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The book for the Ferrari IPO is expected to close Monday afternoon. It is scheduled to price Tuesday for trading at the NYSE on Wednesday.
It's all fabulously sexy and exclusive, and the IPO at the NYSE will be a scene. There will be lots of blazing-red sports cars outside the NYSE (not inside), including a few famous collectibles, I'm sure.
They're seeking to float roughly 10 percent of the company: 17.2 million shares at $48-$52, so at the $50 midpoint that would be $860 million, valuing the company at close to $10 billion.
The Ferrari family owns 10 percent; Fiat Chrysler owns the remaining 90 percent, but Fiat Chrysler's stake will be reduced to 80 percent after the IPO.
The hysteria has already started: The IPO market is in trouble! First Data prices well below the range! Albertson's is in trouble!
It's not in trouble. The IPO market is repricing, and that is good news for investors.
There's an obvious reason for the hysteria. Only 13 initial public offerings have gotten done since Labor Day, about half of the planned number. There have been several high-profile postponements due to "market conditions" since Labor Day, notably Neiman Marcus, and now — perhaps — Albertson's, which failed to price last night and will try again tonight.
Of those that have gone public since Labor Day, the average price has been 18.1 percent below the midpoint of the suggested price range, according to Renaissance Capital, the firm that runs the Renaissance Capital IPO ETF (IPO), a basket of roughly 60 recent IPOs.
Obviously, if you are one of the companies going public, you are disappointed you didn't get a higher price.
But for everyone else — including the public that is buying the IPO at the open, as well as those who hope to trade it a short while later — this is great news.
Why? Because lower prices make it much more likely that the IPO will: 1) trade up at the open, and 2) not fade away in the days following the open.
Is there a better way to do economic forecasting?
There's been lots of talk about applying machine learning, big data and crowd sourcing to the stock market. A new firm wants to apply the same ideas to economic forecasting, and it is claiming its approach generates economic forecasts in real time with a higher accuracy rate than famous Wall Street forecasters.
The firm is Now-Cast Data Corp, and its founder, CEO Giselle Guzman, came by the NYSE recently to demonstrate the program.
You know how dismal economic forecasting can be. First, the very methods used to generate the official numbers involve huge margins of error.
Take new home sales. It's compiled by the Census Bureau from sample surveys. It takes a month to get out. For the July 2015 report, the Census Bureau said new home sales were 25.8 percent above the July 2014 level.
Now read the fine print: They are 90 percent confident that the actual number is 22.6 percent ABOVE or BELOW that number.
That is a HUGE margin of error. You could drive a truck through the estimate. Why are the estimates so...full of holes? Because the sample size is fairly small.
You could get a more accurate number by surveying more builders, but you would need more money, which the Census Bureau doesn't have.
This is true of all government statistics.
Wall Street, in an effort to improve on this dismal science, has an army of analysts and strategists who generate their own estimates of economic data, ahead of the reported numbers.
These are the "consensus" economic numbers which we cite every day.
Guzman has a problem with that "consensus" and the way economic forecasting is done; she doesn't think it's very accurate.
She has strong credentials. She has a PhD in Finance and Economics and worked for 17 years with Nobel Prize winner Lawrence Klein, a pioneer of modern economic forecasting. She was also a research assistant to Nobel Prize-winner Joseph Stiglitz.
Her beef: traditional economics is based on assumptions, not on data. "There's no science in the dismal science," she laments.
Her solution calls for using technology to study what people really are doing, rather than what economists assume they are doing. That, she says, will enable much more accurate forecasting.
On her website, subscribers can pull up a dashboard of roughly 4,000 indicators on virtually every kind of economic activity. The website provides tables of all the predictions and a graph of the predictions placed over the actual numbers.
And — this is the cool part — for some of the indicators you can watch the predictions in real time, part of the program dubbed LiveWire. The data is updated continuously, by the second.
Think about that. The Fed updates its estimates once a quarter, and most federal economic data comes out once a month.
Stare at the Consumer Price Index LiveWire, for example, which is sliced into 14 separate pieces, and after a few minutes the screen will suddenly flash yellow, and the numbers--estimates for the September report, out tomorrow--will change, reflecting an update in the data. Red arrows will appear indicating the estimates are lower, green indicating they are higher.
