IB Traders Insight


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Macro

GUOSEN Closing Bell (May. 30)


MARKET

Chinese stocks closed mixed today, with the benchmark Shanghai Composite Index ended at 2822.45 points. The A share market recovered from earlier fall and fluctuated around the flat line with decreasing volatility and turnover, although current balance might be broken soon, as unlocked shares increase this week. Bank and non bank financial sectors led the gains; while nonferrous metals and coal sectors led the falls. Combined turnover for both markets was 333.4 bn yuan, down 11.8% dod.

 

CLOSE

%CHG

VOL (bn yuan)

%YTD

SH Composite

2822.45

0.05

115.6

-20.25

SZ Component

9768.84

-0.46

217.8

-22.87

CSI300

3066.71

0.14

63.5

-17.80

ChiNext

2058.52

-0.55

69.3

-24.15

 

Sector

Top 1

Led by

Top 2

Led by

Upward-leading

Bank

601169

Non bank financial

002500

Downward-leading

Nonferrous metals

603799

Coal

600395

 

NEWS

*Baosteel Group, which owns Baoshan Iron and Steel Co Ltd, China's largest and most advanced integrated steel manufacturer, has said it will defend its legal rights in accordance with international regulations and laws in the case relating to United States Steel Corporation's complaint against Baosteel. On April 26, US Steel Corp filed an application against Baosteel and other Chinese steel makers under Section 337 of the US Tariff Act of 1930, which seeks to bar import of Chinese carbon and alloy steel products. US Steel Corp alleged that 40 Chinese companies, including Baoshan, have exported steel products to the US in violation of Section 337. It also alleged a conspiracy by the Chinese steel companies to control prices, misappropriation of trade secrets and mis-stating the origin of products, which the US International Trade Commission launched an investigation into the case last Thursday. (China Daily)

*China's Wanda Group on Saturday opened a 40-billion-yuan ($6.1 billion) theme park in the eastern city of Nanchang, capital of Jiangxi Province. Wanda Cultural Tourism City (Wanda City), is the latest rival to Shanghai Disney, scheduled to open next month. At the opening ceremony, Wanda's chairman Wang Jianlin said Wanda hopes to have influence and a voice in the culture, tourism and entertainment industries and Nanchang's Wanda City is the first step towards that goal. (Xinhua)

 

 FUND FLOW

 

Click here for more information about Guosen.

This article is from Guosen Securities Co., Ltd. and is being posted with Guosen Securities Co., Ltd.’s permission. The views expressed in this article are solely those of the author and/or Guosen Securities Co., Ltd. and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


9732




Technical Analysis

EURJPY Weekly MACD Trying to Positively Cross


The EURJPY continues its late Friday bounce in today's Asian morning off triangle support (on the daily chart).  A break above this same triangle's resistance would pave the way for a rally towards downchannel resistance (on the weekly chart).  In the meantime, I'll be watching the EURUSD for signs of Euro bottoming (which will be supportive of EURJPY bottoming), and will closely monitor other strong Yen crosses (such as the GBPJPY and USDJPY) to gauge momentum on Yen weakness.  Weekly, daily and 4hr RSI, Stochastics and MACD are mostly rallying, bottomish or consolidating recent gains.  I am flat and will look to go long intraday on any pullback to the 123-123.2 range.

 

EURJPY Weekly/Daily/4hr/Hourly

 

Click here for today's technical analysis on GBPJPY, Natural Gas

 

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures, spot FX and equity CFD markets can be traded consistently profitably. Tradable Patterns’ daily newsletter (blog) provides technical analysis on a subset of ten to twelve CME/ICE/Eurex futures (commodities, equity indices, interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

 

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


9731




Stocks

Pure Storage: Trouble Arises After Fiscal 1Q17 Results


Pure Storage (PSTG: $12/share at time of writing) has fallen nearly 18% after announcing fiscal first quarter results that largely continue the concerning trends we pointed out when we placed PSTG in the Danger Zone in February 2016.

