iShares Gold ETF Slashes Fees, Sees Results
July 30th, 2010 | Posted by Global InvestorsETFs are cheap, but that doesn’t mean they’re not getting cheaper. One gold fund provider is engaging in a good old-fashioned price war to entice gold traders to its side of the camp, and it appears to be working.
On July 1, BlackRock lowered the annual expenses on its gold ETF the iShares Comex Gold Trust ETF (IAU) to 0.25% from 0.40%, writes William Baldwin for Forbes. Market leader in gold ETFs, State Street-managed SPDR Gold Shares ETF (GLD) is maintaining its 0.40% expense ratio.
IAU ended the month of July with a gain of 4 metric tons of gold, to 90 tons. As more people buy the gold ETF, brokerage firms need to create more shares by acquiring more of the physical metal. GLD, on the other hand, lost 19 tons, but still maintains around 1,282 tons. After the splitting its stock and lowering fees, IAU is now experiencing a 50% boost in daily trading volume.
The lower fees only benefit long-term buy-and-hold investors. For the short-term trader, both funds have high liquidity, which provide trades with bid/ask spreads that are often only a penny a share.
ETF Securities offers the ETF ETFS Gold Trust (SGOL), which stores gold in Switzerland as compared to other funds with gold stored in New York, London and Toronto. SGOL has an expense ratio of 0.39%.
Gold hovers around $1,170 an ounce on the Comex, gaining as equities turned lower and the dollar remained weak, report Claudia Assis and April H. Lee for MarketWatch. However, Kitco Metals analyst Jon Nadler believes that the gold traders are reducing holdings of gold and related ETFs as the eurozone situation stabilizes. Leonard Kaplan, president of Prospector Asset Management, comments that gold supply is high and jewelry demand is large absent.
Max Chen contributed to this article.
Disclosure: None
Acme United: Undervalued and Overlooked
July 30th, 2010 | Posted by Global InvestorsAcme United Corp (ACU), a supplier of cutting, measuring and safety products, reported 2nd quarter results this week. ACU is another small undervalued stock in a boring business line that has been overlooked by the market.
The stock was hit hard during the recession, and is slowly starting to regain its 2006-2008 levels.
Sales Analysis
For the 2nd quarter, ACU reported $20.2m in revenues, a 7% increase from the prior year, and the second highest revenue quarter in company history.
Growth was driven by the company’s European segment, as sales increased 64% vs. a 1% increase in the domestic market.
Impressive growth? Sure…
But European sales accounted for only 12% of total revenue last year and didn’t record a profit.
Turning in a profitable year for the European segment could be one key to to the company’s growth going forward, especially if U.S. sales continue to lag.
Adjusted Earnings
Net income jumped 17% from the year ago quarter, but this increase was driven largely by a tax benefit related to a land donation transaction back in Dec 2009.
Adjusting for the lower tax rate, net income dropped 10% for the quarter.
Management
Despite the business struggles, management continues to deliver value to shareholders in other ways.
The company has increased the cash dividend for five straight years, and paid a dividend going back to 1990. The stock currently yields 2%.
The company is also aggressively buying back shares – 241k in the past twelve months (7.1% of outstanding). Another 83,376 shares are still available under the current repurchase program.
Valuation
My original analysis of ACU back in January assigned a value of $17-$19, but the business has not bounced back as quickly as I hoped.
Even with conservative assumptions, the company is still trading at a substantial discount to intrinsic value:
I’m revising my estimate of intrinsic value to $14-$16.
Conclusions
Since U.S. sales make up the vast majority of revenue, ACU’s future outlook is heavily dependent on the domestic economy.
Historically, the 2nd and 3rd quarter are the most profitable for ACU’s business, so the next earnings release will be good barometer for my future decisions with this stock.
