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Doubling Down: Leveraged ETFs offer promise – and danger

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By StockSnap from PixabayDoubling Down: Leveraged ETFs offer promise – and danger

NEW YORK (Reuters) – In a volatile market, boring investments can be pretty darn sexy. That is why investors have plowed more than $4 trillion into exchange-traded funds, according to London-based research firm ETFGI.

They’re drawn by low fees, tax efficiency and the simplicity and ease of index funds.

Exchange-traded funds, however, also have some swashbuckling cousins. So-called “leveraged” versions offer two or even three times benchmark returns. By using techniques employing swaps and derivatives, they offer the promise of multiplying your gains – or losses – on pretty much any sector you want.

Semiconductor bulls? Check. Energy bears? Check. In fact, there are a dizzying 222 U.S.-listed leveraged ETFs with more than $38 billion under management, according to Morningstar research.

“Based on the flow data we see, they appear to be mainly used for short-term periods in more aggressive tactical fashions,” said Matthew Bartolini, head of SPDR Americas Research. “With that comes volatility. Just as one can be right, they can also be very wrong.”

The risk may only be ramping up. The U.S. Securities and Exchange Commission is evaluating 4x leveraged ETFs, the first of their kind to quadruple potential returns. The SEC initially offered its approval this past spring, before putting that decision on hold.

For aggressive traders, the appeal of leveraged ETFs is obvious. If you are convinced that the market (or just a particular sector) is going to make a big move, then the possibility of multiplying your returns in short order can be irresistible.

But compare the use of leveraged ETFs to handling fireworks. If pulled off successfully, it can be an impressive show. If handled clumsily, they can very easily explode in your face and leave lasting damage.

For long-term, individual investors in particular, there is no reason to crank up your portfolio risk (and potential losses) just because you can. Financial planner David Haraway of Colorado Springs, Colorado, has a simple suggestion for how often such investors should dip into leveraged ETFs: “Never.”

The use of such risky products would be perfectly appropriate if we were all excellent investors, who manage to make the right call every time. Of course, we are anything but that.

Individuals are notorious for being subpar investors, regularly falling prey to our worst behavioral instincts. Among them: Being motivated by greed or fear instead of fundamentals; mistiming markets, buying at the top and selling at the bottom; and trading too frequently, which eats away at returns with investment fees.

Now multiply those sloppy instincts two or three times over, and you can see why highly leveraged products are potentially so dangerous.

“The magnification of returns could make it so a risk-loving person could be tempted to play around with leveraged versions,” said Jodi Beggs, a behavioral economist and lecturer at Northeastern University in Boston. “But unless trading your own assets is your full-time job, my advice is to stay away.”

She noted that management fees on leveraged funds tend to be higher than those of other ETFs – which erases some of the benefits of holding ETFs in the first place.

That in mind, it might be wise to give your portfolio a quick X-ray for any leveraged holdings. If your adviser has placed you in such funds – maybe in an attempt to juice returns, or mask other losses – then perhaps you should be re-evaluating that relationship.

“Individual investors should not be handling these at all, and neither should advisers,” said Kashif Ahmed, of American Private Wealth in Woburn, Massachusetts. “It is impossible to use these and not expose yourself to undue risk.”

If you are nonetheless tempted, the pros have one practical tip: Place a hard cap on such speculative investments, as a percentage of your total portfolio. If you limit it to 10 percent, suggests San Francisco financial planner Steve Branton, then you contain any potential damage. Then, even if you lose it all in a worst-case scenario, the rest of your retirement funds would remain on course.

Also remember that equities themselves are inherently risky. Doubling or tripling down on that risk is essentially a dice roll – and as any gambler knows, there is always the possibility that you will come up snake eyes.

Editing by Beth Pinsker and Dan Grebler

Published at Mon, 21 Aug 2017 13:46:40 +0000

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These Oil Stocks Are at Risk From Venezuela's Chaos

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By webandi from PixabayThese Oil Stocks Are at Risk From Venezuela's Chaos

Political chaos and troubled times in Venezuela’s oil patch are posing problems for a number of international oil companies, according to a recent report in Barron’s.

