Friday, May 30, 2014

Ruble Rally Handing Windfall to Magnit Stock Bulls

Ruble Rally Handing Windfall to Magnit Stock Bulls

Photographer: Andrey Rudakov/Bloomberg
Customers browse in a supermarket operated by OAO Dixy Group in Moscow. Dixy’s earnings... Read More
OAO Magnit (MGNT), Russia’s biggest retailer, is heading for its best monthly advance since 2011 as a rebound in the ruble holds down costs and signs mount that consumer spending is proving resilient.
Magnit’s global depositary receipts have gained 28 percent in May after sinking 16 percent in the two months following Russia’s incursion into Crimea. OAO Dixy Group rose to the highest level in four months after reporting a 73 percent jump in net income yesterday, while Lenta Ltd. (LNTA) climbed to a record. X5 Retail Group NV, the nation’s second-largest retailer, is poised for its best year since 2010.
Dixy’s earnings surge comes three weeks after Magnit reported net revenue growth of 30 percent for April, from a 24.5 percent expansion in March. Investors are buying retailers as they have proven more resilient amid slowing growth, according to OAO Promsvyazbank and Kapital Asset Management LLC. Russian retailers, which are dependent on food imports, are also benefiting from a strengthening ruble.
“I cut our Magnit holdings at the start of the year during the ruble devaluation wave and started buying it at the beginning of May,” Sabina Mukhamedzhanova, a fund manager at Promsvyaz Asset Management in Moscow, which manages about 17.9 billion rubles ($520 million), said by phone yesterday. “Now that the ruble is strengthening and retailers have been posting decent financial results, investors realize that their fears were exaggerated.”
The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. added 0.9 percent to 88.60. The Micex gained 0.1 percent to 1,449.17 by 10:08 a.m. in Moscow today.

‘Most Effective’

The Market Vectors Russia ETF (RSX), the biggest U.S. exchange-traded fund that holds Russian shares, gained 0.9 percent to $25.58. The RTS Volatility Index, which measures expected swings in futures, rose 0.7 percent to 26.45.
“Magnit does well during an economic slowdown because it’s a discounter and is the most effective among retailers,” Mukhamedzhanova said. “Dixy posted decent results and that’s spurring investor interest.”
Russia’s first-quarter gross domestic product growth slowed to 0.9 percent, the weakest in a year, according to Federal State Statistics Service data released this month. The nation’s retail sales grew 2.6 percent on an annual basis after a 4 percent increase in March, the statistics service said May 22.

2,000 Calories

The ruble has strengthened 2.6 percent this month, the second-best performance among 23 emerging-market currencies tracked by Bloomberg after Chilean peso, as Russian President Vladimir Putin has refrained from escalating a standoff in Ukraine after sanctions from the U.S. and the European Union.
Russia has long been dependent on food imports, especially in many of the perishable categories, as weather conditions are unfavorable for much of the year.
“Even in an economic downturn, food is non-discretionary,” Timothy Post, head of investor relations at Magnit, said by telephone from Krasnodar yesterday. “Consumers still must eat their 2,000 calories a day. As a result, the food sector is perhaps the last retail category to experience a slowdown.”
Magnit derives 80 percent of its revenue from food sales, according to Post. Barclays Plc reiterated a rating equivalent to buy in a note dated yesterday.

Growth Resumes

Lenta, which made its debut in London three months ago, should be Russia’s fastest-growing food retailer, Bank of America Corp. analysts Victor Dima and Ilya Ogorodnikov wrote in an e-mailed note yesterday, giving it a buy recommendation and a price estimate implying a 27 percent jump. The company’s strategy of using hypermarkets with low prices is working well, spokesman Mark Walter wrote in an e-mail from London on May 28.
Not everyone is betting on the sector’s invincibility.
“We sold some of our Magnit holdings today, mostly because the rally seems to be nearly vertical when you look at the stock chart,” Anvar Gilyazitdinov, who manages a $10 million portfolio of Russian stocks at Rye, Man & Gor Securities, said by phone from Moscow yesterday. “It’s a very good stock longer-term, while in the meantime we need to see what is going on in the economy before we consider buying retailers. Weaker ruble and rising inflation remain a concern.”
Kapital Asset Management bought shares of Magnit and Dixy this month, said Vadim Bit-Avragim, who helps oversee about $4.1 billion at the Moscow-based firm.
“Retailers were underperforming against the backdrop of a weaker ruble, and now the ruble has strengthened and April results are coming out, from which we can see that retail sales growth has resumed,” Bit-Avragim said by e-mail yesterday. “Investors are realizing that things aren’t that scary and Magnit hasn’t suffered from the Ukraine situation, and they are coming back to quality names with high growth potential.”
To contact the reporters on this story: Halia Pavliva in New York at; Ksenia Galouchko in Moscow at
To contact the editors responsible for this story: Nikolaj Gammeltoft at Alex Nicholson

