Monetary Policy World Tour

Monetary Policy World Tour

Key Points:The Fed is preparing the U.S. market for an interest rate increase; odds favor one increase by the end of the year—specifically, the December meeting.Draghi and the ECB didn’t deliver on extending their asset purchase program but will if they have to.The BOJ “stands ready to use every possible policy tool” if necessary to achieve their policy objectives—especially key as they shift their strategy.Alpha can be found in any corner of the globe, but before capital can be put to work, the fundamentals must be taken into consideration. Nowadays, one of the biggest drivers of returns is central banks. Accordingly, below is what you need to know for each major central bank, from where they stand to what expectations are being priced in, as well as the effectiveness of their current policy as measured by economic activity and inflation.The Federal Reserve – USAAs expected, The Federal Reserve left interest rates unchanged in their September meeting. Fed Chair Yellen did, however, hint strongly at one hike by the end of the year, but slowness in numerous indicators dashed those plans for the September period. Prior to the announcement, rate hike odds were at 18%. For the next meeting, November 2nd, the market has rate hike odds at 7.2%. For the last meeting of the year, December 14th, the market is giving a significant edge to a hike. There is a 64.3% chance the benchmark rate is upped to 50-75 bps, 30.8% chance of being unchanged, and a very slim chance of 4.8% to the 75-100 bps range.Business fixed investment, inflation, and energy prices have kept a cap on inflation...
Edge in Selling Options Part 2: The Put-Write

Edge in Selling Options Part 2: The Put-Write

 Summary:Selling puts is normally characterized as dangerous; however, from 1986-2015, the strategy had the best risk-reward profile out of multiple strategies tested, as measured by standard deviation divided by total return.Modern managers leverage the put-write to benefit in multiple market scenarios: bullish, flat and even moderately bearish price moves.Short puts have risk down to zero, but the put-write strategy actually had one of the lowest max drawdowns during the period tested.$100 invested in the CBOE S&P 500 Put-Write Index strategy in 1986 would be worth just about $1,700 today, clocking in at 10.1% annual returns.A CBOE study recently concluded that despite the perceived risk of shorting puts, the strategy has performed incredibly well, even during the 2008 crash. Specifically, the study tested selling at the money puts on the SPX one month out and investing the secured cash in three month treasury bills. The only other strategy that beat the put-write was the buy-write (BXMD – long the S&P 500 index and each month shorting a 30 delta index call option). At a glance, the BXMD’s 10.7% annualized returns during the same period seems better, but when risk is taken into consideration, it’s not.Risk RewardTrades are not risk free. Every investment has risk to it. Standard deviation quantifies said risk. According to Morningstar, “if for example a fund or strategy had a mean annual return of 10% and a standard deviation of 2%, you would expect the return to be between 8% and 12% about 68% of the time, and between 6% and 14% about 95% of the time.” Risk is one side of the equation. On the other...
The Virtual Reality Revolution is Just Starting, Are Your Stocks Participating?

The Virtual Reality Revolution is Just Starting, Are Your Stocks Participating?

 Summary:Facebook expects virtual reality to be the next big computing platform.Applications are not only limited to video games; sectors from healthcare to real estate could bedisrupted.Early indicators of demand seem to be strong for both virtual and augmented reality (hardware and software).Startups and public companies are in a race to figure out what will be a mixed reality…hoping to grab a slice of the $80+ billion virtual and augmented reality market by 2025…At least according to Goldman Sachs estimates.Expectations naturally differ across the street, but the current level of capital in the sector is undeniable. TechCrunch recently reported that virtual and augmented reality (VR/AR) investments have clocked in at over $1.1 billion in 2016 thus far. The future of this sector also looks hot, as HTC recently announced that they and a team of 28 venture capital funds have created a coalition of capital to be invested in VR & AR. These funds will bring over $10 billion into the industry over the next few years. This is not a brand new trend, however. VR and AR have been gaining traction in the public and private investment world for some time now, as displayed below. While VR is outpacing AR search wise, according to Google, don’t assume that digital information overlaid in our physical world will not be important.On the augmented reality side, these applications are a lot closer to home than you might think. They are actually in your smart phone already. For example, Snapchat just recently updated its app with 3D stickers that can be attached to objects in motion…a natural follow-up to rainbows flowing out of...
What’s Behind Alphabet’s X: The Moonshot Factory

