Buying cold, selling heat...

We are in a good season, at least in the northern Hemisphere, heat, holidays, who can have them, getting tanned... forgetting winter, snow, central heating..., high gas or electricity bills... or, for some people, heating oil invoices...

That is why is it a good moment to pay some attention to one Spread that may get some advantage of that...

One known strategy for that is buying a futures spread on Heating Oil. The idea is that, in winter, mainly if a very cold one is expected, there are often some bottlenecks in this product that catapults the price of HO for December a lot, but keeps the futures of HO for next months at lower prices..

For example, the behaviour last year, 2013, HOZ Dec13 - HOM Jun14 was this:

 

Basically the difference HOZ13 - HOM14 was around 0.03 in summer and went up to 0.16 at end of October.

The strong point of this spread is that it is very difficult under 0 in this season and until end of novembre, when it is clear whether we face a cold winter or not. So, buying the spread when both futures are very close, in summer, we have good chances of getting a good benefit by mid October.

Basically every cent in this spread is worth 420$, so, if we can get 10 cents from now to mid October, well, not bad. Of course, don't forget some stop on the spread, maybe at -0.02 or so in case of a Black Swan..

In my case, I have just bought the spread today,  bought Dec at 2.8750  sold  June at 2.8484 $, that is, 0.0266 Difference.., I selling the spread at +0.10 at least.., lets see in October or so...

As usual, this is not a recommendation, just explaining my personal trading...

Good summer..

More on Spreads

Following previous post on spreads, we got some requests to do another post about spreads for dummies,  although there are plenty of resources in internet explaining that.

In short terms, a spread is a "stock" created by yourself (or your broker) using the difference in price of other 2 stocks (actually, they can be more than 2 and by stocks I mean shares, futures, options, etc..., but to keep it simple, lets say just 2).

To avoid confusion, just consider futures of different products or expiration date as different "stocks", so, in the former post, we take 2 products, NATURAL GAS FEB 2014 and other, NATURAL GAS MAR 2014, but we may consider any combination of 2 products, i. e.,  1 share of Apple vs 1 share of Google,  1 contract Texas oil vs 1 contract Brent oil or even using multiplicators, 1 share Google vs 20 shares Microsoft, or 1 ounce gold vs 50 ounce silver, 1 contract wheat vs 1 contract corn, etc...

In our case, it is called calendar spread because it is the same product or"underlying asset", Natural Gas, at different expiration dates, Feb and Mar 2014. As we point out, what is traded is the "difference" of price, thus, a spread is always Price A - Price B, and we earn or loose that difference. 

Warning.., applying some 5th degree maths, if you buy that spread, you buy the spread A and sell B, that is +(A - B) = +A and -B, buy A and sell B, but if you sell the spread, then -(A - B) = -A + B, that is, you sell A and buy B!!!! In our trading, we sell NG Feb 2014 and we buy NG Mar 2014.

One side effect of that is that, most brokers compensate the needed margin required in futures or option trading in case of trading same underlying asset, because you combine a long and a short position (1 buy and 1 sell). For example, to trade a single long/short position of Natural Gas my broker requires to deposit a little more than 2000$ of margin, however, to trade the spread Feb - Mar, is one fraction of that, based in the difference of the spread, in this case, around 200$ per lot (1 Feb -  1 Mar contract).  More explanation about futures contracts in Wikipedia. Of course, if spreads are based on different underlying assets, it does not apply, although some brokers may have "predefined" spreads, such as crack or crush spreads where some margin can be saved. This does not apply to cash operations with shares, ETF, etc.., just to futures, options or CFDs, and it may depend also on the Broker.

The goal of using (or "creating") a spread is to give that "new stock" some properties that make it easier to predict market's behaviour.