Tuesday, May 27, 2014

Vipshop: Even After A 2660% Rise, There's Still Potential


  • Vipshop Holdings Reported Staggering Q1 Earnings That Exceeded Analyst Expectations.
  • The Effect Of The LeFeng Acquisition Will Likely Be Seen By 2014Q4 At The Earliest, But Should Prove To Be A Very Shrewd Acquisition.
  • The Company Stands To Benefit Further From A Blossoming Chinese Ecommerce Market.


Vipshop Holdings (VIPS) has seen tremendous growth in its equity value since its IPO in March 2012, with the stock price rising a staggering 2660%. Because of this, Vipshop has garnered a lot of attention from investors, particularly as investor appetite for Chinese companies has been waning since the end of Q1. In addition, on May 15th, the firm reported another set of stellar results, beating analysts' expectations on the top and bottom line.
In light of last week's earnings release and the plethora of Chinese ecommerce firms listing in the US this year, this article will discuss Vipshop's outlook and its operations in China.

The Business Model

Vipshop offers genuine brands at large discounts for a limited time period, and their user base has grown to 28 million in just 4 years. The customer base is currently predominantly female, with only 25% of customers being male. The company has about 9900 brands, where the top 20 suppliers account for about 12% of revenue, and the top 10 account for less than 10% of total net revenue.

Many investors have been under the impression that the majority of the revenue comes from tier 3 and 4 cities. However, the revenue from tier 1 and 2 combined is actually larger than the tier 3 and 4 combined revenue. Tier 1 cities represent 12% of revenue, whilst tier 2 represents 40%. This is important, because Vipshop caters for the whole of China, rather than just a particular set of customers. It allows Vipshop to take advantage of the whole boom in the Chinese ecommerce market, rather than just a particularly segment.
In 2014, Vipshop will focus on reducing expenses by expanding warehouse capability. This will also help to improve their ability to serve their customers. At the end of Q4, the company's warehousing capacity reached 350,000 square meters, and is on track to expand over 700,000 square meters by 2016, after a $200m investment. The company will also have its first fully-owned warehouse up and running by the end of 2014.
The company is committed to growing their product portfolio both organically and through acquisitions. Cosmetics is a key element, and this was shown by the company's acquisition of LeFeng.

The Acquisition Of LeFeng

On February 14th 2014, Vipshop completed the acquisition of Chinese online cosmetics retailer, as part of its strategy to diversify its product portfolio into the profitable Chinese cosmetics retail industry.
Of the total active customers from Q1 of 7.4m, about 1m actually came from LeFeng, which generated 1.3m orders. Analysts have discussed the effect of LeFeng on the average order size, because in Q1 the average ticket size actually decreased. However, as CFO Yang Donghao explained, cosmetic customers' orders tend to have a lower dollar amount.
The traditional average orders per customer for Vipshop is about 3x a quarter, which is significantly more than the 1.3x from LeFeng customers. It remains to be seen whether this is a continuing trend, as the LeFeng acquisition wasn't officially closed until mid-February, so the 1.3x figure could improve in the second quarter. Yet Vipshop plans to address this primarily by improving operational capabilities, as cosmetics customers do tend to order less than other customers.
In addition, the revenue contribution from LeFeng in Q1 was less than 5%, although this can be attributed to the deal being closed on 14th February. Although investors will likely have to wait until the end of the year to begin to see the full effects of the acquisition on Vipshop, the combined cosmetics GMV of both firms is $167m, which makes it the second largest player in the market, and ascension to first place is targeted in the near future.
CFO Yang Donghao discussed how the revenue generated by LeFeng isn't currently meaningful to the overall company, as it's still small. In fact, LeFeng isn't growing as fast as Vipshop's core business of apparel. But the intention is that LeFeng will grow and catch up with the rest of Vipshop, as soon as it has been fully integrated with Vipshop. LeFeng and Vipshop currently have two independent websites and systems, which makes cross selling difficult. Whilst it's not a top priority at the moment, the cross selling strategy will develop.

