Verdmont Capital

Monday, September 21, 2015

REITS - Horrible Fundamentals, But a Good Trade on the Back of the Fed Announcement - HTA:$24.50, EQR:$72.70

REITS are disaster waiting to happen… arguably however, the timing of said disaster has been pushed back.

The Fed left their policy rate at nil last week, which caught many by surprise. Clearly, they are concerned about what a rate hike would do to the global economy. The fact that a 25bps hike is such a big deal, lends little confidence that the market is on solid footing.

That said, there should be some follow through on the Fed’s move, or lack thereof, as it surprised a big chunk of the market.

You could buy Healthcare Trust of America (HTA:$24.50) for the bounce, as you can see it had been breaking down in anticipation of rising rates. Nice technical stop there as well, if you have it at around $23/sh. This is slightly below the point where the stock broke down and is in line with recent lows.

HTA – 3 Years

Equity Residential (EQR:$72.70) is also a good candidate to play a potential bounce. Have a stop in the $68/sh range. A break below support of ~$70/sh would suggest that our call for a short term rally was a dud.

EQR – 3 Years

Wednesday, September 2, 2015

Alternative Investment Funds - Proving Their Mettle - GAM Diversity and GAM Trading Fund - Available Through Verdmont Capital

We currently employ a healthy allocation to alternative investment funds in our discretionary investment accounts.

The recent sell off in the broad equity market has highlighted the importance of utilizing alternative investments in a diversified investment portfolio. With both the equity and fixed income markets priced close to perfection, it pays to have another asset class in the mix.

We are at a unique point in history where both the equity and fixed income markets have become increasingly correlated. When interest rates ultimately normalize, by central bank design or via a riot in the bond market, a scenario in which both bonds and stocks correct in unison could easily play out. Against this backdrop, the importance of maintaining an allocation to alternative investments has never been more relevant.

Rather than allocating funds to one individual highflying hedge fund, we choose to invest in diversified multi-manager funds. Sure, this approach may not be as “sexy” as some other options, but when the markets take a hit, you want reliability, not flash.

We have had a longstanding relationship with GAM Fund Management, which has been overseeing alternative investment strategies since 1983. The two funds we maintain the largest allocation towards are the GAM Diversity and the GAM Trading Fund. The most recent fact sheets for these funds can be accessed by clicking on the following links:

Alternative investment funds as a whole had been underperforming the highflying equity markets over the past couple of years. This had been used by various pundits, who often sell traditional mutual funds, to suggest that hedge funds as an asset class has lost their luster. We took a more positive view of the underperformance, thinking that it had more to do with a measured and disciplined investment approach, as opposed to a failed investment model. The rapid pace of equity performance had always seemed somewhat engineered to us, so we were happy to sit in alternative investments which were merely trudging along.

That patience has been rewarded given the steep correction in global equity markets over the past 3 months. Our alternative investment funds have done relatively well on the downside, which was ultimately our objective when allocating cash towards them.

GAM Diversity Fund vs. the MSCI World Index – 1 Year (normalized)
Source: Verdmont Capital S.A., Bloomberg

GAM Trading Fund vs. the MSCI World Index – 1 Year (normalized)
Source: Verdmont Capital S.A., Bloomberg

We highlight this strong relative performance of the GAM Funds because we want our clients to know that there are various investment alternatives available to them. We have access to various GAM Funds that might prove a good fit for a given investor’s current objectives. Positions in these funds can be obtained via enrollment in our discretionary investment program, or, as individual holdings within existing trading accounts.

The highlights of the GAM Diversity and GAM Trading Funds as we see them are:

  • GAM has been managing alternative investments since 1983, has significant assets under management and has weathered many a storm.
  • Both the GAM Diversity and GAM Trading Funds have been tested by numerous market cycles and events.
  • These funds have a low correlation to the traditional equity and fixed income markets.
  • They are diversified by region, strategy and underlying hedge fund manager.
  • Their size enables them to access well-known and highly regarded hedge fund managers.
  • The fee structure of these funds is amongst the most competitive in the industry.
  • GAM offers a very high level of transparency through to the underlying holdings.
  • GAM monitors the performance of the underlying managers with an eye on consistency of strategy and liquidity.
  • These funds have the vast majority of their assets managed on a segregated basis with the managers they invest in. This leads to a very high level of liquidity. 
Please contact your Verdmont representative for further information about these GAM Funds, or Verdmont Capital’s managed accounts program.

