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Eamon Trebilcock
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Eamon is currently a finance student, summer analyst, and part-time investor. He focuses on both value and long-term equity investments, but also employs quantitative strategies to take advantage of short-term trends in the marketplace. He currently manages a diversified equity portfolio that... More
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  • Investing In EM Vs. High Yield Debt

    How Risky are EM?

    Two words used almost synonymously are: emerging markets and volatility. In order to invest in emerging markets, one must carefully evaluate investment decisions and asset allocations. One familiar with investing in developed capital markets should note four unique features of emerging market debt: the average returns are higher, the correlation with developed markets is low, returns are less predictable, and volatility is much higher. Lately, geopolitical tensions have been weighing on these emerging market funds creating even more whipsaws than we traditionally see.

    Despite the volatility in emerging markets, the smart investors know that they should not only look at markets offering sound opportunities like the US Markets, but also markets that are at risk. Coupled with this fact is the current market environment, we currently live in a world of low interest rates, and many investors are consequently scrambling for yield. In many cases, risks of investing in volatile markets have to be taken to generate yield. Some investors may argue that the current yields in emerging market bond funds (5.1% average) are not reasonable for the credit risks that go hand in hand. However, I will look to dispel some of these fears in my below article.

    What Invest in EM?

    I do not disagree that emerging markets have some inherit volatility with them. However, I am not advocating direct investments in particular countries or individual stocks, as this will undoubtedly increase your risk exposure. But rather, I am advocating that investors consider skipping looking at equity markets and junk bonds, and look to emerging market bond funds. As more and more emerging nations tap into credit markets, there will be plenty of room for growth and opportunities to investors.

    Now much of the risk associated with emerging markets can be tied to headline risks of default. However, although this default risk is not ill-justified, as seen in cases like Argentina, the real truth is that most emerging market debt is near investment grade. What a lot of people don't realize is that a lot of these countries have strong balance sheets, fiscal responsibility, strong natural resources, and appetizing long-term growth prospects. As well, a lot of these emerging markets don't have anywhere near the debt-to-equity ratios that their developed market counterparts do.

    Essentially, emerging market funds are similar to junk bonds, but have lower default risk. Furthermore, if the dollar resumes its downward trend as seen in recent months, then investors could be poised well to capitalize on this trend in local-currency denominated bonds. I predict that as inflation continues to rise, we will continue to see currency appreciation account for a good amount of additional return on local currency emerging market debt.

    Where Should you Invest?

    The biggest player in the emerging market ETF space is the iShares JPMorgan USD Emerging Markets Bond ETF (NYSEARCA:EMB). The primary components of this ETF are Turkey, Russia, and the Philippines. With over $4 billion in assets, a 4.5% yield, and .60% in expenses, this ETF would be a good way to get exposure. Despite the fact that this ETF has seen returns of 10.66% in the past year, there is an additional measure of risk with the value of the USD. Another option for slightly a higher yield with a lower expense ratio (.50%) is the PowerShares Emerging Sovereign Debt (NYSEARCA:PCY). This fund offers a slightly more concentrated approach with holdings in liquid emerging market US dollar-denominated government bonds.

    If you want to get specific with your emerging market funds, you can look at the Emerging Markets Corporate Bond Fund (BATS:CEMB), which tracks 192 different bonds from companies like the Mexican telecom giant America Movil (NYSE:AMX) and the Brazilian Energy Company Petrobras (NYSE:PBR). However, you may feel overwhelmed with all the choices to choose from. For investors that are seeking broad exposure, you might want to look at the Market Vectors Emerging Market Aggregate Bond ETF (NYSEARCA:EMAG). This ETF tracks all types of EM bonds (high-yield, local currency, dollar-denominated). As well, this ETF yields 4.95% with only .49% in expenses.

    Overall

    Emerging market bonds offer more yield and less risk than developed market junk bonds. As such, now is the time for investors to consider weighing emerging markets higher. With the potential growth and income that emerging market debt offers, it could be a great play for your portfolio.

    Jul 26 3:50 PM | Link | Comment!
  • How To Make Money In The Stock Market

    Overview

    In this article, we will look at how to make real money in the stock market by trading micro-cap US equities. We will follow three steps to make our buying/selling decisions:

    1. Define a Universe to create a watch-list
    2. Conduct technical analysis to narrow the watch-list
    3. Look at relevant headlines and industry developments

    Introduction:

    There are a plethora of ways to make money in the stock market. So many ways in fact that you can find an investment for virtually every risk/reward profile. But there is a trade-off between risk and reward for a reason. If you want a higher return, you are going to need a bigger risk appetite, and vice-versa. That being said, the following strategy discussed in this article is not for everyone.