Exposure To The Chinese Ecommerce Industry

As with most Chinese ecommerce firms listed in the US, Vipshop operates almost completely within China.
The Chinese ecommerce market is already larger than the US, in terms of size and retail as a percentage of total consumption. One of the main reasons for this is the lack of brick and mortar infrastructure to rival online retail. For example, in the US, huge superstores have been the backbone of the retail industry for decades, with the likes of Walmart being able to offer a wide variety of goods to customers. However, China doesn't have this infrastructure, particularly away from the Tier 1 cities. So out of a lack of feasible alternatives, Chinese ecommerce has boomed.
But as the industry has boomed, it has also evolved in such a way that a brick and mortar alternative is unnecessary. For example, goods ordered online will almost certainly arrive the next day, and in most cases the delivery charge will be minimal, if not free. This is because of the logistics system in China, where it's common to see deliverymen on electric scooters with seemingly far too many parcels balanced precariously on the parcel rack, whilst weaving in and out of traffic. Yet this logistics system works, because every single mile is stretched so that packages can be delivered quickly. And when you compare this to the US, Amazon charges for $99 annually for unlimited two day shipping, which explains the reason why the ecommerce industry has boomed, and will continue to grow. Users have a huge selection of goods that are delivered within 24 hours in a cost effective manner.
The initial boom in the industry began as a customer to customer, C2C, platform model, where the likes of Alibaba would provide buyers and small vendors with an online platform in which to trade. However, as Chinese consumer tastes have evolved, the rise of business to consumer, B2C, platform models has taken place. One of the main reasons for this is because the C2C model offers no guarantee of the quality of goods, and is plagued with fake goods. However, the B2C model connects consumers with the actual brand, and hence doesn't have these worries. This has created opportunities for the likes of Vipshop, and the Tmall branch of Alibaba.
In the US, when Amazon was first launched, the B2C model was already well established, in the brick and mortar sense, because companies would rent physical real estate to sell their goods directly to customers. Therefore, because customers were already used to the B2C model, the Amazon platform was easily accepted by consumers. In China, the Taobao C2C was scalable, and easily accepted by consumers. In fact, you can walk into most shopping malls in China, and still see that the first two floors are brand name shops, and the upper floors are small vendors.
This can explain the huge growth seen in the platform model in China, because the likes of Taobao and Tmall have such a dominant share of the market, that as Chinese consumers' tastes develop and they want brand named goods, these brand name firms can't enter the market directly, so they have to rent the virtual real space on the likes of Tmall and
In the most recent analysis of the ecommerce market by McKinsey China, they discussed the future of the ecommerce industry here in China. The major firms are focusing on the O2O model, online to offline. They do this by letting users pay for goods using the WeChat app, and use mobile promotions to attract customers to come to the physical store. Also, as we have seen with Alibaba's $300m acquisition of department store operator InTime, Alibaba will allow customers to use AliPay on their mobile phone to purchase goods in store, which would increase brand loyalty and additional purchases.
However, in the US, we wouldn't see that. Amazon wouldn't acquire retail space, and in fact, in Best Buy's earnings report, they announced a gross profit margin that fell less than expected, because the firm has been using its physical stores as mini distribution hubs for processing shipments and orders, and is now able to ship from all of its 1,400 retail stores. Retailers focus on this because of the trend of 'showrooming', where customers use the physical stores to view the product, and then buy online.

From A Valuation Perspective

Vipshop had another stellar quarter, reporting record net revenues of $701.93m. This was an increase of 125.95% YOY, which even for Vipshop's own high standards, is impressive. This was primarily due to a 165.1% increase in active customers from 2.8m to 7.4m, and a 129.3% increase in total orders from 8.8m to 20.2m. Year on year, gross margin increased from 23.4% to 24.9%.