Revenue Still Doesn’t Result In Profits

Once again, Pure Storage reported robust year over year (YoY) revenue growth of 89%. Unfortunately, the company’s costs followed suit. Research & development costs, sales & marketing costs, and general & administrative costs grew 66%, 71%, and 69% YoY respectively. In total, the company’s operating loss grew from -$48 million in fiscal 1Q16 to -$64 million in fiscal 1Q17.

Non-GAAP Remains Misleading

We’ve previously warned investors about the accounting practices of IPO companies as well as the over use of non-GAAP earnings. In our original Danger Zone report, Pure Storage raised non-GAAP red flags due to its use of numerous non-GAAP measures that paint its business in a more positive light. The most recent quarterly release is no different.

In fiscal 1Q17, Pure Storage reported a GAAP net loss of -$63 million but a non-GAAP net loss of only -$41 million. The discrepancy comes from Pure Storage’s use of stock based compensation. $22 million (16% of revenue) in stock-based compensation expense was removed from GAAP net loss to calculate non-GAAP net loss. Stock based compensation is a real cost of business and should be included when determining the profitability of a company.

Class Action Lawsuits Consistent With Our Findings

On May 26, 2016, one day after the quarterly release, Goldman Scarlato & Penny, P.C. announced an investigation on behalf of shareholders of Pure Storage Inc. This investigation concerns potential violations of federal securities law and focuses on whether misleading information about PSTG was provided to investors in connection with the Company’s October 2015 IPO. Additionally, Lundin Law PC announced an investigation of PSTG focusing on whether the company was experiencing pricing pressure from competitors or not. Both these lawsuits are consistent with our findings. Pure Storage has presented its business in a better light through the use of non-GAAP metrics, when in fact the economics of the business are in decline. At the same time, Pure Storage’s low profitability, as noted in our original Danger Zone report, is a significant competitive disadvantage when it comes to pricing.

Valuation Is Unrealistic Even After Decline

Even after the nearly 18% decline in PSTG, the stock is still overvalued. To justify the current price of ~$12/share, PSTG must immediately achieve 1% pre-tax margins (-44% in fiscal 2016) and grow revenue by 50% compounded annually for the next 11 years. In this scenario, Pure Storage would be generating over $38 billion in revenue 11 years from now, which is equal to Oracle’s (ORCL) 2015 revenue.

Even if we assume Pure Storage can achieve a 14% pre-tax margin (average of competition from original Danger Zone report) and can grow revenues by 18% compounded annually for the next decade, the stock is only worth $11/share today – a 25% downside to the closing price on May 25, 2016.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

About New Constructs

We find it. You benefit. Cutting-edge technology enables us to scale our forensics accounting expertise across 3000+ stocks. We shine a light in the dark corners of SEC filings so our clients can make safer, more informed decisions.

Our stock rating methodology instantly informs you of the quality of the business and the fairness of the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to.

In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a "Buy" rating, Very Dangerous and Dangerous correspond to a "Sell" rating, while Neutral corresponds to a "Hold" rating.

Cutting-edge technology enables us to scale our forensics accounting expertise so that we can cover enough stocks to cover the ETFs that hold them as well. Learn more about New Constructs. Get a free trial. See what Barron’s has to say about our research.

