All posts by MarketsMuse Staff Reporter

ETF News

BlackRock CEO Roils ETF Audience: “Leveraged ETFs Can Blow-Up The Industry”

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Courtesy of Reuters News

May 28 (Reuters) – BlackRock Inc Chief Executive Larry Fink said on Wednesday that leveraged exchange-traded funds contain structural problems that could “blow up” the whole industry one day.

Fink runs a company that oversees more than $4 trillion in client assets, including nearly $1 trillion in ETF assets.

“We’d never do one (a leveraged ETF),” Fink said at Deutsche Bank investment conference in New York. “They have a structural problem that could blow up the whole industry one day.” (Reporting By Tim McLaughlin; Editing by David Gregorio)

 

Tech Talk

Dark Pool IEX Seeks To Transform to Major Exchange; Solicits Investors With $200 Million Valuation

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Extract below courtesy of WSJ Weekend Edition (May24-25) and reporters Bradley Hope, Telis  Demos and Scott Patterson

IEX Group Inc., an upstart trading venue that aspires to be a haven from high-frequency trading, wants to become the only stock exchange that isn’t dominated by speedy dealers.

The firm is in talks with potential investors to raise millions of dollars to expand its operations and pay for the increased regulatory costs of becoming a full-fledged exchange, according to people familiar with the talks. At present, IEX is a “dark pool,” a lightly regulated, private trading venue.

IEX has previously gained the backing of a number of big investment firms, such as Los Angeles-based Capital Group Cos., which manages American Funds, and has shunned investments from Wall Street banks.

The latest fundraising talks, held at IEX’s New York headquarters, have involved hedge funds, private-equity groups and asset managers, according to people familiar with the talks.

An exchange owned solely by investment firms would be a “game changer,” said Albert Kyle, a professor of finance at the University of Maryland who has advised the government on market issues. “The motives of the exchange would be different than what we have now, and that could have benefits for investors,” he said.   For the full WSJ story, please click here

Global Macro Strategy

Soothsayers Soliloquy “Sell In May…” Is Just Plain Silly in ZIRP Environment

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Excerpt below courtesy of  this a.m.’s Sight Beyond Sight notes to newsletter subscribers. Today’s edition from Rareview Macro LLC also includes the following talking point: “The True Pain Trade is Not SPX 1920-1950 but Beyond 1950”

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

Sell in May and Go Away?

Historically, we despise the advice to “sell in May and go away”. The main reason is that very few of the people who make that argument do not actually factor the following considerations into their analysis:

What index are they selling? There is a big difference between the Dow Jones and S&P 500, especially when you take into consideration the index rebalances over time.

When does the period actually begin and end? By that we mean there is a big difference between selling on May 1st and May 15th.

What happens if you just remove September from the equation? September is usually the weakest month of the year and the month that has the biggest impact on a risk-adjusted return basis, so if you take that out it makes a big difference.

What are the external factors? By that we mean was the market up or down going into May 1st. Or was the budget in deficit or surplus or are investor cash balances high or low? These factors all matter as well.

What are the real world implications? The analysis never takes into consideration taxes, transaction costs, where an investor would re-deploy the capital or what would happen if an investors circumstances change and they cannot buy back into the market in November.

All that said, we felt compelled this year to chime in with a couple of thoughts that we have not seen made in the market this time around, perhaps because most of the analysis has just focused on the period following the global financial crisis. Continue reading →

Global Macro Strategy, People Profiles

Batter Up: New Hedge Fund For Bitcoins

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FINalternatives  Below excerpt is hot of the press and courtesy of one of MarketsMuse’s favorite outlets: FINalternatives..

Coin Capital Management is this week launching a Bitcoin-focused hedge fund, which will buy and hold the leading crypto-currency in an institutional grade environment.

“We are pretty excited about Bitcoin…it is an exciting payment technology,” said Samuel Cahn, managing partner at the New York-based firm. “We are fully dedicated to holding Bitcoin, and we are the first ones to do so in an institutional grade hedge fund using the same types of checks and balances that investors have come to expect.”