In the case of our Natural Gas Spread, the purpose is to obtain a clear down trend in price (in the difference), and so, try to earn some money in that difference, this is the behaviour of this difference in many years (from previous post):

 

Precisely, this week, the behaviour of a single Natural Gas Feb contract has been:

Which is a movement of more than 500 points (using 3 decimal numbers), from 3.820 to  3.485 and, as contract futures have a big multiplier, 0.001 = $10.00, it had more than 5000$ of volatility.., now, lets see the spread's behaviour: 

 A pick of +0.032 to a minimum of -0.006, that is, 40 basic points, 400$ per lot of movement. Clearly a more relaxed week than trading just 1 contract.

That means that, in this case, we add a clear trend, with historical data showing that behaviour to less volatility and margin requirements. I think it is worth to pay a little more commission for all these benefits. In our case, we opened the position at +0.010 and the week ended at +0.002, still some little benefit, but our expectations is it to go down to -0.020 at least. Moreover, having lower margin requirements make it easier to open several lots.

Another operation recently closed, but with an eye on that to be repeated is the spread WHEAT Jul 2014/Dec 2014, the idea would be to sell the spread when difference is around -12 or -13 and close the position around -20 or -22.

 Of course, we must always use some stops to preserve our money from mistakes, or sudden market movements that may drain all our money.., in this case, a narrow stop would be at -10, and maybe, at -5 for braver people, or people with deeper wallets...

For the initial spread with Natural Gas, my planned stop is around +0.045 where it had a double top in daily chart in July and Sept.., a little too far, I recognize, but I think it is quite unlikely to happen.

Well, maybe this post is not so much "for totally dummies", (I prefer how they say it in French, pour les nulls), but I expect is clear enough and, of course, this is not a recommendation of trading, just some information about my trading activity with some longer and boring explanations..., don't trade anything just based on this and, of course, we decline any responsibility on losses (and earnings) because of it.

Trading Gas Futures...

Just a quick post.

I have just opened a position selling the spread NATURAL GAS FEB 2014 -
NATURAL GAS MAR 2014. The different in price has been +0.010 and I expect the different will go down to -0.030 before mid January 2014. Thus, around a benefit about 450$ per contract being conservative, without waiting to the limit.

Let's see..., here some graphs of this trading in different years, from Rankia.com :

Of course, this is not a recommendation of trading, just a log of some of my trading activity. Use this information at your own risk.

The foreseen future of your pension

Just a quick warning, again, about the need for financial education and preparing our own future.

Of course some people still will claim that the state/government will provide.., others pray to other gods..

But even if some will start their own pension fund savings, that does not keep you save from state's greed, just remember what Argentina did not long ago, in 2008:

Today, the government of Argentina will announce the annulment of the country’s private pension system introduced in 1994. The savings funds of 12 million workers will be nationalised. With this move, the government is taking over assets worth 13% of Argentina’s GDP, significantly increasing the state’s role in the economy. The private pension fund industry, which employs 10,000 people, will cease to exist as their clients are forced back into the state PAYGO system.

Cacerolada against pension theft in Argentina

Basically they stole workers pension savings to reduce deficit, to keep on wasting money.

But you might say these things only happen in countries like Argentina, with little guaranties and long history of dictatorships and government theft..

Well, maybe that is not that clear, what about if the same happens in an EU (European Union country). Yes, just yesterday that was confirmed to happen in Poland, stealing workers private pension funds to reduce public deficit.., to continue wasting money...

Poland said on Wednesday it will transfer to the state many of the assets held by private pension funds, slashing public debt but putting in doubt the future of the multi-billion-euro funds, many of them foreign-owned.

Of course, Polish government does not call it theft or even nationalization, according to Nomura experts:

The reform is "a decimation of the ...(private pension fund) system to open up fiscal space for an easier life now for the government," said Peter Attard Montalto of Nomura. "The government has an odd definition of private property given it claims this is not nationalisation."

But, as a matter of fact, it seems in the EU, Cyprus banking security, Polish pensions, Spanish unemployment....  we are not that far from Argentina. So, be smart, think about your future. Be very aware of pension funds, maybe some minor fiscal benefit now does not compensate future legal changes (state thefts), and it is worth thinking about funds in countries like Switzerland...