    If you want a check in the mail every few months go buy a large-cap dividend stock, if you want a safe place to store you cash look to Money Market instruments, if you want average capital gains go buy a blue-chip or index fund, or if you want to stow your cash way for 20 years in the hope of a large return go buy-and-hold an undervalued stock.

    However, if you want to make real money in the marketplace, there is really only one place that can deliver more than 100% price movements: micro-cap stocks. Now please don't be confused with the term micro-cap. I am not talking about your Wolf of Wall Street pink sheets, I am talking about real companies that are liquid, have earnings, and trade on an exchange. As well, this strategy isn't a day trading strategy. We aren't scalping here. But rather, we are swing trading here and holding positions longer than a day, and no longer than a month.

    Defining Your Universe:

    Now let's get to what to look for and how to find your money-makers. Let's start by defining a stock universe. Some common methods for this are using sites like: value-line.com or finviz.com. However, my preferred method is to use TD Ameritrade's free trading platform: ThinkorSwim. So let's get to the actual screening criteria:

    (click to enlarge)

    I like to make sure the securities I consider are liquid enough to trade, because if is no liquidity I won't trade it, and neither should you. So I choose a prior day volume of 100,000. Secondly, like the total shares outstanding to not exceed 100mn so I know I can still get large price movements. I am really not interested in anything with more than 100,000,000 shares. I should also note that I would prefer to use the share float on here, but TD Ameritrade does not offer that feature. Lastly, I browse for stocks with a prior closing day price of .50 to 5.00. There are somewhat arbitrary numbers, but from experience I like this range, and it limits the universe down a bit. The power of such low shares outstanding can be seen from the below:

    (click to enlarge)Next, we will weed down our actual universe. So you should have something that looks like the below:

    Now that you have your universe, you will need to start to build a watchlist of tickers. Here comes the most time consuming part, you will need to drag these tickers into your stock analysis software (mine: ThinkorSwim's Charts feature). Essentially, in this step you will only be looking at graphs, and recent price movements. In this part, don't be concerned with what the company actual does or what kind of news the stock recently had. We only want to help further refine a watchlist then we will get into the actual analysis.

    Looking for Chart Patterns:

    First off, stay away from stocks with graphs like this:

    (click to enlarge)

    These large price swings are really not what we are looking for. This is what traders call "chop". Essentially, a stock like this just moves up and down with no real overall price movement in either direction. What we are looking for a graph poised for a large price swing either positive or negative.

    Below are some examples of stocks we would want to add to our watchlist:

    In this graph above, we see a price move from a low of 0.14 to 1.02. Anything that has this big of a movement should be added to your watchlist. Once you have your list you would want to see what the stock is up this high, and if that news is "fluff" news (does not really change the stock's fundamentals) or is important news. If you were to conclude that this was really just fluff news, you would want to try and find shares to short.

    In this example of BMTI, we see a clearly defined resistance level at the 2.72 price level. On this stock we would want to watch to see if price could break above this level with any significant conviction. On that same example, look at the gradual raising of the support level below.

    The fact that this support level has gradually inched up is a good sign that we might be seeing a strong bullish price movement soon.

    A good buy might be seen in the below graph. We saw volume kick in and cause a short spike, and then we saw a retracement back to a higher support level. The fact that price has found a consolidation at a higher support level is good news. As well, we can see price inching forward a bit, which could be the start a huge price move.

    Lastly, I'll just throw in a classic example of a pump-and-dump. Obviously you wouldn't want to get into something like this now. However, if you tried to play this price move a while back, you should have most definitely tried to find shares to short. The thing about price moves like this from around 1.00 to 10.68 is that these moves are simply not sustainable.

    By simply looking for the types of graphs seen above you can create a manageable list of stocks to analyze further. The important thing to look for is clearly refined support and resistance levels for price. As well, things like volume, moving average crossovers, and RSI all help to make your decisions easier. I will briefly go into some tech indicators that might make your buying/selling decisions easier.

    Basic Technical Analysis:

    In this section, I will cover some basic technical indicators to look at that will help you make more informed buying/selling decisions. The first indicator will be the Exponential Moving Average.

