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GOT TO LOVE A SHARP KNIFE?. BIGFOOT INVESTMENTS OPEN FORUM Mar 7th, 2013 WELCOME!. AGENDA WELCOME! ADMIN NOTES QUOTE OF THE DAY OPTIMISM GAUGE CHARTS OF INTEREST – ARE WE CORRELATED? SO WHAT’S UP WITH: ETF COSTS MARCH PORTFOLIO REVIEW A CLOSER LOOK AT: UTHR DAVID’S CORNER
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BIGFOOT INVESTMENTS OPEN FORUM Mar 7th, 2013 WELCOME!
AGENDA • WELCOME! • ADMIN NOTES • QUOTE OF THE DAY • OPTIMISM GAUGE • CHARTS OF INTEREST – ARE WE CORRELATED? • SO WHAT’S UP WITH: ETF COSTS • MARCH PORTFOLIO REVIEW • A CLOSER LOOK AT: UTHR • DAVID’S CORNER • SWAPS AND SPREADS • LEE’S COMMENTS • QUESTIONS/COMMENTS
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QUOTE OF THE DAY: In poker, “if you don’t know who the patsy is after 30 minutes of playing…………………… …it’s YOU.” Warren Buffett
Optimism Gauge As of: 3/7/2013
Measuring Our Economy Last Update: 3/7/2013
Measuring Our Economy READING AS OF: 3/7/2013 Economic Optimism Index NOTES/COMMENTS CURRENT READING: 72.0% PRIOR READING: 72.0% BIAS: BULLISH 10 OF 13 INDICATORS POSITIVE TREND - POSITIVE 45 65 35 75 25 85 72.0% 15 95 Current Reading Prior Reading POSITIVE AS OF: 8/17/2012
ONE “DOWN” – ONE TO GO? Stopgap Spending Bill Passed by House WASHINGTON—The House on Wednesday moved to put aside the threat of a partial government shutdown this spring, sending to the Senate a bill that funds government operations through Sept. 30, the end of the fiscal year. NOW IT’S THE BUDGET CEILING The Senate is expected to take up the legislation next week. Senior Democratic aides said the Senate isn't likely to make changes to the bill that would derail its final approval in Congress. Source: Wall Street Journal
ARE WE CORRELATED? CBOE White Paper: CBOE S&P 500 Implied Correlation Index
LET’S GET BACK TO CORRELATIONS & VOLATILITY • SOME INFORMATION FIRST: • Option prices reflects the risk of a stock or index > implied volatility(IV) • The data for a single stock indicates expectation of price movement • IV of an index is the same • However, index volatility is really driven by 2 factors • Individual VOLATILITIES plus….. • TheCORRELATIONof individual component returns
VOLATILITY AND CORRELATION (CONT) • You would expect that the IV of an index would rise with an increase in component IVs • Yet, there are times when index IV moves and there is no similar shift in the component IV • This is due to the market’s changing views on CORRELATION • BOTTOM LINE: INDEX VOLATILITY IS SENSITIVE TO CORRELATION
VOLATILITY AND CORRELATION (CONT) • So, there is a “SLIP” between STOCK OPTION PRICES andINDEX OPTION PRICES • The difference indicates the RISK FOR THE MARKET versus STOCKS IT’S REALLY APPLES AND ORANGES UNLESS YOU FACTOR IN CORRELATION
OK….NOW WE GET A LITTLE “DEEP” • We take the VARIENCE of the INDEX and compare it to the VARIENCE of the STOCKS in the index* • The difference gives you an idea how much MARKETCORRELATION is implied in the stocks Variance = squared differences from the mean
Tracking symbols for CORRELATIONare JCJ, KCJ and ICJ • 1. JCJ (Bloomberg Symbol = JCJ:IND) • 2. KCJ (Bloomberg Symbol = KCJ:IND) • 3. ICJ (Bloomberg Symbol = ICJ:IND)
CONCLUSION: When the market is under a higher state of fear, or when we see swift movement lower, CORRELATIONS START TO RUN HIGHER as liquidations beget liquidations. (HIGH CORRELATIONS ARE DANGEROUS) On the other hand, if the correlations MOVE LOWER, stock picking is critical and markets are more positive
SO WHAT’S UP WITH: ETF Costs
THE “COST” OF AN ETF • BID/ASK Spread • Expense Ratio • Premiums and Discounts • Commissions • Tracking Error • Leveraged “Costs” • Currency Hedging (Intl Funds) • Sampling Error (Intl Funds) • Trading Expense Ratios
BID/ASK Spread Source: ETF Experts (xtf.com)
BID/ASK Spread S&P Global 100 Index Source: ETF Experts (xtf.com)
Expense Ratio iShares S&P Global 100 Index
Premiums and Discounts ETFs trade at premiums and discounts to the underlying securities
Premiums and Discounts iShares S&P GLOBAL 100 INDEX FUND
Commissions – Know thy cost • Tracking Error The term relates to how closely a fund follows its benchmark. Since most ETFs are passively run, the calculation is considered a key way for investors to perform proper due diligence.