Right now there are three primary economic indicators offered in live time: consumer price index, personal income, and producer price index, though all three have dozens of sub-indices.
She will be rolling out retail sales shortly, with more to come.
OK, so what's the secret sauce? How is this information gathered and updated? Guzman is reluctant to get into a discussion about the details of her methodology, but she summarizes it thus: "It's the wisdom of crowds, but with a whole lot of math."
When I asked for more specifics, Guzman notes that the Internet is the perfect vehicle for exploring what people are really worried about and how they really feel, rather than what they say they are worried about or feel.
A paper she published that studied inflation concluded that people are far more likely to do Internet searches for "inflation" when they are worried that prices are rising, which makes sense. But she argues that this can be used to predict inflation expectations more accurately than surveys.
That's the wisdom of crowds part. The next step: she claims to have developed sophisticated algorithms that quantify those behaviors.
And how does she feel about the math? She says she is beating the Wall Street consensus.
Based on a brief look at her recent estimates, she seems to have had some hits. I was on the NYSE floor on the morning of Sept. 30 when the Chicago PMI came out. A number of traders had obtained a "private" (not published) forecast of 48.7 from Now-Cast. The consensus was for 53.4, so Now-Cast's estimate was a real outlier.
Traders were eager to see how close her estimate was. The reported number: 48.7, right on the nose.
August personal income was out Sept. 28. Consensus was for a gain of 0.4%; the Now-Cast estimate was for a gain of 0.3%. The actual number: a gain of 0.3%.
The Consumer Price Index (CPI) for September will be out tomorrow. Consensus is for a month-over-month DECLINE of 0.2%, Now-Cast's estimate is the same: a decline of 0.2%.
But that will keep changing, until midnight tonight.
Here's what I would like to see: an analysis of her predictions, against the predictions of the top strategists on Wall Street.
I certainly agree that Wall Street needs to improve its data analytics. What we need to determine is whether Now-Cast's methodology is clearly superior.
Programming note: Guzman will visit with Pisani on Power Lunch Wednesday, at 1:30 p.m., ET.
I've been away for a week, but even from afar it's been pretty obvious that the start of the fourth quarter has seen some rotation.
The two worst-performing sectors of the year — energy and materials — are the two best performers in October. Industrials, also a poor performer on the year, are up a healthy 7 percent, all outperforming the S&P's 4.9 percent gain.
S&P Sectors this month:
The year's best performer — the defensive consumer staples sector — is lagging, but still up 4.6 percent.
There is a certain deja vu in all this, at least for energy. This is the fourth time the energy sector has attempted to rally following efforts in December of last year, then January, March and again in August. Every rally has failed.
Importantly, I don't see anyone who is predicting this rally is based on fundamentals. Goldman Sachs was out with a long note this morning in which it concluded: "Despite the magnitude of the recent rally, we do not believe that any data releases or company announcements over the past two weeks suggest a change in commodity fundamentals."
So, for the moment, let's just leave this as an old-fashioned buy-the-losers-at-the-start-of-the-quarter rally.
The IPO market is a mess right now.
The disappointing jobs report is not just a problem for existing stocks, it's a problem for companies that are trying to go public in the near future.
This didn't happen with the jobs report. The IPO market has been flashing a strong yellow light for months. The Renaissance Capital IPO ETF, a basket of roughly the last 60 IPOs, dropped nearly 20 percent in the third quarter.
And with good reason: returns have been very disappointing.
Sixty percent of IPOs that went public in 2015 are trading below their IPO price.
According to Renaissance Capital, average IPO returns were down 4 percent from their IPO price in the third quarter, the first negative quarter since 2011. More IPOs ended the quarter below their offer price than above it.
And the IPO market reacted: the number of deals was down 43 percent.
We're not starting off the fourth quarter very well either. Investors who have been burned this year are demanding price cuts, and they are getting it.
Five companies priced their IPOs this week (Peformance Food Group, Edge Therapeutics, Mima Therapeutics, Surgery Partners and NovaCure), and all five priced at least 20 percent below the midrange of the expected price.
Now we have two very leveraged companies that need money to pay down debt announcing terms for their IPOs.