    EMA

    I prefer to use an EMA vs. a traditional SMA due to the fact that the exponential average helps to reduce the lag by applying more weight to recent prices. In this method we will use what is known as a Triple Exponential Moving Average or TEMA. The three averages we will use are the 5, 10, 20-day (closing prices). Your graph will look something like this:

    (click to enlarge)

    Once you have your graph set up, you will want for bullish/bearish crossovers. First off, you can see the general trend is up in the above by just looking at the 5-day EMA (light blue). However, you get a bigger picture by looking at where the lines are in relation to each other. In essence, when you see the shorter-term moving averages break above a longer-term moving average (acting as a support), you should expect bullish price movement. This is the opposite for bearish signals, where the shorter moving average crossing below a longer moving average would indicate a fall in price. See the below example for a bullish signal:

    (click to enlarge)

    In the above picture you can see that once the 5-day moving average broke above the 20-day moving average, we saw a surge in price. However, crossovers like these are often time prone to whipsaws (a swing in price in the opposite direction). As such, a trader would have wanted to add this stock to a watch-list once the 5-day EMA moved above the 10-day EMA, and once the 5-day EMA broke above the 20-day EMA the trade should have been placed. You would want to wait for the 5-day to break the other EMA to make sure that this price movement has some conviction behind it and isn't a short-term spike. A good short might look something like this:

    (click to enlarge)

    For information definitions and further insights on moving averages, please see: http://www.investopedia.com/articles/trading/10/simple-exponential-moving-averages-compare.asp

    RSI (14-Day)

    The Relative Strength Index is used to identify if security is currently overbought or oversold. An RSI level of 70 means the security is overbought, and is likely to experience a short-term correction back to a normal price level. Adversely, an RSI level of 30 would mean the security is oversold, and should jump back up to a normal price level. Some traders may use 80/20 as their indicators, however, for the sake of their guide we will use the traditional 70/30. The first example I will use is a large-cap equity that has had some positive press recently: INTC

    (click to enlarge)

    As you can see from the above, RSI spiked to a near 100 which gave us the stock high of 34.74. This would have been an obvious short for anyone that uses RSI. A stock overbought that much is simply not sustainable. As such, we saw a correction in the stock down to the 33.7 price level, and an RSI level of 75.1247. Looking more closely we see that buying/selling pressure has stabilized. However, this RSI is undoubtedly still do high, and it may not be next week but this stock will drop to a lower level.

    For more information on RSI, please see: http://www.investopedia.com/articles/active-trading/042114/overbought-or-oversold-use-relative-strength-index-find-out.asp

    For the sake of this guide, I will only go into detail on EMAs and the RSI level, however, more good indicators to look at are MACD and Williams %R.

    Analyzing Your Watchlist:

    In this section you will want to look at three things: recent news developments for each equity, upcoming announcements that may cause price movement, and industry developments. Now in this strategy, I really don't care about what the Free Cash Flow looks like, or what the EPS growth rate is, or anything like that. We are really only concerned with only indicator: price, and what is causing short-term price movements.

    As you saw in our above examples, many stocks had these huge price moves from oblivion to the stars. What we want to find out is: is this fluff news or is does this news change the fundamentals of the company? For example, fluff news might be that there is speculation that the company is to be acquired by a Fortune 500 company. This might causes huge amounts of buying pressure, however, what is the validity to this acquisition? You will want to search around to see find how valid these claims are and how trustworthy the source. An example of news that changes the fundamentals of the company might be that the company won a favorable lawsuit that gives them royalties on a FDA approved drug. Whatever, the case find out if there is any news and if that news is fluff or not.

    Next you want to see if the companies have anything in the pipeline for the future. For example, a stock like the below might be hovering around a support level awaiting an announcement by the FDA on wither a new drug was approved. Whatever the case is, found out if there are any headlines that could affect the price of the stock significantly in the feature.

    Lastly, you want to look at the industry that each stock is in. I like to have my watchlist set up like the below:

    Really the only thing I am interested in in this table is the industry. I already have a good idea as to where the price, volume, and shares are due to my defined universe. The reason I want to know the industry is to see if there is any industry events causing buying or selling pressure. For example, if the price of oil has rose significantly lately this might cause hype around solar or alternative energy companies, as well as companies centered around oil. Whatever the case, you will want to see if there have been any significant changes to the industry your companies operate in.

    Once you have removed the companies that are up on fluff news, and the ones that might have poor industry outlooks, you should be down to a strong list of stocks. Now you will need to channel your inner Zen and wait for the right opportunity to strike. Keep an eye out for stocks nearing resistance levels or crossing below support levels. As a traders you have a host of tools to help you as you choose which positions to enter, be confident and patient or the market will eat you up.

    --

    Stay tuned for my next article on how to code your very own trading algorithm and apply it to the above universe for more of a hands-off approach.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 26 3:50 PM | Link | Comment!
  • Financial Stocks Outlook - Asset Managers, Large And Mid Cap Banks

    Summary:

    The following article provides some insights into the financial industry. Below I will provide a general overview of three groups within the sector, along with Buy/Sell recommendations for each group. This article covers: Asset Management, Mid-Cap Banks, and Large-Cap Banks.

    Industry Group

    Return

    1-month

    3-month

    YTD

    Payments

    2.40%

    5.10%

    -3.10%

    REIT

    3.00%

    8.60%

    22.70%

    Mortgage REIT

    -2.00%

    2.40%

    16.20%

    Large Cap Bank

    -0.40%

    3.60%

    2.90%

    Specialty Finance

    -0.60%

    -5.70%

    -16.10%

    Asset Mgrs - Alt.