The acquisition of cosmetics retailer is expected to generate synergies via cross selling, using both platforms to streamline cosmetic offerings, and by lower combined expenses. Vipshop has already been investing in warehouse expansion, in cooperation with LeFeng operations.
Vipshop also issued new guidance for the second quarter revenue to be between $780m and $790m, which would represent a YOY growth rate of between 122% and 124.9%.
The trailing 12 months P/E ratio is 133.14, which is high relative to most in the industry, but the forward P/E ratio drops to 36.03. Likewise, the P/S ratio for 2014 and 2015 estimates is 2.87x and 1.85x respectively. Given that revenue since 31st Dec 2011 has grown at a CAGR of 173%, these P/S ratios seem very cheap.

The company has 1.95m shares short, as of the 30th April, which is a ratio of about 8% of the 24.86m float. This is somewhat understandable given the exponential rise in its stock price since its IPO, however, Vipshop's earnings continue to beat estimates.

The company saw improving gross margins this quarter, which was due to the growing economies of scale. The fast growing revenue has given the firm greater bargaining power with suppliers. In the Q1 conference call, CFO Yang Donghao highlighted the number of sales events that the company held during the quarter, with the 14,200 events exceeding the 14,000 from the previous quarter and increasing 63.4 from a year before.

Looking Ahead

The company is focusing on three areas of development for the future: extending the consumer base, improving the customer shopping experience, and using technology and mobile to drive more business.
The company is looking at expanding their product portfolio, outside of their core categories, and this has included testing of an auto flash sales model, in which Vipshop would offer discounts on buying cars for a limited time. One of the main reasons for this is because the majority of Vipshop's customers are female, and an auto flash sales category would attract more men to the site.
CEO Eric Shen has commented that the firm is making strides to migrate their services onto mobile platforms. As discussed earlier, the Chinese ecommerce industry as a whole is moving towards mobile platforms, and it's important for Vipshop to maintain the pace within the industry.
On 11th March 2014, the company priced a follow on ADR and convertible senior offering that raised over $632m. This capital was used to fund the acquisition of cosmetics firm LeFeng, and to fund future growth initiatives. This is particularly interesting because Vipshop is seemingly at a stage where it can afford to grow and diversify its operations through acquisitions. CEO Eric Shen discussed that any acquisitions would be to supplement their core customers, in order to attract more loyal and sticky customers to the company.
The company has invested a lot into the IT department, where the current number of 860 staff is expected to almost double to 1500 by the end of the year. This will help to launch the company's focus on personalised recommendations and customer profiling. In Q2, they have already begun testing different interfaces for male and female customers, based on previous purchase and browsing history. This is intended to increase customer retention and the customer purchase rate.
Vipshop has migrated to a mobile platform via the wildly popular WeChat application. This is an important step for Vipshop because WeChat has the technology that allows customers to pay for items via their WeChat account. This has only just been released by Vipshop, but it certainly has a lot of potential. In Q1, mobile trends contributed 36% of revenue, and in April alone, it reached 43.6%.


It's unusual to think that a stock that has risen 2660% in 2 years could still be highly regarded by analysts, but Vipshop is one of those rare exceptions. From a financial point of view, it continues to see staggering growth across all key metrics, and management is raising guidance for the following quarter.
From an industrial point of view, the Chinese ecommerce market continues to grow, and as the middle class gets wealthier and more numerous, it will drive the industry. In addition, the Chinese government is committed to developing transport infrastructure networks from the affluent eastern coast to inland China. This should increase online retail revenue from the tier 3 and 4 cities.
Finally, from a future outlook point of view, Vipshop is making the right acquisition moves to develop and diversify its product portfolio, and is keeping up with the industry trends by migrating to a mobile platform. As it grows both organically and through acquisitions, investors will start to see Vipshop taking market share away from competitors and Tmall.

Friday, May 16, 2014

Are Stocks Cheap Or Overpriced? Here's Why Analysts Passionately Disagree


  • Some analysts claim stocks are cheap, others argue stocks are expensive. Which one is it?
  • P/E ratios vary depending on calculation method. Discussed are two and why they may be altogether worthless.
  • There is one "non-fudgeable" valuation metric: dividends.
A standard is defined as a rule set by an authority to measure quantity, quality, weight or value. In short, standards are established to limit confusion.
By what standard are analysts measuring stock market valuation? There must be different "standards," because stock market valuation is a passionately fought and never-ending debate. Some analysts say that stocks are overvalued, others argue they are cheap. How can that be, and who is right?
This article will review three different valuation metrics, each plotted against the S&P 500 (timeframe: from 1881-2013; datasource: Robert Shiller), and two variables that make P/E analysis almost worthless.