Disclosure: Long ACU
Global X Launches ‘Well-Diversified’ Brazil Financials ETF
July 30th, 2010 | Posted by Global InvestorsFresh off the successful launch of their Lithium Fund (LIT), Global X unveiled the newest addition to its lineup yesterday, the Brazil Financials ETF (BRAF). This fund makes 14 ETFs in total for the New York City based issuer which has a heavy focus on international funds including China sector ETFs and a fund tracking equities in Colombia. The fund is also the third a series of Brazilian ETFs from the company, coming after earlier launches in the consumer sector (BRAQ) and a Mid Cap ETF (BRAZ). These funds offer exposure to the dynamic Brazilian economy which is currently a $2 trillion force which is poised to double by 2018 and eventually surpass Britain and France to become the fifth largest economy in the world.
Due to these trends, Brazil makes for an interesting choice for investors seeking exposure to financials in Latin America and emerging markets in general. Although greatly troubled in the past, the country has become an economic powerhouse under the direction of President Luiz Inácio Lula da Silva who oversaw high growth levels and moderating inflation throughout most of his tenure. However, the real catalyst for Brazil’s rise in finance came in 1995 when the government revolutionized its financial system under the Proper Restructuring Program.
The program implemented a set of measures that allowed the Central Bank to enhance the oversight of financial institutions, whereby weak financial institutions were required to either increase their capital, transfer shareholder control, or be acquired by another bank. As result, the strength of the Brazilian financial system was enhanced and Brazilians have much more confidence in the financial system; from 2001-2008, the number of checking and savings accounts in the country both more than doubled with checking accounts now numbering more than 120 million and savings accounts approaching the 75 million mark.
In addition to growing consumer banking, the country has seen a surge in commercial financial activities as well. In fact, loan portfolios in Brazil are approaching $800 billion and currently exceed the next five largest loan portfolios in Latin America combined, suggesting that the country has a reasonably well-developed and diversified financial sector which is poised to become the hub of Latin American financial activities. This is further underscored by a report from Dealogic which showed that 156 Brazilian M&A deals worth $37.8 billion in Q1 2010 took place; nearly double the $19.1 billion over 81 deals posted in Q1 2009. Estimates indicate that M&A activity continues to grow quickly and totals for 2010 will be high.
The new fund tracks the Solactive Brazil Financials Index which is designed to reflect the performance of the financial sector in Brazil. It is comprised of securities of companies which have their main business operations in the financial sector and are domiciled or have their main business operations in Brazil. While all of the fund is exposed to the financial sector, it does a great job in terms of allocating assets to the various sub-sectors of the financial industry. 44% of assets go towards banking firms, 33% to real estate, 16% financials services, and 7% to insurance which ensures that investors get access to the full spectrum of financial activities in Brazil. For individual holdings, Banco Bradesco SA Preferred (BBD) takes the top spot with 10.5% of the fund’s total assets. This is closely trailed by Itau Unibanco Holding SA (ITUB) (10.3%) and Banco Do Brasil which round out the top three holdings. Roughly three-fourths of the exposure is denominated in reals while the rest is in U.S. dollars. The fund holds 25 securities in total and will charge an expense ratio of 0.77%.
Disclosure: No positions at time of writing.
Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.
Keeping Track of the S&P 500 Index Trackers
July 30th, 2010 | Posted by Global InvestorsBy Michael Rawson, CFA
With so much risk in the markets, when we take a passive position in an index to form the core of our portfolio, we want to be sure that the fund company is actually doing what it promises it will do. One way to evaluate how closely a fund sticks to its benchmark is to look at tracking error. In this article, we compare two S&P 500 Index-tracking ETFs with a large sample of index mutual funds to see which products do a better job of tracking the index. Does paying a higher expense ratio result in lower tracking error or better performance? We also discuss different ways to define tracking error. We conclude that the S&P 500 tracking ETFs have performed as promised, with a lower tracking error and better performance than almost all index mutual funds. However, the granddaddy of all index mutual funds can still teach the new kids on the block a thing or two about efficiency.