May the luck be with all of us...

The need for financial education

One of the driving topics in this blog is about encouraging self financial education, to learn, if not how to manage our savings like Buffet, at least, not to be cheated by financial industry (banks, insurance companies, funds, governments..,), at least not most of the times. You cannot avoid it always since they work 24h per day on that with most skilled people in the field.., but at least let's try.

So, last weeks in Moneybox, a program of BBC Radio 4 they talked about something very related to this, if not the same thing, how we pay for the City, that is, how we all pay when we try to save, either by investing in a managed fund, our pension fund or .....    and if this is really worth the money.

There were 3 programs, first related to investing funds, hedge funds, etc.., second about pension funds and third about derivatives and high frequency trading.

I would like to encourage to anyone interested in his/her own money and in learning how really this financial industry work, to listen carefully to this 3 mp3 audios, it will teach you more about this than many other sources.

Just to comment a little about them, first program pointed out that when you send you money to be invested in one of these great hedge funds, it goes from your pocket (or bank account), to the real bought share, commodity, etc.., through 15 o 16 middlemen!!!!, that is, a full soccer team, including some reserves.

One of the best sentences in this audio is that the way to earn really money with an hedge fund is by owning/managing one, because of the fees.. Most of them are managed with the mediocrity principle and cannot beat most passive funds that just follow major indexes (SP500, NASDAQ, etc..).

The second audio is related to pension funds, basically how low return they provide, and how difficult is to get information about your own pension fund, portfolio, fees, real return, and the high fees that reduce the total return.

One funny thing is that fund managers often get a fee on the total amount of managed money, and normally a pension fund gets more and more money in every year.., so they get more commissions on that money, no matter the profit ...

The film is actually about an internet startup, but maybe not that different

So, grosso modo, if an average person puts money in his pension fund during 25 years, if the fund takes 1% fee on the capital, it has taken 25% of that person's money in the fund in these 25 years???

Last audio is about derivatives and high frequency trading.

The derivatives part was about SWAP positions sold to people with mortgages. They were sold to people like an insurance against rises of interest rates but, instead, they really are a bet that bets that interest rates will go up, and, if that happens, you earn a lot of money, the different you would pay more in your mortgage.

But, unlike an insurance, these SWAPs have a big drawback, if interest rates go down, the SWAP owner, the person with a mortgage PAYS that money!!! It is really a futures' contract on interest rates...

And, of course, these SWAPs were sold when interest rates were at peak, and they have only go down since then...

Rest of audio is about blaming on derivatives.., and I don't totally agree on, but I recognize the big danger of inadequate leverage ratio, and about High Frequency Trading, funny to know, but not normally related to one's personal money.

In conclusion, highly recommendable podcasts, specially first and second, to convince yourself that you need financial education or, at least, to be really carefully with your money.


References:

Moneybox BBC

Direct url to the podcasts:

http://downloads.bbc.co.uk/podcasts/radio4/moneybox/moneybox_20130803-1230b.mp3
http://downloads.bbc.co.uk/podcasts/radio4/moneybox/moneybox_20130810-1230a.mp3

http://downloads.bbc.co.uk/podcasts/radio4/moneybox/moneybox_20130817-1230a.mp3

Value Investing traps

In this post I would like to introduce you one of the best Fund managers in the world, and a couple of interesting lessons we can learn from them.

Bestinver is one of the best asset managers in the world, as recognized by many experts and reports, like Morningstar, for example the return of two of their funds in last 10 years has been:

 

and, Spanish/Portugal stocks:

According to themselves, the three basic cornerstones of their management are:
   Investment philosophy based on "Value Investing".    Fully independent management.    Focus on returns, not AuM.

So, this is the first lesson to learn. Value Investing, good analysis of every company, hard work and good managers pay off. Its methods are similar to the analysis we made of Karelia, but, of course, more precise, during months and including many more variables..., and made by smarter people than me.