The story notes that Venezuela has some 300 billion barrels of proven oil reserves, but it cites Credit Suisse analysts who write that the country’s oil production has fallen by more than half to just over 2 million barrels from 3.3 million barrels in 2004.

And of course the slide in crude prices over the past few years is expected to weigh on production and profits in the South American country. (see also: Venezuela: 4 Reasons Why This Country May Go Under).

Plus there’s the threat of broader sanctions on Venezuela (see also: Oil Prices May Spike as Odds Increase of US Sanctions on Venezuela).

A History of Bad Business

Venezuela’s lack of investment in its state oil company — Petroleos de Venezuela or PDVSA — may leave it crippled even if the current political regime were overturned, according to Barron’s, which also notes the nation’s checkered past with foreign oil firms left holding contracts that Venezuela has backed out of in years past. In fact, Exxon Mobil Corp. (XOM) and ConocoPhillips Co. (COP) are still in arbitration with Venezuela over 2007 government actions.

The oil companies are apparently angling for better results: Schlumberger NV (SLB) has severely limited activity since the second quarter of 2016 until it has visibility on getting paid, per Barron’s. The story points out the international and national oil companies with the most exposure to Venezuela: Chevron Corp. (CVX), France’s Total SA (TOT), Repsol SA of Spain (REPYY), Eni SpA (E) from Italy, and Russia’s Rosneft.

Rosneft has provided $6 billion in financing to Venezuela, which used its Citgo refineries in the U.S. as collateral in the deal last fall, per Barron’s. The Russian company has oil-for-loan deals with the government and state-run PDVSA, and the two have joint ventures together—although Barron’s points out that many of them have not been developed yet due to lack of funding by the state company.

The Credit Suisse research note posits that Rosneft’s loans may get some priority over other payments, adding that China has more exposure to Venezuela and those loan repayments “appear to be behind schedule.”

Published at Mon, 21 Aug 2017 10:24:00 +0000

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Asian shares fragile as Trump turmoil, Korea tensions weigh

 

Asian shares fragile as Trump turmoil, Korea tensions weigh

TOKYO (Reuters) – Asian shares were fragile on Monday as investors remained unconvinced about U.S. President Donald Trump’s ability to fulfill his economic agenda, even as the departure of his controversial policy strategist raised hopes of some progress.

Japan’s Nikkei shed 0.3 percent, hitting a 3-1/2-month low, shrugging off a Reuters poll which showed confidence at Japanese manufacturers rose to its highest in a decade in August.

MSCI’s broadest index of Asia-Pacific shares outside Japan was barely in the black thanks to modest gains in China, but many markets, including Australia and South Korea, were in the red.

European shares are expected to dip, with spread-betters seeing a lower opening of 0.3 percent in Britain’s FTSE, and 0.2 percent in France’s CAC.

S&P Mini futures were down 0.1 percent at 2,424, not far from their one-month low of 2,419.5 touched on Friday.

Wall Street shares got only a short-lived boost on Friday after Trump fired White House chief strategist Steve Bannon.

“Markets seem to think that the administration will remain fragile and its ability to carry out its policies will be hampered even after Bannon’s departure,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Although Bannon’s departure removes a major source of friction within the White House, Trump’s attacks on fellow Republicans following violence in Virginia earlier this month have isolated him, prompting some Republicans to begin questioning Trump’s capacity to govern.

Investors were also wary of any flare-up of tensions between North Korea and the United States as U.S. troops and South Korean forces started a joint exercise on Monday.

Many investors suspect Pyongyang might respond to the latest drill with more sabre-rattling, such as missile tests, although it has said last week it delayed a decision on firing four missiles toward Guam, home to a U.S. air base and Navy facility.

Tech-heavy Korean shares – one of the best performers globally for much of this year – have lost momentum since last month, partly on worries about escalating tensions in the Korean Peninsula.

JACKSON HOLE

In the currency market, the dollar was also hampered by political uncertainty in Washington.

