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Market Insider Trader Talk with Bob Pisani

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  Saturday, 9 Dec 2017 | 9:39 AM ET

With bitcoin futures set to trade, here's how it's going to work

Posted ByBob Pisani

The Cboe will launch futures trading in bitcoin at 6 p.m. ET on Sunday. The ticker symbol will be XBT.

Since the interest level is so high, let's try to answer a few basic questions on how this will work.

So how does this work? The Cboe will start by listing three near-term serial months. They will likely be January, February and March. They will expire on two business days prior to the third Friday of the month.

What will the initial prices be and what is the size of a contract? Each contract is one bitcoin. Market makers will set an initial price for each month and trading will begin. The front-month (January) price will likely be close to the underlying cash price. The minimum price interval is $10.00 per contract. The contracts are traded and settled in cash (you get dollars, not bitcoin, at the settlement).

How is the price determined? There are many different bitcoin exchanges, but Cboe uses Gemini Trust Co., an exchange and custodian founded in 2014 that allows customers to buy, sell and store digital assets such as bitcoin. There is a lively debate about how to "accurately" reflect the bitcoin price. CME, for example, is using the Bitcoin Reference Rate which is an aggregate of prices on four different exchanges. Bitcoin futures at CME are set to begin trading Dec. 18.

What are the fees for trading? Cboe will be waiving all of its transaction fees for the month of December. After that, the basic retail rate is $1.00 per contract.

"What is the margin rate? Right now, the Cboe and CME will have margin rates of 44 and 35 percent, respectively. (Note: Cboe has recently raised the rate from 33 to 44 percent) For example, if bitcoin is trading at $15,000, you can purchase a contract on margin for $6,600 (44 percent of $15,000)."

When can I trade? Almost 24 hours a day during the week. Regular hours are 9:30 a.m. to 4:15 p.m. ET Monday through Friday, but extended trading hours go from 6 p.m. ET Sunday to 9:30 a.m. ET Monday, then 4:30 p.m. to 9:30 a.m. ET Tuesday through Friday.

How can I trade bitcoin futures on Cboe? You should contact your brokerage firm. Not surprisingly, retail brokers do not have a uniform stance on whether they will allow their clients to trade bitcoin futures. Fidelity is not currently planning to allow its members to trade futures contracts. Interactive Brokers will allow trading, but with a much-higher 50 percent margin requirement. Charles Schwab says it is evaluating its client interest in bitcoin, including their familiarity with the risk. And a TD Ameritrade spokesperson told CNBC they will only allow trading once volumes, open interest, and the market place meet their threshold

A number of large firms that typically cater to institutional brokers have already said they will not initially offer their clients access to the bitcoin futures market, including JPMorgan, Bank of America Merrill Lynch and Citigroup. Goldman Sachs, the largest U.S. futures broker, will offer access but only for certain customers.

If my broker doesn't allow me to trade bitcoin futures, are there any other options? You could open a separate futures account with a futures broker, such as R.J. O'Brien.

Are there any price limits or trading halts? There are no price limits, but trading can be halted for two minutes under certain circumstances, for example when prices rise or fall 10 percent from the previous day's price, and five minutes if it rises or falls 20 percent. The cash market for bitcoin would not be halted.

Will futures reduce or increase the volatility of bitcoin? No one knows. A lot will depend on how liquid the contracts themselves are, which depends on the number of participants and how many firms allow access to trading.

"Historically, the introduction of futures contracts has tended to reduce volatility in the underlying asset," Brian Kelly of Brian Kelly Capital Management told me. "But in the short term, since you may not have a lot of sellers, it could exacerbate the volatility."

Can you short the futures contract? Yes. For example, suppose the bid is $15,000, you can go in and sell it immediately (you will have to post the margin requirement of 30 percent). You are now short one bitcoin contract at $15,000. If that goes to $16,000, you will have a potential loss of $1,000, and you may be forced to put up more margin. If it goes to $14,000, you have a potential profit of $1,000. You can close out the position at any time, or if you wait until the expiration it will settle automatically to cash.

Who are the market makers? There has not been a formal announcement of who the market makers will be, but some of the known large players — such as DRW and Virtu Financial — will be participating.

Who are the sellers? This is one of the big questions. You will likely see bitcoin miners as well as hedgers, or people who own bitcoin but sell futures against that to capture the spread. You may also see institutional traders come in because it's a cash traded and settled account, you don't need bitcoin.

So is all this hoopla around futures contracts going to make bitcoin respectable? Not necessarily, but it is certainly a first step toward it. It's also the first step toward some regulation of this market, which is a welcome development.