Valuation Metric #1: 12-month Trailing P/E

Figure 1 shows the S&P 500 P/E ratio based on 12-month trailing "as reported" earnings.

As of December 31, the 12-month trailing as reported P/E was at 18.19 (18.91 today).
The 134-year average is 15.81. The highest reading was 123.79 (May 2009), the lowest reading was 5.31 (December 1917).
Based on this P/E metric, the S&P 500 (SNP: ^GSPC) is 19.6% overvalued (compared to its 134-year average).

Valuation Metric #2: Cyclically Adjusted P/E

Figure 2 shows the S&P 500 Cyclically Adjusted P/E ratio (CAPE). The CAPE is based on average inflation-adjusted earnings from the previous 10 years (formula: take the annual EPS of S&P 500 for the past 10 years. Adjust EPS for inflation using the CPI. Take the average of inflation adjusted EPS figures over the 10-year period. Divide the current level of the S&P 500 by the 10-year average EPS).

As of December 31, the CAPE was at 24.86 (25.62 today).
The 134-year average is 16.61. The highest reading was 44.20 (December 1999), the lowest reading was 4.78 (December 1920).
Based on the CAPE, the S&P 500 (NYSEARCA: SPY) is 54.24% overvalued.

Valuation Metric #3: Forward (Imaginary) P/E

The forward P/E is based on forecasted (or projected) earnings. Wall Street analysts are generally optimistic, and most optimistic towards market peaks. As such, earnings forecasts are often inflated, resulting in depressed P/E ratios.
The current S&P 500 P/E based on projected earnings is 15.80. This P/E doesn't have a 134-year history, but here is what Factset says about the forward P/E:
"The current 12-month P/E ratio is stil below the 15-year average (16.0). During the first two years of this time frame (1999 - 2001), the forward P/E ratio was consistently above 20.0, peaking at around 25. With the forward P/E ratio still below the 15-year average and not close to the higher P/E ratios recorded in the early years of this period, one could argue that the index may still be undervalued."

Is P/E Ratio Analysis Worthless?

There are two problems with P/E ratio based valuation analysis:
1) Corporations can and often do fudge their balance sheets (such as FASB rule 157). More details about one of the biggest loopholes here: The Simple Trick that Ruined the P/E Ratio for Everybody.
2) Multiple expansion: Multiple expansion is a fancy term for investors' willingness to overpay for stocks. Some research suggests that 70% of bull market returns are based on multiple expansion.
To wit. In January, one high-flying tech stock was trading with a P/E ratio of 1,403. The January 5 Profit Radar Report featured this little tidbit:
"Trivia: Which high-flying tech leader has a P/E ratio of 1,403? Tip: This stock is the fourth biggest component of the Nasdaq-100. Answer: Amazon (AMZN). Amazon founder Jeff Bezos is a true visionary and Amazon is working on amazing technology, but ultimately earnings are more important than pure vision. A close below 380 would open the door for much lower targets."
From January to May, AMZN lost as much as 30%. Willingness for "multiple expansion" creates bubbles, and there's no telling when bubbles start or end. It's a wild card. Ultimately, a stock is worth as much as investors are willing to pay for it, regardless of its P/E ratio.

The "Non-Fudgeable" Valuation Metric

Investors are irrational and corporations can cook the books, but one gauge that can't be fudged are dividends. Dividends are either paid, or not.
The S&P 500 dividend yield was at 1.94% on December 31 (1.91% today).
The 134-year average is 4.32%. The highest yield was 13.84% (June 1932), the lowest yield 1.11% (August 2000).
Based on dividend yields, the S&P 500 is 55.79% overvalued.


Each of the above charts is plotted against the S&P 500, providing a clear visual that valuations don't work as short-term market timing tools. What does work as short-term timing tool?
Here is a closer look at a fascinating type of analysis that's pegged the recent S&P 500 moves:

Thursday, May 15, 2014

Vipshop Holdings Beats Estimates On Exponential Sales Growth, Raised Guidance

China’s leading discount online retailer, Vipshop Holdings Ltd-ADR (VIPS) went up 8.7% to $163 in extended trading yesterday after the company topped earnings estimates for the quarter and provided strong revenue guidance for the current quarter.
Vipshop Holdings operates on a flash-sale style, where a limited quantity of product is sold for a limited period of time to drive maximum consumer interest. This model ensures low operating and inventory costs for the online retailer. The flash-sale industry operates on a "get it before it's gone" mentality.

