Mark Whitmore

Mark Whitmore
Contributor since: 2013
So is your point that I made up the 17%? All I did was check the amount XIV was down for the day at the time I finished the article on the 15th. Since it was after hours, I included that figure since that was the best, and only, market price at the time for XIV.
You say that even at its low for the day, XIV did not trade close to -17%. Check your facts. The intraday low for XIV was $21.45, which was -15.9%. By any reasonable measure, I think that is close to down 17%. It then happened to go down more than this in after-hours trading.
Your point about volatility is actually my original point. XIV can indeed be a very volatile instrument, which crushes its value for investors very quickly.
I would be much more inclined to agree with you if two things were true. First, if more than a miniscule portion of AMZN's revenue came from the type of potentially exciting and higher margin "internet revolution" elements like AWS. Rather, the vast majority of its revenue continues to come from paper-thin-margin (and that is being generous) retailing.
Second, if it were possible to successfully dominate the whole internet ecosystem. It is one thing to hand Borders or Barnes & Noble their heads on platters. But to assume that AMZN can do that to the likes of Google, Apple, Ebay and Microsoft is quite another thing altogether.
I suspect the downside of AMZN looks much more promising from here than the upside.
I clearly stated that the 17% decline on April 15th included the after hours trading that had taken place when I wrote the article.
Fair enough. I suspect you are on to something that is creating a bias towards contango. I just think the bias towards contango will be more than offset by volatility loss when you actually see an elevated VIX, as well as and the compounding of daily investor fees. But a very interesting issue to raise.
4cessna - Thanks for the comment. While I am not a trader, your method seems to be a prudent approach. I agree with you that elevated VIX futures generally do not persist, and to go long XIV at that time would be a trade with a very good risk-reward profile.
As a former attorney, I am keen to parse cautionary investor language. Having reviewed such statements for a plethora of investments, I have not seen an explicit warning that holding a security for the long term would lead to an EXPECTED value of zero, or substantially close to that, except for daily rebalanced exchange traded vehicles. There are plenty of ways for funds to cover their rears short of this kind of statement.
If one looks at the hypothetical examples used by Credit Suisse in the prospectus, it is clear that under sustained periods of extreme volatility in the VIX markets, XIV will lose the vast majority of its value. Again, if the greatest stress test for XIV is a sub 15% decline in the S&P, one that is wedged within one of the greatest bull market runs ever, I think it is foolhardy to believe XIV is not vulnerable to a large decline.
Finally, your naked assertion that markets are only in backwardation 5% of the time is simply not correct. The actual number based upon almost six years of market history is closer to four times that (
I congratulate you on your acumen picking up XIV when it was quite low, as well as the success you have had holding it. However, I would happily wager a bottle of single malt scotch that should you hold XIV (I assume that is what you meant) for another two years, your returns will not be 300%.
This is patently incorrect. The same statement I quote from the prospectus applies to all of the leveraged and inverse funds. The rationale behind this is a combination of investor fees compounding as well as the volatility loss noted in the article. Please note that one divided by zero undefined and indeterminate. Accordingly it cannot be an expected value of any fund.
Thanks for the comment. I think there might be a tenancy to data mine here. For instance, I could point out that had someone bought XIV in early July of 2011 and held it until early this year it would have been dead money. Yet despite the XIV gaining nothing, the VIX dropped during that time period from the low 16 handle to under 14. One would expect gains of 15% if it performed like a true inverse ETN.
I would argue that if you hold this and are patient having purchased XIV in the mid-20's, you will likely have your money chewed up at some point in the not too distant future.
Excellent points and overall analysis. I think what may explain some of the gulf that separates us in our assessment of XIV is holding time. As I tried to stress I am looking at this instrument from an investment as opposed to a short-term, closely monitored trading vehicle. Now I think of investment as being something one holds for AT LEAST six months (preferably much longer).
From a trading perspective I am agnostic as to whether XIV is a good instrument. On one hand I certainly agree with you that it will usually have the wind at its back due to contango being prevalent in the VIX markets. On the other hand I liken holding XIV to vacuuming up $20 bills (nickels are too de minimis given the tailwinds contango provides) in front of a steam roller. A day like yesterday (which granted does not come along very often) brought XIV back to its levels from mid-late January.
