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Trader Talk with Bob Pisani

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  Tuesday, 9 Jun 2015 | 10:22 AM ET

Trendless market showing some weak spots

Posted By: Bob Pisani

The trendless market is showing some weak spots. It's been a frustrating month for active traders. The S&P 500 has not seen two up days in a row since May 14 to 18. The Nasdaq has not seen two up days since May 20 to 21.

We noted yesterday that the Dow Transports average is now in correction territory, more than 10 percent off its recent historic (closing) high, which it hit in December.

The good news is very few of the indices are anywhere near correction. The S&P 500, for example, is only 2.6 percent off its historic high, which it hit May 21.

Nor are any of the other major indices near correction.

Major indices (percent from historic high)

However, several interest-rate sensitive sectors are showing signs of weakness:

»Read more
  Monday, 8 Jun 2015 | 2:43 PM ET

Pisani: Get ready to own more of China

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

On Tuesday, the world's largest indexing firm, MSCI, will rule whether shares in mainland China should be included in the firm's global indexing scheme, which is used by fund managers and ETF providers the world over.

It could mean billions of dollars would come out of other emerging market countries like Brazil and South Africa and flow into mainland China.

There are three main classifications of Chinese stocks: 1) A-shares, which are mainland China stocks, 2) H-shares, which are Chinese companies that trade on the Hong Kong exchange, and 3) N-shares, Chinese companies that list on the U.S. markets.

While H-shares and N-shares are widely available to outside investors, the A-shares are not. But that is changing.

Why is this a big deal? It's simple: indexers rule the world. Many investors are increasingly investing through indices, most of which are used in the 1,600 ETFs that are traded every day in the U.S.

Adding more China stocks to indexes essentially forces investors to hold more exposure to China.

There's a larger political and economic issue at stake: China wants to become a bigger part of global trade. A key component of that is to become a bigger part of the global stock trading market.

By all accounts, China is slowly accomplishing that goal. Mainland China (the Shenzen and Shanghai exchanges) has the second-largest stock market by market capitalization, while Hong Kong is third:

Stock market capitalization by country (in trillions)
U.S. $24.8
China 9.7
Hong Kong 5.2
Japan 5.0
UK 3.8
France 2.1
Canada 2.0
Germany 1.9
Source: Bloomberg

But China has had problems getting to "the next level." The problems are twofold:

1) China itself has restricted ownership of A-shares by foreigners. However, the government has begun allowing more access to the mainland market. Last November, for example, a trading link was established between the Hong-Kong Exchange and the Shanghai Exchange that allowed foreign investors to buy mainland shares through registered broker dealers, though this, too, is subject to a quota.

2) Indexers—including MSCI and its main competitor, FTSE—have until recently considered the A-shares ineligible for inclusion in their indexes because of those restrictions and, to a lesser extent, over concern about government control of some of the largest enterprises.

The key is that MSCI must be comfortable that there are enough A- shares available to foreign investors to replicate their indices, and that may be a problem. After all, they can't reweight the indices and then discover that the people using the indices (ETFs, for example) can't buy enough stock to cover demand.

One way to deal with this issue is a gradual roll out of, say 5 percent of the listings by market weight initially, then adding more in the coming years. They could, for example, just include a few large companies initially.

One thing's for sure: there is clearly momentum to bring mainland China into the international fold.

Just a couple weeks ago, MSCI's competitor, FTSE, added China A-shares to its core benchmarks.

This is getting a bit more publicity than usual because of the enormous out-performance of China's mainland market this year.

China markets this year
Shanghai, up 58%
Shenzhen, up 112%

Those are eye-popping numbers, and we have seen much higher levels of money flowing into the few ETFs that have access to China A-shares, including the X-trackers CSI 300 A-Shares ETF (ASHR), which launched in 2013.

Let's look at the MSCI Emerging Markets Index, which is the index used for the largest emerging market ETF, the iShares Emerging Market ETF (EEM).