Against the yen, the dollar fetched 109.24 yen, not far from Friday’s four-month low of 108.605.

The euro stood at $1.1750, stuck in its rough $1.17-$1.18 range in the past two weeks.

Investors are looking to European Central Bank chief Mario Draghi’s comments later this week at a meeting of the world’s central bankers in Jackson Hole, Wyoming. But sources told Reuters last week he will not deliver any fresh policy messages.

Federal Reserve Chair Janet Yellen’s keynote speech at the symposium will also be a main attraction for markets.

Comments last week from Fed officials suggested the stock market’s steady rise, still low long-term bond yields and a sagging dollar are girding the Fed’s intent to raise interest rates again this year despite concerns about weak inflation.

“People focus on inflation but in the Fed’s minutes policymakers spend a lot of time discussing whether bond yields are too low or asset prices are too high. If Yellen questions market stability, markets will expect a tighter policy,” Hiroko Iwaki, senior bond strategist at Mizuho Securities.

The 10-year U.S. Treasuries yield slipped to as low as 2.162 percent on Friday – its lowest since late June – and last stood at 2.199 percent.

Oil markets were stable, holding on to Friday’s big gains even though rising U.S. output weighed on hopes the market will tighten with crude inventories down 13 percent since March.

U.S. crude futures fetched $48.46 per barrel, down 0.1 percent while Brent futures were down 0.2 percent at $52.63 per barrel.

Editing by Kim Coghill and Jacqueline Wong

Published at Mon, 21 Aug 2017 05:55:07 +0000

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Ideas For Jumpstarting the Market Week

 

Ideas For Jumpstarting the Market Week

*  If you want to know another person’s psychology, just listen to their words and observe their actions.  Are they dwelling on the past or creating opportunity for the future?  Do they express anger and frustration or gratitude and fulfillment?  Do they actively create positive experiences for others, or are they largely focused on their own needs?  Do they seek adventure or the sameness of routine? If their words and actions were foods, how nourishing would you find their diet?  Does your trading reflect awareness and acceptance, or does it come from a place of ego?  All the psychology in the world won’t help a trader living the wrong values.  Our psychology reflects our values in action.

*  Seriously, if you haven’t delved into Weighing the Week Ahead and all its links, you’re missing some solid market prep.  Check out winners of Jeff’s Silver Bullet Awards:  perhaps a gold bullet should go to winner David Bailey and colleagues for consistently provocative, thoughtful research.

*  Nice to see Merritt Black teaching new traders with a framework of auction theory and Market Profile.  Recognizing value areas in markets and how volume behaves as we move away from value is key to understanding short-term price action.  Jim Dalton’s work remains a tremendous resource in making sense of seemingly random market behavior.

Published at Sun, 20 Aug 2017 13:53:00 +0000

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The Single Biggest Bullish Catalyst For Oil

 

The Single Biggest Bullish Catalyst For Oil

By: OilPrice.com | Thu, Aug 17, 2017


One of the key objectives for OPEC is to bring down inventories, a goal that has been elusive this year. But if the oil futures curve is anything to go by, the oil market is showing signs of tightening.

Brent futures have recently begun to exhibit a state of backwardation, which is when near-term oil futures trade at a premium to contracts dated further off into the future. This is the first time in years that backwardation has occurred, and most analysts are taking it as a sign that the oil market finally could be getting closer to rebalancing. In the past, backwardations have accompanied a rebound in the oil market after a bust, while a contango (the opposite of backwardation) tends to occur when the market crashes because of a supply glut.

There are several reasons why backwardation is bullish, which has been discussed in previous articles. A declining futures curve makes it uneconomical to store oil, so backwardation could accelerate the drawdown in inventories. It also complicates the hedging strategies of shale producers, which could hold back expansion plans. It also is a symptom of tightening near-term supplies, although, to be sure, the flip side of that argument is that it could merely be a reflection of expectations that the supply glut will reemerge at some point in the future.