Looking back to the summer of 2011 again, XIV dropped 50% in less than three weeks!! Even trying to put myself in the shoes of a trader, I do not like the idea that I could leave for a extended family vacation and find an asset cut in half. So again, my point is that XIV has three benefits going for it during times of low volatility, juicing the ETN's returns; but those same three factors make it deadly to hold when volatility spikes.
Another point I would like to reiterate is my concern about the short- to medium-term direction of volatility. Considering all of the red flags abounding economically and geopolitically, the level of complacency in US equity markets is remarkable, and unlikely to persist. If you look at a chart of XIV or hypothetical back-testing of the same, where the real money was made by going long at the peak of market panics.
Thanks for your thoughtful reply.
1) It is not surprising that back-tested results would yield excellent annualized returns since 2006. Not only has the VIX itself been trading at extremely low levels, but contango in short-term VIX futures have, along with mid-term VIX futures, gotten to historically high levels ( MY theory is that in a post-2008/2009 world, investors are pricing in a higher possibility of extreme market dislocations. Hence the premium they are willing to pay in purchasing VIX futures is higher, causing contango to have increased.
But this is not a sustainable phenomenon. One of two things will occur. We could reach a "new normal" with low volatility, in which case investors will be unwilling to pay such a high premium for insurance against volatility. This will cause the contango to decrease in the VIX, reducing the easy money spread currently enjoyed by XIV investors. Alternatively, we could get a reversion to the mean in volatility. The VIX would then revert to a higher, more typical level. Contango would thus naturally decline, if not completely reverse to a period of backwardation.
I should note that the back-tested results do not factor in the compounding of daily investor fees, which would reduce investor returns by more than 10% in the time period delineated on the return graph.
2. I do not disagree with the fact that VIX markets tend to be in contango. But in addition to the fact that one should not expect the current extreme levels of contango to persist for the reasons mentioned above, investors should keep two other points in mind.
First, it should be clear that during those infrequent times where backwardation rears its ugly head, the XIV will get crushed in an order of magnitude greater than the just increase in VIX that would occur. In the process one could see months of positive returns wiped out in days.
Second, investors in XIV have been lucky enough to experience constant contango in the VIX market since 2011! To expect such a run to continue much longer seems to be the triumph of hope over reason. So again, recent amazing returns for the XIV can be explained by several aberrational events in the market.
3. I did not say the VIX spiked in July. I mentioned that BETWEEN early July and late November the VIX increased 115%. I then compared that increase with the catastrophic 75% decline in the price of XIV, which would obviously not beat the S&P.
4. The other side of this trade is most certainly NOT VXX. As a daily rebalanced ETN, it suffers from all the same problems as XIV for a long-term investor, plus it faces the headwind of the VIX being in a state of contago most of the time. Literally the "other side of the trade" is to be short XIV, which I am not advocating for general investors. But with the VIX trading where it has been, combined with the extreme and unsustainable levels of contago in the VIX market, I suspect there is more medium-term upside in being short XIV rather than being long.
5. I did fail to mention ZIV, as I was focusing on the top-performing exchange traded vehicle during the time-period I examined, which happened to be XIV. I am not surprised ZIV has lower volatility, and possibly better returns over a different time-period than I examined. However, it would still suffer from the three performance issues I mentioned in the article when volatility returns to the markets. Furthermore, as contango has gotten even more extreme in mid-term VIX, it could have further to fall.
I would also argue that investing in XIV when the markets are calm is exactly the opposite of what one should do. That is the equivalent of buying high.
Not to pile on here, but even if that is true and for the sake of argument shopping in a brick and mortar stores go by the dinosaurs within the next 10-15 years, your assumptions going forward would have Amazon be a monopoly player in the market. It seems like with no barriers to entry other than AMZN's goodwill (which is largely predicated upon subsidizing its sales to Prime members), and the fact that the existing brick and mortar companies are already making inroads into the online space, there is no way that would ever happen.
After all, the first bank to use ATM machines did not monopolize the banking industry.