Quarterly Performance

Vipshop Holdings reported its financial results for the first quarter of fiscal year 2014 (1QFY14; ended March 31, 2014) after the closing bell yesterday. The company operating out of Guangzhou, China reported revenues of $701.9 million, increasing 125.9% year-over-year (YoY), and beat consensus estimates of $656.9 million by nearly 6.9%. The company has managed to beat revenue estimates for eighth consecutive quarters.
The increase in revenues resulted from an increase in the number of active customers along with a rise in total orders. Active customers jumped to 7.4 million at the end of 1QFY14 from 2.8 million a year ago. Total orders skyrocketed to 20.2 million compared to 8.8 million a year earlier.
The company’s gross margin expanded by 150 basis points (bps) YoY to 24.9%. This was because of an increase in revenues as well as effective margin management by the company due to improving bargaining power with suppliers as the scale of business grows.
The company reported a net profit of $26.6 million, an impressive increase of 359% YoY, translating into adjusted earnings per ADS of 63 cents, which excluded stock-based compensation. The company beat consensus earnings estimates of 46 cents by 17 cents. Vipshop Holdings has now beaten consensus estimates for earnings for the eighth consecutive quarter.


For the current quarter, the company expects revenues to fall between $780 million and $790 million, which would represent an increase of 122-124.9% YoY. The yearly growth in the topline is expected to be similar to what the company experienced during the first quarter. The revenue guidance provided by the company was stronger than analysts’ expectation of $688.3 million. For the first quarter of FY14, the company had expected to report revenues in the range of $640 million and $650 million, and blew past its own projections to generate revenues of $701.9 million.

The Street’s Outlook

Currently, Vipshop Holdings gets coverage from 18 analysts. 14 of them have given the stock a Buy rating, while the other four recommend holding onto the stock. The average of the 12-month target price given by these analysts is $182.94, which translates into an upside of roughly 22% from yesterday’s closing price of $150.
Among notable financial companies across the Street, JPMorgan Chase & Co. (JPM), Credit Suisse Group AG (ADR) (CS), and Deutsche Bank AG (USA) (DB) are all bullish on the stock. The 12-month target price given by these renowned financial services companies is $200, $178, and $177 respectively.
Vipshop is currently trading at a year’s forward price-to-earnings (P/E) multiple of 49.2x, a premium of 21.4% to its one-year average forward P/E of 40.6x. Going forward, Vipshop Holdings expects to see its earnings grow 109% during 2014.
However, the company is trading at a cheaper valuation compared to the largest online retailer in the US,, Inc. (AMZN), which has a forward P/E multiple of 67.9x. Amazon reported its earnings late last month and the stock price plummeted after the Seattle-based company provided weaker revenue guidance for the current quarter.
In the past one year, Vipshop Holdings’ stock price has increased 372%, outperforming the Chinese Internet ETF (KWEB) and the S&P 500 ETF (SPY) in the process. These securities increased 25% and 15.7%, respectively, during the same period.

Dangdang Preview

Chinese e-commerce retailer, E Commerce China Dangdang Inc (ADR) (DANG) will also report its earnings before markets open today. Following positive earnings results by Vipshop Holdings yesterday, the stock price of Dangdang also increased 4.85% during after-hours trading.
Analysts expect the company to report revenues of $284.2 million, an increase of 32.7% YoY, and break even in terms of earnings per ADS. Dangdang is currently covered by 16 analysts. Seven analysts have given the stock a Buy rating, while six recommend holding onto the stock. The 12-month average target price given by these analysts is $15.70, which translates into an upside of 36% from yesterday’s closing price of $11.54. Among notable names, JPMorgan and Barclays Plc ADR (BCS) have given Dandang an “Underweight” rating. A better-than-expected financial result by Dangdang could further fuel a rally for Chinese e-commerce retailers, and can have a favorable impact on the valuation of Alibaba Group Holdings Ltd., which is expected to go public later this year.
The Gap, Inc. (GPS) is also planning to enter the Chinese market by opening 35 stores in the country and plans to use them to fuel future growth for the company.
You can also go over our piece: 3 ways to Invest in China.