Still, backwardation is occurring at a time when there are other bullish indicators starting to crop up. The U.S. has seen a sharp drawdown in inventories in recent months, down more than 60 million barrels since March. The IEA and OPEC both recently upgraded their oil demand estimates. “World economic growth has gained momentum,” OPEC said. “With the ongoing growth momentum and an expected continued dynamic in second-half 2017, there is still some room to the upside.”

The view of Wall Street is also becoming more bullish. Hedge funds and other money managers have amassed a large number of long positions on recent weeks. For the week ending on August 8, investors stepped up their bullish bets on Brent by the equivalent of 58 million barrels, according to the FT, which was the largest weekly increase towards net length since December.

“It’s hard to be aggressively negative if every week you’re getting stronger numbers,” Paul Horsnell, global head of commodities research at Standard Chartered, told the FT, although he added that “there is still resistance. The market is not willing to push prices too far up.”

Indeed, there is little prospect of oil prices moving much beyond $50 per barrel. Not everyone is even sold on the notion that the market is tightening. OPEC production is at its highest point so far in 2017, U.S. shale continues to rise, and some long-planned projects are coming online later this year in Canada and Brazil, for example. “There is no way this oil can be accommodated into the market so prices are going to have to give at some point,” Mr Dei-Michei of JBC Energy told the FT. “This bullish sentiment cannot last.”

In fact, swings in sentiment, like a pendulum, are typical. More than once this year, the bullish positions have built up too far, only to be undone when sentiment shifted, causing a steep selloff in oil prices. Following the price crash in June, the profoundly bearish positioning amongst hedge funds and other money managers also went too far, causing shorts to be liquidated and bullish bets to remerge – which, again, accompanied a rebound in prices.

All of that is to say that the most recent shift towards long bets on oil futures probably can’t carry oil prices all that far. The underlying fundamentals simply don’t justify significant price gains…at least for now. “They’re going to have to dig in for the long haul,” Neil Atkinson, head of the IEA’s oil markets and industry division, said on Bloomberg TV, referring to the OPEC cuts. “Re-balancing is a stubborn process.”

In short, the shift into backwardation in the futures market suggests that the supply balance is heading in the right direction, and it probably puts a floor beneath prices for the time being. But it doesn’t necessarily mean that oil be heading much higher than $50 per barrel anytime soon.

By Nick Cunningham of Oilprice.com

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Published at Thu, 17 Aug 2017 10:20:30 +0000

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Single Market

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Single Market

DEFINITION of ‘Single Market’

The European Single Market is an entity created by a trade agreement between participating states. These states include the members of the European Union (EU), as well as four non-EU countries that are members of the European Free Trade Association (EFTA).

The Single Market created a unified trading territory that functions without border regulations, such as tariffs, which typically apply to trade between countries. The Single Market allows the unrestricted movement of goods and services, as well as capital and people throughout the territory or bloc.

BREAKING DOWN ‘Single Market’

Development and Goals of the Single Market

The European Single Market, originally known as the Common Market, has its foundations in the former European Economic Community (EEC) which was established by the Treaty of Rome in 1957. The first significant change to the original treaty was in 1986, with the Single European Act (SEA). In 1992, the European Union was formed, encompassing the former EEC.

Primary goals of the Single Market include stimulating economic growth across the region, improving quality and availability of goods and services, and reducing prices. In aiming to meet these objectives, the following benefits have been provided:

  • A larger ‘domestic’ market with more resources.
  • Greater specialization within the region.
  • A powerful trading presence in the international arena.
  • Increased economic integration among members.

Another major function of the Single Market is the setting and enforcing of measures that ensure high safety and quality standards, as well as environmental protection.

Drawbacks to the Single Market

Being a part of the Single Market means that an individual country does not have the right to refuse to sell products which are deemed acceptable in other countries in the bloc. There have been instances where a country has challenged EU law as the country sought to ban the sale of a product deemed to be harmful. France, for example, succeeded in getting permission to ban the sale of Red Bull drinks on the basis that one of the main ingredients was harmful to health. This ban remained in place for twelve years until it was over-ruled on the grounds that there was no proof for this health risk.

