You’ve probably seen it in the news during the last few days – Alphabet is officially the biggest company in the world.

Alphabet.2docx

Shortly after trading opened on Tuesday Alphabet reached a market cap of a staggering $570 billion. That’s almost two Tesla’s worth more than Apple at the moment, whose market capitalization lays at $535 billion during writing. Not only does it speak for the success of Google’s (surprising) corporate restructuring endeavour announced just four months ago. It also comes hand in hand with Apple’s future potential being increasingly called into question.

You may have noticed Apple being increasingly criticized over the last few months. With companies of this size, actual financial results and forecasts are only one part of their valuation. The potential that investors see in a company also plays a huge role. The main criticism of Apple is its dependence on the iPhone. This criticism has been growing for months now – Apple is desperately trying to find a viable alternative, the next big thing. Will it be the Apple watch? That’s still questionable, to put it lightly. The point being is, that as strong as the restructuring has made Alphabet, it has also been helped on its path to the top of the ranking by the slow decline of the previous titleholder.

The restructuring has been a success because it vastly increased Alphabet’s potential in the eyes of investors and analysts. This becomes even more apparent if we consider the fact that Apple is still the company with the higher profit numbers and cash reserves.

Quarterly results

Alphabet released its Q4 results for 2015 on Monday. They were highly anticipated, as they were the first results to be released since the restructuring. And boy, they did not disappoint. The company reported an 18% increase in revenues, profits of $4.92 billion, and growth of 17% in its core business of online ads. After close on Monday, the stock shot up by about 12%, leading to the new leading market cap of $570 billion.

The purpose of the restructuring was to streamline Google’s many business unit. They’re now all a part of the new conglomerate, Alphabet. It allows the company to better follow its strategy of acquiring and investing in innovative ideas and companies while making serious money with its core business units. Google, under new CEO Sundar Pichai, can now focus solely on their own business and doesn’t have to worry about the likes of Google Ventures, Nest Labs, and the ominously named “X” (previously Google X).

The first set of financial results show that it’s working so far. Investors and analysts seem to agree that the company now shows higher potential for future growth than ever before. Being the first “world’s most valuable company” that doesn’t sell a physical product is also an exciting development that underlines the changes of the global economy over the last decade. It will be interesting to see just how long Alphabet can remain at the top.

Written by Lorenzo Heinbuch

The AEX partly recovered from the weeks of red numbers and some groups profited from this, like Ad Infinitum; this week’s biggest winner had an AEX Turbo Long. Another group who did well, Unity Investments, is now leading the competition; they took profit on Fugro and ArcelorMittal.

Japan shocked the world last Friday: The Japanese central bank pushed the interest rates on excess reserves down into negative territory. This, as a desperate attempt to boost inflation to the 2% level shocked investors and economists alike. Japanese stocks surged, the Nikkei climbed over 3 per cent in 1.5 hours, and the Yen went down from about 130¥/€ to about 132¥/€.

One stock that performed particularly well, Royal Dutch Shell, the Dutch giant hit hard by the oil plunge, partly recovered its loss of the past weeks. Being around the €23-24 level in November, it plummeted to a record-low of €16.7 (-30%), followed by a quick climb back up towards the €20 level (+20%) this week. This was mostly due to the oil price going up again. This also gained oil bear Taurus the achievement of this week’s biggest loser.

Written by Justin van Haaren

12. Ranking 31-01-2016

Worst week since 2011

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WARNING: If you take a look at this week’s ranking, you may want to cry. 2016 took off unbelievably bad for the bullish investor, it was the worst week since 2011! The 41 investment groups lost over €11,000 in this single week and every investment group contributed to this loss, no exceptions. Quants and Ad Infinitum contributed the most, they lost 86% and 60%, respectively (this is even more than Rising Investments lost last year!). China was mainly responsible for all these losses.

What happened to China?