In what may be the biggest IPO of the year (and the biggest since Alibaba), electronic payments processing firm First Data said it would float 160 million shares at $18-$20. And Albertsons, the no. 2 grocer in the U.S., said it would seek to float 65.3 million shares at $23-$26.
Both will likely price Wednesday Oct. 14 and trade on Oct. 15.
There are other big companies waiting to go public out there. Data storage firm Pure Storage will be the first pure tech company to go public since July, scheduled for next week.
This will be an important test. Investors love the company. It has wild growth. But it also has big losses.
After that, Nieman Marcus has filed but hasn't set terms. So has Univision. And Ferrari. And Petco. And McGraw-Hill Education.
While none have set terms, all of them are potentially in danger of going public at prices lower than anticipated.
That's good news for IPO investors. For example, Edge Therapeutics, after pricing at $11, well below the price talk of $14-$16, is trading today in the mid-$15 range.
The lesson: investors will buy if the price is right!
Bottom line: if market volatility continues, look for fewer deals, and those that do will have price cuts.
But if we get into mid-November, and the S&P is up 5 to 10 percent from today, you will see a VERY crowded fall schedule.
So much for bad news is good news.
S&P futures dropped 20 points, and bond yields slipped as nonfarm payrolls came in at 142,000, well short of expectations of 200,000. But the real killer was notable downward revisions in July and August.
Not to mention, hourly earnings were flat.
So what do traders do? They will likely do what they have been doing for the past six weeks or so: nothing. After lowering exposure dramatically, most traders have exhibited no interest at all in increasing exposures, even though the S&P 500 is down about 13 percent from its high on May 21.
My friend Jeff Saut at Raymond James highlighted exactly the dilemma investors are facing in October: "The portfolio managers basically wanted to be 'flat' because if they make a 'big bet' right here and they are wrong, not only do they have performance risk, but also bonus risk and ultimately job risk at year end."
There's a new player in the bond trading business.
Everyone knows it's getting harder to trade bonds. Jamie Dimon, Bill Gross and others have all complained about the lack of liquidity. Enter Liquidnet, which runs a dark pool for electronic trading in stocks. On Tuesday, the firm began operating a dark pool to trade bonds.
They're the latest organization to try to bring bond trading into the twenty-first century, by trading electronically. CEO Seth Merrin's hope is that it will attract much-needed liquidity to the industry.
It's an old problem: there is no central facility to trade bonds, like a stock exchange.
Partly, it's because bonds are much more heterogeneous than stocks. There's about 5,000 listed stocks in the U.S., but roughly 2 million individual tradeable bonds.
Bonds traditionally trade over-the-counter, between dealers—usually banks, and there have been attempts to get bonds to trade electronically, just like stocks do. Those efforts have been met with very limited success, however, partly because the banks who control the trading don't want to do it.
That was fine when banks had capital to trade bonds, but because of all the new regulations, that capital has gone away.
Merrin says that as of June, 2015, dealer inventories in bonds are down 75 to 90 percent to roughly $18 billion—a drop in the bucket in a $7.8 trillion market. Meanwhile, the amount of corporate issuance has shot up dramatically because of the low interest rates.
A lot more bonds with a lot less liquidity is a recipe for trouble, Merrin says.
You've heard this many times: October is traditionally the month where stocks bottom.
There is some truth to this. The Stock Trader's Almanac calls October the "bear killer" because it has turned the tide in 12 post-World War II bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and 2011.
The "worst six months of the year" trend also ends in October.
Still, these are not normal times and anyone who relies on seasonality exclusively is courting trouble.
What do we need for a bottom?
JPMorgan analyst Marko Kolanovic is having his moment of fame.
Kolanovic is the global head of derivative and quantitative strategies. He got considerable attention right after the Aug. 24-25 selloff by publishing a report saying that "price insensitive" programs might cause repeated selloffs.
Yesterday, he got more attention by claiming that "technical selling pressure" from trading firms was largely completed, and that the trend would be toward buying in the days and weeks ahead. The report—out in the middle of the day—was even credited by some with the 200-point rally in the Dow.
Thursday's report also contained a long section analyzing the events of Mon., Aug. 24, when the Dow dropped roughly 1,100 points in the first five minutes of trading.
Kolanovic blamed a good part of that drop on a lack of liquidity in the marketplace, as well as to a herd mentality by traders desperate to buy protection against further market declines at any cost.