Sunday, May 11, 2014

VIX Contango Comet - Profitable Observations

Some of the readers of my last article on volatility suggested that the trading model I outlined focused too much on the spot price of the VIX and not enough on the contango effect. Others berated me for suggesting going long the iPath S&P 500 VIX Short Term Futures TM ETN (VXX) in certain situations and that my recommendations are a big money loser. I think they are both right and I am writing this article in the hopes that I can rectify my standing with those two camps. While I agree that a long-term buy and hold of the VXX is not a good idea, I do believe that every person that invests his own money is at his core a trader and a little bit of a gambler; if you don't find the idea of taking occasional shots at making a big return on a VIX spike appealing then you might as well go and plant flowers in the backyard. Trading is a risky business and the return is commensurate with the risk taken. However, most people do prefer a buy and hold approach with capital preservation of utmost importance and the goal of this article is to outline a buy and hold strategy for volatility trading.

VIX Contango Comet

I decided to dig a little bit deeper into the contango effect. While there are terrific articles on Unraveling the VXX Roll Yield Riddle, I want to focus more on figuring the parameters of when to get into a trade and when to get out. I agree that contango, more specifically the front-month contango, and spot price of the VIX have to be taken into account together before making a trading decision. The front-month contango is the difference in the price of the current month's VIX futures contract and next month's VIX futures contract. Since the volatility ETFs and ETNs sell the current month VIX futures contract and buy the next month VIX futures contract, the front-month contango is of utmost importance. I was able to get VIX front-month contango data (from here on I'll just call it "contango") from June 21, 2007 to February 15, 2013. This is almost 6 years worth of data that encompasses the end of the bull market in 2007, the financial crisis in 2008, the recovery of 2009, the European debt crisis debut in 2010, the US downgrade fiasco of 2011, the choppy election year of 2012, and of course, all the bullish action in between these episodes. This is a nice compilation of years that combine good and bad times and will provide us with a good objective look into the interplay between VIX and contango.

(Click to enlarge)
This scatter graph plots the VIX vs. contango for 1425 trading days. What becomes immediately obvious is that for the most part the VIX is between 10 and 30 and that the contango is mostly positive. In fact, this is true 65% of the time. There seems to be a loose linear relationship between the VIX and contango. The data is not exactly stuck to the regression line but there does seem to be a relationship. The higher the VIX, the higher the chance that the contango will be negative. In fact, for VIX values over 45, there are only 2 positive contango days, the other 84 days are strictly negative. However, a higher VIX doesn't automatically mean a lower contango. The cluster around the head and the looseness of the tail is why I call it the VIX Contango Comet. 65% of the time, the action is in the head of the comet where the VIX is low and the contango is positive which means for the long-term you want to be a buy and hold investor of the VelocityShares Daily Inverse VIX Short Term ETN (XIV).
For your information, I have put together some other interesting statistics from the VIX Contango Comet:
Average Contango
Standard Deviation
2 StDev Above
1 StDev Above
1 StDev Below
2 StDev Below
Min Contango
Max Contango
Average Negative Contango Steak
8 days
Average Positive Contango Streak
21 days
Longest Negative Contango Streak
76 days
Longest Positive Contango Streaks
178 days
These are the odds of the contango being above or below certain thresholds:
And here are the longest consecutive streaks:

Longest Negative Contango Streaks (days)

1st: 76 (8/1/2011 to 11/15/2011)
2nd: 63 (9/12/2008 - 12/10/2008)
3rd: 54 (1/15/2008 - 4/10/2008)
4th: 39 (1/7/2009 - 3/11/2009)
5th: 26 (11/7/2007 - 12/13/2007)

Longest Positive Contango Streaks (days)

1st: 178 (6/30/2010 - 3/14/2011)
2nd: 145 (5/31/2012-12/27/2012)
3rd: 126 (11/16/2011-5/17/2012)
4th: 91 (6/19/2009-10/30/2009)
5th: 83 (3/16/2011-7/13/2011)
I was very surprised at how long the longest negative contango streak was. 76 trading days is almost 4 months. If you are invested in the XIV at that time, the backwardation will be eating your money faster than Kobayashi can eat hot dogs. You might as well pull the money out, buy yourself a box of cigars and use the remaining Benjamins to light them up. At least you will be putting the money to some practical use. As with anything, there is no free lunch and XIV can bite you just as hard as the VXX if you are not careful.