We analyzed five years of weekly returns for 61 index mutual funds and two ETFs that track the S&P 500. The following table shows just the five mutual funds with the lowest tracking error and both ETFs. Two Vanguard mutual funds had the lowest tracking error, but one is an institutional product with a minimum investment of $5,000,000 while the other has a higher expense ratio, which leads to lower performance.
click to enlarge
The next lowest tracking error product, iShares S&P 500 Index ETF (IVV), has no investment minimum (beyond the price of one share) and only a 0.09% expense ratio. This was the same expense ratio as the other ETF in our survey, SPDR S&P 500 (SPY). That product is structured as a unit investment trust, rather than as a 1940 Act fund, which prevents it from reinvesting dividends back into the fund. The inability to reinvest dividends leads to a cash drag that creates tracking error, particularly in volatile markets. Most mutual funds also have a cash drag due to keeping cash on hand to fund redemptions. For SPY, this leads to a slightly higher tracking error than IVV, but it is still less than half the average fund tracking error. Both ETFs had expense ratios well below the average index fund (which was 0.38%) as well as tracking error much lower than the 0.29% average tracking error. Perhaps most importantly, both ETFs had better performance than the 0.28% average fund yearly loss.
Is Cheaper Better?
With this data, we can address the question of whether the expense ratio matters. For instance, out of the 63 funds (grouping the ETFs with the mutual funds and including institutional funds with high minimum investment requirements), the 10 funds with the lowest expense ratios charge an average expense ratio of just 0.11% and underperformed the benchmark by an average of just 2 basis points per year with a tracking error of 0.22%.
On the other hand, the 10 most expensive funds had an average expense ratio of 0.85%, underperformed the bench by an average of 0.68% and had nearly double the tracking error at 0.41%. Both the return and the tracking error were impacted by the expense ratio and this relationship was statistically significant.
Thus, when it comes to S&P 500 Index funds, cheaper is better. Many analysts claim that the high expense ratio causes a high tracking error and that the expense ratio should somehow be added back to reduce tracking error. This is not true in our analysis, where the expense ratio would reduce a fund’s return but have no direct effect on tracking error.
Tax Efficiency
ETFs are often said to be tax efficient due to the fact that the in-kind creation and redemption process allows an ETF to exchange low-cost basis shares for shares of the ETF, washing away the tax basis. However, this is not the only way to save on taxes.
Vanguard has a lot of experience managing for tax efficiency and is able to achieve economies of scale given the size of their fund. (Vanguard 500 Index Investor (VFINX) has $86 billion in assets). Fans of founder Jack Bogle, Bogleheads as they are known, tend to be buy-and-hold investors, so the fund does not incur the same kind of hot money redemptions that we might see in other funds. Over the past five years, the fund has had a tax-cost ratio of just 0.31%, which compares favorably with the 0.69% for IVV and 0.67% for SPY. This means that investments in these funds held in taxable accounts would have lost that amount of assets each year, thus reducing return. Certainly the flat returns over the past 10 years have helped prevent capital gains, but going forward, VFINX has a larger potential capital gains exposure at 9% versus negative exposure for both of the ETFs. For more on the tax efficiency of Vanguard’s products, take a look at this video featuring Vanguard CIO Gus Sauter.
Tracking Error Defined
Tracking error can be defined in a number of ways. Perhaps the simplest is to look at the amount by which a fund underperformed its benchmark. While this is what investors care about most, it says nothing about the probability distribution of how that fund might perform in the future. After all, we are concerned about risk, so a good definition of tracking error should tell us something about the risk our fund manager is taking.
You have heard the saying, past performance is no guarantee of future results. While that may be true for a manager’s ability to beat an index, it turns out that overall risk is relatively stable and somewhat predictive of future levels of risk. The excess return of a fund is the fund return minus the benchmark return over a unit period of time, such as daily or monthly. The time series of excess returns will include both the positive and negative values from when the fund beats or trails the benchmark, whereas underperformance just looks at negative values. If we define tracking error as the standard deviation of those excess returns, we can now judge the variability of the fund. For example, if the standard deviation of a fund is 1%, then we can assume that the fund should be within 1% of the benchmark 68% of the time, and should lag the benchmark by more than 2% only less than 3% of the time.