There's over $1.5 trillion indexed to this alone.

Right now, about 23 percent is pegged to China, all represented by stocks that are listed in Hong Kong.

MSCI Emerging Markets Index (weighting)
China 23%
South Korea 14%
Taiwan 13%
South Africa 7%
India 7%
Brazil 5%
Mexico 5%
Russia 4%
Other 20%

However, the market for mainland China stocks is far larger than Hong Kong--adding even modest amounts of mainland shares could push China's percentage over 30 percent. Some estimate that if China was fully weighted in the index, it could represent 60 percent of the entire EEM!

Which would probably be fine with China.

The next step would be to include more of China in broader, global indices. For example, the MSCI All Countries World Index has a minuscule weighting to China:

MSCI All Countries World Index (weighting)
U.S. 50%
Japan 8%
UK 6%
Germany 3%
China 2%
Source: ETFdb.com

Note the disparity: the U.S. has 50 percent of the weighting, and China has only 2 percent, despite the fact that China is roughly 15 percent of global GDP.

One final point: China is also set to announce an additional Shenzhen-Hong Kong stock link to complement the existing Shanghai-Hong Kong link. If that happens, it will make it even easier to own mainland China shares, and MSCI could accelerate the integration of China into the global markets.

Get ready to own more of China!

»Read more
  Monday, 8 Jun 2015 | 10:06 AM ET

Strange session for China's Shenzhen, Shanghai

Posted By: Bob Pisani
Investors watch a digital screen displaying the prices of China's stock market in Hangzhou, Zhejiang province of China.
ChinaFotoPress | Getty Images
Investors watch a digital screen displaying the prices of China's stock market in Hangzhou, Zhejiang province of China.

It's a mixed day overseas. Europe is down modestly as Greece negotiations drag on and Germany enters correction territory. The DAX is down 10 percent from its April 10 historic high.

But it's been a strange session overnight in China, with the Shenzhen (largely tech stocks) falling 1.7 percent, while the Shanghai Composite (more financials, energy, and telecom) is up 2.2 percent.

It's about time. Small cap tech stocks as represented best on the Shenzen have more than doubled this year.

China markets this year:

  • Shanghai: up 58 percent
  • Shenzhen: up 112 percent

As I noted last year, the world's largest indexing company, MSCI, will announce tomorrow whether it will include domestic mainland stocks in its indices. This is important for one simple reason: indexers rule the investment world.

Many investors are increasingly investing through indices, most of which are used in the 1,600 ETFs that are traded every day in the United States. Adding more China stocks to indexes essentially forces investors to hold more exposure to China.

»Read more
  Monday, 1 Jun 2015 | 4:07 PM ET

Pisani: Future of the financial industry at XFin

Posted By: Bob Pisani

The Singularity University/CNBC Exponential Finance conference will take place Tuesday in New York City. While it is currently sold out, here is the conference agenda:

Oh, great. Another tech conference. Just what we need. Not!

Another conference on all the amazing "disruptive" technologies that are going to change our lives: Artificial intelligence, robotics, big data analytics, genomics.

There is now a small army of professional futurists who are telling us how fabulous our lives are going to be, how much more efficient, faster, productive, and, well just more cool, than the past ever was.

There is also a small army of start-ups that usually consist of millennials who are stunningly confident they can "disrupt" the medical world, the financial world, the legal world.

And why shouldn't they be confident? They are too young to have known failure, and if they are sufficiently possessed of a modestly cool idea they will have soon have a cadre of middle-aged venture capitalists courting them.

What's missing from this picture? What's missing is the medical industry, the legal industry, the financial industry.

There are plenty of smart people at these large institutions who can see what's going on, and they are not lumbering dinosaurs.

They all have their own ideas about what the future will look like, and none of them are sitting around waiting to be "disrupted" by a group of millennials half their age.

That's what this conference aims to do, bring together disruptors with the firms they would like to disrupt: the JP Morgans or the RBCs or the Citibanks.

