(CS) Cash is Leaving Both Bond and Equity Funds



US Economics Digest

Cash is Leaving Both Bond and Equity Funds

* Net new mutual fund cash flows are starting to get interesting after a relatively benign stretch in 2014 and the first half of 2015.

* Households typically use mutual funds to save for such long-term goals as saving for college or preparing for retirement. Many household investments into these funds are made through regular payroll deductions, which help steady the funds' net new cash flows, even during periods of market turbulence.

* When we do see unusual flows out of (or even into) mutual funds, we take notice. Such changes in retail investment behavior can help us identify inflection points in household attitudes toward risk.

* In this note, we review mutual fund cash flows from the financial crisis to the latest monthly data – through June 2015 – provided by the Investment Company Institute (ICI).

* Also, we observe that the latest weekly estimates from the ICI indicate these retail investment outflows began gaining strength in Q3 2015. Data to date suggest that we will see the first example of back-to-back monthly outflows from both equity and bond mutual funds (in July and August 2015) since Q4 2008. 

WSJ : A Healthy Side of Insurer Mega-Mergers



A Healthy Side of Insurer Mega-Mergers

As hospitals consolidate, more market power is needed to bargain for better prices.
Anthem’s proposed merger with Cigna following Aetna ’s acquisition of Humana has set off alarms about lack of competition in the health-insurance industry. But policy makers should consider the potential benefits of industry consolidation. The greater efficiency and market power of larger insurance plans could lower prices for consumers by offsetting the bargaining power of health-care providers.

In many U.S. communities there are only one or two hospitals, which dictate the cost of care. A recent report by Kaufman, Hall & Associates LLC showed that the number of hospital mergers and acquisitions increased 44% between 2010 and 2014. There is a similar problem with specialist physicians who, through consolidation of practices, control of entry and other arrangements, have considerable market power.

Insurance companies can act as a counterweight, and lower prices will get passed along to consumers instead of increasing insurance-company profits. That’s because the Affordable Care Act requires insurers to spend at least 80%-85% of every premium dollar on consumer medical claims and activities that improve the quality of care.

Moreover, health-insurance companies now must take all customers, regardless of their health, and under the Affordable Care Act, risk adjustment payments move money from health plans that enroll healthier populations to those with sicker people. Health insurance is no longer about “avoiding sick people.”



Apart from these nationwide rules, state exchanges can improve the operation of insurance markets. Covered California, the state exchange established under the Affordable Care Act, requires insurers selling coverage through the exchange to provide uniform benefits on top of minimum essential coverage. By creating standard benefit designs—in which most care is not subject to deductibles—health plans compete on price and provider availability rather than on differences in deductibles, copayments and coinsurance that are largely incomprehensible to most consumers. Consumers win by being able to make apples-to-apples comparisons.

Covered California will offer a total of 12 insurers in 2016, up from 10 in 2015. In some local markets consumers will have a choice of seven different insurers. While consolidation of insurance companies is a potential threat to consumers in regions where there are only a small number of plans, the bigger threat is from the consolidation of health-care providers and from pharmaceutical prices.

Consider the difference in premiums between Northern and Southern California. Covered California recently announced an average premium increase of 4% statewide for 2016 compared with 2015. The average increase was 1.8% in Southern California, but in Northern California the average increase was 7%. This increase came on top of already markedly higher costs in Northern California. Today, the average annual health-insurance premiums for individuals are 30% higher in the north than in the south. This price difference is not due to a lack of competition among large insurers. Rather it is mostly attributable to the higher prices charged by hospitals and physicians.

The other great problem is the ability of pharmaceutical and biotechnology companies to charge whatever the market will bear. According to a January 2015 analysis by Aswath Damodaran, a professor at New York University’s Stern School of Business, the average yearly profit margin for the top 151 pharmaceutical companies world-wide is more than 24% and for the top 400 biotech firms it is nearly 23%.

Gilead Sciences Inc., which sells Sovaldi and Harvoni, the recently approved hepatitis C treatments, is doing far better than average. These drugs currently cost from $60,000 to $90,000 for a three-month treatment. Gilead recently raised its full-year profit-margin forecast to 88% largely on the sale of these two drugs. These huge profits get baked into health-insurance premiums.

Meanwhile, the average annual profit margin for insurance plans offered by Covered California is just 1.1%.

Large insurance companies can make a major contribution to health-care costs by fostering changes in how health care is paid for and delivered. Many insurers are organizing or contracting with Accountable Care Organizations that provide care for a defined population for a fixed annual fee, or with penalties and rewards linked to the quality and cost of care provided. This is one example of how those who pay for health care can join with Medicare in the move from a health-care system that rewards volume to one that rewards value.

It is easy to decry the evils of large insurance companies. But they are in a unique position to raise the quality and lower the costs of American health care.

