For months we have watched energy, materials, and global industrials weaken on concerns about oil oversupply and slower global growth.» Read More
'Tis two days yet to New Year
but despite what you're hopin'
The folks in the Board Room
say "the full Eve we'll stay open"
So we'll buy and we'll sell
as the tape crawls along
And though "Bubbly's" verboten
we may still sing a song
Ferrari is about to spread a lot more of its stock around.
The company sold 10 percent of its shares in a much-publicized IPO on the New York Stock Exchange in October. Piero Ferrari, son of Ferrari's founder, also owns a 10-percent stake.
On Jan. 3, Fiat Chrysler's remaining 80-percent stake will be spun off to its shareholders with those shares slated to begin trading on the Milan stock exchange the following day.
Fiat Chrysler investors will get one share of Ferrari for every 10 of Fiat Chrysler. The last day to buy Chrysler and get Ferrari stock is tomorrow, Dec. 30.
After the spinoff, the Agnelli family's holding company, Exor, will own 24 percent of the company's shares. Piero Ferrari will also continue to own 10 percent of the shares. But together they will control almost half of the voting rights.
Ferrari was one of the most high-profile IPOs of 2015 and one of only two in the fourth quarter (next to Atlassian) that was able to price above its proposed midpoint, but after a big splash in the first week of trading the stock dropped below its initial price of $52 and is now trading around $47.
Can Ferrari get back some of its lost luster? It's going to be a tough sell.
While most investors look at mutual fund and ETF prices as a gauge of success, flows — the money going in and out — is sometimes a better indicator of investor sentiment. Despite the market fluctuations, it was another big year for ETFs in 2015: Money flowed into equity and bond ETFs, while money flowed out of mutual funds.
Don't pooh-pooh this buy-the-losers-into-the-end-of-the-year trick: With many Energy and Material stocks down 20 percent or more, it makes perfect sense to be buying them now, in a seasonally strong period of the year, with tax-loss selling abating, and with traders looking for a few percentage points gain to end the year on a positive note.
I repeat: don't laugh at this strategy. I know guys that are suddenly very long the Alcoa's and Exxon's of the world as a "Santa Claus rally" trade, because a 5 to 10 percent rally in the next few days could make the difference between being in the green — or in the red — for the year.
On a longer-term level, Value versus Growth for 2016 is the big investment debate on trading desks right now.
The iShares S&P500 Value ETF (IVE), down 4 percent this year, is up 1.3 percent today, more than twice the performance of the iShares S&P 500 Growth ETF, which is up 4.7% year to date.
Many Growth names are being sold today. Nike is the outstanding example, up 30 percent or so this year, being sold on heavy volume today, despite a strong earnings report. It's not just Nike — big 2015 winners like Activision , Facebook , and Priceline are all down today.
The biggest losers (all Value) this year: Freeport McMoran, Williams, Southwest Energy, Range Resources, Devon — all down roughly 50 percent or so on the year...are the biggest gainers today, all up 10 percent or more today
What's the difference? Growth is traditionally associated with companies that are regularly growing earnings (duh).
Value is a bit trickier to define. It's usually associated with flat or declining earnings growth, a higher dividend yield (often because prices are down), and low price-to-book ratio and/or a low price-to-earnings ratio.
Traditionally, Value is associated with consumer names like Campbell Soup and Kimberly-Clark . But for 2015, Value was most associated with Energy and Materials. But it also dragged in regional banks like Huntington Bancshares and Fifth Third. And even many retailers like Kohls and Wal-Mart.
It's easy to argue for a short-term pop in Energy and Materials. Making a shot at Value as a strategy outperformer for 2016 is a tougher sell.
Here's why: For Value to work, several things would have to go right:
1) Oil rises, even if modestly;
2) The global economy expands, even if modestly;
3) The Fed is very slow on its interest rate hikes.
Doesn't sound like much, but that's a fairly tall order. The consensus is that we get another year of below-trend growth and that oil will struggle to rise, at least in the first half of the year.
So which wins long-term, Value or Growth? This is an old, old debate. Investment firm Gerstein Fisher recently published a paper noting that there have been long periods of dominance between the two:
July 1926 to 1944: Growth wins
1945 to 1962: Value wins
1963 to 1980: Value wins
1981 to 1998: Value wins
1999 to July 2015: Growth wins
Over much shorter time periods, however, it can be a bit of a coin toss. But when you have years like 2015 — with Energy down 22 percent and Materials down 9 percent — it is not a surprise that this debate is a little more vigorous than usual.
'Tis two days before Christmas
and at each brokerage house
The only thing stirring
was the click of a mouse
Down on the Exchange
the tape inches along
Brokers bargained and traded
as they hummed an old song
The Fed turned data dependent
or so they would claim
Yet they hiked in December
though the data looked tame
A new stock exchange is launching today, or, more accurately, an old one is re-launching.
