Friday September 23 Daily Market Primer

Happy Friday. Stocks had another good day post Fed meeting as the global equity rally came full circle to the US on Thursday, as the dollar weakened, yields fell, and commodities rose. However, the rally ran out of gas in Asia and Europe overnight, with Spain leading Euro markets down with a 1.5% drop.  US futures are pointing down slightly this morning.

	LAST	CHANGE	% CHG
DJIA	18392.46	98.76	0.54%
Nasdaq	5339.52	44.34	0.84%
S&P 500	2177.18	14.06	0.65%
Russell 2000	1263.44	18.4	1.48%
Global Dow	2472.29	-7.79	-0.31%
Japan: Nikkei 225	16754.02	-53.6	-0.32%
Stoxx Europe 600	344.84	-3.02	-0.87%
UK: FTSE 100	6896.94	-14.46	-0.21%
CBOE Volatility	12.33	0.31	2.58%
Australia: S&P/ASX 200	5431.3	56.8	1.06%
China: Shanghai Composite	3033.9	-8.42	-0.28%
Hong Kong: Hang Seng	23686.48	-73.32	-0.31%
India: S&P BSE Sensex	28668.22	-104.91	-0.36%
Singapore: Straits Times	2856.95	10.89	0.38%
France: CAC 40	4479.29	-30.53	-0.68%
Germany: DAX	10628.7	-45.48	-0.43%
Italy: FTSE MIB	16442.11	-195.58	-1.18%
Spain: IBEX 35	8797.8	-137.1	-1.53%
U.S. 3 Month	0.175	0/32
U.S. 2 Year	0.77	0/32
U.S. 5 Year	1.156	2/32
U.S. 10 Year	1.612	3/32
U.S. 30 Year	2.331	4/32
Germany 2 Year	-0.67	0/32
Germany 10 Year	-0.083	-4/32
Crude Oil	46.19	-0.13	-0.28%
Brent Crude	47.74	0.09	0.19%
Natural Gas	3.066	0.005	0.16%
S&P GSCI	358.38	-0.5	-0.14%
E-mini DJIA	18281	-18	-0.10%

The data is out on the Yahoo hack and its the biggest in history, with 500 million customers effected, which the company is blaming it on “state sponsored” hackers.  Fortunately it doesn’t look like credit card or social security numbers were stolen. Its interesting that it took the company about two years to report it. There may be other shoes to drop, but it shouldn’t derail the Yahoo-Verizon deal.  There are rumors this morning that Twitter (TWTR) is entertaining merger approaches from some tech giants, including Google, which is no surprise to those that have been following the growth challenged company.  Facebook (FB) misreported data on video watching, and the stock dropped 1.5% yesterday.  The presidential polls are narrowing, and the latest view from rock star pollster Nate Silver indicates that Hillary has the edge now but its no slam dunk http://bit.ly/538Update.

Friday Factoid: GICS Real Estate Sector

A couple of weeks ago I mentioned that S&P and Russell are breaking real estate out of the financial sector in their indices, and here is some additional information courtesy of Pasadena PCS PM Zach Bohr

The Global Industry Classification Standards (GICS®) has created a sector specifically for equity real estate. As a result, equity REITs will now be separated from the financial industry classification. This reclassification in the index will only apply to equity REITs. Mortgage REITs will continue to be a sub-category under the financial sector classification.  As a result, for the first time since 1999 the S&P 500 index is being reconfigured. The last time this occurred was when technology was separated out from industrials and listed as an independent sector.

Currently, there are 27 REITS in the financial sector of the S&P500 that will be reclassified into the standalone REIT category. The collective market cap of these companies is ~3% of the S&P500, which is bigger than both the telecom and mining sectors.

The Russell indices will also be reconfigured and real estate will become one of the largest sectors in the Russell 2000 Value index (~12%). This will also effect the small-cap Russell indices where real estate will have a significant weighting.

Amongst sector ETFs, REITs have almost $68b in assets. This allocation dwarves other sector ETFs.  Financial ETFs’ have to adjust to the change.  The largest financial ETF (XLF) which holds ~$15b will be paying out a special dividend in shares of XLRE that equates to approximately a fifth of the funds assets.