A country is also unable to limit the immigration of nationals from other countries in the bloc, and at the time of the announcement of “Brexit,” regaining control of immigration appeared to be a key issue for the United Kingdom (UK). EU leaders made it clear that the UK retaining the benefits of free trade depended on the continued rights of EU nationals to work and reside in the UK.

Leadership of the Single Market

The Single Market is governed by the European Commission which is responsible for monitoring the application of EU laws and acting on non-compliance under the Single Market Act. The Commission also collects data for the purpose of evaluating policy implementation, and assessing areas in which policy development is required.

Economic reports are also presented based on analysis conducted by the Commission. These reports investigate the results of the application of regulations in various sectors, and provide a basis for future direction. Reports also pinpoint areas in which progress has been made, as well as those which have encountered obstacles.

 

Published at Thu, 17 Aug 2017 20:42:00 +0000

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These Country ETFs Are Near Technical Buy Points

 

These Country ETFs Are Near Technical Buy Points

Cory Mitchell, CMT August 17, 2017

Published at Thu, 17 Aug 2017 17:00:00 +0000

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Wall Street extends losses on Trump policy worries

Wall Street extends losses on Trump policy worries

(Reuters) – U.S stocks hit session lows in early afternoon trading on Thursday as investors worried about President Donald Trump’s ability to pursue his pro-growth policies.

The market also remained on edge after a van crashed into dozens of people in the center of Barcelona on Thursday and Spanish media, citing police sources, said at least 13 people were killed.

Catalan’s police said the van crash is being treated as a terror attack.

Trump disbanded two business councils on Wednesday after several chief executives quit in protest over his remarks on white nationalists.

Stocks were rattled earlier in the day following speculation of White House Economic Adviser Gary Cohn’s possible departure.

A White House official said Cohn “intends to remain in his position as NEC director … nothing’s changed.”

“The concern would be if Gary Cohn would decide that if he needs to take a safe step that a lot of CEOs did, it will be very difficult to move forward with pro-growth tax reforms,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

At 13:04 p.m. ET (1704 GMT), the Dow Jones Industrial Average .DJI was down 177.97 points, or 0.81 percent, at 21,846.9 and the S&P 500 .SPX was down 25.38 points, or 1.03 percent, at 2,442.73. The Nasdaq Composite .IXIC was down 87.89 points, or 1.39 percent, at 6,257.22. Investors have also been assessing minutes from the Federal Reserve’s July meeting that showed growing concerns over weak inflation, muddying the path of interest rate hikes.

Weak inflation has spurred concerns that the Fed may have to cool its monetary tightening pace even though the economy is growing moderately and the unemployment rate is at a 16-year low.

The central bank is also considering reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities.

“If they don’t start selling their asset portfolio in September, which is what they have indicated, that will be a negative signal to the markets,” said Brad McMillan, chief investment officer for Commonwealth Financial Network in Waltham, Massachusetts.

“The Fed is still fairly comfortable with the economics, but they’re getting more concerned about the politics.”

All 11 major S&P sectors were lower, with technology index’s .SPLRCT 1.17 percent fall topping the list.

Apple’s (AAPL.O) 1.24 percent fall weighed the most on the S&P and the Nasdaq.

Cisco (CSCO.O) fell 4.12 percent after reporting a revenue miss in its closely-watched security business.

Wal-Mart (WMT.N) was down 2.30 percent after the retailer reported a drop in margins due to continued price cuts and investments in its e-commerce operations.

Declining issues outnumbered advancers on the NYSE by 2,085 to 718. On the Nasdaq, 2,031 issues fell and 778 advanced.