One criticism of this approach is that it penalizes for either beating or trailing the index, while beating the index seems like the kind of risk we want to have. While that point is valid, it should be noted that in an efficient market, managers would not be able to beat the index without taking risk. While it may pay off in one period, it may not in the next and we should at least be aware if the manager is deviating from his stated objective. While not perfectly symmetrical, stock returns (unlike alternatives like options) can be approximated by a normal distribution so the positive side of the standard deviation looks similar to the negative side.
A slightly more complicated definition of tracking error is the standard error from a regression of fund returns on the benchmark. This will break fund performance into three categories: manager skill (alpha), market risk (beta), and tracking error (standard error). This approach has the added benefit of adjusting for the expense ratio of the fund as a reduction in the alpha and any leverage in the fund through the beta.
Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.
Understanding the S&P 500 VEQTOR Index
July 30th, 2010 | Posted by Global InvestorsIt is unfortunate that there are not more mutual funds or ETF’s that directly enhance long equity positions with option overlays. I have covered the enhanced Sharpe ratios (risk-adjusted returns) that often accompany these strategies. I was surprised to find out that Direxion is going to bring the S&P 500 Dynamic VEQTOR Index to the mainstream retail investor packaged nicely in a simple ETF. As a follow-up to my readers’ requests when I first described the strategy’s performance, I want to take a closer look at just how the index makes systematic calls on implied volatility and how it has achieved such stellar returns.
The S&P 500 Dynamic VEQTOR Index (Volatility EQuity Target Return) represents an investment in the broad equity market with a dynamically rebalanced volatility allocation. The strategy gains its volatility overlay through the use of short-term VIX futures. The premise of the strategy is that the VIX has a correlation with the S&P 500 of about -73%. When the S&P 500 falls sharply, the VIX spikes and then slowly reverts to a long-term mean.
Under the simplest strategy, a fixed allocation to VIX futures will reduce the volatility of the long equity portfolio by providing a positive offset when the equity market corrects. This would increase the risk-adjusted returns of the portfolio by reducing the tails of the portfolio’s return distribution. If the idea is taken one step further, then we can introduce a tactical allocation in volatility wherein the investor can capture the gains from a volatility spike by reducing the allocation to volatility under the assumption that it will eventually revert to the mean.
The S&P 500 VEQTOR Index has the following characteristics:
In order to determine the implied volatility trend, the index uses the following scheme which requires 10 consecutive daily indicators:
With our trends established, we can look at the respective allocations:
*The realized volatility environment is determined using the last 22 trading days.
The last piece of the puzzle is the stop-loss feature. Every day, the five business day performance of the excess return strategy is evaluated. If there is a loss greater or equal to 2%, both equity and volatility allocations are moved to 100% cash position at the close of the following business day. The strategy will allocate back into equity and volatility once the 5-business day loss is less than 2%.
After a long-winded explanation – just how did it do? (Click to enlarge)
Not a bad strategy at all…
I challenge you all to use this as a guideline for starting your own long vol / long equity strategy. I think there is a lot of promise in these types of strategies as tools for individuals and fund managers.
Disclosure: None
Chinese Demand Should Boost These Three Clean Energy ETFs
July 30th, 2010 | Posted by Global InvestorsAround the world, stock markets have been very rocky as of late with investors fearing a return to a recession in many developed countries. This fear has compounded with weak earnings out of many large banks and tempered growth predictions for mainland China to reduce expectations for one of the main drivers of growth in the emerging world. The government has stepped in to cool down the red-hot Chinese economy in order to avoid inflationary pressures but still keep the economy growing at an acceptable rate. This has forced China to end a variety of stimulus programs and forcing banks to cut down on their lending. Chinese banks issued 36 billion yuan less in loans for the month of June and the government has set a target of 7.5 trillion yuan in loans for the year, a 22% decrease from 2009 levels. Due to this sharp cut in available loans, it looks likely that many Chinese sectors will not be able to grow as quickly as they have been in previous quarters as growth looks likely to fall back below the 10% mark for the next quarter.