As we all know, China is plagued by bad news about the economy. This Monday, the Chinese Purchasing Managers’ Index (PMI) dropped far more than expected. This PMI is an indicator of the health of the manufacturing sector. It is based on 5 major quantities: new orders, inventory levels, productions, supplier deliveries and the employment environment. As you can guess, a disappointing PMI means a soon to come disappointing economy and that’s where it went south. Next to that, the Chinese authorities thought it would be a good idea to introduce a so called circuit-breaker mechanism. You can read more on this mechanism in the in-depth article later this week. In short, if the most important CSI-300 index drops 5% in one day, the Chinese markets will be closed for 15 minutes. If the index then drops to a 7% loss, the traders can go home for the rest of the day. Including the 2% increase on Friday, the CSI-300 Index lost 9.9% this week. The Shanghai Composite fell 10%. Still, the Chinese claim to have a ‘healthy’ financial system.

What happened to the rest of the world?

When I say global financial markets, you all say: connected to the bone. Hence, the results in China turn into a catastrophe for global stock markets. Let’s look at je major indices. The S&P500 lost 5.96%, the AEX lost 7.02%, the DAX plunged 8.32% making it the worst week since August 2011, and the FTSE declined 5.12% over the last week. Only Negotium Novum and Unity Investments managed to maintain positive returns, good job guys!

Artificial Intelligence in 2016

The first week of 2016 began quiet for the M&A sector. Apple took over Emotient, a start-up specialized in Artificial Intelligence. Their core focus lied on developing software that is able to analyse emotions from facial expressions. Why would Apple buy such a company? Experts say they might use it for the AppleCar or some kind of virtual reality device. Watch the Artificial Intelligence companies this year, as it is a very promising sector in Silicon Valley!

 

9. Ranking 10-01-2016

 

Written by Mees Heeringa

Ranking Optiver Investment Competition

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Below you will find the rankings of the last two weeks. Please note that the M2 might sometimes give a biased outcome, especially since most groups have a negative return, but this will most likely change during the year.
Helios is a good example. With a small negative return and a low volatility, they are the new number one of the Optiver Investment Competition. Alpha Investments decreased their loss and made a nice jump last week. Ad Infinitum had another volatile week and lost 7.5%. Quants still has the highest return: 13.33%.

Ranking 3rd of January. Please note that two investment groups were excluded from the ranking because they didn’t start investing before the 1st of January.

8. Ranking 03-01-2016

Ranking 27th of December

7. Ranking 27-12-2015

Introduction M2

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From this week on, the weekly ranking will be based on the Modigliani risk-adjusted performance measure. This means that the volatility of the portfolios will also be taken into account. The M2 measure can be defined as: (volatility market/volatility portfolio) * (return portfolio – risk free rate)+risk free rate. Please note that the M2 might sometimes give a biased outcome, especially since most groups have a negative return, but this will most likely change during the year.

December started very bad, but most groups were able to make a small profit again last week, following the market sentiment. Due to a very low volatility, Unity Investments is now the number one in the Optiver Investment Competition, but their unrealistically high M^2 will probably drop in the next weeks. Quants dropped a few places in the ranking because of their high volatility. Next Generation was the biggest winner of this week, gaining 10% on an AEX turbo long.

Ranking 20-12-2015

Written by Robert Kaptein

The Fed will raise the interest rate – Should we worry?

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We’ve been hearing about it for years now, but it looks like it will finally happen. The consensus seems to be that the US interest rate will be raised this Wednesday. It has spent seven whole years, since December 2008, at the historic low of 0.25%. The numbers being thrown around are anything from an interest rate of 0.5% to 2.5%, although any rate above 1% seems highly unlikely. Either way, when thinking about the basic effects of the rate hike on our investments, the size of the hike is insignificant for now.

Why was the interest rate so low for so long? Well, following the financial crisis of 2007/2008 the Fed wanted to make borrowing cheaper for companies and banks. The boom we have seen in the US economy since then can be traced to this decision. But why raise it now if it led to the high economic growth and low unemployment? The Fed simply wants to slow growth down a bit in order to prevent the economy from over-heating: the US economy is currently 10% bigger than it was at its pre-crisis peak.

FED1

The US funds rate since the financial crisis.