I'll be speaking with two banking futurists—Gavin Michael, head of digital for consumer and community banking at Chase, and Linda Mantia, head of digital, cards and payments for RBC, on the future of mobile payments, wearables, and far smarter credit cards.

Another area ready for innovation is the consumer investment space, everything from traditional full service on one end, to DIY on the other end.

Much of the action is in-between, with roboadvisors and those who want more personal service—but at a lower cost—all competing.

The key: technology enables you to provide more services at a lower costs.

I'll be speaking with two innovators in this field, both recipients of the 2014 CNBC Disruptor List: Bill Harris, CEO of Personal Capital, and Hardeep Walia, of Motif Investing.

Cryptocurrencies and the blockchain revolution will also be a key focus of the conference. The secure transfer of digital assets is promising to disrupt financial transactions, the real estate industry, stock settlement—anything that requires secure transfer of digital assets.

Blythe Masters, who left JPMorgan last year after holding several senior positions, including running the bank's commodity business and serving as CFO of the investment bank, and now heads up Digital Asset Holdings, will discuss how blockchain technology can: 1) reduce the cost of maintaining the infrastructure involved in transactions, 2) reduce systemic risk, and 3) improve the security and resilience of the financial system.

There's more:

1)Brett King, American Banker's Innovator of the Year, will discuss the future of banking and how most banks will become technology companies in the next decade.

2) Machine learning, big data, and artificial intelligence are at the heart of disruptive technologies. Neil Jacobstein, who co-chairs the artificial intelligence and robotics track at Singularity University, will tie all three together and show how these three disciplines are impacting stock trading, investment analysis, and consumer science.

3) Dan Nadler, founder of Kensho, will discuss how big-data analytics is disrupting not just the world of stock investing (Disclosure: NBC Universal is an investor) and uncovering hitherto hidden relationships, but also how its disrupting the news business, the music and movie business, and the retail industry.

4) Marc Goodman, author of the new book "Future Crimes" will give us an overview of the digital underground and how a vast army working for criminals, corporations and countries are using all the technologies discussed here and what may be the ultimate solution for cybertheft.

5) No Singularity University event would be complete without an appearance by its founder, Dr. Peter Diamandis, chairman of the XPRIZE, and Ray Kurzweil, currently a director of engineering at Google, where he leads a team developing machine intelligence.

Ray and I will discuss the latest developments in AI research and the recent dustup over Elon Musk's comment that higher-than-human machine intelligence could imperil mankind.

»Read more
  Monday, 1 Jun 2015 | 10:44 AM ET

Traders brace for MSCI decision on China

Posted By: Bob Pisani

China mainland shares have resumed their rally, with the Shenzhen closing up 4.8 percent and the Shanghai Compsite up 4.7 percent, after a wild prior week that saw both indices drop.

Still, the whole world has been watching one of the great runs of the century in China's domestic market this year.

China domestic stock market (YTD)

  • Shanghai: up 49 percent
  • Shenzhen: up 107 percent

Some of this is due to the continued stimulus from the Chinese government, some of it due to more trading using the Shanghai-Hong Kong link, and some may have been in anticipation of a decision that is looming from MSCI, the world's biggest indexer.

Read MoreTwin PMIs show improving Chinese factory activity

Read More

On June 9, MSCI will announce whether mainland China shares will be included in its Emerging Markets Index, which is the index used for the largest Emerging Market ETF.

If that happens, it could change the dynamic of global investing. A lot of western money managers will be buying mainland Chinese shares.

»Read more
  Friday, 22 May 2015 | 3:04 PM ET

Pisani: NYSE moves into new digs

Posted By: Bob Pisani

For the past year, the NYSE's main office building has been a construction site. First, the Garage, one of the two main rooms on the trading floor, was completely renovated and reopened in January.