Glenn - I respectfully take issue with several of your points. Regarding the "market" getting Amazon wrong for the last sixteen years, less than 4 1/2 years ago Amazon was trading below $40. It was also trading below $110 less than three years ago. So even in recent times the market has afforded Amazon a much lower valuation level. Since July 2010 the S&P is up about 45%, while Amazon is up more than three times that. So I think it is fair to say that those of us who think Amazon's stock price is more reflective of a bubble as opposed to fair enterprise value are focused on the blow-off pricing of the stock within the last 30 months. After all, even those of us who are bearish generally acknowledge that Amazon is worth anywhere between 35-65% of its current market cap.
I am also a bit confused as to what you are referring when you discuss the "market," and the extent to to which it has either been proven "wrong for sixteen years," or has been vindicated because the "market is not stupid over that long a span of years." This is patently contradictory.
Concerning the validity of probability distribution analysis going forward as a way of attempting to reach a fair value of the stock, I think your method is spot on. Where most of us who are not nearly as sanguine about the future price of Amazon stock would take issue is the probabilities you assess to the various outcomes. Having read your previous piece, you ascribe more than 37% of Amazon's present value to the "total domination" scenario for the company throughout all retail. This is a scenario where by 2018 "malls are deserted," Walmart is "struggling to survive," and Amazon lays waste to Apple and Google in the electronic media space. Amazon thus becomes as $1.8 trillion (!!) company within eight years. The odds you place on this happening is 5% and assert that "yes it could happen."
Pardon my skepticism, but I think any sober assessment of such a likelihood would place the odds of this happening between .01%-.5%. Even lower cost retailers that have much larger revenues than Amazon, such as Walmart and Costco, have not been able to "totally domina(te)" the space. And I think the assumption you have about is "insane customer loyalty" that would be necessary for this scenario to be even remotely conceivable is misplaced. It is not hard to understand why there are so many loyal customers so long as Amazon is subsidizing prime members' purchases through unlimited free two-day shipping. Once Amazon has to concern itself with such trifling details as earning money, it will not be in such a position. And once the subsidy disappears, so too will many customers who can both get immediate gratification at a local big-box retailer, and increasingly, price matching as well.
Further questioning the level of loyalty of Amazon customers (outside of the company under-cutting the competition on the total price of a good including shipping, handling and tax), I should note that Mr. Santos has provided excellent analysis as to why there is strong indicators that once Amazon has been forced to collect sales tax in certain states that sales there have slowed markedly. This trend will most certainly continue as more states impose sales taxes on internet purchases. The upshot of this is that Amazon faces either existing in the razor-thin margin business for the vast majority of its revenues (thereby earning little to no profits for shareholders), or letting its actual costs of providing goods become reflected through higher prices (thereby losing customers and revenue growth)
Indeed, if one estimates the "total domination" scenario as that which would occur only as something beyond a triple sigma event, your own analysis would place fair value for Amazon at in the neighborhood of $170-175. This is a range that many of us Amazon bears would see as being more reasonable.
Finally, there is simply the problem of large numbers coming into conflict with those that build castles in the sky. I vividly recall similar price action concerning Cisco thirteen years ago. The company had seen its stock price increase increase at levels skeptics called unsustainable for more than eight years. Bulls scoffed at those stating that Cisco's revenue growth rates that were even in excess of the high growth rates in the tech sector as a whole could not be sustained ad infinitum. Cisco was leveling its competition through either acquisition or by crushing them competitively.
Alas, Cisco almost 13 years later has a market cap roughly one-quarter what it was at its peak. While I am not projecting the same obliteration for Amazon's stock price, those who are projecting the company's future growth by looking in the rear-view mirror may be sorely disappointed.
Nice catch 215304. Not an insignificant difference considering the degree to which AMZN top line growth has faded dramatically since 2010. The problem of large numbers (ala Apple) and an increasingly competitive retail environment will almost certainly cause top line growth to diminish further.
I continue to be very impressed with the level of research (such as consistently pouring over filings to uncover information overlooked by almost everyone) and quality of insight you offer, particularly concerning Amazon. Kudos for uncovering the common thread among the investment banks leading the charge for supposed future gains in AMZN's stock price - pocketed commissions.