For the rest of the reporting, please visit FINalternatives

ETF News, Global Macro Strategy

Macro Muse: Expert Says: Short USTs, Yields Poised to Rise

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Courtesy of one of our reader’s sighting this a.m.’s comments from Rareview Macro LLC’s “Sight Beyond Sight”, we’re compelled to cite the original source:

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

“…For the first time in months the setup is compelling enough for us to short US Fixed Income.

Earlier this morning the model portfolio sold short enough 30-year bond futures (symbol: USM4) at 135-28 to risk $50,000 USD per basis point. The reference point or last yield on the 30-year cash bond is ~3.40%. The first target in cash yield terms is 3.48% and the second is 3.52%. A stop at 3.36% (closing basis) has been placed. This is a short-term tactical trade with a risk-reward profile of three to one (3:1)…”

For those who embrace the above outlook, our insightful reader who pointed out the above sighting caveats: You can increase your chances by using a non-leveraged short ETF like TBF or simply shorting the long ETF. Beware: shorting bonds ETFs will result in you having the pay the dividends, which can be substantial.

Below includes a snapshot of (3) inverse-bond ETFs that could be considered by those seeking to hedge against or exploit a pending spike in UST yields. *

Note: MarketsMuse DOES NOT OFFER OR RECOMMEND TRADE IDEAS, NOR DO WE ENDORSE ANY SPECIFIC ETF PRODUCT Continue reading →

ETF News, Global Macro Strategy, Tech Talk

Let’s Get Technical: Wasatch Funds’ Fundamentalist Embraces Chartism

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A Fund-Company Chief Embraces Technical Analysis

MarketsMuse Editor Note: In the course of rifling through the onslaught of today’s mid-day trading desk talking points sent to us courtesy of top gun traders at major Wall Street firms, the theme has been ripe with “support levels” i.e. the most followed stocks and ETFs that are approaching, or “violating” short-term “technical support levels.” While our editorial staff has spent more time [in prior lives] analyzing point and figure charts than most of our readers would care to count, this week’s WSJ profile of Wasatch Funds’ Sam Stewart (courtesy of reporter Simon Constable) indicates that more than a few smart folk embrace the notion that charts merely tell traders what happened in the past..

Wasatch Fund's Sam Stewart. photo courtesy of WSJ
Wasatch Fund’s Sam Stewart. photo courtesy of WSJ

“….If it wasn’t for the global financial crisis that began in 2007, Sam Stewart, president of the Wasatch Funds, might never have considered using so-called technical analysis to help pick stocks. But these days he wouldn’t consider doing otherwise.

In the fall of 2007, he saw value in stocks. The major indexes were starting to drift lower then, and some sectors, including financials, were already tanking. Some stocks looked cheap to him, based on fundamental analysis, so he bought them—and lost money as markets plunged in 2008 and into 2009.

In retrospect, Mr. Stewart says, “I lost sight of the forest for the trees.” If he had looked at the charts at the time, he’d have said to himself, “You are crazy” to consider buying, he now says.

For those who are bullish on stocks, Mr. Stewart has some good news. The same indicators he ignored at his peril back in 2007 “are giving me reasons for optimism today,” he wrote to shareholders.  The full story at WSJ

ETF News, Global Macro Strategy

Time to Worry About Stock Market Bubbles (?): Nobel Laureate Robert Shiller

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nytLogoExtract below courtesy of NY Times and reporter David Leonhardt

Relative to corporate earnings over the previous 10 years, the Standard & Poor’s 500-stock index is still less expensive than over much of the last 15 years. But it’s more expensive than at any other time over the last century, save the 1920s.

While the rest of economy has been growing frustratingly slowly for almost five years, stocks have been rising at a boomlike clip. An investment in the Standard & Poor 500-stock index would have doubled from early 2009 through early 2013 and then gained an additional 18 percent over the last year.