>>> US Gapping Up

Gapping up
In reaction to strong earnings/guidance: NADL +11.7%, EDAP +11.6%, BURL +8.8%, SIG +5.7%, PVH +5.2%, PRCP +3.9%, GOGL +3.5%, AVGO +3.4%, SJM +3.3%, PSEC +3%

M&A news: STJ +4.2% (FT report that Abbot (ABT) is considering a $25 bln bid; Bloomberg TV reports that Abbot (ABT) denied the report that it was preparing a bid for STJ), TOT +3.3% (divests its North Sea Midstream assets for GBP585 mln), NGD +2.6% (to sell its 30% interest in the El Morro project to Goldcorp)

Select China related names showing strength: YGE +15.6%, SHI +8%, WB +7.3%, JKS +6.1%, JMEI +5.6%, LEJU +5.5%, BTU +5.2%, KNDI +5.1%, ACH +4.8%, SUNE +4.6%, CSIQ +4.4%, QIHU +4.3%, TSL +4%, YNDX +3.8%, JD +3.6%, CMCM +3.4%, BIDU +3.2%, SFUN +2.8%

Select metals/mining stocks trading higher: AKS +7%, GFI +3.3%, X +1.7%, GG +1.0%


Other news: NQ +57.8% (entered into agreement to sell Nation Sky for $80 mln and FL Mobile for no less than ~$626 mln; co also reported earnings), GBSN +34.3% (announces intent to settle certain warrant exercises with cash), FORD +9.9% (cont strength), EXEL +8.5% (announces Swissmedic, the supervisory authority of Switzerland, has approved cobimetinib for use in combination with vemurafenib to treat patients with advanced melanoma), FCX +4.3% (announces further spending cuts in response to market conditions), RAX +2.4% (still checking), ACAS +1.6% (closed on the sale of $510 mln of collateralized loan obligation bonds), SIRI +1.3% (announced Board authorization for the addition of a further $2 billion to its stock repurchase program)

Analyst comments: CEO +11.7% (upgraded to Outperform at Credit Suisse), PBYI +6.3% (initiated with a Overweight at JP Morgan), TDOC +5.2% (initiated with a Outperform at Leerink Partners), SCTY +4.7% (upgraded to Overweight from Equal-Weight at Morgan Stanley), BSX +3.5% (upgraded to Buy from Neutral at Goldman), YELP +2.9% (upgraded to Neutral from Sell at B. Riley & Co), ACAD +2.9% (upgraded to Overweight from Neutral at Piper Jaffray;), ANF +2.5% (upgraded to Buy from Hold at Stifel), AMZN +2% (upgraded to Strong Buy from Outperform at Raymond James), PHG +1.8% (upgraded to Buy at Nomura ), AFL +1.5% (upgraded to Outperform from Mkt Perform at Keefe Bruyette), QLIK +1% (initiated with a Buy at Nomura
)

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: WSM -6.2%, GES -6.1%, TIF -5.4%, WDAY -4.7%, TLYS -4.1%, DG -3.5%, QURE -3%, MIK -2.2%, VNET -1.5%, PSG -0.7%


Other news: ANAD -5.8% (filed registration statement for up to $50 mln offering of a combination of debt and equity securities; disclosed entry into an At-The-Market Issuance Sales Agreement with MLV & Co to sell common stock), RUN -4% (to issue Q2 earnings report after the market closes on Thursday, September 10, 2015), VNET -1.5% (announced management changes: CFO Terry Wang has resigned as a director of the Board, Sean Shao appointed as an independent director, effective on August 24; co also reported earnings), RJET -1.4% (cont weakness), IMNP -1.0% (filed for 14 mln share common stock offering by selling shareholders), DEO -1.0% (EU peer Pernod Ricard (PDRDF) trading lower after earnings)

Analyst comments: N/A.

(BArron's) Profit From a Surging VIX

Profit From a Surging VIX

If you think the CBOE Volatility Index reflects too much pessimism about China, then the options market looks like paradise for put sellers.

If you liked the VIX at 12, you should love it at these elevated levels.

A high VIX today suggests your fellow investors are scared out of their minds that China’s economic and financial difficulties will send the world spinning into a very dark place.

However, if you think that the CBOE Volatility Index view of what may happen in the next 30 days is extremely pessimistic, the options market is a paradise for put sellers.

In recent trading, the VIX was around 32.60. When the VIX is above 30, it is interpreted as pricing an economic depression. That rationale was minted during the credit crisis of 2007 and 2008 that turned the VIX into one of the world’s most watched market indicators.

At its current level, the VIX is far above its long-term average of 19. On Aug. 14, the VIX was at 12.80. The VIX is a proxy for the Standard & Poor’s 500 index. When the VIX is high, puts on the largest stocks tend to be expensive. This is because investors are buying puts to hedge their portfolios or single-stock positions.

Investors can take advantage of the fear premium by selling puts. The trade expresses a view that the associated stock will rise. If the stock declines, investors are obligated to buy the stock.