There are very good asset managers over there, and not all of them require exaggerated amounts of money or are inaccessible to the average small/medium investor. And you can see Bestinver among the best, along with Carmignac, Templeton, etc... but, if you are living and working in Spain, pay attention to Bestinver pension funds, to save taxes while getting good profit.

 García Paramés

But in 2nd quarter letter to investors, García Paramés, CEO of Bestinver, commented the biggest lost in its Iberian portfolio, that was the company Pescanova. This was one of greatest fishing companies in the world, pioneer in fish treatement, washing, preparing and freezing fish directly in big factory ships in the coasts of Spain, South Africa, America, etc.., and, until now, one of the leaders in fish farming.

It happened that, according to balance data, deep analysis and, at that time, stock price, it looked like a good investment to Bestinver analysts, and so the bought some shares, around 1.5% of Iberian stock, Bestinver Bolsa (companies in Spain and Portugal).

Basically Pescanova went bankrupt last quarter, debt was too big and it is difficult now for companies to get credit, governments are eating it all, for our good..., so they could not continue and the company filed for bankruptcy. Basically Bestinver lost that investment, 1.5% of the fund completely... (well they may get something back after some years in court.., but they are realistic and they don't count on that).

And how did it come to great analysts as Bestinver's? Well,  it happened that numbers were not bad, but they were false!!!!, balance was false, there were simulated transactions, hidden debt, etc... so they had a good analysis with good results, but based on fake data!!! 

Of course former Pescanova managers, and its CEO, Manuel Fernández de Sousa-Faro, are now waiting for a trial and they may face prison, but the stock value has dropped, and has no practical value to a fund because trading is forbidden for now:

 Pescanova stock

Here you can read the sequence of news about this scandal.

Still, I must say, the fund, Bestinver Bolsa, is still profitable increasing its value 3.4% first half of this year.

So, here we have another lesson. Even best analysts, performing a good analysis and working on that plenty of ours per day can loose 100% of its investment in one stock. If so, what can a small investor do? What if the public data we used in the analysis of Karelia is not accurate enough.. (not to say false). We can not really know. And in most if cases, even if managers go to jail we don't care, that won't give our money back...

Some will recommend you to keep diversification in your investments, cover your positions with options, or trade indexes, ETF, etc.., already diversified by themselves but, if still you plan to invest long in one company, study it and, as a precaution, look at its price movement, no company went bankrupt if its price was in primary uptrend.



Disclaimer: Stocks, funds or strategies commented in this blog are just for informative and example use. They are not recommendations to buy or sell.

Economic bubbles

According to André Kostolany, stock markets are like a man walking with his dog. They both follow the same path, but, while the man is walking slowly, his dog is jumping around back and forth. Sometimes man is ahead; he will wait for the dog and in other occasions when the dog is ahead and the dog will wait. The man represents the economy, and the dog stock markets.

https://www.youtube.com/watch?v=GomcMKBIjMA (In German though).

Question is why this happens. How come that wisest experts in biggest investment banks do not agree them all if stocks will go up or down by just studying numbers.., even most often, when most agree, they are wrong..

In a previous post we showed an example of investment based in company public/published data, as, normally, any fundamental investor would do, but, what if those data are not totally true, or if there is most updated information, internal problems, new legal regulations, etc..., that is not known yet...

All these uncertainties may be reasons for the dog to go forth and back, but, as humans, there is an even most important reason human psychology. And this, actually, has not changed in last 8000 years...

In stock market bubbles, human nature comes in and mucks up elegant economic theories.

http://www.psychologytoday.com/blog/the-decision-tree/201107/psychology-not-economics-is-behind-market-bubbles

So, it is important to be aware when a bubble ongoing, to avoid get trapped, and, if you are smart enough, to make money out of it.

Stock market bubbles are as old as stock markets. Probably there were bubbles in ancient Egypt based on wheat price, or on real state in Rome, but one of the first documented ones was the Tulip mania, where prices of a single tulip bulb was higher than the price of a mansion in Holland.