Photo courtesy of Peter Yang
Photo courtesy of Peter Yang

Relative to long-term corporate earnings – and more in a minute on why that measure is important – stocks have been more expensive only three times over the past century than they are today, according to data from Robert Shiller, a Nobel laureate in economics. Those other three periods are not exactly reassuring, either: the 1920s, the late 1990s and in the prelude to the 2007 financial crisis.

schiller2“..It’s possible that a world of rising inequality and low interest rates is here to stay – and that stocks have reached a permanently high plateau. In that case, whatever our other economic worries, the stock market’s valuation doesn’t need to be high among them…”

For the full NYT story, please click here

Global Macro Strategy

“Sell in May and Go Away” ? Macro-Strategist Says “Maybe Not This Year..”

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On April 24, Rareview Macro’s Neil Azous had this to say about the notion of “Sell in May and Go Away..” Since that appearance Rareview’s newsletter, “Sight Beyond Sight” has provided further insight to aforementioned “long held wisdom.”
[gigya src=”http://plus.cnbc.com/rssvideosearch/action/player/id/3000269877/code/cnbcplayershare” ]

ETF News

Market Structure: The Great “Flash Boys” Debate and Putting the Genie Back in The Bottle

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tumblr_m66pvmdFe61rog4ypo1_500  MarketsMuse Editor Note:  Though we typically focus on using a high-touch approach to aggregating the more topical  and poignant ETF, Options and Macro-Strategy news items, the  nearly never-ceasing diatribes re market structure and the impact of “high-frequency trading” which has either been incited or simply elevated by Michael Lewis’s book “Flash Boys” inspires us to distill the multitude of most recent opinion articles and punditry promoted by the ever-increasing universe of “content experts.”

In that spirit, we point our readers to 2 different pieces worth picking over:

1. For the ETF-focused audience, this week’s published comments from ETF.com’s Dave Nadig, “Great Flash Boys Idea IEX Doesn’t Matter” is a solid read for RIAs and the universe of investment managers who use exchange-traded funds. As always, Dave frames his observations and insight in a thoughtful, non-conflicted and erudite manner. Here’s the link to the ETF.com posting.

2. For institutional equity fund managers, institutional equity brokers and whomever else might be intrigued by the latest “survey of capital market professionals” conducted by ConvergEX, one of the major institutional order execution platforms. Their study finds that 70% of those canvassed believe the market structure is “unfair” to them. The study was published this week and since re-published by an assortment of industry media websites, including TABB Forums, and starts with the following: Continue reading →

ETF News, Global Macro Strategy, People Profiles

Smart Money Says: No Gold Needed As Capex Spending Kicks In to Global Economy

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For readers focused on expert views re: the precious metals, and in particular Gold, below a.m. note courtesy of macro-themed analyst Paul Krake to his “View From The Peak” audience of institutional investment managers provides a “bid-on” to market observations made last week by Neil Azous, principal of “bespoke macro strategy boutique” Rareview Macro LLC, and the publisher of “Sight Beyond Sight” :

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

“..Short gold has been one constant theme for VFTP for the past 18 months and I do not see any reason to adjust this structural stance. The reasons to be short gold are long and varied but they all go back to my basic theme that as the world becomes less risky, the need for safe haven assets declines. If real interest rates are on the rise then gold will decline. A more sophisticated thesis is being proposed by my good friend Neil Azous from Rareview Macro, an extremely thoughtful and thorough daily overview of the investment landscape (www.rareviewmacro.com). Neil’s argument revolves around a revitalized global capex cycle that will be driven by a spurt in bank lending and the global economy playing catch up after five years of underinvestment across the developed world. We have this expressed via our long energy (XLE) / short consumer discretionary (XLY) basket but short gold is also an excellent expression of what will be the end result of this recalibration of the capex cycle: higher global growth and higher real interest rates…”

Courtesy of View From The Peak
Courtesy of View From The Peak

 

Paul Krake’s observations are available via http://www.viewfromthepeak.com.hk/.