But the bigger disruption has been for the 800 or so NYSE staff, who have been moved out of the 17-story 11 Wall St. office and into temporary offices next door while the entire building was torn apart and renovated, the first large-scale renovation in many decades.

That is all ending this week. President Tom Farley moved back in two weeks ago to new digs on the 16th floor, leaving the traditional sixth floor executive suite, where all previous NYSE presidents have been located. That floor is now being renovated and will be turned into space for listed company meetings. The iconic Board Room will remain, along with fixtures like the 1903 Russian urn that was a gift to the exchange from Czar Nicholas II.

We asked Farley to show us around his office and to explain why he felt the need for a top-down renovation, and why he's now giving away free food to the entire staff...


»Read more
  Wednesday, 20 May 2015 | 2:14 PM ET

Do ETFs pose a 'systemic risk?'

Posted By: Bob Pisani
Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

Do ETFs pose a risk to the marketplace in times of high volatility? Possibly, according to a government watchdog report, but there are no specific accusations.

The report I'm referring to comes from the Financial Stability and Oversight Council (FSOC), which is the governmental organization created by the Dodd-Frank Act in 2010.

Its purpose is to identify and monitor excessive risks to the U.S. financial system. They have issued an annual report since 2011 outlining risks to the financial system, which has turned into a "this is what we're worried about" report on anything and everything that could possibly go wrong in the financial system.

Read MoreETF craze crosses a huge hurdle

In other words, their job is to worry about everything.

»Read more
  Monday, 18 May 2015 | 4:34 PM ET

Pisani: Are we at a market top? Signs flash yellow

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

Tracy Knudsen, senior vice president for Lowry, came by the NYSE to say hello Monday. Lowry is the oldest technical analysis service in the U.S. (founded in 1938), and they, along with Ned Davis and Dorsey Wright, produce some of the best technical analysis commentary out there.

Her main message: don't worry, at least not yet.

The big topic among traders over the weekend was the fact that we have broken decisively out of a trading range for the Dow and the S&P 500, but several important indicators are lagging, specifically the Dow Transports (down more than 5 percent from its historic closing high on Dec. 29) and the Dow Utilities, also down more than 5 percent.

The fact that the Dow Industrials hit a new high when the Dow Transports are quite a ways from a new high is, of course, a non-confirmation under Dow Theory, which holds that for a new uptrend to be confirmed the Dow Transports must also make a new high.

Why is Knudsen not worried yet? Because, she says, signs of a "classic" market top are not yet evident. Specifically:

1) No sign of an increase in stock for sale (selling pressure)

2) No sign that demand (buying interest) for stocks is dramatically decreasing

3) the advance/decline line is not deteriorating

However, there are signs that the market is "aging." She's specifically concerned that the major indices are at new highs and yet there are not many new highs in individual stocks, a sign the rally is narrowing.

In a similar vein, she notes that 30 percent of small caps are down 20 percent or more from their 52-week high.

I agree with this analysis, my one concern is the bond market. Once again, we are seeing a move up in yields—8 basis points on the 10-year—on no news. On Friday, down 8 basis points, today up 8 basis points. Worrisome.

»Read more
  Friday, 15 May 2015 | 10:41 AM ET

What the new VIX ETF means for investors

Posted By: Bob Pisani

There's a potentially important new ETF launching next Tuesday, May 19th, which allows investors to invest in the well-known CBOE Volatility Index.

Will it do a better job of tracking the VIX than other ETF and ETN products? The answer is likely yes, but there are some wrinkles.

The CBOE Volatility Index measures the intensity of put and call buying for the S&P 500 for a 30-day period and is often referred to as the "fear index."

The new Volatility ETF is attracting more attention than usual because the brains behind it is Robert Whaley, the man who invented the VIX.

His company, AccuShares, will float two different VIX ETFs: 1) the Spot VIX Up Class (VXUP), which seeks to track the VIX over a one-month period, and 2) the AccuShares Spot VIX Down Class (VXDN), which seeks to track the inverse performance of the VIX over a one-month period.