Despite the slightly lowered prospects for growth in the overall market, the energy sector looks to attract an out-sized percentage of investment going forward. China has now become the world’s largest energy consumer, surpassing the U.S. for the first time since the statistics first began. While ten to twenty years ago this event would have been met with fanfare in China as another symbol of their growing industrial might, Chinese leaders have downplayed the news saying that the report was flawed and inaccurate with one Chinese official saying that “the IEA’s data on China’s energy use is unreliable” . This shows just how far the world has come in terms of attitudes on energy usage in just a few short years, leaving the Chinese scrambling to come up with a variety of new technologies and ideas in order to help reduce the country’s dependence on oil and coal while still allowing the economy to grow unimpeded by energy issues.
In light of this, there are now rumors that the Chinese government is planning to spend roughly 5 trillion yuan ($738 billion) over the next ten years on clean energy programs in order to reduce the country’s dependence on oil and coal for power. By doing this the government hopes to nearly double the amount of energy that comes from non-fossil fuel sources in ten years time, increasing the overall percentage of non-fossil fuel energy from 8% to 15%.“This does seem a very high figure on spending, although it’s not clear how this has been worked out,” said Barbara Hon, an analyst at China Everbright Securities in Hong Kong. “The government is taking the issue of cleaner energy seriously for the reasons of climate change, energy security. It’s already meeting some of its targets for sectors like wind power well ahead of schedule.” The country is already a big player in the alternative energy market, attracting over $11 billion in capital for the sector in the second quarter alone; more than the U.S. and the EU combined. Additionally, the country has invested its own funds in alternative fuels, plowing close to $35 billion into the sector; a 50% increase over the previous year.
Clearly the country needs a lot more energy to sustain its economic growth, especially given the fact that on a per capita basis China still uses about one-fifth as much energy as their counterparts across the Pacific in the U.S. If China is ever able to get all of its citizens up to U.S. living standards it will have to be through clean energy programs since there is not enough oil and coal to support a continually growing Chinese economy that is fast approaching developed market levels in many areas of the country. Due to these trends and the likely massive spending program, the following three ETFs look to be good long-term plays to take advantage of growing Chinese demand for alternative sources of energy.
Arguably the biggest push towards clean energy in China has come through wind power which is quickly growing into the alternative power source of choice for the world’s most populous nation. In fact, China erected more wind turbines in 2009 than any other country and may install a record 18 gigawatts of wind-power capacity in 2010, Bloomberg New Energy Finance estimates show. One way to play this growing trend is with the PowerShares Global Wind Energy Portfolio (PWND) which follows the NASDAQ OMX Clean Edge Global Wind Energy Index. The fund has a heavy weighting to European countries with its top holdings going to European giants Vestas Wind Systems (VWDRY.PK) (11.8%), Iberdrola Energias Renovables SA (IBDRY.PK) (9%), and EDP Renovaveis SA (8.7%). Slightly more than two-thirds of the fund’s assets go towards European firms which could allow China to buy up more wind turbines should the value of the euro continues to fall against the world’s major currencies. Despite these positive trends, the fund has done very poorly in 2010; so far it is down 27.2% this year however it is up 8.7% over the past month suggesting that the wind may finally be blowing in PWND’s direction.
Nuclear power is quickly gaining favor as a source of power in China; of 60 nuclear power plants currently under construction worldwide, one-third are going up in China, said Fatih Birol, chief economist of the International Energy Agency (IEA). One fund that stands to benefit from this push to nuclear power in China is the PowerShares Global Nuclear Portfolio (PKN). This fund tracks the WNA Nuclear Energy Index which is designed to track the overall performance of globally traded companies which are engaged in the nuclear energy industry with representation across reactors, utilities, construction, technology, equipment, service providers and fuels. The fund has a heavy weighting in American and Japanese firms which combine to make up 63.5% of the fund’s total assets and in terms of market capitalization exposure, PKN focuses on large and giant sized companies while only allocating 5% to small and micro caps. PKN has held up better than most energy ETFs in 2010, posting a loss of just 2.2% since the beginning of the year.
