS), which was subject to a second creation limit last November, is up 12.1% this year. ASHS tracks the CSI 500 Index of Shanghai- and Shenzhen-listed small-caps.

The Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT), the younger of the two A-shares small-cap ETFs, has surged 23.7% year-to-date, making it 2015’s top-performing non-leveraged ETF. CNXT, which is heavily allocated to mid-caps, tracks the SME-ChiNext 100 (SZ399611), which provides exposure to the 100 most liquid mid- and small-cap stocks that trade on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange (SZSE).

 

ETF News, Global Macro Strategy

US Equities: Lower Is More Likely Than Higher: A RareView Global Macro View Point

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Below is excerpt from opening lines of today’s edition of “Sight Beyond Sight”, the macro-strategy commentary courtesy of Stamford, CT-based think tank Rareview Macro LLC. Our thanks to firm principal Neil Azous for the following observations.

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

Model Portfolio Update:   Significantly Reduced Equity Net Long Exposure

Our inspiration level today is almost as low as the price of gold – that is, close to touching a low for the year.

We are struggling to find a meaningful macro catalyst or new top-down theme. None of the specific ideas we have analyzed recently are an “A Trade” and we will not deploy them ourselves, or ask you to either. The risk-reward in the short-term in many consensus themes are up 1 and down 2, not the profile of up 3 and down 1 that in the past we have always looked for.

In fact, we are finding that the psychology that has driven us all year is dissipating and for the first time we are more concerned about giving back performance in the model portfolio than generating further profits.

In the absence of a new opportunity, and following a period of healthy outperformance, a dilemma has arisen for us – markets/positions by nature mean revert. Now everyone has their own metric they watch for,  and their own threshold for the mean reversion in their portfolio to start with. But let us just say that ours has been breached and it has served us well in the past to pay attention to that.

Now that may not be the case for many of you, and if we were in your position there is little question we would be pursuing the same ideas/themes in order to catch up with our benchmark. For today, we have little to offer you. However, like the Homebuilder seasonality and beta observation made yesterday (reminder BZH reported this morning and is in small cap basket we presented), we will continue to highlight ideas as and when they arise.

So in that spirit, we significantly reduced our net long equity exposure. Continue reading →

Global Macro Strategy

Macro-Strategy Synopsis: China is the Story, Not Crimea

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MarketsMuse Editor Note: For those with a “macro mindset”, i.e. investment strategy with focus on global economic events and related opportunistic and/or risk reduction themes, a.m. note from Rareview Macro’s Neil Azous in the “Sight Beyond Sight” note  struck a chord, if only because Azous seems to be continuously ahead of the curve when it comes to focusing on what only becomes clear to others after the opportunity becomes a fait accompli.

“…We begin today asking two hard questions.

1.  How real is the China stimulus conversation and does the Street need to temper its short-term views on local Equities?

 

2.  Will Crude Oil and Gold begin to challenge the Commodity length?

 

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

What this means is that no one was prepared to start 2014 with a much weaker profile in China relative to outsized gains in Commodities.

 

So the question now becomes: What if that profile started to reverse now and have the signals of that in the market already been sent?…”…

Another critical insight: Continue reading →

ETF News

China ETFs: A Chinese Menu of Share Class Descriptions

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Courtesy of Dennis Hudacheck

Investing in China is tricky. There are now more than 20 China-focused ETFs to choose from, ranging from size and style funds to sector-specific funds. As if sifting through expense ratios, liquidity and holdings isn’t enough, China investors have another big, fundamental factor to consider: Chinese share classes.

Foreign investment in China is still restricted: A U.S. investor cannot simply open a brokerage account and trade locally listed Chinese shares. As a result, there are multiple shares classes of Chinese companies floating around on various exchanges, allowing investors different ways to access this complex market.

Depending on the underlying index that an ETF tracks, some funds are eligible to hold only a certain type of shares. This matters because the different share classes an ETF is eligible, or ineligible, to hold can significantly impact the fund’s performance, and ultimately determine the type of Chinese companies in the portfolio.

Chinese share classes, especially as they relate to ETFs, are often misunderstood—or worse, ignored altogether. We at IndexUniverse think investors deserve better, so we prepared this document to provide insight and guidance on the topic to help investors make an informed decision on choosing the right China ETF. Continue reading →

ETF News

ETF Fund Flow: Trumping Mutual Funds

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According to technology and trading firm ConvergEx Group, during the first 6 weeks of 2012, more than $8 billion has flowed in to U.S. Equity ETFs, while nearly $8 billion has “flown out” of U.S. equity mutual funds.

“Some of the commentary surrounding these products has made them sound like the hoof beats which precede the Four Horsemen of the Apocalypse,”  said Nicholas Colas, ConvergEx’s Chief Market Strategiest, alluding to various critiques of ETFs that have emerged over the past 18 months, notably Kauffmann Foundation reports that blamed ETFs for a dead U.S. initial public offering market, and argued huge short interest in some funds could pose systemic risk.

“If you want to understand how investment capital flows play into the year-to-date rally for risk assets, the world of exchange-traded funds is essentially your ‘One Stop Shop,’” Colas said in the note, stressing that whatever negative comments are being made about ETFs, they are a great way to gauge overall sentiment in financial markets.

“But for 2012, you can just as accurately call them the most visible source of capital to help U.S. stocks and other risk assets higher,” Colas wrote.

Most Popular Funds

As far as the individual funds that have really “Killed it” in year-to-date asset gathering this year-to-date, Colas said the ETFs that have pulled in over $1 billion include:

  • iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG)
  • iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM)
  • iShares Russell 2000 Fund (NYSEArca:IWM)
  • iShares $ Investment Grade Corporate Bond Fund (NYSEArca: LQD)
  • Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO)
  • Powershares QQQ (NasdaqGM QQQ)
  • SPDR Barclays High Yield Bond ETF (NYSEArca: JNK)
  • SPDR Gold Trust (NYSEArca: GLD)

Apart from the strong push into U.S. equities, Colas said emerging markets and precious metals are coming back into favor, with inflows of $9.1 billion and $2 billion, respectively.

”We’ve noticed a trend now for at least a year where investors use country-specific funds in lieu of regional products,” Colas said, singling out a number of those funds that have gathered more than $100 million dollars in new investments since the start of the year.

Among those are:

  • iShares FTSE China 25 Index Fund (NYSEArca: FXI)
  • iShares MSCI China Index Fund (NYSEArca: MCHI)
  • iShares MSCI Germany Index Fund (NYSEArca: EWG)
  • Market Vectors Russia ETF (NYSEArca: RSX)
  • iShares MSCI Chile Index Fund (NYSEArcaECH).

“I have no doubt that mutual fund flows will eventually turn positive, and we’ll have to keep an eye on this trend when it develops,” Colas said.

“But for now, exchange traded funds look to be the horse pulling the market’s proverbial cart.”