Some years later, we can find the South Sea Bubble, where South Sea Company shares went up next to £ 1000, to drop under £ 70 in few weeks.

Even people as smart as Isaac Newton lost lot of money in this bubble..

We could ennumerate many others, but just as example, lets mention a just a few more, the pre 1929 stocks bubble:

The known dot com bubble, year 2000..

The following real state building, pushed but low interest rates and subprime mortgages, to recover from previous bubble...

The post 2008 crisis gold bubble, (many people won't agree on calling this bubble yet, denial phase, see below).

And just a few months ago, Bitcoin bubble, last closing price, Friday July 26th was $94.72, http://bitcoinprices.com

So, have you noticed the pattern, yes, all of them look alike.., just now things happen faster and faster..., and main impulse to bubble is human psychology, here we see the known phases in every bubble...:

In fact, using some common sense and making numbers, bubbles can be avoided, even they can be used to get some profit out of them but, be aware, it is not as simple as it seems, people as smart as Newton were caught by crowd psychology, and it is hard to listen to your neighbour saying he is making money in (dot com, gold, real state, tulips, etc..) and you are not...

Which is next, shale gas,  3D printing, self driven cars, China real state, student loans in USA, art, wood.., don't get trapped, if something had a bubble before, history always repeats.

Contrarian Investing in practice...

Post inspired in a comment of user magno11 in financial portal www.rankia.com.

In a previous post we mentioned a style of investing called Contrarian Investing.

According to the definition in Wikipedia, Contrarian Investing is “In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.“

In this post, rather than explaining it in detail, we will try to follow a contrarian analysis to find a good investment. You can find plenty of web and book resources about Contrarian Investing.

So, let's try it.

First of all, look at a market that normal investor never would go at this moment, what about South Euro area, Italy, Portugal, Spain, Greece, Cyprus...

At first sight, Cyprus would be the worst one, but we are talking about investment with risk, not gambling... And there is a corralito de facto for Cypriot euros, https://bitcointalk.org/index.php?topic=253670.0 .

So, maybe the next in bad state is Greece, and what do we have in that market?? Well, the overall index has not done bad this year, but it includes all risks, so lets look at some good companies in it, mostly those undervalued...

To not bore you with long analysis, I propose to analyze directly one of the sectors with bad reputation, which normally are those that perform better..., in this case, a tobacco company, Karelia Tobacoo, KARE:ATH.

This company's last closing price was 145.05 €, but, according to some it may be 50% undervalued, that is, it may reach, in 2 – 3 years time, double price.., let's see the data:

This company exports 80% of its production, (15 billion cigarrettes), that means that, in the worst case of Greece exiting the euro, costs will do down (currency devaluation), increasing profits.

In Greece it has 10% marketshare, (3 billion cigarrettes), but it is a leader in Bulgaria, 20% and it is performing an active international expansion.

In 2009 they started launching new products and expanding in duty-free markets. Earns per share rose 16% in last 5 years with 10% increase in sales.

In 2004 it sold 15 billion cigarettes, the same amount as in 2009, however operating profit went up 30%, but transferring increases in taxes and inflation to the final price.

Getting more market share in other countries is a very good signal, because normally tobacco consumers have a lot of fidelity to their brands..

Now let's do the numbers using latest published data, price evolution and other economical facts.

Company Valuation

Analyzing the enterprise value, as market cap + debt – cash, that is 420M – 150M, that is, 120 million euros.

EBIT = 56 M.

Free cash flow = EBIT – capex

EV/EBIT = 4.2 x pret-tax

EV/FCF = 4.3 x pre-tax
ROTE, Return on tangible equity =56/260-60-150+70=46% pre.tax
EBIT margin = 9%
ROIC=56/236=23% pretax


If we compare this numbers with similar companies, for example Imperial Tobacco, it has a ROTE, of 31%, (just 25% including goodwill).