Most importantly, it's a big step toward making this whole cryptocurrency thing a little more open.

"This is your first opportunity to take a bitcoin derivative and put it on a centrally cleared exchange that has transparency," JJ Kinahan, chief derivatives strategist at Ameritrade, told me.

Correction: The Cboe and CME margin rates will be 44 and 35 percent, respectively. An earlier version misstated the percentages.

»Read more
  Wednesday, 6 Dec 2017 | 7:00 AM ET

The market has a problem: There's nothing left to rotate into

Posted ByBob Pisani
Traders pass in front of an American flag displayed outside of the New York Stock Exchange in New York.
Michael Nagle | Bloomberg | Getty Images
Traders pass in front of an American flag displayed outside of the New York Stock Exchange in New York.

The market has a problem: there's nothing left to rotate into.

Stocks sold off again midday Tuesday for the second day in a row.

On the surface, the tax bill that has been such a market mover got push-back from Democrats who organized protests against what they view as tax cuts for the rich.

I have already warned that the tax bill is not a fait accompli, but for different reasons: It is not clear if corporate tax cuts will be a 2018 or 2019 event (the Senate bill pushes it out to 2019) and President Donald Trump has intimated that the corporate tax cut may only be 22 percent, not 20 percent.

That is a half a loaf for traders, who are anticipating tax cuts in 2018 and a 20 percent tax cut.

But the markets have already indicated there may not be too much juice left in the whole "tax cut" trade, even if it passes.

We have been in a frenzy in the past week as traders have bought sectors that would benefit from tax cuts (banks, telecoms, industrials) and sold those that would benefit very little (technology).

But we may be reaching the limits of that trade.

Two days in a row, markets rose mid-morning, then sold off.

On Tuesday, the S&P 500 ETF (SPY), widely used by active traders to quickly get in and out of the market, spiked down decisively around 2:15 p.m. when it dropped notably below the early morning low, as well as Monday's low.

That is a bad technical indicator.

It doesn't help that the recent market leader — banks led the charge down. As with Monday, the bank stocks weakened midday. The Bank ETF (KBE) also saw a volume spike midday when it, too, dropped below the early morning close. But this time most closed down, with many regionals down nearly 2 percent. Banks were down since midday Monday, with the KBE was down almost 3 percent from Monday's high.

They have also grabbed almost every underperforming sector, regardless of tax implications: transports, retail and small caps (Russell 2000).

But all that reversed Tuesday. The biggest losers were the last week's biggest gainers: telecom, banks, retail, Russell 2000, transports.

This tells you traders are now seeing the limits to this "land grab" of buying underperforming sectors and playing the "tax cut" game.

Who can blame them? Take Macy's. It was $18 three weeks ago. It hit $26 Tuesday before selling off, up 40 percent.

Macy's up 40 percent in three weeks? Really? What happened to Macy's in three weeks? Oh sure, Thanksgiving was OK and the earnings were a modest surprise, but up 40 percent?

Or take bank stocks. The regional banks went nuts. BB&T was up 10 percent in four days. So was U.S. Bancorp. Zions Bancorp was up even more. Really?

You can't help but start to think we are stealing a bit from next year's gains.

Here's a bigger question: The whole market this year has been based on tech momentum. Will traders take the chance to buy some of the (modestly) beaten-down tech names?

Take Facebook. It's in another one of its periodic downdrafts, down about 7 percent in the last week. Facebook has had several downdrafts this year, most recently in September and October, and volume spiked each time. But ultimately, buyers bought on the dip.

Will that happen this time? Ask the same question for Nvidia or Alibaba. There's been endless demand on weakness.

The difference this time: There's not much in the way of other "beaten-down" stocks to buy.

»Read more
  Tuesday, 5 Dec 2017 | 7:00 AM ET

The huge run in bank and industrial stocks may mean you've already missed the 'tax trade'

Posted ByBob Pisani
A worker is pictured in the The 777 Wing Body Join and Final Assembly area is at Boeing's production facility in Everett, Washington, June 1, 2017.
Jason Redmond | Reuters
A worker is pictured in the The 777 Wing Body Join and Final Assembly area is at Boeing's production facility in Everett, Washington, June 1, 2017.

We may be testing the limits of how far we can push the "tax cut" trade.

Since early last week, when momentum in Washington really picked up, sectors that would see the biggest earnings boost from tax cuts have been notable outperformers.

But there may be limits to how far investors can push this trade.