The National Stock Exchange (NSX) is re-launching today to trade equities and ETFs.
It was one of the oldest stock exchanges in the country, founded in Cincinnati as the Cincinnati Stock Exchange in 1885. It existed as a small regional exchange until it became an all-electronic stock market in 1976. They moved to Chicago in 1995 and changed their name to the National Stock Exchange, then moved again to Jersey City, New Jersey. After being acquired by the CBOE Stock Exchange in 2011, the NSX ceased trading in May, 2014.
It was bought by a small group of investors and is re-launching today in a partial or "soft" rollout that should be completed by December 31, 2015.
Do we really need another stock exchange? There are three stock exchange holding companies that each own several exchanges: ICE owns three exchanges (NYSE, NYSE Arca, and NYSE Amex), BATS has 4 (DirectEdge A, DirectEdgeX, BATS BYX, BATS), NASDAQ has 3 (NASDAQ, NASDAQ BX, NASDAQ PSX), and then there's a couple very small ones, including the Chicago Stock Exchange, and now the National Stock Exchange.
On the surface, the answer seems to be no. But CEO Mark Sulavaka told me last night he thinks there is room for more, particularly on the issue of access fees.
There's been a lot of debate around access fees, which are fees exchanges charge to execute trades. In general, they charge a lower fee to "provide" liquidity (post bids or offers) than for "taking" liquidity (hitting the bid or offer). Brokers will often go to great lengths to avoid paying those fees, including internalizing orders or routing them to dark pools that charge lower fees.
Jeff Sprecher from ICE has said he wants to greatly reduce access fees, but there has not been much progress. There's a groundswell that thinks rebates distort the markets.
Sulavaka thinks the lack of action on these access fees is a big opportunity for him. He is dramatically slashing the fees, essentially charging nothing to post liquidity and a fraction of what other exchanges charge to "take" liquidity.
He's hopeful this will give his fledgling exchange a leg up with the competition.
"Our goal is to be the low-cost provider in the space," Suvlaka told me.
It's certainly true reducing access fees will reduce the cost for brokers to trade on an exchange. What's not clear is whether brokers will pass those savings on to their clients.
Suvlaka also has ideas on expanding the exchange business. Down the road, he sees opportunity as a regulator to build a system for regulating market dealers involved in crowdfunding, which has now been greatly expanded for general investors thanks to the JOBS Act.
The ownership of the NSX, according to documents filed with the SEC, consists of two categories of shareholders. One group consists of 12 individuals who own approximately 64 percent of the outstanding shares, described as "securities industry and technology professionals with senior executive managerial experience in areas including capital markets and investment management, management, exchange
operations, electronic trading, and systems architecture and development." The second category of shareholders consist of two affiliated entities: Thor Investment Holding LLC, which owns approximately 16 percent, and TIP-1 LLC, which owns approximately 20 percent.
No individuals are directly named as owners, however, former Lehman Brothers CEO Dick Fuld has been identified as a part-owner.
As for the other exchange waiting to get out...IEX, whose application is still in front of the SEC, Suvlaka had little to say, other than to note the somewhat intense commentary from the other exchanges.
Why is the stock market lower today?
The Street has talked itself into a new funk. The basic theme is: lower for longer.
This theme is familiar to those watching oil, but this time the theme is broader.
Lower for longer not just in oil, but natural gas. Lower for longer in steel & copper & aluminum and other base metals. Lower for longer in global Industrial sales. Lower for longer in interest rates. And lower for longer in many emerging markets.
How long is "lower for longer?" It depends, but the general theme is that lower everything continues into at least the first half of 2016.
That doesn't mean that commodity prices—or corporate sales—will keep dropping. They don't have to for everyone to be gloomy. They just have to remain at these depressed levels:
Commodities in 2016
Oil down 31%
Natural Gas down 31%
Copper down 25%
Aluminum down 17%
Gold down 10%
Let's look at each sector.
1) Oil. Besides weak earnings, Energy stocks face the possibility of dividend cuts among big names if lower for longer continues into late 2016. Iberia Capital, speaking of Occidental's dividend, recently wrote: "If the lower for longer scenario plays out as many predict, a dividend reduction becomes increasingly likely."
In oil, the general feeling is that for an appreciable rise to occur either: 1) Saudi Arabia has to cut production, or 2) U.S. shale producers have to cut production, or 3) some geopolitical event has to occur that would cause oil to spike, or 4) the global economy suddenly gets better and oil demand improves.
Macquarie: "The IEA's most recent update suggests the global oil market is unlikely to balance NT [near-term] and lower for longer WTI appears increasingly likely."