    2.10%

    5.40%

    3.00%

    Asset Mgrs - Trad.

    0.60%

    3.40%

    0.10%

    Mid Cap Bank

    -3.40%

    -1.40%

    -0.40%

    Life Insurance

    0.10%

    6.70%

    0.20%

    S&P 500

    0.80%

    5.00%

    5.90%

    Asset Managers

    Overview:

    1. Given the current macro environment and volatility, this group will not perform better than the broader market. However, this group has seen modest inflows of capital, but it will not be enough to offset the outflow from equity mutual funds. Investors on the side-lines will be waiting for an affirmation of fund flows to make a decision.

    Performance/Value:

    • Alt. Asset Managers +3.0% YTD
    • Trad. Asset Managers 0.1% YTD
    • Both Alternative Asset Managers and Traditional Asset Managers are both trading at higher multiple than their historical average.

    Equity Recommendations:

    BUY: BlackRock (NYSE:BLK)

    BLK appears to be strategically positioned to capitalize on the current asset management environment. Strong benefits to this company are it's ETF platform and dominance in alternative investments (up 3.0% compared to trad. Asset managers of +0.1%). I expect strong returns and EPS growth in the months to come.

    SELL: Federated Investors (NYSE:FII)

    FII faces significant struggles in the future. Money market fund fee waivers will continue to weigh on earnings, and it appears short-term interest rates will remain low until next year. In the long-term, money fund reforms remains a growing concern. Investors should expect money fund outflows as investors increase their risk appetite. As well, given the small size of it's equity and fixed income departments, FII may have trouble retaining clients on its current path.

    Mid-Cap Banks

    Overview:

    Thus far, we have seen some surprises within this group. First Republic (NYSE:FRC) sold off more than 15% after an announcement of slower loan growth and higher expenses due to regulatory reforms. Fifth Third (NASDAQ:FITB) lost almost 6% due to lower than expected EPS and weaker loan growth. Furthermore, Fifth Third did not paint a good picture for the future as it did not tell investors any plans to fix the lackluster income lost from its loans business. It may seem that investors are unsure of the management of these companies, and will look to next week to get a better sense of where the industry is.

    Performance/Value:

    • -0.4% YTD
    • -1.4% past 3 months
    • Mid-Cap Banks are currently trading at a multiple of 15.1x compared to the historical multiple of 14.5x

    Equity Recommendations:

    BUY: New York Community Bancorp (NYSE:NYCB)

    NYCB is a strong play for the income investor, with an appetizing dividend yield of 6.40%. Furthermore, I believe this yield is sustainable as the company has had a 5-year average dividend yield of 6.80%. As well, NYCB has been posting strong loan growth which should drive net income higher and work to further support the dividends. Lastly, I believe that NYCB is prime for an acquisition, of which offers strong upside.

    SELL: Bank of Hawaii (NYSE:BOH)

    BOH is undoubtedly a profitable bank in the mid-cap banking industry. However, I do not see significant upside or growth to this stock. The company has seen poor revenue growth due to losses in its consumer and auto loan business. As well, the Hawaiian economy has seen a slowdown recently which could strongly weigh on the stock. I expect this stock to underperform the broader market.

    Large Cap Banks

    Overview:

    I expect Large Cap Banks to perform strongly in the future despite declining trading revenues and mortgage lending. These banks will be helped by a stronger dollar, improving credit quality, and stronger loan growth. As well, I believe these banks will continue to see strong growth in credit card revenues that will offset losses in other departments as consumer spending continues to increase. Lastly, these institutions look poised to tank advantage of a steep yield curve.

    Performance/Value:

    • 2.9% YTD
    • 3.6% past 3 months
    • Large Cap banks appear slightly overvalued with a current P/E of 12.3x, and a historical P/E of 11.9x

    Equity Recommendations:

    BUY: Citigroup (NYSE:C)

    There are many upsides to this stock: a reducing of losses in credit cards, strong international growth, and price appreciation. I believe this stock is undervalued in the industry and holds the potential to move much higher. Lastly, Citi Holdings, the storage spot for non-performing loans within the company, posted a surprising profit for Q3, which provides investors with further positive sentiment.

    SELL: Goldman Sachs (NYSE:GS)

    There are many headwinds that are creating a downside risks for GS. Those include: increased public scrutiny over government investigations, regulations like the Volcker Rule and Dodd-Frank weighing on segments like the derivatives business and prop trading desks, and lastly, I believe that Goldman is exhibiting poor risk management skills that have that have the potential to weigh on earnings further.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 19 4:42 PM | Link | Comment!
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