Here’s the news:

Tech companies have had better days

Facebook Inc. has been giving advertisers an inflated metric for the average time users spent watching a video — by not counting people who viewed for less than 3 seconds. Shares in the company fell 1.5 percent in extended trading. Yahoo! Inc. said it suffered an attack in 2014 in which the personal information of at least 500 million users was stolen. The revelation of the hack comes ahead of Verizon Communications Inc.’s planned acquisition of Yahoo's web portal assets. Finally, Twitter Inc. was downgraded by RBC Capital Markets Analyst Mark Mahaney to "underperform" as a proprietary survey showed advertisers plan to cut back spending on the site. 

Oil deal in Algiers?

A barrel of West Texas Intermediate for November delivery jumped as much as $1.00 to $46.41 this morning after Reuters reported that Saudi Arabia was ready to cut production if Iran agreed to a freeze. Former Algerian Energy Minister Chakib Khelil said he is confident that OPEC will reach an agreement at the meeting next week in Algiers. As the global oil surplus to continues to grow, the pressure for an accord increases.

European PMIs

IHS Markit's monthly composite Purchasing Managers Index for the euro area fell slightly to 52.6 for September, from 52.9 in August, showing growth in the currency bloc is still struggling to gain traction. At a national level, there was a surprise in the German data, where services PMI came in at 50.6, well below the 52.1 expected by economists surveyed by Bloomberg. Markit's U.S. manufacturing PMI is due to be released at 10:00 a.m. ET, with expectations for a reading of 52.0, unchanged from August's figure.

Market rally falters

Overnight, the MSCI Asia Pacific Index dropped 0.2 percent, with Japan's Topix index also slipping 0.2 percent as concerns over the strength of the yen weighed on exporters. In Europe, the Stoxx 600 Index was 0.6 percent lower at 6:15 a.m. ET. A Bank of America Corp. report showed fund managers have withdrawn money from the region’s equities for a 33rd straight week. S&P 500 futures were down 0.1 percent.

Brexit quarter

Three months ago today, polling opened in the U.K.'s referendum on membership of the European Union. The latest warnings on the fallout from the result of that poll include a risk to 100,000 jobs in London, if the City loses its dominant role in clearing, claims of added difficulties for trade deals, and more concerns about the weakness of the pound. One study, however, points out that the EU may have more to lose from Brexit than the U.K

France's economy is driving Europe. For the first time since 2012, France's economy is doing better than Germany's, at least according to preliminary PMI data released by IHS Markit. The euro is up 0.1% at 1.1218 against the dollar.

Job openings in finance are plunging in the UK. Data from Institute for Public Policy Research says that jobs openings in the finance industry in the UK are down 10.1% since the UK's vote to leave the European Union.

Leon Cooperman says he will beat the insider-trading charges. Cooperman, who was charged with insider trading on Wednesday, told reporters, "If you're 73 and don't give a s--- what it costs you and your reputation is important, basically you'll defend yourself to the end."

CBOE is trying to buy the second-largest US equity market. Bloomberg reports that the Chicago Board Options Exchange has approached Bats Exchange for a takeover, but a price is not yet known.

Facebook inflated its video views. A Wall Street Journal report found that for more than two years the social-media giant exaggerated a key advertising metric used to assess video views on the site by as much as 80%, but Business Insider's Lara O'Reilly says it's not as bad as it seems.

Yahoo's data breach is enormous. The company believes the credentials of at least 500 million user accounts were stolen by a "state-sponsored actor" in 2014, which would make it the largest-ever data breach.

All of the top five investment banks are located in the US. Deutsche Bank has fallen to sixth place in Coalition's latest rankings of investment banks, making it the first time since the tail end of the financial crisis that a European bank is not in the top five.

Valvoline goes public. The engine and automotive-maintenance company will begin trading Friday after pricing its initial public offering at $22 a share, within the expected range of $20 to $23. Shares of Valvoline will trade under the ticker "VVV."

Web of Intrigue
Yahoo said Thursday that hackers penetrated its network in late 2014 and stole personal data on more than 500 million users, from names and email addresses to telephone numbers and encrypted passwords. The internet company is blaming “state-sponsored” hackers for what may be the largest-ever theft of personal user data. The significance of the disclosure is twofold: that the company says the breach is the work of another nation and because it raises questions about the fate of its pending $4.8 billion sale of core assets to Verizon, announced in July. The telecom company said it was notified of the breach earlier this week. Yahoo didn’t say how the hackers broke into its network or which country sponsored the attacks. Many computer attacks in late 2014 were believed to be the work of China, while more recent hacks have been blamed on Russia. Meanwhile, big ad buyers and marketers are upset with tech giant Facebook after learning that it vastly overestimated average viewing time for video ads on its platform for two years, according to people familiar with the situation.