Last week, Cannacord, working with Thomson Reuters, published a study on the sectors that would get the biggest boost from a 20 percent corporate tax cut. Four of them — energy, financials, industrials and telecom — would see notable double-digit gains in earnings. One sector, technology, would see almost no boost:

Biggest gainers from 20 percent tax cut

(boost to 2018 earnings)

Energy 21.5 percent

Financials 18.5 percent

Industrials 13.2 percent

Telecom 15.5 percent

Tech 1.5 percent

Source: Cannacord/Thomson Reuters

Not surprisingly, the movement of these sectors in the past week has reflected the prospects for earnings improvement from tax cuts, and, in the case of technology, the lack of such improvement:

Sector gainers and laggards

(since last Tuesday)

Banks up 7.7 percent

Energy up 3.7 percent

Industrials up 3.6 percent

Telecom up 8.4 percent

Technology down 3.9 percent

This also helps explain the recent outperformance of so-called value stocks versus growth stocks. Value stocks (financials, energy, telecom) would simply fare better under tax cuts. Growth (technology) would not.

However, in the middle of the day, bank stocks, which have had huge gains in the past week, began selling off aggressively. Most ended the day positive, but well off their highs, on heavy volume. Other market leaders like industrials and telecom also ended off their highs.

This suggests traders are taking profits on the outsized gains, and we may be approaching the limits to the current rally.

Regardless, the tax cut is healthy because it creates a new base of stocks that can see their earnings boosted. It takes attention away from a small group of technology stocks (semiconductors, FAANG) that have received enormous attention this year.

"It ought to mean a rotation in asset allocation given that equity investors up to now have concentrated their portfolios into a small group of 'super-performers' that benefited from the disinflationary environment," said Sean Darby, chief global strategist for Jefferies.

However, we are not out of the woods yet. The Senate bill would put off corporate tax cuts until 2019, and President Donald Trump hinted over the weekend that the final corporate tax rate may not be 20 percent, but 22 percent. That will lower the expected earnings boost, and this combination could be a significant disappointment to markets.

Beyond the tax bill, traders are split between those who "sell on the news" and those who argue that any correction will be met by more buying in early 2018.

The "sell on the news" crowd has considerable support, arguing that stocks are seeing a final blowoff on the tax cut news and that it is simply unreasonable, and against the weight of history, to see stocks continue to advance.

But that's where the split occurs. Most traders believe some correction is coming, but a surprisingly large group feels that the sell-off will be met by more buying.

Tony Dwyer, chief market strategist for Cannacord, has been in the bull camp, arguing that "in our view, investors are not adjusting expectations up enough to reflect headwinds that have become tailwinds for growth."

Dwyer makes two arguments. First, he argues that the combination of global growth, a weak dollar, improving capital spending and a still-accommodative Fed will continue to help markets, though he admits some short-term correction may occur.

He also goes farther than most strategists by insisting that the S&P 500 can support a rather large multiple of 20 times forward earnings, close to where it is now.

»Read more
  Monday, 4 Dec 2017 | 7:43 PM ET

The bitcoin futures race is on

Posted ByBob Pisani
Photo illustration of Bitfinex cryptocurrency exchange website taken September 27, 2017.
Dado Ruvic | Illustration | Reuters
Photo illustration of Bitfinex cryptocurrency exchange website taken September 27, 2017.

The race to get bitcoin futures is now on. The CBOE announced Monday it would begin trading bitcoin futures on Sunday evening at the start of global trading hours.

The first full day of trading would be on Monday, Dec. 11. That would beat the CME, which has announced it, too, will begin trading bitcoin futures on Dec. 18, a week later, and the Nasdaq, which is also planning to introduce futures trading in the first half of 2018.

Bitcoin enthusiasts are hopeful that a bitcoin ETF might be coming. The SEC denied applications to start bitcoin ETFs earlier in the year on the grounds that the cryptocurrency was "unregulated," but CBOE head Ed Tilly said he plans to reapply with the SEC for a bitcoin ETF.

The argument seems to be a simple one. The presence of a futures market will demonstrate that the cryptocurrency is sufficiently "regulated" to allow ETFs to start.

The argument may be helped by two features that will be a part of the bitcoin futures: price limits and margin rates.

The CBOE and CME will have margin rates of 30 percent and 35 percent, respectively.

In addition to being able to short bitcoin, there's considerable speculation about whether futures will lower or increase the volatility level of bitcoin. The CME, for example, says it will be using price limits that kick in during gains or losses of 7 percent, 13 percent and 20 percent that would slow and in some cases halt trading. In particular, prices will not be allowed to move up or down more than 20 percent from the prior day's close. If that limit is hit, trading can only continue at or within the +/- 20 percent limit for the remainder of the trading session.