The “Sight Beyond Sight” newsletter authored by Neil Azous is distributed to leading investment managers, Tier 1 hedge funds and top gun traders across the universe of sell-side, cash trading desks. Additional info at www.sightbeyondsight.com

 

Tech Talk

Finally: Debate re High-Frequency Trading Includes A Tangible Solution

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tabb forum logo Excerpt courtesy of TABB Forums April 21 submission by Chris Sparrow, CEO of “Market Data Authority” a consultancy that provides guidance within the areas of equities market structure, transaction cost analysis and “best execution.”

MarketsMuse Editor note:  below snippet is a good preview to the most recent “short-form white paper” written by Mr. Sparrow in connection with the ongoing brouhaha re high-frequency trading aka HFT. The submission itself inspired a broad assortment of comments from industry experts..and, having been considered a “market structure expert” in a prior life, MarketsMuse editor says “overlook the ‘techno talk’, its worth hitting ‘read more.’

“Eliminating Unfairness: Creating a Protocol For Synchronized Period Trading”

The goal of this piece is to describe at a high level a protocol that could be introduced to allow for a multi-venue system operating synchronized batch auctions. The motivation for this protocol is to eliminate any advantage from the asymmetric distribution of order book information – i.e., trade and quote updates. No attempt is undertaken to control other types of information that may be relevant to trading.

The protocol should allow for competition of trading venues and not discriminate against any type of market participant. Further, the protocol is suggested only as an option that could be used by venues that want to participate.

A strong motivation for creating the protocol is the perceived “unfairness” that is present in the existing market structure, where some participants may be able to get faster access to trade and quote information than others. The result has been a perceived erosion of confidence in the equity markets. Other externalities that exist in the current system include the need to store vast amounts of data generated from continuous trading and a technological arms race.

Continue reading →

ETF News, Global Macro Strategy

Don’t Sell in May and Go Away…

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rareview sbs logo   Excerpts from this a.m. edition of Rareview Macro “Sight Beyond   Sight” could be comforting to those who “don’t want to sell in May and go away”

* tickers referenced in the a.m. note include :

• The Argument for S&P 500 to march to 1950 and beyond … the risks of a “deflationary shock” have also begun to be priced back out of the market. Clearly there have been many “false starts” on this theme in the past, and this could just be another one. But the difference this time is that the conditions are now in place for stabilization in the rate of inflation.
• a lot of professionals de-risked and the assets that were sold-off will need to be re-redeployed elsewhere. The key point is that the S&P 500 will have a difficult time falling beyond what already occurred in April without those assets being first reinvested.

Neil Azous, Rareview Macro LLC

• Thematically, we are very sympathetic to the view that a fundamental shift in the market will occur over the next 6-18 months: business-to-business (B2B) will benefit more than business-to-consumers (B2C).
• As a result of this migration into capital expenditures, the top down investment views expressed around housing and corporate share repurchases will be paired back as investors cannot hold all of these macro themes at once. To be clear, this is not a call that buybacks will slow down materially or that the stocks that have benefited the most from this capital redeployment will start to fall. It is a call that buyback strategies will underperform the capex theme even though both could rise at the same time

• the traditional “sell in May and go away” rule will not hold true coming back from the holiday break this year.
• We believe that alongside a basket of long “capex plays”, i.e. US energy and the US Dollar, there is also room for a short Gold position
• We initiated a starter short position in Gold last night

To read the entire morning missive, you’ll need to get your subscription to Sight Beyond Sight…10-day free trial with no credit card required can be secured via www.sightbeyondsight.com

ETF News, Tech Talk

ETF “BackTesting” Often = “Over-Fitting”: Is It Bait and Switch?

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barrons  Below excerpt courtesy of Brendan Conway’s April 17 Focus on Funds

 

MarketsMuse Editor Note: Brendan’s article deserves front page focus, but in the process of publishing this piece, a bigger story has emerged and the internet has been overwhelmed by stories that suggest pro-Putin militants in East Ukraine are distributing flyers that purport to come from local government officials with formal announcement that Jews in the city will be required to reqister with the local government, upon which they will be subjected to new taxes or face deportation. MarketsMuse Editorial team says : “Sounds like a Putin-supported strategy intended to cause more chaos, and in turn, provide Putin the perfect storm in which he can defend a larger action on the part of Russia..under the auspices of having to come in and protect Russian (Jews) among others..”