For investors not sold on either of the above options, the iShares S&P Global Clean Energy Index Fund (ICLN) makes for an interesting choice as a play on the broad clean energy sector; in total for 2009 China added 37 gigawatts of renewable power capacity last year, greater than any other country. The fund tracks the S&P Global Clean Energy Index, which allocates assets to companies engaged in biofuels, ethanol, geothermal, solar, and wind energy. It offers its second highest allocation to Chinese securities and has a heavy focus on medium sized companies which make up just under 40% of the fund’s total assets. In terms of individual holdings, the Energy Company of Parana takes the top spot with 6.6% while the National Electricity Company of Chile and the Energy Company of Minas Gerais trail closely with just over 6.1% each. The fund charges an expense ratio of 0.48% and like the rest of the sector has seen its shares tumble so far in 2010 posting a loss of 23.7%.
Disclosure: No Positions at time of writing.
Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.
General Dynamics: A Strong Value Investment
July 30th, 2010 | Posted by Global InvestorsGeneral Dynamics Corporation (GD) is the fifth largest defense contractor in the world. It is a conglomerate active in four main business segments: Aerospace, Combat Systems, Marine Systems, and Information Systems & Technology. The company is a conglomeration of varied businesses built up through acquisitions and divestitures. In the 1990s the company started expanding beyond its core businesses of shipbuilding and land combat systems into information technology and passenger jets. The company’s 2009 revenues were $31.98 Billion.
The Aerospace group comprises Gulfstream Aerospace Corporation, Jet Aviation and General Dynamics Aviation Services (GDAS). In 2009 the Aerospace group contributed to 16% of the company’s total revenues with sales of $5.2 billion. This was a decline of about 6 percent from 2008, but expected given the difficult economic environment.
The Combat Systems group is involved in the production and service of land and expeditionary combat systems. The group supplies and supports wheeled and tracked combat vehicles, guns, ammunition & ordnance, reactive armor, mobile bridges, and components for aerospace systems. The group is further made up of 4 business units: Armament & Technical Products, European Land Systems, Land Systems, and Ordnance & Tactical Systems. With sales of $9.6 billion in 2009 (18% over 2008) and operating earnings of $1.3 billion, the Combat Systems group had the highest revenue growth and the highest operating earnings of all the four business groups.
The Marine Systems group is also made up of four business units. The Bath Iron Works (BIW), Electric Boat, National Steel & Shipbuilding Company (NASSCO), and American Overseas Marine (AMSEA). In 2009, the Marine Systems group grew 15% over the previous year to post revenues of $6.4 billion and operating earnings of $642 million.
The Information Systems and Technology (IS&T) group caters to the information technology requirements of US defense, intelligence and homeland security. The IS&T group is the company’s revenue leader with sales of $10.8 billion in 2009 and operating earnings of $1.1 billion.
Current Year Performance
The first six months of 2010 has pretty much been a continuation of General Dynamics’ long record of past performance in terms of profitability and management’s ability to respond to changing business conditions. The company-reported net earnings for the first six months of 2010 are $1.25 billion which is a 3.5% increase over the same period last year. Top-line revenues, however this year are either stagnating or under pressure.