There may even be a price war developing for the business. The CBOE made a point in its press release this morning to say trading would be free through December, but doesn't say how much it would be after.

The CME says bitcoin futures will be priced at a premium to standard Equity Index futures, but in line with the pricing conventions of other premium products.

»Read more
  Friday, 1 Dec 2017 | 2:21 PM ET

Markets grapple with tug-of-war between tax cuts and Trump's legal woes

Posted ByBob Pisani

Tax cuts versus potential legal troubles for the president: Which wins out in the markets?

The markets have been focused for months on global economic growth, record earnings and the premium in the market for tax cuts.

But traders have spent almost no time thinking about the risk premium in the market for President Donald Trump's potential legal troubles.

It was an issue earlier in the year. Remember, the Dow dropped more than 300 points on May 17, when reports of a memo from former FBI Director James Comey surfaced, saying Trump asked him to stop the investigation into former National Security Advisor Michael Flynn.

Comey had been fired just the week before.

It's important to remember that the rally in the past year has not been solely based on the global economic expansion and tax cuts, though they are the two most important factors. Another factor, more difficult to quantify, is the belief that this administration and this Congress would be particularly sensitive to business interests, everything from tax cuts to regulations.

"There is a strong sense that the administration is more business-friendly, and we have seen that with rising business sentiment," Joe LaVorgna, chief economist for the Americas at Natixis, told me.

Then there's the issue of Republican control of Congress.

CNBC contributor Larry Kudlow told "Fast Money: Halftime Report" earlier in the day, "If Trump is in trouble, that will damage the Republican Party in certain parts of the country."

Stocks are reflecting that concern.

»Read more
  Friday, 1 Dec 2017 | 7:00 AM ET

The market sees good and bad sides to tax cuts

Posted ByBob Pisani
Daniel Acker | Bloomberg | Getty Images

This could be a big day. With the Senate nearing a vote on its tax bill, corporate tax cuts are getting much more real. Aside from the global economic expansion and the record earnings this expansion is producing, the biggest marginal mover for the stock market has been tax reform.

If you doubt this, note that the S&P 500 moved 15 points in the hour after Sen. John McCain announced he was supporting the tax bill on Thursday.

Stocks were initially lower in Friday's premarket after the Senate announced a last-minute delay to its vote on the tax bill overnight on Thursday.

But fresh momentum was building later Friday as more GOP senators voiced their support for the bill – including Montana Senator Steve Daines and Wisconsin Senator Ron Johnson, two of the last Senate GOP holdouts.

Here is the good news: The market believes tax cuts will help earnings. The market is anticipating earnings gains of about 8 percent next year, but that is without tax reform. Models that incorporate tax reform estimate that earnings could grow 11 percent to 15 percent next year. Without tax cuts, the market forward multiple is a very pricey 18.9. With tax cuts, the multiple can be in the mid-17 level, far more reasonable.

But there is some bad news.

If you buy today, you are buying with the assumption that gains from tax cuts are happening. If you are buying today, you need a tax cut to pass, and it needs to be effective for calendar year 2018. If the rate is only, say, 25 percent rather than 20 percent, it's likely the market will be disappointed.

Even if we get the tax cuts we want, the gains will be tougher, because the market has made such explosive moves. It's getting harder to make a bull case as time goes by, even my bullish friends tell me. I don't disagree. The risk/reward is deteriorating, but the market is showing us there is more upside from tax reform. If there wasn't the market would have sold off on the McCain news.

Maybe the strategy should be to sell on the news when the tax bill is passed. That would be the immediate, knee-jerk reaction. And I wouldn't be surprised if it happened.

But I also wouldn't be surprised that, after a 5 percent to 10 percent decline, the market came back. Because now you are in 2018, and the issue is where you stand on two key issues: what U.S. and global growth will look like in the new year and how aggressive the Fed will be at raising rates.

If you are on the side that says global growth will be more than 3 percent, and that U.S. growth will be around 2.5 percent with no recession, you can certainly make an argument that stocks can continue to go up or at the very least move sideways.

If you believe that the Fed Chair nominee, Jerome Powell, will continue on Janet Yellen's path and that the Fed will raise rates in December and at most twice next year, you can also plausibly argue that the market will be able to digest those gains, assuming the economic expansion continues.

But if you think the economic expansion stalls out and is sub-par, or the Fed steps on the pedal and we get four rate hikes, you can definitely argue the markets will be lower.

»Read more

About Trader Talk

  • 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.

 

  • Bob Pisani

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

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