At this moment, selling puts is like selling insurance during hurricane season. You are going to get paid a lot, but the risks are high. You can mitigate the risk by selling puts only on stocks you want to own. Do not sell puts on any stock you are not prepared to buy.

The strategy can be used to position to buy market darlings like Amazon.com (ticker: AMZN ) and Facebook ( FB ), and any stock that pays reliable, hefty dividends.

Consider Facebook, a play on mobile advertising that some Wall Street investors are starting to discuss as potentially another game changer like Apple.

With the stock at $85, you can sell Facebook’s September $82.50 put for $3.25.

Facebook’s stock has traded in the $90s since July, reflecting a steady advance that began in March. But China’s stock market crash, which crashed into the U.S. market on Monday, pushed Facebook as low as $72 in intraday trading.

If Facebook retraces its losses, and the stock stays above the put strike prices, investors can pocket the premium.

Should the stock decline below the $82.50 or $83 strike prices, investors are obligated to buy the stock. The risk is that the stock falls far below the strike prices. If that happens, investors would be obligated to buy the stock at the strike price, or cover the put at a sharply higher price.

Stocks that pay reliable dividends are also good put-sale candidates in the current environment. The stock market’s gyrations tend to drive investors to stocks like AT&T ( T) and Southern Co. ( SO ) that pay hefty, reliable dividends that are greater than the 2% yield of 10-year U.S. Treasury bonds.

At about $32, AT&T’s dividend yield is 5.6%. Investors can sell the October $32.50 put recently bid around $1.02. If you want to take in more money, sell the January $31 put that was recently bid at $1.36.

Investors will be tempted to bottom-fish in the oil sector, especially with a focus on leviathans like ExxonMobil ( XOM ) and Chevron ( CVX ) that pay good dividends.

Those are extra risky trades. The stocks will be pushed around by the market, and oil. Anyone who sells puts on Exxon and Chevron should probably stick to options that expire in a month or less. The premiums will not be as large as say three-month expirations, but too much can happen between now and the end of the year.

Investors who want to mitigate single-stock risk in the oil patch can sell puts on the Energy Select Sector SPDR exchange-traded fund ( XLE ). The ETF is a basket of energy stocks, which diversifies the risk. If this appeals, focus on puts that are 5% to 10% below XLE’s price and that expire in less than three months.

To be sure, selling puts during extreme stock market volatility will strike some investors as financial insanity, but it expresses an approach to options trading that has been tempered by time.

When volatility is low, options tend to be better buys than sales. That animated our thinking when we recommended buying SPDR S&P 500 ETF ( SPY ) puts to hedge against a China-induced decline.

Think of volatility as a rubber band. When volatility is stretched, it tends to revert to the mean.

Now, with VIX roughly triple its Aug. 14 level, selectively selling options on quality stocks makes sense.

>>> Early premarket gappers

Early premarket gappers
Gapping up: NQ +58.4%, STJ +14.7%, EDAP +11.6%, FORD +10.5%, EXEL +9.9%, RAX +9.5%, WB +9.1%, NADL +8.3%, CSIQ +7.7%, JKS +7.4%, BURL +6.6%, TSL +5.6%, JMEI +5.6%, YNDX +5.3%, PVH +5.2%, CMCM +5.1%, KNDI +5.1%, QIHU +5%, SFUN +5%, GFI +4.8%, SIG +4.7%, JD +4.6%, BSX +4.5%, BIDU +4.1%, SDRL +4%, PRCP +3.9%, TOT+3.8%, FIT +3.6%, SUNE +3.5%, PSEC +3%, ACAS +1.6%, AVGO +1.6%, SIRI +0.5%

Gapping down: GES -8.4%, TIF -6.9%, WDAY -6.8%, WSM -6.8%, ANAD -5.8%, TLYS -4.1%, RUN -4%, DG -3.5%, QURE -3%, MIK -2.2%, DEO -1.1%, IMNP -0.8%, THOR -0.8%, PSG -0.7%

>>> Fred's reports Q2 in-line with lowered guidance; guides Q3 EPS below consens

Fred's reports Q2 in-line with lowered guidance; guides Q3 EPS below consensus, revs in-line; guides FY16 EPS below consensus

  • Reports Q2 (Jul) loss of $0.13 per share, in-line with the Capital IQ Consensus of ($0.13); revenues rose 11.2% year/year to $546.1 mln vs the $563.63 mln consensus.
  • Warned on Aug 6: Lowered EPS to ($0.15-0.10) from $0.02-0.07 vs. $0.03 consensus; preannounced rev $545 mln vs. $564 mln consensus.
  • Co issues guidance for Q3, sees EPS of $0.08-0.12 vs. $0.15 Capital IQ Consensus Estimate; sees Q3 revs of +12-14% to ~$533-542.8 mln vs. $540.83 mln Capital IQ Consensus; comps +0-2%.
  • Co issues downside guidance for FY16, sees EPS of $0.10-0.18 vs. $0.26 Capital IQ Consensus Estimate.