Kolanovic notes that the seeds of the selloff were planted the night before. On Sunday night, Aug. 23, a large drop in equities in Asia triggered a drop in index futures in Europe and the U.S. U.S. stock futures went down (7%) prior to the U.S. open.
Panic buying of protection. That, Kolanovic says, caused traders to panic and seek to buy protection in any form, including put options. Lots of it. They got this protection from dealers, who were overwhelmed with the need to sell protection to traders.
When a dealer sells a put option, the dealer is long the market. If the market moves down and the option goes "in the money" the dealer needs to sell to stay neutral. Normally this does not matter, but when you have massive amounts of options hedging that hedging itself will move the market.
These long positions from the dealers got larger and larger, Kolanovic says. Those dealers, to protect themselves, needed to "dynamically hedge", meaning if the market moved down, they needed to sell as well.
And that was a part of the problem: as the market opened down big, dealers were forced to sell as well.
Lack of liquidity. A second problem was a lack of liquidity, which means that there wasn't enough traders willing to buy all the stuff everyone wanted to sell: "a crash would not have happened if there was sufficient liquidity in the marketplace to absorb these flows," Kolanovic said.
How did that happen? A good part of the trading and hedging occurred in the pre-open hours, when there is poor liquidity. Also, the last two weeks of August is typically light on volume.
In other words, traders dumped large amounts of stock at exactly the wrong time.
Why? Why sell into no liquidity? Was there some fever that suddenly struck the trading community that caused them to make colossally stupid sales when there was no liquidity.
Well, in a way, yes. There was a fever. They had to sell, or at least that is the implication.
Look at this way: you are a trader responsible for managing risk at your firm. Suddenly you have outsized risk. You are through your risk limits, and your job is to stay in your risk limits. You are in danger of losing a lot of money, and worse, you are in danger of getting fired if you do nothing.
So you need to flatten your books, which, in plain English, means selling. In this somewhat panicky situation, they are not necessarily looking around considering the health of the market or the participation of other traders.
Market makers and high frequency traders. Kolanovic also briefly mentions the role he believes market makers and high frequency traders (HFTs) may have played in the decline.
He notes that there were extreme dislocations in the market going into the open and in the first 15 minutes or so:
1) Only about half of S&P 500 stocks were opened on NYSE by 9:35 a.m.;
2) 765 stocks in the Russell 3000 were down more than 10 percent on an intraday basis;
3) There were 1,278 trading halts for 471 different ETFs and stocks.
Because of this, it was not possible to calculate the value of many ETFs, or hedge or trade ETFs and stocks at a 'correct' price.
He notes that HFTs and other high-speed traders have models that essentially shut down their systems when they detect extreme pricing anomalies that may be incorrect or erroneous. This is a safety design that essentially says, "Can some human take a look at this and see if this stuff is pricing correctly?"
This certainly happened that morning. Many market participants withheld liquidity when they weren't sure what the prices were, or weren't sure if they were correct.
Is Kolanovic's analysis accurate? I think his key points about a rush to buy protection and a liquidity crunch are indeed components that exacerbated the decline.
However, don't kid yourself—the markets were going down, first and foremost on the fundamental issues of weakness in China and uncertainty about the Fed's policy on raising interest rates.
In a sense, this is oddly reminiscent of the 1987 crash report—which many blamed on "portfolio insurance." Markets were going down no matter what, and we are really debating about collateral effects that relate to liquidity and market structure.
What can be done? That doesn't mean we should ignore the fact that the market frayed around the edges. What can be done to tweak the system to make it work better on days of extreme volatility, like Aug. 24?
Kolanovic does not go into a discussion on this, but based on my own discussions with dozens of market participants in the past few weeks, I have a few observations.
They fall into three buckets:
1) improving liquidity. Kolanovic is certainly correct in noting that lack of liquidity was a big problem.
a) Almost everyone agrees that the volatility would have been lower if all the exchanges had opened at the same time.
One major problem was that parts of the market were open, but other parts—many of the NYSE listed stocks—took several minutes to open.
This allowed NYSE-listed stocks to trade away from the NYSE at widely different prices.
This is an age-old debate. The NYSE still uses a hybrid model, employing electronic trading and floor based designated market makers (DMMs) to open and trade stocks during the day.