Reporting by Sruthi Shankar and Tanya Agrawal in Bengaluru; Editing by Anil D’Silva

 

Published at Thu, 17 Aug 2017 17:10:16 +0000

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Cisco Stock Could Test Lower Support After Weak Earnings

 

Cisco Stock Could Test Lower Support After Weak Earnings

By Justin Kuepper | August 17, 2017 — 8:35 AM EDT

Cisco Systems, Inc. (CSCO​) shares fell nearly 3% in after-hours trading after the company reported worse-than-expected fiscal fourth quarter financial results in key segments. Fourth quarter revenue fell 4% to $12.13 billion – beating consensus estimates by $60 million – while earnings per share were in line with forecasts at 61 cents. The market appears primarily concerned with the company’s largest segments – switching ($3.44 billion) and routing ($1.98 billion) – which both contracted by 9% year over year.

Competitors have started to take meaningful market share, including Arista Networks, Inc. (ANET​), which has experienced 50% year-over-year growth. AT&T Inc.’s (T) white box testing has also led to concerns that telecom network providers could build fast and reliable networks with generic computer switches and open-source software. These trends mesh with Facebook, Inc.’s (FB) vision for software-defined networking as an alternative to high-end networking gear. (See also: Facebook’s Open Compute Takes on Cisco.)

Technical chart showing the performance of Cisco Systems, Inc. (CSCO) stock

On a technical level, the stock reached the upper end of its price channel near R1 resistance at $32.29 during Wednesday’s session. The relative strength index (RSI) remains relatively lofty at 62.43, while the moving average convergence divergence (MACD) has trended sideways over the past several months. If the 50-day moving average crosses over the 200-day moving average, traders could see a prolonged intermediate-term downtrend.

Traders should watch for a breakdown from upper trendline resistance toward the lower end of its price channel near $32.00. If the stock opens high, traders should watch for a breakout from upper trendline resistance to R2 resistance at $33.12. Cisco has underperformed the S&P 500, disclosed mediocre financial results and trended sideways over the past few months, which means traders may want to keep a neutral to bearish bias on the stock. (For more, see: Cisco’s Security Business Revenue Misses Estimates, Shares Drop.)

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.

 

Published at Thu, 17 Aug 2017 12:35:00 +0000

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Ackman says owned stake in Hilton, a previously unnamed bet

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Ackman says owned stake in Hilton, a previously unnamed bet

BOSTON (Reuters) – Investor William Ackman said on Wednesday his hedge fund had bought and sold a stake in Hilton Worldwide Holdings, identifying the portfolio company that recently earned him a double digit return.

Ackman and one of his partners told investors on a conference call that they have long admired the hospitality company and made the investment last year as Hilton was trading at a temporarily depressed valuation.

Pershing Square Capital Management owned a roughly 5 percent stake but sold out within the last two months, Ackman said, noting that the stock price ran up too quickly and prevented him from buying more.

“Our big disappointment here is we were never able to make it as large a position as we would have liked,” Ackman said, adding that it finished up “about 30 percent versus our average cost where we exited.”

Despite the gains from Hilton, Ackman’s funds are flat to down nearly 2 percent for the year, he said, adding that Chipotle Mexican Grill, Herbalife and government sponsored enterprises Federal National Mortgage Association and Federal Home Loan Mortgage Corp have weighed on performance.

For years any word from Ackman about a new idea could send the company’s stock racing. But after two years of double-digit losses, Ackman is looking for a win and has tried to keep some bets under wraps.

That includes his most recent investment, a $4 billion bet on human resources software company Automatic Data Processing Inc which Pershing Square previously owned between 2009 to 2011.

To make that bet, Ackman said he raised $500 million in a special purpose vehicle to invest in ADP.

While Ackman will lay out his case for improving performance at ADP on a conference call on Thursday, he said on Wednesday that if management had been quiet he might have worked more collaboratively with the firm.

“Had they given us a week, I don’t think we’d be in a proxy contest,” Ackman said just days after proposing three people, including himself, as independent board directors.

The company announced Ackman’s investment earlier this month and said he was seeking to fire Chief Executive Officer Carlos Rodriguez and control the company. The CEO later called the fund manager a “spoiled brat” on television.

Ackman hit back on Monday in a filing which disclosed that Rodriguez had accidentally sent him an email intended for the ADP legal team in which the CEO dismissed Ackman’s pledge to work collaboratively as not credible.