***Also, please remember to follow us on Twitter @VerdmontCapital to get a glimpse of our activities and views.***

Wednesday, August 26, 2015

Aguia Resources (AGR.AX:$0.19) - Successful Completion of A$9.5Mil Financing - Stay in the Name

Aguia Resources (AGR.AX:$0.19) successfully completed a A$9.5Mil non-brokered private placement. An overview of the placement and the company’s intended use of the funds can be found here.

These developments are very encouraging given that the raise was done at par with the previous days close and at a premium to the 20-day VWAP $0.16/sh. The company is now fully funded as it looks to exploit its aggressive development and exploration plans.  

Congrats to Aguia management for making this happen, in what has been a horrible junior mining market.

Aguia Resources, which Verdmont Capital helped finance at $0.06/sh in 2013, has been one of the top performing junior mining stocks over that period.

AGR.AX – 2 Years
Source: Verdmont Capital S.A., Bloomberg

Aguia Resources vs. the Market Vectors Global Junior Miners Index – 2 Years (normalized)
Source: Verdmont Capital S.A., Bloomberg

We continue to recommend that holders of Aguia hang onto their positions. The company is now fully funded to commence development of its Tres Estradas project. Furthermore, there is still a considerable amount of potential exploration upside at AGR.AX’s Joca Tavares and Cerro Preto Targets. There should be a considerable amount of positive news flow associated with the advancement of these various initiatives.

Oshkosh Corp (OSK:$40.01) - Good Trade

Oshkosh Corp (OSK:$40.01) inked a $6.7Bill contract for a replacement vehicle for the Humvee.

The company has market cap of $3Bil, so a $6.7Bill contract is a big win. It also moves their business more towards defense, which should bring in a different set of institutional buyers. Defense revenue is on the sticky side, so it should help prop up the multiple as well in today's volatile environment.

Some color from the Stifel analyst yesterday:

“”After market close, the Department of Defense announced that Oshkosh (OSK, $38.52, Buy) received the winning bid for the much anticipated Joint Light Tactical Vehicle (JLTV) contract. We believe this is the positive catalyst investors have been waiting for, given the slowdown seen in the rental channel. The contract win should provide stability to Oshkosh’s revenues, earnings, and cash flows as the Defense business becomes a larger piece of the investment story. Shares carry a 1.8% dividend yield and an 8% FCF yield, trading at 6.7x our 2016 EBITDA estimate (FY1 EBITDA 2yr average: 7.2x).””

In addition to an improving fundamental backdrop, the chart looks good. Use a stop of $38.00/sh, which is where the stock was roughly trading before the news, based on the “good news indicator” approach. If it fails to hold the pop off of this solid development, which does not appear as if it was traded into, we are missing something.

OSK – 1 Year
 Source: Verdmont Capital S.A., Bloomberg

Analysts are lukewarm on the stock as well, so more upgrades are arguably due to play out. Only 50% of analysts have a buy rating on the stock. This is on the low side relative to the market.

Aggregate Analyst Price Targets and % Buy Ratings (green) – 3 Year
Source: Verdmont Capital S.A., Bloomberg

Monday, August 24, 2015

iShares JP Morgan USD Emerging Market EMB:$107.09 - Going Lower

Watch the mutual fund flows out of emerging market debt. We do not see how a logjam does not play out as investors/speculators dart for the exits.

Flow into EM Bonds (% of Assets)

With the emerging market currencies collapsing and equity markets getting crushed, look for EMB to follow them lower.

EM Bonds (EMB:$107.09) vs. EM Equities (EEM:$32.75) - 1 Year (normalized)
Source: Verdmont Capital S.A., Bloomberg

Emerging Market Bonds vs. EM Currencies – 15 Years

Lots of juice left in shorting EMB if weakness continues to play out. EM bonds got hammered in 2008. Even if we don’t a crash in the magnitude of the last financial crisis, there is still lots of meat on the bone in shorting EMB.

EMB – December 2007 to Present
Source: Verdmont Capital S.A., Bloomberg

Wednesday, August 19, 2015

Mr. Bubble, is Worried about Bubbles : Short Idea - iShares JP Morgan Emerging Markets ETF (EMB:$107.94)

Alan Greenspan knows a thing or two about bubbles. He played a key role in creating at least 3 of them. He has now gone from causing bubbles, to calling bubbles.

Frankly, we prefer when public officials go quietly into the night, especially after dropping so many turds when they were in “public service.” We guess Alan is trying to protect his legacy, so he has jumped over to the other side of the fence. We would imagine that the crazy speaking fees he receives, for peddling influence and access, act as further motivation to remain relevant.