What’s Behind Alphabet’s X: The Moonshot Factory

Summary:Alphabet X’s portfolio of semisecret projects hit on many key future investment themes.A number of X’s projects involve completely autonomous services, from cars to delivery drones.Disruptive high tech startups have been getting bought up by firms like Alphabet.Alphabet’s moonshot factory, X, is trying to solve huge problems with breakthrough technologies and seemingly radical solutions to make the world a better place. While investors can obviously participate by owning Alphabet, the projects they are working on could be forward looking investment ideas as well.X’s ambitious semisecret projects include a self-driving car, Wi-Fi for the world, a more efficient wind turbine, and automated aircraft, to name a few. What we know is limited with respect to their other projects, but these industries are ripe for disruption. The first mover with sweeping innovation will likely gain traction and become the leader in its respective space. Below are some of X’s projects that might become game changers.Project WingDrones are not just the newest toy for cameramen and aviation fans. X plans on delivering everything from consumer goods to emergency medical supplies via this technology, unmanned. Completely automated delivery of goods is expected to be a billion dollar market in the near future, despite the first legal drone delivery in the U.S. having been done just one year ago. The company was surprisingly not X, Amazon, or a large U.S. multinational firm.  Flirtey, an Australian startup, was actually the first company to get the green light from the Federal Aviation Administration (FAA). Flirtey’s first legal drone mission delivered medical supplies to a health care clinic in rural Virginia, a historical moment for the drone...
Japan’s J Curve

Japan’s J Curve

Summary:Japan’s trade balance and current account are on the upswing, making material strides on the J Curve.One of the largest stakeholders of Japanese stocks has quietly become the Bank of Japan.Monetary policy leaders from the BOJ will be meeting June 15th and 16th to discuss their next move.Japan’s most recent affair with quantitative easing began in October of 2010 following poor economic and inflation growth after the great recession. Since then, Japan’s headline stock index, the Nikkei 225, has rallied nearly 70%; however, Japan’s quantitative easing program has far outpaced stock market growth. Specifically, The Bank of Japan’s bond buying program currently stands at 80 trillion yen per year, 2.28 times the original amount initially suggested in late 2010 of 35 trillion yen.While stocks have responded to the Bank of Japan (BOJ), other sectors of the economy have taken some time to recover, specifically trade. According to some economic trade theory, this should be expected.Economists define a J Curve as the upswing in a country’s current account after a successful devaluation of the local currency. The presumption is that immediately after the devaluation event, imports become more expensive for the local economy. Also in the short term, trade contracts remain little changed. These short term events lead to a slight worsening of the current account balance. This is the trough of the “J” in the below chart, location “Y”.In the long run, the current account will start to rise above previous levels, higher than both location “X” and “Y” on the chart above. The current account rallies due to better international pricing—driven by the more competitive domestic currency. Over...
Buybacks Boost Silicon Valley

Buybacks Boost Silicon Valley

Summary:2016 dividend and buyback expenditure is expected to grow faster than “growth” related expenditures.Icahn: Be aware of the current “earnings mirage”.Public firms are focusing more on executing more conservative cash strategies—a pro and a con for equity investors.The Bay Area knows its way around an expansion cycle. Few have experienced equity volatility like Silicon Valley, for both public and private entities. Low interest rates and a general appetite for risk has seemingly pushed tech multiples to the moon, but this underlying trend has bolstered The Valley more than many give it credit.Corporate America has been pushing cash back to shareholders for some time now. The trend has been to increase dividend yields and engineer higher earnings per share with buybacks. While many companies have been doing this since their inception, a number of firms have just jumped on this trend. Boards attract investors with these measures, which is especially important in a near zero interest rate environment with seemingly slow economic growth.Executing a shareholder friendly policy of returning a material amount of earnings back to owners can be good for the short term, but this policy might not be best in the long run.Innovation is the trade off here.Goldman expects “growth” related spending—which includes capex, mergers, acquisitions, and research and development expenses—to grow 3% this year. On the other end of the risk spectrum, buybacks and dividends are expected to grow 7% vs. 2015 levels. This underscores the thesis that the majority of U.S. public firms are focusing more on executing more conservative cash strategies vs. growing their businesses…with the marginal dollar going back to shareholders.In a recent note,...