Reporting by Svea Herbst-Bayliss; Editing by Chizu Nomiyama and Tom Brown

 

Published at Wed, 16 Aug 2017 18:17:46 +0000

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The Dangers of Share Dilution

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The Dangers of Share Dilution

By Matt Cavallaro | Updated August 16, 2017 — 1:00 PM EDT

When a company issues additional shares, this reduces an existing investor’s proportional ownership in that company. This often leads to a common problem called dilution. The end result is that the value of existing shares may take a hit. This is a risk of investing in stocks that investors must be aware of. In this article, we’ll look at how dilution happens and how you can protect your portfolio.

What Is Share Dilution?

Assume that a simple business has 10 shareholders and that each shareholder owns one share (10%) of the company. If each investor receives voting rights for company decisions based on share ownership, every shareholder has 10% control.

Suppose that the company then issues 10 new shares and that a single investor buys them all up. There are now 20 total shares outstanding, and the new investor owns 50% of the company. Meanwhile, each original investor now owns just 5% of the company (1 share out of 20 outstanding), because their ownership has been diluted by the new shares.

There are several situations where shares become diluted. These include:

  • Conversion by holders of optionable securities: Stock options granted to individuals, such as employees or board members, may be converted into common shares, boosting the total share count.
  • Secondary offerings where the firm is looking to raise additional capital: A firm may looking to raise new capital to fund growth opportunities or to service existing debt may issue additional shares to raise the funds.
  • Offering new shares in exchange for acquisitions or services: Instead of paying for an acquisition with shares, new shares might be offered to shareholders of the firm being purchased. For smaller businesses, new shares could be offered to individuals for services provided. For example, special counsel could be offered shares for representing the firm or in exchange for other legal services.

Warnings Signs Of Dilution

Because dilution can reduce the value of an individual investment, retail investors should be aware of warnings signs that may precede a potential share dilution. Basically, any emerging capital needs or growth opportunities may precipitate share dilution.

There are many scenarios in which a firm could require an equity capital infusion; funds may simply be needed to cover expenses. In a scenario where a firm does not have the capital to service current liabilities and the firm is hindered from issuing new debt due to covenants of existing debt, an equity offering of new shares may be necessary.

Growth opportunities are another indicator of a potential share dilution. Secondary offerings are commonly used to obtain investment capital that may be needed to fund large projects and new ventures. Investors can also be diluted by employees who have been granted options as well. Investors should be particularly mindful of companies that grant employees a large number of optionable securities. Executives and board members can influence the price of a stock dramatically if the number of shares upon conversion is significant compared with the total shares outstanding. (Learn more about employee stock options in our ESO Tutorial.)

If and when the individual chooses to exercise the options, common shareholders may be significantly diluted. Key personnel are often required to disclose in their contract when and how much of their optionable holdings are expected to be exercised.

Diluted EPS

Because the earnings power of every share is reduced when convertible shares are executed, investors may want to know what the value of their shares would be if all convertible securities were executed. Diluted earnings per share is calculated by firms and reported in their financial statements. Diluted EPS is the value of earnings per share if executive stock options, equity warrants and convertible bonds were converted to common shares.

The simplified formula for calculating diluted earnings per share is:

Net Income – Preferred Dividends(weighted average number of shares outstanding + impact of convertible securities – impact of options, warrants and other dilutive securities)

Diluted EPS differs from basic EPS in that it reflects what the earnings per share would be if all convertible securities were exercised. Basic EPS does not include the effect of dilutive securities. Basic EPS simply measures the total earnings during a period, divided by the weighted average shares outstanding in the same period. If a company did not have any potentially dilutive securities, basic EPS would equal dilutive EPS. (Learn more in What is the weighted average of outstanding shares? How is it calculated?)

The formula above is a simplified version of the diluted EPS calculation. In fact, each class of potentially dilutive security is addressed. The if-converted method and treasury stock method are applied when calculating diluted EPS.

