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Views from the Hill  
An off-the-cuff forum to comment on the trends
and happenings we see affecting markets.

Views from the Hill

Jun

25

2015

Anatomy of an Event Driven Options Strategy

Posted by Vivian Lo & Simon Legge


Yesterday the U.S. Supreme Court announced it would uphold the federal subsidies provided under the Affordable Care Act. In anticipation of this outcome, we explored different strategies in the Aston Hill Growth & Income Fund to maximize the upside potential of our healthcare exposure while minimizing the downside risk.


Stock: HCA Holdings Inc.

Rationale for trade: Minimize capital outlay while gaining exposure to potential upside. We believed the Supreme Court’s decision would result in a binary outcome for the stock. The goal of our strategy was to achieve two things:

1)   Gain exposure to the potential upside in the event of a positive outcome

2)   Buy the stock at a 5% - 10% discount in the event of a negative outcome


Strategy implemented: Risk Reversal
(writing a put option, and using the proceeds to buy a call option)

Sold puts at $75.50 strike price to collect $0.84

Sold puts at $80.00 strike price to collect $2.07

Bought calls at $86.00 strike price and paid $2.55

Net cost outlay: zero (collected $0.36)

Net profit: $5.46 per contact


Outcome:
A positive ruling on upholding the Affordable Care Act subsidies resulted in HCA closing up +8.8% yesterday at $90.72, and we participated in 74% of that rally (+6.5%) while taking on significantly less downside risk than if we just owned the stock outright.  The additional upside capture of our option strategy can be seen when compared against various scenarios.

The bottom line… we achieved greater upside return because we used the premiums collected from writing puts to pay for the cost of the call. 

 

 




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Jun

4

2015

Transports: Something to pay attention to

Posted by Jeffrey Burchell & Claire Thornhill


We have many indicators we follow to formulate our near-term, medium term and longer term views on the U.S. equity market. This process has served us well to add to and reduce the beta of the portfolios.

TRANSPORTS: SOMETHING TO PAY ATTENTION TO...

One of the metrics we watch (as do many others) is the Dow Jones Transportation Index. We continue to be bullish on U.S. equities after this 9 month low volatility ‘consolidation’. BUT, we have to flag the negative implications of the transports over the last several months.

Recently the Index significantly underperformed the broader S&P 500 Index and the Russell 2000 Index. The airlines were the notable laggards, with bellwethers like American Airlines down over 14% on talk of capacity additions and investor concern of a breakdown in the supply discipline that has helped the U.S. airline industry return to profitability over the past few years. The Class I rails also sold off sharply, underperforming the market by another 8% last month amid concern around volatile commodity carloads given the pressure of the stronger USD, energy uncertainty and port issues.  However, beyond idiosyncratic issues such as these, the underperformance across all sub-sectors of the index has increased anxiety over the sustainability of the broader market rally, since many view the index as a barometer for overall economic activity.

When you look through the sub-sectors of the transports index, each group’s decline is somewhat explainable beyond simply an economic slowdown. Needless to say we would be more encouraged if the index bottomed and started to climb higher...

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May

14

2015

Turn to theme-based investing to navigate volatility

Posted by Andrew Hamlin


To weather market volatility, we remain focused on theme-based investing as a way to generate returns. What are some of the main themes we’re watching in the North American and global markets?


1) Steel Fundamental dynamics in the North American steel industry suggest that there are opportunities to makes some decent returns over the short/medium term:

  • The USD has come off its recent strength, which will slow down imports
  • Small price hikes have been announced and appear to be sticking
  • Inventories look to be coming down and lead time will be pushed out
    (Lower inventory + longer lead times = higher utilization rates)

All of these factors are good for steel stocks. In addition, there looks to be a trade case pending to protect U.S. steel producers against cheap foreign imports (US Senate Bill S. 1015); this is just one more point that should help North American steel producers. 


2) Defense The defense industry differs from other sectors because of its exposure to non-commercial markets and dependence on the U.S. government’s budget. The cycle is driven by the political environment and is more insulated from general market movements than other industries. 2015 looks to be a tough year for U.S. defense budgets; the world is not getting any safer. Foreign governments are procuring more weapon systems from U.S. prime defense contractors as it’s a higher margin business. We expect major improvements (increases) in the defense budgets for 2016 and beyond, and favour the primes over tier 2 or tier 3 suppliers. 

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May

5

2015

An update on global markets

Posted by John Kim


Last week was eventful as we had increased volatility and some divergence between stocks and commodities.

WTI was up 3.5%, but energy stocks in Canada were down -0.8% as a group.  Looking at metals, base metals were up as well as the stocks, but gold was essentially flat while the stocks were up over 3.5%. The materials sector was up over 3.1% as a group last week.