Tracking Error - iShares Source: BlackRockiShares website
Also: Refer to sedar.com/FindMFDocuments.com (System for Electronic Delivery Analysis and Retrieval) This will provide the Management Performance Report (MPR) Source: SEDAR
Leveraged “Costs” • Leveraged Funds maintain 2/3 times the exposure for each $1 in capital • Leveraged Funds respond to share creation with derivatives • As with all ETFs they are almost always fully invested • Constant “resizing” has costs especially with derivatives • LFs usually have a large amount of cash in short-term derivatives • Maintaining the “perfect” leverage ratio is difficult • Gains are good but losses are multiplied • Tracking error makes it worse
Leveraged “Costs” • INCREASING MARKET: • Simple example – Fund value increases from $100 to $102 (2X Fund) • Now must take profits and leverage up from $200 to $204 • Must keep exposure to index at leverage ratio • DECREASING MARKET: • Fund value decreases to $98 (2X 196) • Fund would sell depreciated securities to reduce exposure and lose 4% of actual value (4/100) along with increased derivative costs of rebalancing • LEVERAGE MATH AT 2X • $10 buys $20 • A $1 loss is 5% of portfolio (1/20) • But a 10% decrease in my actual $ (1/10)
Sampling Error (Intl Funds) • Example: • EAFE must track 952 companies in 21 countries • Often use SAMPLING to achieve rather than buying all • Can end up with sampling error and tracking error • Currency Hedging (Intl Funds) • Form of DERIVATIVE COST • Trading Expense Ratios • Total Expense Ratio is the MER + Trading Costs • Found in SEDAR (Sample) Actually 3.19%
Investment Style of the Portfolio As of February 28, 2013- Subject to change.
Beta of the Portfolio – March 2013 For a Portfolio with 100% invested in Equity – Beta of Portfolio= 1.2104
March 2013 Stock Picks As of February 28, 2013 - Subject to change.
United Therapeutics Corporation (UTHR) United Therapeutics Corporation, a biotechnology company, engages in the development and commercialization of therapeutic products for patients with chronic and life-threatening diseases in the United States and internationally. It offers Remodulin, Tyvaso, and Adcirca for the treatment of pulmonary arterial hypertension (PAH). The company also develops Oral Treprostinil (UT-15C), a new drug application filed with the United States Food and Drug Administration for the treatment of PAH. Its development products under Phase III clinical trials include Oral Treprostinil (UT-15C) Combination Therapy for PAH; Ch14.18 monoclonal antibody (MAb) targeting Neuroblastoma; and Remodulin for the treatment of PAH in the United States, the United Kingdom, France, Germany, Italy, and Japan. The company's development products under Phase I clinical trials comprise Beraprost-MR for PAH in North America, Europe, Mexico, South America, Egypt, India, South Africa, and Australia; 8H9 MAb targeting Metastatic brain cancer; and IW001 for the treatment of Idiopathic pulmonary fibrosis and primary graft dysfunction. Its pre-clinical stage products consist of Glycobiology Antiviral Agents for viral infectious diseases; PLacentaleXpanded cells targeting PAH; and pulmonary tissue replacement and remodeling products for the treatment of end-stage lung disease. The company serves pharmaceutical wholesalers through specialty pharmaceutical distributors and other distributors. United Therapeutics Corporation was founded in 1996 and is headquartered in Silver Spring, Maryland. Source: FinViz.com, March 2013
United Therapeutics Corporation (UTHR) POSITIVES:With the approval of Adcirca and Tyvaso, United Therapeutics has a varied range of therapies available for the treatment of pulmonary arterial hypertension. Analysts believe the company’s pulmonary arterial hypertension product portfolio will drive strong top-and bottom-line growth. Possible concerns:United Therapeutics is facing a patent challenge for Remodulin (treprostinil) injection. Sandoz is seeking approval for its generic version of Remodulin (10 mg/mL). Sources: Zacks, February 2013
March 2013 Stock Picks 3 Drug Manufacturers Biotechnology As of February 28, 2013 - Subject to change.