VIX, Contango and the Nonfarm Payrolls Report

The most important market moving economic indicator each month absent some catastrophic event like Lehman is the Bureau of Labor Statistics Employment Situation report. It is the most widely followed report by the financial media and it comes out in the first week of every month. The seasonally adjusted monthly nonfarm payrolls report sets the table for trading during a given month more so than any other economic indicator and as such I think it strongly affects the value of the VIX. I have taken all VIX and contango data and averaged them for a given month and then compared them against the nonfarm payroll release for the prior month. I have made comparisons against the actual payroll number as well as the change in payrolls. Here are scatter graphs of these comparisons:

(Click to enlarge)

(Click to enlarge)
Clearly, the more positive the payroll number, the lower the VIX is and the more positive the contango is, although the relationship is not strictly linear. Generally, the same relationship exists for change in payrolls. I have summarized the above graphs in these two tables that show ranges for payrolls and number of months in which the average contango was positive or negative:

(Click to enlarge)
Since contango is 70% of the time positive, months with negative payrolls will experience periods with positive contango. However, in red above, we can find the sure bets. When payrolls change is above 100K jobs, contango is 100% of the time positive and when actual payrolls are above 100K, there is an 85% chance of having positive contango. So if the monthly jobs report is in excess of 100K or the payroll number is 100K higher than the prior month, you might as well go out and buy the XIV. This month (May 2013) is one such month for example as the nonfarm payrolls clocked in at 165K although the change from the prior month was only 27K.

VIX Contango Oscillator

But why stop here? How about we look at a simple chart of the VIX vs. contango over the entire period for which I have data. This is by far my favorite chart:

(Click to enlarge)
Clearly it shows that contango is for the most part positive, although it does tend to go negative for long periods of time during times of extreme market duress. Big dips in the contango are present during the aftermath of the Lehman bankruptcy and after the rating downgrade of US treasury debt from AAA status. Negative contango also coincides with spikes in the VIX. The best time to buy the XIV is when the VIX is coming down from elevated levels and the contango turns from negative to positive. On the chart above, when the VIX and contango lines intersect that seems to constitute an XIV buy signal. To make this buy signal even more clear, let's create a composite data series that combines the VIX and contango using the following formula and plot it against time:
VIX Contango Oscillator = VIX -45 + 1000 * Contango

(Click to enlarge)
A XIV buy order should be placed when the VIX Contango Oscillator goes from an extended negative streak into positive territory. You can also place buy orders when the oscillator touches the axis and bounces back into positive territory. If it goes negative for more than a couple trading days, you might want to consider closing your XIV positions. When it hits zero again and goes positive, then buy the XIV again. And if you are an adventurous gunslinger, then you might want to consider buying yourself some VXX when the oscillator goes into negative territory for a couple of days. But make sure to close out of your positions quickly if the oscillator bounces back into positive territory.
To illustrate the profitability of this strategy, let's look at the XIV against the VIX Contango Oscillator. The XIV was started on November 30, 2010 so I can only go back that far. The shaded areas show when you should be invested in the XIV based on buy and sell signals from the oscillator:

(Click to enlarge)
There were 3 fairly stress free opportunities to double the money you have allocated to volatility trading using XIV over the past 3 years. Are you going to catch the next one?
You can get today's front month contango value from

(Click to enlarge)

Friday, May 9, 2014

孙正义赚$580亿 马云:他一毛不拔铁公鸡自私透顶(图)

孙正义赚$580亿 马云:他一毛不拔铁公鸡自私透顶(图)

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  种子基金CrossPacific Capital的管理合伙人Greg Tarr对此评价道:“这哥们儿就是亚洲的巴菲特。在风投行业,我们衡量成功与否的标准是最初投入和最终回报之间的比较,500倍的好买卖时不时地也能碰到,比如Twitter,再比如阿里巴巴。”
  过去30年时间里,孙正义的成功投资案例还包括:用借来的钱将自己于1981年创建的软件批发公司打造成了一家横跨两大洲的通讯运营商;最早将苹果iPhone引入日本的也是他;他买下斯普林特,将美国顶级运营商Verizon Communications Inc和AT&T Inc收入囊中。


马云戏说孙正义:一毛不拔的铁公鸡 自私透顶

来源: 21世纪经济报道(广州)