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The Transparent Analyst is an investment professional in a buy-side environment. Previously, he spent four years working in a corporate finance role for a fortune 100 company. He is a recent MBA graduate and a Chartered Financial Analyst. He joined this site to refine his ideas on an open forum,... More
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  • Why I Am Short Energy
    On Thursday, I made the decision to begin shorting energy. This was a purely macro call that I had been watching the last few weeks. The European situation had finally hit a point where I think the devaluation of the Euro is unavoidable, at least in the short-term. With oil approaching $90 a barrel, I felt comfortable taking a position after the recent run-up. China may also offer a catalyst if they follow through with the threats to curb inflation. I would like to point out that this call has nothing to do with commodities, which I would entirely avoid in the near-term. The perceived "monetary" based metals are far too risky to get short with the potential for risk aversion positions being established. 

    Summarizing my reasoning:
    • Sovereign issues - weakening dollar, macro weakness, fear trade
    • China inflation concerns
    • Oil is approaching the fear based price 
    I used an ETF to establish this position, ERY (3x leverage). The 3x leverage aspect will keep me in the short-term mind frame, which I believe makes sense for this kind of macro trade. Once the situation plays out, I plan on removing the position ASAP.

    Disclosure: Long ERY
    Tags: ERY
    Nov 14 1:19 PM | Link | Comment!
  • Emerging Market Bubble? Not yet
    The concept of an emerging market bubble is picking up steam, but simple analysis will not back this up. That said, at some point an emerging bubble will form, but those drivers are exactly why you want to be invested right now. 

    One of the easiest calls to make regarding near-term money flows are the emerging markets. Pension funds are in bad shape. The lower interest rates are wreaking havoc on funded status through higher liabilities and lower expected returns. Whether "achievable" expected returns are being factored in or not is an interesting topic, but, regardless, trustees will need to focus on higher returns. Tee up the emerging markets. Pension funds were under-allocated in the previous market cycle, and the expected growth will be too enticing to pass up again.

    This situation should create some compelling returns assuming the macro environment holds up globally. 

    Valuations in the BRIC (Brazil, Russia, India, China) countries back this thesis up. Current and future PE multiples are all low compared to their historical averages. EV-to-EBITDA also look interesting across the board. Based on these metrics, China looks the most interesting right now with a Current PE Multiple of 14.1x against a historical average of 17.0x. 

     Now, specifically where/how do you invest in emerging markets? I prefer VWO compared to EEM for a basic emerging markets ETF due to the lower fees. The EEM charges significantly higher fees even though they all but removed their optimized selection strategy after the crisis.

    If you are interested in China specifically, PGJ offers something similar to the MSCI Golden Dragon. FXI is another one, but it is more concentrated with an extreme bias towards financials. 

    Disclosure: None
    Tags: VWO, EEM, PGJ, FXI
    Nov 10 6:18 PM | Link | Comment!
  • A Dollar Led World
     As this is my first postI will try to keep it brief and stick to some higher level views.  I would like to consider myself unbiased in lifewhich is most importantly applied
     to the financial marketsIn a perfect worldI would expect to at least have some
     buy-in to an equity rally such as thisbut I have fought this particular move since
     late 2009The first half of 2010 proved my thesis correctequity markets were 
    volatile and drifted negativebut after this impressive rally I am now licking my 
    woundsThe question is whether I begin to embrace this rally or stay my ground?

    While I recognize some macro level themes that can push the equity markets higher in the medium term(the Fed, the Fed, the Fed), I tend to think the headwinds are too strong in the short term. The overwhelming direction for equities in 2010 has been decided by the dollar.  When the dollar weakens, stocks go up.  This is no special revelation and has been pointed out countless times over the past two years.  I personally believe this correlation is safe in the near term.

    The Fed is an impressive machine which can overwhelm the currency markets in almost any fashion. That said - certain events can outweigh the endless printing of money. The situation in Europe is reaching the tipping point of becoming one of thoseevents”. The weakening dollar or conversely the strengthening Euro (insert most any currency) is causing havoc for these countries which will soon be usurped by the growing debt issues in Ireland and Portugal. A quick glance at the cost of CDS protection or Bund spreads will show the problem has grown infinitely worse in the past weeks. While I have seen a handful of articles, the press has failed to really back this developing story.

    I expect the opportunity to jump on the short side of the equity markets will be here shortly while the dollar strengthens. This would lead to a bearish call on energy and bullish call on gold.

    *Update* Well this post seems far less pro-active now. For what it is worth, this was written before the market opened this morning, but either way I believe these topics will dictate the next several months. As of yet, I have put on no particular positions in favor of my views, but do plan to consider things over the next few days. More to come as this situation plays out.

    Disclosure: None Currently
    Nov 09 8:09 PM | Link | Comment!
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  • Ireland spreads with Germany have blown out another 20bps. Now at 577bps.
    Nov 10, 2010
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    Nov 9, 2010
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