Table 1.
|
First-half Earnings Data as Reported by General Dynamics (Unaudited) ($ millions except earnings per share) |
|||
|
2010 |
2009 |
% Increase or (Decrease) |
|
|
Revenues |
15,854 |
16,364 |
(3.1)% |
|
- Aerospace |
2,740 |
2,870 |
(4.5)% |
|
- Combat Systems |
4,113 |
4,812 |
(14.5)% |
|
- Marine Systems |
3,276 |
3,294 |
(0.5)% |
|
- IS&T |
5,275 |
5,388 |
6.3% |
|
Operating Costs and Expenses |
13,951 |
14,514 |
(3.9)% |
|
Operating Earnings |
1,903 |
1,850 |
2.9% |
|
- Aerospace |
451 |
415 |
8.7% |
|
- Combat Systems |
564 |
579 |
(2.6)% |
|
- Marine Systems |
328 |
331 |
(0.9)% |
|
- IS&T |
602 |
573 |
5.1% |
|
Net Earnings |
1,245 |
1,208 |
3.1% |
|
Earnings per Share (Diluted) |
3.20 |
3.12 |
2.6% |
While revenues this year are under pressure the company reports that it has managed to reduce costs at a faster rate in order to preserve earnings growth. The company has managed to defend operating margins for the most part. The company reports that the Aerospace group increased operating margins from 14.5% in the first half of 2009 to 16.5% in the corresponding period this year. First half operating margins for the Combat Systems group also report an increase from 12% in H1 last year to 13.7% in H1 this year. The operating margins for the Marine Systems and IS&T groups remain unchanged from the same period last year. Both Aerospace and Combat Systems report a drop in revenues this year from the same period in 2009. While Marine Systems is largely unchanged, the IS&T group increased revenues by 6.3%.
Other Things Considered
The United States remains embroiled in conflicts in Iraq and Afghanistan that continue to require the presence of American ground troops. Meanwhile, from a long-term perspective, the US military continues to upgrade its navy, air and ground forces with a mind toward maintaining technological dominance. The unrelenting terrorist-threat perception and the need for continued development of newer systems for the intelligence, homeland security, and law-enforcement communities mean that the demand for products and services from companies like General Dynamics Corporation will remain high into the foreseeable future.
Given the companies long track record of association with and provision of technologies and equipment to, the US government there is little reason to believe that this will be undermined in the medium-term.
To Buy Or Not To Buy?
General Dynamics has a P/E ratio of about 10 for the trailing twelve months and a forward P/E ratio of 9.25 based on management projections
The company has a long history of dividend payouts for over the past 15 years with the 15 year dividend growth rate over 11%
Uninterrupted profits for the past 10 years with continuous profit growth for the past six years (up to year-end 2009). 2003 saw a fall in annual profit
With a book value of 33.75 and current share price of $61.80 the PE ratio x Price to Book Ratio = 18.30 (< 22.5)
The Current Ratio = 1.34 and the Debt-to-Equity Ratio = 30%
Going out on a limb I would estimate the company’s intrinsic value between $95 to $110
Continuing conflicts that involve the US military, and ongoing tensions with Iran and N. Korea mean that demand for hardware and technology from the US military will remain strong.
Given the strong performance record of General Dynamics in terms of dividend payouts, long-term record of profit growth, and satisfactory showing in most value-investing parameters (it fails the Current Ratio test) I would recommend General Dynamics as a good defensive investment and a strong value stock.
Disclosure: I currently own no positions in this company
The Struggles of the ELEMENTS Long-Short Commodities ETF
July 30th, 2010 | Posted by Global InvestorsLaunched in June 2008, the ELEMENTS S&P Commodity Trends Indicator ETN (LSC) was an immediate hit with retail investors, attracting a considerable volume, offering diversification from an equity-heavy portfolio and even using a long-short approach to take advantage of both bullish and bearish trends in commodities. By the end of the 2008, the ETF was already up more than 6%.