The main event last week was the Fed rate decision where, as expected, rates were left unchanged.  Most thought the Fed would close the door to a June rate hike, but they did not do that, saying the weakness in the economy in Q1 (GDP was 0.2% versus the expected 1.0%) was transitory.  Investors are still betting on a September or later rate hike.  The weakness continued into April with ISM of 51.5 versus consensus forecast of 52.  Official China data showed China’s April PMI at 50.1, the same as March.  The HSBC version of PMI came in at a weak 48.9, below the 49.2 reading in March.

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Apr

29

2015

VOLATILITY CUTS BOTH WAYS - Currency Hedging Update for Investors

Posted by Jeffrey Burchell

“It’s safe (and cheaper) to book a spring trip south of the boarder.”

As most investors know we are currently hedged against moves in the US$.  In full disclosure – and hindsight – we moved to fully hedged in December which was early, but it’s not our investment philosophy to be greedy.

THE DOMINO EFFECT THAT DROVE THE C$ SO LOW… IS IN FULL REVERSE

As the bond market gets smoked in Europe – the German 10-year yield almost doubled this morning – the Euro has rallied alongside this sell off.  U.S. bonds have started to sell off too. As German rates fell, global yield seekers scurried to the U.S. and bought US$s and bonds seeking “relative” value on our shores. This reversal all translates into MORE pressure on the C$ to move higher. Adding to the upward pressure on the C$ has been the rising price of oil over the past number of weeks.

We think the longer term trend for the US$ is higher, especially if the Fed starts to move later in the year.  This trend clearly overshot the mark over the past 6 months and we look for stability (and a higher C$ in the near term).

Myself and my team work to generate low volatility returns and focus on “grinding it out” without huge swings – down OR up. To this end we wanted to let our investors know we are fully hedged at present. As in the past, we look to re-initiate US$ exposure when the dust settles on the C$ rally.

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Disclaimer:
This commentary is published by Aston Hill Financial Inc. (“Aston Hill”). The information contained herein does not constitute a recommendation by the authors or Aston Hill to buy or sell any of the securities, commodities, currencies or other financial instruments or assets discussed herein. This commentary has been prepared using information from sources that the authors and Aston Hill believe to be reliable, however neither the authors nor Aston Hill guarantees the accuracy of such information. This report does not constitute and may not be used for the purposes of effecting an offer or solicitation of units of any Aston Hill investment products. Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus and other publicly filed documents available at www.sedar.com before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Please correct the following errors:

Minimum Investment Requirements

The AHF Credit Opportunities Fund is generally available to investors that can meet a certain minimum amount of money to invest. The minimum initial investment for residents in any province or territory in accordance with applicable securities laws is set out below:

All provinces and territories $125,000 or $25,000(1)
BC, NB, NS and NL Only: $5,000(2)

Notes:

(1) A minimum purchase of $25,000 is available to residents who meet certain requirements.
(2) A minimum purchase of $5,000 is available to residents who meet certain requirements and reside in BC, NB, NS and NL by way of the prescribed OM.
Investors should contact their investment dealer or Financial Advisor for more information.

If you can comfortably invest the minimum dollar amount required in your province or territory, please accept the disclaimer below to learn more about the AHF Credit Opportunities Fund.


Disclaimer: Information pertaining to AHF Credit Opportunities Fund is not to be construed as a public offering of securities in any jurisdiction of Canada. The offering of units in the AHF Credit Opportunities Fund is made pursuant to its offering memorandum only to those investors in jurisdictions of Canada who meet certain eligibility requirements. Please read the offering memorandum carefully before investing.

Minimum Investment Requirements

The Aston Hill Opportunities Fund is generally available to investors that can meet a certain minimum amount of money to invest. The minimum initial investment for residents in any province or territory in accordance with applicable securities laws is set out below:

All provinces and territories $150,000 or $5,000(1)

Notes:

(1) A minimum purchase of $5,000 is available to residents who meet certain requirements. Investors should contact their investment dealer or Financial Advisor for more information.

If you can comfortably invest the minimum dollar amount required in your province or territory, please accept the disclaimer below to learn more about the Aston Hill Opportunities Fund.


Disclaimer: Information pertaining to Aston Hill Opportunities Fund is not to be construed as a public offering of securities in any jurisdiction of Canada. The offering of units in the Aston Hill Opportunities Fund is made pursuant to its offering memorandum only to those investors in jurisdictions of Canada who meet certain eligibility requirements. Please read the offering memorandum carefully before investing.

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Markets

Jul 7, 2015 11:20 EDT

AHF-T 0.00 0.50
S&P/TSX -192.61 icon-arrow-down-red-small.png 14,400.96
S&P 500 -19.70 icon-arrow-down-red-small.png 2,049.06
Dow Jones -158.34 icon-arrow-down-red-small.png 17,525.24
NASDAQ -47.13 icon-arrow-down-red-small.png 4,944.81
CAD/USD -0.01 icon-arrow-down-red-small.png 0.78
Oil (NY) -1.49 icon-arrow-down-red-small.png 51.04
Gold -22.40 icon-arrow-down-red-small.png 1,150.80
Natural Gas -0.04 icon-arrow-down-red-small.png 2.71
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