This article is from New Constructs, LLC and is being posted with New Constructs, LLC’s permission. The views expressed in this article are solely those of the author and/or New Constructs, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


9729




Futures

Eurocurrency Losses & Oil Rallies Pre-OPEC


Scott Nations, CNBC Contributor & NationsShares

This video is from CME Group and is being posted with CME Group’s permission. The views expressed in this video are solely those of the author and/or CME Group and IB is not endorsing or recommending any investment or trading discussed in the video. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


9730




Stocks

The Best and Worst of the Large Cap Blend Style 2Q16


The Large Cap Blend style ranks second out of the twelve fund styles as detailed in our 2Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Large Cap Blend style ranked first. It gets our Attractive rating, which is based on aggregation of ratings of 37 ETFs and 845 mutual funds in the Large Cap Blend style as of May 3, 2016. See a recap of our 1Q16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Large Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 3810). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Large Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

NewConstructs_LargeCapETFRatings_2Q16

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

WisdomTree Total Earnings Fund (EXT), FlexShares U.S. Quality Large Cap Index Fund (QLC), and State Street SPDR MSCI USA Quality Mix ETF (QUS) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5

NewConstructs_LargeCapMFRatings_2Q16

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

State Street SPDR Dow Jones Industrial Average ETF Trust (DIA) is the top-rated Large Cap Blend ETF and Financial Investors Trust Vulcan Value Partners Fund (VVPLX) is the top-rated Large Cap Blend mutual fund. Both earn a Very Attractive rating.

First Trust Mega Cap AlphaDEX Fund (FMK) is the worst rated Large Cap Blend ETF and AmericaFirst Seasonal Trends Fund (STQAX) is the worst rated Large Cap Blend mutual fund. FMK earns a Neutral rating and STQAX earns a Very Dangerous rating.

Franklin Resources (BEN: $38/share) is one of our favorite stocks held by VVPLX and earns a Very Attractive rating. Over the past decade, Franklin Resources has grown after-tax profit (NOPAT) by 8% compounded annually. The company has improved its return on invested capital (ROIC) from 21% in 2005 to a top-quintile 26% over the last twelve months. Possibly most impressive, Franklin has generated positive economic earnings in every year since 2003. Despite the success, BEN remains undervalued. At its current price of $38/share, Franklin Resources has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means that the market expects Franklin’s NOPAT to permanently decline by 20%. If Franklin Resources can grow NOPAT by 3% compounded annually over the next decade, the stock is worth $60/share today – a 58% upside.

NRG Energy (NRG: $15/share) is one of our least favorite stocks held by EQAL and earns a Dangerous rating. Since 2006, NRG’s NOPAT has declined by 1% compounded annually. The company’s ROIC has fallen from 9% in 2006 to a bottom-quintile 2% over the last twelve months. Additionally, over the past five years, NRG has generated a cumulative -$10.8 billion in free cash flow. Despite these operational struggles, NRG remains overvalued. To justify its current price of $15/share, NRG must grow NOPAT by 9% compounded annually for the next 11 years.

Figures 3 and 4 show the rating landscape of all Large Cap Blend ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

NewConstructs_LargeCapETFLandscape_2Q16

Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Funds

NewConstructs_LargeCapMFLandscape_2Q16

Sources: New Constructs, LLC and company filings

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

About New Constructs

QUESTION: Why shouldn’t ETF research be as good as stock research? Why should ETF investors rely on backward-looking price trends?
ANSWER: They should not.

Don’t judge an ETF by its cover. Take a look inside at its holdings and understand the quality of earnings and valuation of the stocks it holds. We enable you to choose the best ETF based on its stock-picking merits so you do not have to rely solely on backward-looking technical metrics. 

The figure below details the drivers of our forward-looking Rating system for ETFs. The drivers of our predictive rating system are Portfolio Management and Total Annual Costs. The Portfolio Management Rating (details here) is the same as our Stock Rating (details here). The Total Annual Costs Rating (details here) captures the all-in cost of being in an ETF fund over a 3-year holding period, the average period for all fund investors.

Cutting-edge technology enables us to scale our forensics accounting expertise so that we can cover enough stocks to cover the ETFs that hold them as well. Learn more about New Constructs. Get a free trial. See what Barron’s has to say about our research.

This article is from New Constructs, LLC and is being posted with New Constructs, LLC’s permission. The views expressed in this article are solely those of the author and/or New Constructs, LLC and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


9725




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Disclosures

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