We cannot imagine that current Fed officials, who are trying to keep the debt bomb stitched together, are super pumped that Alan is out there stoking bubble fears. After all, they are just playing the same game he was when he was wreaking havoc on the financial system and spewing double talk.

Thanks to Alan, we had two terms of Bill Clinton, LTCM, the tech crisis and the housing bubble. Other than Barney Frank, we cannot think of anyone more destructive (Barney Frank is still by far the most repulsive – what a slob).  We went from the greatest generation to the worst at an unbelievable clip. Bill Clinton and his ilk led the charge, while Alan Greenspan helped finance it. Thanks again for our current predicament baby boomers!

Anyway, Alan might be onto something with his bond market call. As we have learned with our oil short, and are currently learning with our Royal Bank of Canada short, timing is everything when trying to short something. We are looking to buy puts on the iShares JP Morgan Emerging Markets ETF (EMB:$107.94).

The stars are aligning for emerging market bonds to get whacked. If there is a bond bubble, the epicenter of it will be in emerging market and high yield debt. If the bond market cracks, the emerging market bond correction of 2008 will seem like a speed bump in comparison. 

Emerging market equities are breaking down and cyclical commodities have fallen into the abyss - are EM bonds set to follow? We are having a difficult time finding reasons to suggest that they will not.

iShares JP Morgan Emerging Markets ETF (EMB:$107.94) – 2007 to Present
Source: Verdmont Capital S.A., Bloomberg

Monday, August 10, 2015

VC Commodities Comment : Barron's Says Buy Gold and Oil : Relative Value is There (Kinda) : Watching the USD and Yields for a Turn

The following Barrons article suggests that now is the time to buy oil and gold.

Now, of course, we have seen similar articles by various market participants over the past few years. Had you followed the advice in similar themed pieces, you would have been killed.

The Barrons article mentions how there is a strong case to be made from a relative value standpoint, which we tend to agree with. Both the equity and bond markets are currently priced for  perfection, whereas the commodity market has digested a barrage of negative news and sentiment is quite depressed.  

In tune with this, the relative performance between traditional equities and commodity linked companies, should not diverge by such a wide margin, as both are linked to global growth dynamics over the long term.  Based on this logic, making a relative value call when discussing commodities is not totally off the mark.

MSCI World Index vs. the CRB Commodity Producers Index – 5 Years
Source: Verdmont Capital S.A., Bloomberg

Getting this trade right however, and most trades for that matter, comes down to timing. We recently tried to play the relative value theme outlined above, and had to exit quickly, when it became evident that commodities were due for another leg down. The one hole in the relative value argument, is that if you pull up a longer term chart of traditional equities to that of the commodity producers, it paints a completely different picture.

Commodity related equities have still outperformed traditional equities by a wide margin since the commencement of the “commodity super-cycle” roughly 15 years ago. The market is currently figuring out how much of that super-cycle argument was built on complete B.S. and how much of it made fundamental sense. Regardless of where you fall on that side of the discussion, the long term chart serves to sober up those who think commodity related stocks are completely washed out. That isn’t necessarily the case.

MSCI World Index vs. the CRB Commodity Producers Index – 15 Years
Source: Verdmont Capital S.A., Bloomberg

There is a trade shaping up here in the commodity complex and we want to be there in size when it happens. When prices are collapsing and sentiment is dour, you want to become increasingly more positive, as opposed to vice versa. In fact, we believe there is a very profitable trade to be made in commodities and related stocks between now and the end of the year.

During the past couple of trading sessions, we have seen a reversal in some key commodities and commodity related currencies. This is despite the fact we have seen a strong jobs number in the US and a rising US dollar. This reversal, in light of US dollar strength, is a good sign, and we removed our short position in the Canadian dollar this past Friday as a result. We have also seen significant selling volume in some key commodity focused equities, and that volume is subsiding, which is a hallmark of capitulation.

We are watching the US dollar and 10 year yields for clues as to when we should become more aggressive within the commodity trade. We would like to see the trade weighted US dollar fail to breach $100 decisively. Furthermore, and ostensibly linked, we would like to see the 10 year treasury yield breakdown anew. A falling 10 year yield would be indicative of falling real-yields, which would be a major tailwind for the commodity trade.

Trade Weighted USD – 5 Years
Source: Verdmont Capital S.A., Bloomberg

10 Year US Treasury Yield – 5 Years
Source: Verdmont Capital S.A., Bloomberg