2) In metals, the basic theme is capacity remains relatively high, though it is coming down. Deutsche Bank downgraded a bunch of steel stocks yesterday, saying they expect lower steel prices to continue into next year. Morningstar said that despite cuts in production aluminum capacity is still high, and that "This is a key driver of our "lower for longer" view on aluminum pricing. "
3) In Financials, there are two stress points: a) fewer rate hikes leaves less opportunity for banks to raise rates, and 2) lower for longer on oil increases the chances that banks will have to take writedowns on energy loans. Macquarie, writing about Bank of America but speaking generally about most banks, recently wrote: "lower for longer interest rates would cause a meaningful downdraft in consensus estimates."
4) In global Industrials, many expect the global economy to continue to be anemic into 2016. Baird reflected this in a recent report discussing Industrial firms like ITT, ABB, and Emerson Electric, saying: "3Q commentary suggested no signs of improvement in 2H15 as companies continued to slash both operating and capital budgets to adjust to the new lower-for-longer demand environment."
I could go on and on, but you get the point: "lower for longer" has now become a regular part of the Wall Street jargon.
How much of this is real and how much is just a short-term funk? We don't know. One thing is for sure there are an awful lot of bets that this will continue into 2016. If it doesn't, we will see some short, sharp rallies.
And the Fed? Oh, traders have talked themselves into all sorts of logical knots.
How's this one: Yellen is damned no matter what she does.
The argument is: if the data is good, she is going to raise rates quicker and the markets will have a tough time digesting that. If the data is poor, she will be less aggressive, but stocks will respond negatively to the poor data.
See what I mean? Damned either way.
Wall Street needs to stop drinking the Kool Aid and start drinking the eggnog.
What's next for markets? Europe and Asian stocks have rallied, commodities are firm on the dollar strength, and even emerging markets are rallying.
Mass hypnosis? Wall Street has convinced itself that the Fed will raise rates two or at most three times next year. Witness bond yields, which are down in the U.S. and Europe, an indication that investors believe the pace of rate increases will be modest.
Wow. You can agree or not with what the Fed has been doing, or whether they are behind the curve and should have raised earlier this year or shouldn't raise at all.
Regardless, the Fed delivered a statement that was precisely in-line with what the market anticipated:
1) a quarter point rate hike;
2) a "dovish" tone that indicated the pace of rate hikes would be "gradual": "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate;"
As Steve Liesman has pointed out, this is not "one and done," which would have been the most dovish scenario, but it was dovish enough.
Here's the two questions that matter today:
1) How does the Fed communicate its intentions? The crowded trade is "dovish Fed." The risk, therefore, is that the Fed appears more hawkish than anticipated. Everyone believes Yellen will reiterate they plan to keep rates low for an extended period. But how to communicate that? Simply saying the Fed is "data dependent" may not enough, in fact that could be interpreted as being too hawkish.
She needs to tick off a few boxes to convince the trading community that they will not be moving fast. It would help to make some passing reference to the continuing volatility in oil and perhaps even to the credit market.
The Fed has said it would take a "balanced" approach to raising rates and that "economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run."
One way to project a "dovish" position is to lower expectations for a rate hike. The current consensus is for rates to be roughly 100 basis points higher a year from now. That would imply four rate hikes of 25 basis points each, likely at each of the four meetings with press conferences: December 16, March 16, June 15, September 21.
If the Fed were to indicate that rates may be lower than that a year from now, that would certainly be dovish.
Another way would be to say they need to see more evidence that inflation is moving closer to their 2 percent goal.
2) What is the market reaction? Equity volatility has seen elevated, but not dramatically so, going into the Fed meeting. Part of this is due to the continuing volatility in oil, and, on Friday, in the credit markets.
I noted Tuesday that the quadruple witching expiration, the quarterly expiration of stock and index options, and stock and index futures that happens on Friday, is not normally a market moving event though it brings heavy volume. The concern this time is that because of the Fed this could be different. If the Fed appears to be "hawkish" (raising rates more aggressively) the S&P 500 could drop through several key levels where option prices are pegged for the Friday expiration, which would force additional selling.
If the market perceives the Fed remains "dovish," the consensus is for a rally going into the close of the year. We are in a seasonally strong period, tax loss selling is abating, many have been underweight stocks going into the Fed. Of course, stability in oil and high yield will be important factors.
The Fed will likely raise rates more than the market expects as inflation ticks up, BAML's Michael Hanson says.
China's foreign reserves fell for a third straight month in January, as the central bank dumped dollars to defend the yuan.
For months we have watched energy, materials, and global industrials weaken on concerns about oil oversupply and slower global growth.