Why an inverse ETF? It has to do with how the ETF is structured.

Other ETFs exist to track spot indices—including commodites like oil—but they buy future contracts in their respective sectors. When the contracts expire, the next contract has to be bought, which greatly increases the cost of investing, since most future contracts are in contango, that is, the cost of the contracts further out are more expensive.

So you are usually buying high and selling low.

That creates tracking errors from the index. In other words, most investors find the investment they bought does not track the spot index they want to follow.

AccuShares is trying a different approach with this VIX product, and with other spot indices they will be launching in the near future. They hold cash and cash equivalents. Each ETF has an "up" asset class and a "down" asset class. Assets are swapped back and forth, depending on the increase or decrease in the spot price.

On the 15th of every month, everything is recalibrated. So you are essentially making a bet on where the VIX might be in the middle of the month.

With that said, there are a couple important details:

1) This is not free. There is a management fee of about 90 basis points a year.

2) There is a monthly distribution. Because this is cash, any accrued interest is paid out to shareholders (they park the cash in Treasurys). While it does create tax issues, it is treated as ordinary dividend income and will be reported on a 1099 form.

3) if you own the Long VIX there is a "tail risk insurance premium" that is paid the Short VIX of 15 basis points a day.

Why? Whaley pointed out to me that the VIX is not like a stock. That's because everyone knows that at some point the VIX will spike up—in some cases dramatically—in response to some event. It will also come back down again.

This has a very simple implication: at some point, you are going to make money if you buy the VIX, because we all know it is going to go up at some time. You just have to hold it, and voila! At some point it will go up, and you will make money.

What this means is that shorts are disadvantaged by definition. Who is going to sell you this product knowing that you are guaranteed to make money at some point, and they are guaranteed to lose money?

No one. So longs have to compensate the shorts for the risk of being short.

Why 15 basis points? Whaley tells me that is the point at which his team felt that market participants were willing to make a market in the products.

So, does it track the VIX? Let's take a look at an example.

On a daily basis, it seems to be pretty close. For example, from May 4th to May 5th, the VIX moved 11.4 percent, from 12.85 to 14.31.

If you deduct the 15 basis point fee, you have a gain of 11.25 percent, minus a management fee of roughly 0.0025 percent, the one-day cost of that annual 90 basis point fee, which gets you to 11.2475 percent.

VIX up 11.4 percent, you get 11.2475 percent. Not bad. Pretty close.

But that is for one day. The tracking error gets larger if you hold it for longer periods.

Suppose you invest $1,000 in the Up ETF (VXUP) on the 15th of the month and one month later the VIX is up 10 percent, so the value of the fund is $1,100.

Here's what you will have: 1) the $100 from a 10% gain, 2) whatever interest rate you get from short-term Treasuries (a few pennies), because the fund parks the cash here, 3) less the daily 15 basis point fee, which over thirty days would amount to $45, 4) minus the management fee of one-twelfth of 90 basis points, which is roughly $0.77, let's call it $1.

So you'd have a gain of roughly $100-$45-$1 = $54 or a roughly 5.4 percent gain.

That is not the same as a 10 percent gain, BUT you would get something that is directionally correct.

Bottom line: you'd have an index that tracks the VIX, but how closely depends on how long you hold it. You are paying a significant fee for the option-like privilege.

That sounds like an awful lot of fees, but when you compare how much is lost by the cost of carrying futures in the alternative products that use VIX futures, it may be worth it.

What does all this mean? You can definitely make money if you have a strong hunch that volatility is going to spike in some period in the not-too-distant future.

But because of the costs and distributions, this is not something you would want to hold for any length of time. It's the kind of trade you would want to make a quick directional bet on.

Whaley agrees that this is for short-term trading bets, and in case you don't get this point, it's spelled out in the prospectus: "Investors who do not intend to actively manage and monitor their Fund investments at least as frequently as each distribution date should not buy shares of the Funds."