Death and Taxes
Hillary Clinton detailed a new tax plan yesterday that would levy a 65% tax on the country’s largest estates. That’s up from today’s 40% top rate and marks an expansion of tax increases the Democratic candidate would impose on the uppermost sliver of America’s affluent. In all, Mrs. Clinton would raise taxes by about $1.5 trillion over the next decade to pay for expanded education assistance, paid family leave and other programs. The plan comes in contrast to the tax cuts favored by Republican rival Donald Trump, leaving the two sides at least $6 trillion apart on tax policy. The GOP nominee, meanwhile, spoke yesterday of an “America-first energy” plan, promising sweeping deregulation of U.S. gas, oil and coal production. Mrs. Clinton has maintained an edge over Mr. Trump in recent polls, including a 48-point advantage among Hispanic likely voters, a new WSJ/NBC/Telemundo survey finds.

Turkish Lessons
American charter schools have become embroiled in a proxy fight between Turkish President Recep Tayyip Erdogan and his nemesis. With millions of global followers, Fethullah Gulen, a Muslim cleric blamed by Turkish officials for orchestrating a coup attempt in July, has a network that includes supporters who run schools and institutions around the world. Lawyer Robert Amsterdam, whose firm was hired by Turkey, says he is out to prove that roughly 150 schools in the U.S. and hundreds of other academic institutions and businesses around the world channel millions of dollars annually to the Gulen movement—ties that he says amount to a “money laundering” scheme. Yuksel Alp Aslandogan, executive director of a nonprofit that promotes Mr. Gulen’s ideas, says the schools targeted by Mr. Amsterdam “are American institutions serving American children and their parents.”

Here's what Janet Yellen has wrong about the job market.

Deutsche Bank woes sparks concern among German lawmakers.

Analysts are trying to persuade traders than the Bank of Japan's plan will fail.

Bond bulls curb their enthusiasm in China's leverage crackdown.

For the first time in years, incomes are rising faster than home values. 

Carney says green finance can help prop up the global economy.

Back to school for 43-year-old JPMorgan banker as Koreans flee finance.

Riots Upend Charlotte’s Civic Identity

As Violence in Syria Again Soars, One Rebel-Held Neighborhood Relents

Islamic State Driven From Strategic Town of Shirqat, Iraqi Military Says

Airbnb’s Funding Round Led by Google Capital

Breakthrough Gene Technology Attracts Investors Amid Patent Dispute

Bond ‘Tantrum’ Threat Fades

Stock markets around the world are in the red. China's Shanghai Composite (-0.3%) lagged in Europe, and Spain's IBEX (-1.3%) trails in Europe. S&P 500 futures are down 2.50 points at 2,165.75.

US economic data trickles out. Markit US Manufacturing PMI will be released at 9:45 a.m. ET, and the Baker Hughes rig count will cross the wires at 1 p.m. ET. The US 10-year yield is down 1 basis point at 1.61%.

The stock market crash of 1987 was so surprising, big, and powerful that it left a permanent crater on the landscape of financial markets. This crater is most clearly visible when looking at a chart of implied volatilities for any normal stock or equity index. People almost always pay more for options that protect against a down-movement in a stock then they do for options that pay off in the event of the equivalent move up. That wasn't the case pre-1987, when hedges roughly cost the same amount in either direction. This changed shape of the curve is known as The Volatility Smile, and it's also the name of a new textbook from Emanuel Derman on how to price options. Derman, of course, is the author of My Life as a Quant, which described his career at the forefront of the marriage between theoretical physics and Wall Street. Now everybody knows that physicists can go to work on Wall Street, but when Derman arrived at Goldman Sachs in the mid-80s it was still a novel thing. Even if quantitative finance isn't your thing, you should check out the first chapter of his new book which is available for free online. It gives a really nice plain-English overview of what financial models are and what they seek to accomplish. And if you're still interested, you should check out Derman's appearance on What'd You Miss on BloombergTV this afternoon at 4:30 ET, where we'll talk about options pricing theory, math, and the current state of finance.

Source: Bloomberg, BI, WSJ,