Unfortunately, since the end of 2008 the ETF has been steadily losing ground and is now down 44% from its 2008 high water mark. The graphic below, from ETFreplay.com, shows LSC’s performance relative to broadly diversified commodity ETFs, RJI and DJP over the course of the last year. While the graphic alone may make LSC appear to be an attractive short, I think it is important to note that the prospectus has historical data going back to 2001 which shows excellent long-term performance characteristics. (Click to enlarge)
A look under the hood shows that LSC’s trend following approach uses a 7-month exponential moving average (EMA) to evaluate trends in the following 16 commodity futures contracts:
Based on where the commodities are relative to the EMA, the ETF will go long or short, or have a neutral position. The one exception is crude oil, where the ETF is only allowed to be long or flat. The prospectus lays out the rationale for the short restriction on crude oil as follows:
Energy, due to the significant level of its continuous consumption, limited reserves, and oil cartel control is subject to rapid price increases in the event of perceived or actual shortages. For example, although a problem of this magnitude has not occurred historically, if the Index were capable of shorting the energy sector and a catastrophe occurred which caused Light Crude prices to surge dramatically while the energy Sector allocation was set to short, the Index would lose a significant portion of its value on the Light Crude position alone. Because no other sector is subject to the same continuous demand with supply and concentration risk, the energy sector is never positioned short in the Index.
LSC evaluates all futures contracts at the end of each month and makes any new long-short decisions at that time. The current (July) positions of LSC are as follows:
Going forward, I think the “…and More” portion of this blog will begin to place increased emphasis on the commodity space, including ETFs, futures and options on commodities.
Disclosure: Short LSC at time of writing
[sources: ETFreplay.com, ELEMENTS/Merrill Lynch]
Why I’m Closing Out My TLT Position
July 30th, 2010 | Posted by Global InvestorsI am closing the last smallish piece of a long held short on iShares Barclays 20+ Year Treasury Bond (TLT).
I, and many others, thought yields would increase this year, as the mounting debt load in America finally caused the bond vigilantes to demand higher rates. And/or inflationary pressures mounted. Instead we’re seeing bonds of all maturities – 2 years, 10 years, 30 years – see their yields crushed, some at record levels despite an epic bout of deficit spending and debt acquisition. There is one other country that "enjoyed" such a situation, and it starts with J and rhymes with Napan.
From an economic point of view it will be fascinating to see how this ends up, since there are many variables that separate the two countries (Americans are spendthrifts, Japanese are savers; much of America’s bonds are in hands of foreigners, almost all Japanese debt is in the hands of their citizens and banks). But as a citizen the "message" the bond market is sending is all a bit depressing. The only real positive I suppose is we might get to an era where 30-year mortgages are going to be handed out at 3.75%. But with 5-year CDs paying 0.75% annual.
Believe it or not, while intellectually I want to be correct on things I see out in the future economically, as a citizen of the country I hope I am very wrong. Just as I did back in late 07. [Dec 4, 2007: First Half 2008 Predictions] Unfortunately I was correct… if anything even my abject pessimism at the time was not negative enough.
So with that I am crying uncle on this short, a position I’ve held this January 2009. I’ve had a few wins in this name along the way in terms of trades, but just as many losses so over time there has been little value here. This last batch is small (0.6% exposure), but will exit at a 14% loss. (Click to enlarge)
Disclosure: No position
July 30th, 2010 | Posted by Global InvestorsThe Dow Jones Industrial Average, along with its related ETFs, is one of the most prominent stock benchmarks, with millions around the world following its every movements every day. How is it calculated?
The Dow is made up of 30 stocks but uses a divisor – not just dividing by 30 – that is gauged to make the Dow’s average equivalent to past levels due to shifts in its composition, reports Walter Updegrave for CNNMoney. The divisor, which is currently 0.132129493, will change as stocks are swapped in or out of the index.
Additionally, the Dow is weighted by each stock’s share price – higher priced stocks have a larger impact on the Dow’s movement. This price-weighting methodology may result in smaller companies with a larger impact on the Dow’s movement because the smaller company trades at a higher price, which differs from some other indexes that weight holdings based on market capitalization.
By monitoring stock and bond indexes, investors may gauge the performance of their investments. If there is a large disparity between returns, then it may be time to readjust one’s portfolio based on risk as compared to the market.
There’s one ETF that tracks the Dow itself: the SPDR Dow Jones Industrial Average (DIA). It’s one of the world’s largest ETFs, with $8.1 billion in assets.
click to enlarge
Max Chen contributed to this article.
Disclosure: None
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