US Companies and the US Economy

One of the causes for the impressive economic growth of the US economy since the crisis was definitely the historically low interest rate. It meant that US firms could take out cheap debt and invest, invest, invest. The result was a recovery that made Europe jealous. US unemployment is almost at the natural rate, and GDP growth has been impressive.

However, it’s not all rosy. Unemployment is low, yes, but wages are stagnating while many costs keep rising and inflation remains flat. Consumer spending has also remained flat, even though a low interest rate is supposed to have the opposite effect. Instead of making people save less, the low interest rate seems to have made them save harder. Therefore, some argue that a rate hike will have the opposite effect and increase spending, which would be beneficial for the US economy.

Over-heating is not the only concern. Some economists are worried about the levels of debt resulting from the low rate over the last seven years. Some argue that if rates stay this low for long, people and companies will get used to the low rates and take on too much debt, leaving them in a bad position once the rates do rise again.

EU Companies and the EU Economy

The EU economy has its own very unique problems. You can read more about them and about Mario Draghi’s monetary policy in last week’s article, The New ECB Plan. The Euro actually rose in response to the ECB announcing that they will flood the markets with money for longer; the opposite effect of what they wanted to achieve.

The financial markets expecting a rate hike has already driven the value of the dollar higher in the past year. It is v­­­ery probable that the effect will continue once the rate is raised, as money will be brought back into the US. Maybe a strong dollar resulting from the Fed rate hike will help drive the euro down? Either way, it will have a positive effect on EU companies exporting to the US, while making it more expensive to import goods from the States.

Unlike the US, we are still fighting the demons of the 2008 financial crisis. Whereas the US is dealing with stagnant inflation, the EU is actively trying to fight the threat of deflation, which lead to the curious negative deposit rate (interest rate) of the ECB. Obviously, in this globalized world, the Eurozone economies will feel the effects of the Fed’s monetary policy.

FED2

GDP growth in the US, the Eurozone, and China since the financial crisis.

Apart from the effects on the Euro, a rate hike would directly affect companies with high dollar debts. Many EU companies have very high dollar debts, which could become problematic. Especially banks, both in the EU and in the US, have also heavily invested in, and loaned money to, the emerging markets over the last few years.

The Emerging Markets

The state of the emerging markets is what’s making many investors nervous about a rate hike. They’re the reason the IMF has warned the Fed, advising them not to raise the rate just yet. Many emerging economies are in trouble. The sinking commodity prices have hit them hard.

Across the board, many are in a recession. This includes countries such as Thailand, Indonesia, Venezuela, and Argentina, but also the powerhouses of the emerging markets, like China, Brazil, and Russia. The volatility in financial markets, especially resulting from a slowing Chinese manufacturing sector, was the main reason the Fed did not raise rates in September.

Many companies in emerging markets, most notably Chinese ones, have been increasingly accumulating debt. So have the governments of many emerging markets. This debt is often based on the dollar, which made it nice and cheap over the past seven years. However, this also means that their cost of debt will rise with a rate hike, which could have far reaching consequences. Some (many?) won’t be able to cover their costs anymore. To add to this, money is already flowing out of these markets, back into the States in anticipation of a rate hike.

This is a real threat to the global economy, and therefore to the US economy. However, it seems like the Fed believes that the benefits of a rate hike outweigh the potential negative consequences on the global financial markets. Keep an eye on investments with a high amount of dollar-debt and those which depend heavily on emerging markets. It’s been seven long years of historically low dollar interest rates, and ignoring everything else, a rate hike would be a return towards normalcy.

Written by Lorenzo Heinbuch

Oil: this week’s bugbear

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Last week was another dramatic week for the bullish investors. After the enormous losses of last week due to announcements of the ECB, the oil prices were responsible for this week’s disaster. Every single index closed with red numbers. If you take a look at the ranking, you see that most groups that suffered from this were those who invested in ETFs. Phoenix was one of them: they lost 5% on their turbos on the AEX, DAX and S&P 500.