So the argument boils down to this: should we just allow an all-electronic open everywhere?
The NYSE has historically opposed this, arguing that investors get fairer pricing in times of high volatility by having humans price the open, and if that means it may take a few more minutes past the open, so be it.
The NYSE has argued that the "just get it open" mentality can be dangerous, that by waiting to get better pricing retail investors—who are the ones who typically get the opening price—would be better served.
Would the markets have had less volatility on August 24th had there been an all-electronic open? I don't know, but I do think it is likely that the system-wide circuit breaker...a decline of 7 percent in the S&P 500....would have been triggered. That would have created a 15-minute pause.
Would that have calmed the market quicker? I don't know. Perhaps.
But it's unlikely that the exchanges will all open all their stocks at the same time; the markets are simply too competitive. No one is going to wait for anyone.
b) how can market makers be prudent, but more active? Kolanovic talked about market makers and HFTs shutting down when the data is uncertain...how can they get more certainty and not shut down?
One thing that's very important to understand about market makers—whether they are on options desks or HFTs or NASDAQ broker/dealers or Designated Market Makers (DMMs) on the NYSE floor—is that they play a game of pennies. They eke out small profits every day.
But history is littered with market makers who went out of business on disastrous days, when they committed massive liquidity and got killed.
So the retiscence is understandable. The obligation of market makers to provide "fair and orderly markets"—an obligation that has been considerably diluted over time—does not include the obligation to go out of business.
c) can the opening rules for the NYSE be improved? Many DMMs had to open stocks manually on Aug. 24. This was no problem when most DMMs had only three or four stocks, but it's difficult to get everything open in a timely fashion when each DMM now has 40 or more stocks. What could help them open stocks quicker, but still fulfill their obligation to find the best price?
2) improving regulation. After the 2010 "flash crash" the entire industry created individual stock circuit breakers, known as "limit up, limit down" (LULD) that halt trading in stocks for 5 minutes when they move more than 5% percent in a rolling five-minute period (the band is widened to 10 percent in the first 15 minutes of trading).
Those circuit breakers have worked well, but on an extreme day a huge number of halts (more than 1,200) definitely caused a problem.
Is five minutes the right amount for a halt? Should it be shorter? Is there a better metric that can be used? For example, why just use a time period if there is the same imbalance of buy and sell orders? Why not use a metric that says, we have to wait until a certain amount of buy orders are available before we reopen when there is an excess of sell orders?
c) changing the practice of market orders and stop orders. Dumping market orders into the exchanges was a problem on Aug. 24. There were many market orders that got executed at prices way below the prior day's market.
People who put in a market sell order on Aug. 24 were understandably upset when they sold down 10 or 20 percent. You can almost hear them say, "I wanted to sell, but I didn't want to sell down that low!"
What could be done? Market orders and stop orders that become market orders arguably should no longer be used. Instead, every order should have a limit, even if it's 10 percent away. That way, no one is surprised.
I'm sure there will be other recommendations. The SEC's Advisory Committee on Market Structure will also undoubtedly address some of these questions in the months ahead.
Whatever is done, let's not lose sight of the fact that August 24th was a very unusual day. There was something akin to a genuine panic among market participants in the pre-open, and nothing was going to prevent a big drop when the markets finally did open.
Thank you, Janet Yellen, for finally taking a side and clearly stating that an interest rate hike seems likely sometime this year.
And thank you for finally clarifying the sudden emphasis that was placed on developments abroad in the last FOMC statement.
Specifically, thank you for this clarification: "The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy."
Yellen is helping the banks this morning on higher interest rates prospects. This is not only important for banks, it's important for the S&P 500.
Bank earnings estimates have been under some pressure recently on the inability to realize higher rates.
More importantly, investors are relying on higher bank earnings to balance out the disastrous decline in earnings from energy companies. There are precious few sources of earnings growth right now.
Markets seem to be be moving higher and shirking off bad news no matter what, strategist Michael Farr says.
Barclays was hit by a $108.5 million fine on Thursday as it allegedly worked with super-rich clients in a way that could have facilitated financial crime.
A class action lawsuit accuses banks of conspiring to limit competition in the $320 trillion market for interest rate swaps.