Whaley says he has plans to launch many other target spot indices—largely for commodity indices in oil, natural gas, agriculture, and metals.

These products should not need to have the "tail risk insurance premium" the VIX products have, and so they should more closely track the underlying indices, even over longer periods of time. That would be significant.

Is investing in volatility ever going to be an asset class that you can buy along with stocks, bonds, commodities? Tom Lydon, editor and publisher of ETF Trends, told me it might become an asset class if there was something available to buy that correlated to the VIX.

This may or may not be that instrument, but I am doubtful volatility will become a big asset class. What I do believe is that it can be a very useful tool to manage short-term risk, and that, as Whaley pointed out to me, has great value when markets change on a dime on geopolitical and macroeconomic events.

»Read more
  Thursday, 14 May 2015 | 3:41 PM ET

Pisani: The Avon Hoax and what it means

Posted By: Bob Pisani

A fake filing related to a takeover of Avon has highlighted several issues for regulators.

Avon was having a perfectly normal day, trading around $6.60 at 11:35 a.m., ET, when the stock shot up to almost $6.97, triggering a volatility trading halt.

These "volatility trading halts" are single-stock circuit breakers that were created after the 2010 "flash crash" to control volatile trading in stocks. Simply put, it stops trading in a stock if it moves more than 5 percent in a five- minute period. The stock halts for five minutes everywhere (not just on the NYSE), then reopens, but if there are still huge imbalances, it can be halted for up to another five minutes.

Some firm calling itself PTG Capital had filed an offer to buy Avon for an exorbitant price. Given that it was at a 20-year low, the move immediately attracted attention.

The stock reopened, and immediately shot up to almost $8, triggering another trading halt.

By then, traders on the floor were noticing that the filing contained numerous typos, and no one had ever heard of them. There were rumors floating around that they didn't even exist.

My colleague Brian Sullivan called both the attorney's listed for the firm and the company; both went into very odd sounding voice mail.

When it reopened, the stock went in the other direction, from roughly $7.98 to $7.60, triggering a third and final trading halt.

CNBC reached out to Avon and they told us "it has not received any offer or other communication from such an entity ... and has not been able to confirm that such an entity exists."

In other words, it was a hoax.

There are two problems here:

1) how on earth did a phony filing get into the SEC's Edgar database? The trading community assumes filings made there are accurate and reliable, because—everyone assumes—they are supposed to be vetted by the SEC.

2) the NYSE (and other exchanges) should have the power to halt a stock when there is unusual and unexplainable trading activity, but it does not.

A company has the power to halt trading in its stock if it has "news pending," but that did not happen. In fact, the NYSE was unable to get in touch with the company during the halts, despite many attempts.

In the past, NYSE floor officials were able to halt stocks for an "order imbalance," that is, a huge order of buy stocks with no sell orders, or vice-versa.

That went away several years ago. Instead, the "volatility trading halts" were what stopped the trading. That's what happened—three times.

It might be easier and more logical if exchange officials merely had the power to halt stocks that are trading strangely for inexplicable reasons. This is an issue for the regulators.

At 2 p.m., ET, the stock was still trading up roughly 6 percent. Why? Because the big price moves and huge volume (more than five times normal) generated heavier than usual volume and volatility, even after everyone realized the story was a hoax.

How is that possible? Because heavy trading begets more trading. The heavy volume and higher volatility allowed traders to step in and make small amounts of money trading the stock, which corresponds to that cynical old trader saw, it doesn't matter if the story is right or wrong, as long as you're on the right side of the trade.


»Read more

About Trader Talk with Bob Pisani

  • Direct from the floor of the NYSE, Trader Talk with Bob Pisani provides a dynamic look at the reasons for the day’s actions on Wall Street. If you want to go beyond the latest numbers— Bob will tell you why the market does what it does and what it means for the next day’s trading.

 

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    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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