Oil prices dragged down the world indices

On a weekly basis, the price for one barrel crude oil decreased dramatically with almost 11% to the lowest point in 7 years. Note that 7 years ago investment bank Lehman Brothers collapsed, accelerating the financial crisis. On Friday 4 December, the OPEC decided not to decrease its oil production (as a matter of fact, they will increase their production a little bit), meaning that the excess supply will continue to exist. The ancient Law of Supply and Demand says in this case that the prices will decrease. Since everyone is dependent on oil, every index plummets together with the oil prices. The AEX lost 3.99% this week, closing on 429.10. Remember the AEX opened 2 weeks ago at approximately 469! Our German neighbours lost 3.83%, the S&P 500 lost 3.70% and even our friends in Tokyo closed at -1.4%.  In addition, oil companies like Shell (-8.35%), Glencore (-2.2%) and Fugro (-6.73%) also felt the pain.

Ad infinitum is the new Quants?

After taking the lead 2 weeks ago, Ad Infinitum is now positioned last in the ranking, following the same path as Quants did earlier. Ad Infinitum also suffered from the oil prices via their turbo on Shell. Furthermore, their turbo on ASML caused them to lose 30% this week. In the meantime, Quants is working on their M^2, standing steady but lonely at the top. Unity investments made a surprising profit on Arcelor Mittal (-9.49% on a weekly basis), which advanced a little bit during the week, but lost all of it on Friday.

Keurig Green Mountain and DuPont

On Monday, the biggest winner by far was Keurig Green Mountain: +71.93%. Shareholders of Keurig Green accepted a takeover offer from JAB, who pays a premium of almost 79% on the market value of equity at Friday 4 December. In contrast, DuPont (-5.5%) and Dow Chemical (-3.2%) who are in business as well, announced that they will split up the company in three parts. Clearly, investors didn’t quite like this plan.

Happy holidays!

Ranking 13-12-2015

Written by Mees Heeringa

Options

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This week the academy dealt with options. Options are the rights to buy or sell an amount of underlying assets for a specific period for a certain price. This article will deal with the explanation what options are, what affects options and how you can use them.

If you buy a call (put) option then you have the right to buy (sell) an amount (normally 100) underlying assets for a specific amount of time, the expiration date, for a certain price, the strike price. The most common options are the publicly traded normalized options. These normally have a contract for 100 times the underlying asset. Month options expire every third Friday of the month, while week options expire the last trading day of the week, normally Friday.

The price of an option is not only related to the price of the underlying asset. It reacts to volatility, the interest rate and amount of time left in the option. You can expect that if an asset has a higher volatility, the chance that the price rises (or decreases) with greater steps is higher. Therefore you pay more for an option if the volatility is higher. The interest rate is to correct the price of the option to the present value. The amount of time for your option to expire has to deal with the volatility. If you have more time, your underlying asset has more time to increase or decrease. You therefore expect a higher value for options with an expiration date far in the future than options expiring this week. In the end the intrinsic value of your call option is the price of the underlying asset minus the strike price and vice versa for your put option. The price of your option minus the intrinsic value is called the time value. This is the value you pay extra for the volatility, time and interest.

You can look at options as a kind of insurance for your portfolio. Options were originally created for investors to decrease their risk during decreasing markets. This way they would not be forced to sell their assets and can for a relatively small price hedge their portfolio. However, the structure of options makes it possible to do a lot more. Strategies have been developed to profit from expected situations. I will discuss a few.

The Bull Call Spread

First of all: The Bull call (Bear put) spread. A Bull call (Bear put) spread is buying a call (put) option and write, selling, another for a higher (lower) strike price. Now you only profit from the increase (decrease) in price from the first strike price until the other strike price. Further increase (decrease) will lead both options to increase equally in value and have a neutral effect on your investment. You can use this strategy if you think a price will go in a certain direction, but only for specified amount. It makes it cheaper to do this than just buying a call (put) option since you will earn cash on writing another call (put) option. A nice quote: ‘You only buy a train ticket towards the place you want to go’. Keep in mind: buying an option gives you a right, but writing an option gives you an obligation. In case of an obligation, you could lose more than your initial investment.  In this case you cannot lose more than your initial investment, since you don’t have a short position but a neutral position.