Now on to Brendan Conway’s observations re: “ETF BackTesting”

Brendan Conway
Brendan Conway

“…..It’s negligence, or worse, when an investment manager’s innovative-looking strategy is the result of too much quantitative trial-and-error.

That’s the argument in a notable new study flagged by Stephen Foley of the Financial Times. “Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance” argues that what happens behind the scenes in the development of quantitative strategies is a major problem in investment management.

“Backtest” simply means reviewing historical returns to try to divine how a new strategy might perform in the future. The method has become bread-and-butter in the launch of many new ETFs.

Investors don’t know how many hypotheses managers examined before finding the perfect-looking backtest, a process which turns out to matter greatly, write David H. Bailey, Jonathan M. Borwein, Marcos Lopez de Prado and Qiji Jim Zhu. “The higher the number of configurations tried, the greater is the probability that the backtest is overfit,” they write. “Overfit” means the data has been tortured until it yielded something that looks nice.

If an investment process is driven by what looks good historically, there’s a greater chance the attractive-looking result is just a fluke.

Sure enough, a Vanguard Group study found a while back that backtested ETFs — which look great in the historical data — on average lagged the market after the real-world launch.

From Foley’s discussion: Continue reading →

Tech Talk

51% Of Pension Managers Say NO to High-Frequency Trading

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pensioninvestmentlogo   Excerpt below courtesy of Pensions&Investment April 14 edition, story by Christine Williamson

Controversy over high-frequency trading, fomented by Michael Lewis’ new book, highlights the conflict many chief investment officers experience over the practice.

On the one hand, both pension fund executives and their external money managers are grateful that the development of electronic trading and the competitive exchanges established to serve the growing high-frequency trading segment has dramatically lowered trading costs.

On the other hand, it’s maddening for many CIOs to suspect their portfolios’ returns might be harmed from front-running by high-frequency trading algorithms.

A Pensions & Investments’ online reader poll conducted last week showed 51.5% of respondents believe high-frequency trading is bad for institutional portfolios, while 17.1% said it’s good. The remainder said it was neither good nor bad.

For the full story and who said what, please visit P&I

 

ETF News, Global Macro Strategy

Macro-Strategist Rareview: Pause in Mean Reversion

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rareview sbs logo Below excerpt courtesy of this a.m. edition of Rareview Macro’s “Sight Beyond Sight”
“..The call today by the professional community for a retracement of the recent weakness in Equities is very loud…

This viewpoint disregards the fact that S&P 500 futures are already 2.5% higher than Monday’s intra-day low. The key point being is that with the last price in index futures at ~1848 the market is right back at the 50% retracement of the April high (~1892) and low (~1803).

Neil Azous, Rareview Macro LLC

In our view this thought process misses the point. The real takeaway is that after weeks of instability many are finally resigned to a pause in the mean reversion of last year’s strategies. This also includes a contraction in the very high intra-day volatility. Meaning, the peak-to-trough index ranges should narrow into option expiration.

While we do not fully agree with the shift in sentiment we are mindful that the price action argues in favor of a retracement in certain strategies and we will adjust some positioning in the model portfolio to be prudent..

Firstly, the model portfolio pre-market closed out the entire short Small Cap (IWM) and long Large Cap (SPY) relative value strategy. We covered the IWM short for 112.22 and sold the SPY long at 185.36. While we still believe this is a great intermediate-term theme the fact is that we never thought we would be able to generate more than 5% of outperformance this quickly relative to when we deployed the strategy on March 19th. We will look to re-initiate this position in the near future if it were to retrace 3-4%.

Continue reading →

ETF News, People Profiles

Best ETF Market-Making Award Goes To..