EV/ebit = 11.3 x, that is 3 times Karelia Tobacco.

Analysing the stock price, it shows a clear primary trend up, since 2012.

Moreover, this company has given its employees 1.8 Million € in bonus last december, from 400 to 1400€ extra depending on family charges per employee.., which shows an economically healthy company with motivated employees.


And last but no least, new limits in tobacco advertising is good for small companies, because it reduces the gap between big companies, that can spend huge amounts in TV ads, and small ones.

So, if everything sounds that good, why is the share so cheap..


Risks

Of course, there are risks, but a good analysis of them will be the key to a good contrarian investment. What are those risks?

Well, these days, anything with the word Greece in it is considered as a bad investment. Basically, the media do not use to publish subtle details...

There is also a risk of task increasing on tobacco, but we have seen in the past that this the cost can normally be transferred to the final price, how much before people leave smoking?.

The management team is a family, Karelia family, and normally funds do not like family-managed companies, however, in 2009, when many strategic decisions had to be taken, they did really well.

Another risk is the little free float, just 150.000 shares out of 2.76 million in total.

And, one strange thing, the big amount of 120 million € of cash with 400 million € of market capitalization. Why did they not buy shares back in 2012 with PER was 4???


So, what must happen for the stock to double price??


Triggers


The company looks very good, could it be bought by another (big) one??

Maybe, spending those free 120M in dividends, or buying shares back???

Maybe a big hedge fund does same calculations or reads this post and buys all free float shares???

These things are not likely to happen, but just simple expected growth may produce a very good return.


Finally, here 3 possible growth scenarios in the next 4 years:

1.- Share price 202€, 7% yield in 4 years.
2.- Share price 354€, 24% yield in 4 years.
3.- Share price 489€, 34% yield in 4 years.

All calculations performed by magno11

As a disclosure,  please do not consider all these as a buy/sell recommendation, it is my first approach to Greek markets, and it would require deeper analysis and, even better, some local information about this company in Greece.

This exercise is just an example, how to find jewels dismissed by the media, and so by the crowd.., in countries, sectors or companies that the crowd dismisses.., and there is where money can be made.

How to get rich by following the media.

Article based on Great prophecies of the media, by Francisco Toledo.


Let's talk a little about the information we received about stock markets.

It seems good to have plenty of information, so lets take an initial look at the financial press, and how it can help us to invest in a safe way our little savings...

To begin with, let's look at the some covers of newspapers, starting some years ago on October 22th, 1929, just 2 days before black thursday, the D-Day in 1929 crisis.

It is well known, everybody could become rich just putting a few bucks in Wall Street.., or maybe not.., but experts didn't hesitate giving ONE advice, BUY.

Original image, here you can read the articles!!!

I recommend reading that article, even more now that we know what happened..., also the one at the left, about opening craniums with saw instead of hammer for brain surgery..

Later, in 1979, Business Week magazine published that stock markets were dying. After some years where stocks didn't grow much, with increasing inflation after petrol crisis in 1973. 

Here it is the cover in detail:

 

The thought behind this cover was that stagnation in markets growth lead people's money to monetary funds and federal and municipal bonds, so, forget stocks...

After a couple of years stock markets started a rally that lasted until Dot-com bubble exploded...

 

We could find plenty of similar examples, just need a little googling.. For example, more recently, after first correction in the markets in may 2012 after the crisis, Financial Times repeated title of Business Week, The Death of Equities, do journalists like that sentence that much??

 

Of course, history repeats, now just maybe at higher speed...

And these days, some covers publish Dow Jones at 16000, or even further, nothing can stop us now, yes we can, etc....

So, covers are never wrong, put your money in stocks, Dow goes to 36000!!!!!

Or not?

Don't dismiss this topic as if you think it has nothing to do with you.., where do you think your pension fund is? In most of cases in funds lead by mediocrity principles, following the crowd, that follows the media.

There is even a trend in investing that basically follows the media, and other published data, to do the opposite, contrarian investing.