The Straddle

This means buying both a call and a put option. In this case it does not matter which way the price of the underlying asset goes as long as it moves a lot. Since you pay a time value twice, you need a bigger price change to compensate for that. The reverse is a short straddle (sell both a call and a put option) and now you don’t want prices to move a lot. You can use these strategies if you think prices will move a lot (or not) in the future, but you don’t know which direction. Another use would be if you think volatility in the market will rise (decrease) in the future. The option price of both options will increase if the volatility goes up and therefore you make a profit (make sure you use options with an expiration date far in the future).

There are other strategies to use options and you can easily find them on the internet (http://www.investopedia.com/slide-show/options-strategies/). If you have a great idea to profit from some kind of situation then options are probably the way to go. Keep in mind that naked short selling is prohibited in the Optiver Traders Competition, but covered calls are fine (since you cannot lose more than your initial investment).

You can find an excel file about options pay offs in this article and binck offers an ‘optiewijzer’ which indicates you when you start making a profit or loss. Feel free to try every strategy you think off in this file and see which one you like most.

Options Pay off

Written by Paul Hendriks

 

The New ECB Plan

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ECB 1

Figure 1 AEX and EUR/USD Thursday 03/12/2015

Last Thursday (3th of December) the ECB announced a couple measures that it’s going to implement the coming months. After Mario Draghi’s speech, markets fell sharply. The AEX, for example, went down 3.7%. To make matters worse the euro rose with 3.6% relative to the dollar, meaning that dollar investments lost value for European investors. So, what did Mr. Draghi announce and why did the markets react this way?

To begin with, the ECB sees two factors that could threaten price stability in the Eurozone. The first is a global environment of volatile oil and commodity prices. The second is economic weakness within the Eurozone. Due to these factors, the inflation target of 2% is not reached. The ECB further notes that their instruments are working but need some extra calibration (inflation probably would have been negative this year if not for the measures of the ECB, according to Mr. Draghi).

ECB 2

With the above in mind, the ECB announced to step up its efforts to boost the weak economies in Europe (when comparing with the U.S, most economies in Europe are lagging behind with very weak growth). The first measure announced is that the ECB is cutting its deposit rate to minus 0.3% (form minus 0.2%). This is the rate at which banks can store their excess reserves. The idea behind cutting this rate, is that it will stimulate banks to lend more. The second change announced Thursday is that the Quantitative Easing program, under which €60 billion of bonds (mostly government bonds) are purchased each month, is extended by half a year until March 2017, or longer if necessary. The ECB also said that they will reinvest the principal payments on the securities they purchased under the QE program, for as long as necessary. This means that maturing of the securities will not offset the effects of new bond buys. A final change to the QE program announced by Mr. Draghi, is that the ECB extends the range of assets that can be bought under the program, to include debt sold by regional governments. This makes it easier to buy enough bonds under the restrictions set by the ECB (there is a price restriction on the bonds the ECB buys so if the prices rise they will not be able to buy €60 billion of debts monthly).

These measures are all meant to boost the economy. So why do the markets react negative to them while they are positive for investors? The downfall of the markets Thursday was due to the expectations being too high. Until now, Mr. Draghi had the reputation of over delivering. Mr. Draghi was often able to make the markets go up, this time it was the other way around. The markets expected a larger cut of the deposit rate to minus 0.4%, instead of the minus 0.3% the ECB delivered. And besides this a lot of investors expected the ECB to also cut the main refinancing rate, which remains at 0.05% (the refinancing rate is the rate at which banks can borrow funds from the central bank). Further disappointments for the markets are the changes made to the QE program. The expectations where that the ECB would announce to not only prolong the program, but also to expand it (to raise the amount of securities the ECB buys monthly).

Mr. Draghi fell short of the expectations, or, as John Brady, managing director at futures brokerage R.J. O’Brien, said “Draghi decided to leave the bazooka at home and he brought a squirt gun”. But this doesn’t mean that there is no positive thread to all of this. Economic recovery is under way and the QE program is working. A brightening economic situation in the Eurozone reduced the need for more aggressive ECB stimulus, which is a good thing.

Written by Martijn de Kok