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In coetfcomlogonnection with the 1st Annual ETF Awards hosted by ETF.com, the world’s leading authority on exchange-traded funds, agency execution firm WallachBeth Capital was selected “ETF Market- Maker of the Year” by a panel of judges representing prominent firms from across the ETF industry. The announcement was made during a gala dinner held on March 20th at New York’s Chelsea Piers and attended by more than 300 industry members.

According to ETF.com Founder and CEO Jim Wiandt, “The award to WallachBeth for market maker of the year recognizes the firm that has done the most to improve investor outcomes throughout education, support, services, innovation and outreach.” Runners-up for the category included Citigroup, Goldman Sachs, Jane Street Capital and KCG. A total of 23 categories were voted upon by the ETF.com judge’s panel.

In making the award, the ETF.com judges noted, “While many firms share credit for helping ETF investors understand ETF liquidity, few have been more dedicated to the task of educating clients and improving outcomes than WallachBeth. The prototypical agency broker, it uses strong Street connections to source liquidity for clients, allowing the world’s best market makers to compete for each order. The agency approach—where WallachBeth is always on the side of the client—resonates with advisors, who often need hand-holding when they enter the fast-moving world of ETF trading.”

Tech Talk

Regulators Take Aim at Maker-Taker Fees; High-Frequency Trading v. Brokers’ Fiduciary Obligations

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wsjlogoExcerpt courtesy of April 15 edition of WSJ and reporters Scott Patterson and Andrew Ackerman.

A fee system that is a major source of revenue for exchanges and some high-frequency trading firms is coming under the heightened scrutiny of regulators concerned that market prices are being distorted, according to top Securities and Exchange Commission officials.

SEC officials, including some commissioners, are considering a trial program to curb fees and rebates they say can make trading overly complex and pose a conflict of interest for brokers handling trades on behalf of big investors such as mutual funds.

At issue are “maker-taker” fee plans, which pay firms that “make” orders happen—often high-frequency trading firms that specialize in trading strategies designed to capture payments. The plans charge firms that “take” trades—typically big investment firms looking to buy or sell a chunk of stock or hedge funds making bets on short-term price swings.

The trial program would eliminate maker-taker fees in a select number of stocks for a period to show how trading in those securities compares with similar stocks that keep the payment system.

For the full story from WSJ, please click here.

ETF News, Global Macro Strategy

ETF Adoption Continues at Brisk Pace

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marketsmedia logo  Excerpt courtesy of MarketsMedia

Providers of ETFs and mutual funds are using targeted marketing approaches to match the right products with the right customers.

With ETFs use climbing among active investors, both retail and institutional, packagers of ETFs view the product as a low-cost vehicle for investors to access alternative strategies such as those employed by hedge funds, many of which act as sub-advisers for the ETFs.

ETF use among registered investment advisors (RIAs) has grown nearly 27% annually over the past 5 years, according to research firm Cerulli Associates anticipates this growth to continue.

“The allocation to ETFs among RIAs grew 48% from 2011 to 2012,” said Kenton Shirk, associate director at Cerulli. “The RIA channel is an extremely attractive opportunity for asset managers.”

ETFs gained popularity as a cost-effective method to achieve diversification, but with increased adoption they have evolved to cover a wide variety of investment strategies.

“ETFs provide an easy way for managers to offer out products to alternative investors,” said David Beth, president and chief operating officer at WallachBeth Capital. “The ETF wrapper is very easy and transparent.”

davidbethmm
David Beth, President / COO WallachBeth Capital

Fund manager Direxion offers leveraged and inverse ETFs for active traders looking to execute short-term trading strategies.

“We consider ourselves a provider of alternative investment strategies,” said Andy O’Rourke, Direxion’s chief marketing officer. “We also have a few strategy-based non-leveraged ETFs that they have rules-based indexes, such as KNOW, which is an ETF that tracks the buying activity of corporate insiders on the secondary market.”

Direxion recently unveil a marketing campaign designed to inform experienced active traders about the potential benefits of the firm’s 3X leveraged ETFs. A departure from simply highlighting the flexibility of trading in either direction, the marketing campaign’s 60-second television commercial invites active traders to join “The Fellowship of the Bold.” Continue reading →