If-Converted Method

The if-converted method is used to calculate diluted EPS if a company has potentially dilutive preferred stock. Preferred dividend payments are subtracted from net income in the numerator and the number of new common shares that would be issued if converted are added to the weighted average number of shares outstanding in the denominator.

For example, if net income was $10,000,000 and 500,000 weighted average common shares are outstanding, basic EPS equals $20 per share ($10,000,000/500,000). If 10,000 convertible preferred shares that pay a $5 dividend were issued, and each preferred share was convertible into five common shares, diluted EPS would equal $18.27 ([$10,000,000 + $50,000]/[500,000 + 50,000]).

The $50,000 is added to net income because the conversion is assumed to occur at the beginning of the period so there would be no dividends paid out. Thus $50,000 would be added back, just like when after-tax income is added back when calculating the dilution of convertible bonds, which we will go over next.

If-Converted Method for Convertible Debt

The if-converted method is applied to convertible debt as well. After-tax interest on the convertible debt is added to net income in the numerator and the new common shares that would be issued at conversion are added to the denominator.

For a company with net income of $10,000,000 and 500,000 weighted average common shares outstanding, basic EPS equals $20 per share ($10,000,000/500,000). Assume the company also has $100,000 of 5% convertible bonds that are convertible into 15,000 shares, and the tax rate is 30%. Using the if-converted method, diluted EPS would equal $19.42 ([10,000,000 + ($100,000 x .05 x 0.7)] / [500,000 + 15,000]).

Note the after-tax interest on convertible debt that is added to net income in the numerator is calculated as the value of the interest on the convertible bonds ($100,000 x 5%), multiplied by the tax rate (1 – 0.30). (For more examples see our CFA Level 1 Study Guide Calculating Basic and Fully Diluted EPS in a Complex Capital Structure.)

Treasury Stock Method

The treasury stock method is used to calculate diluted EPS for potentially dilutive options or warrants. No change is made to the numerator. In the denominator, the number of new shares that would be issued at warrant or option exercise minus the shares that could have been purchased with cash received from the exercised options or warrants is added to the weighted average number of shares outstanding. The options or warrants are considered dilutive if the exercise price of the warrants or options is below the average market price of the stock for the year.

Again, if net income was $10,000,000 and 500,000 weighted average common shares are outstanding, basic EPS equals $20 per share ($10,000,000/500,000). If 10,000 options were outstanding with an exercise price of $30, and the average market price of the stock is $50, diluted EPS would equal $19.84 ([$10,000,000/[500,000 + 10,000 – 6,000]).

Note the 6,000 shares is the number of shares that the firm could repurchase after receiving $300,000 for the exercise of the options ([10,000 options x $30 exercise price] / $50 average market price). Share count would increase by 4,000 (10,000 – 6,000) because after the 6,000 shares are repurchase there is still a 4,000 share shortfall that needs to be created.

Securities can be anti-dilutive. This means that, if converted, EPS would be higher than the company’s basic EPS. Anti-dilutive securities do not affect shareholder value and are not factored into the diluted EPS calculation.

Using Financial Statements to Assess the Impact of Dilution

It is relatively simple to analyze dilutive EPS as it is presented in financial statements. Companies report key line items that can be used to analyze the effects of dilution. These line items are basic EPS, diluted EPS, weighted average shares outstanding and diluted weighted average shares. Many companies also report basic EPS excluding extraordinary items, basic EPS including extraordinary items, dilution adjustment, diluted EPS excluding extraordinary items and diluted EPS including extraordinary items.

Important details are also provided in the footnotes. In addition to information about significant accounting practices and tax rates, footnotes usually describe what factored into the diluted EPS calculation. Specific details are provided regarding stock options granted to officers and employees, and the effects on reported results.

The Bottom Line

Dilution can drastically impact the value of your portfolio. Adjustments to earnings per share and ratios must be made to a company’s valuation when dilution occurs. Investors should look out for signals of a potential share dilution and understand how their investment or portfolio’s value may be affected.

 

Published at Wed, 16 Aug 2017 17:00:00 +0000

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Wall Street pares gains after Trump disbands two advisory councils

 

Wall Street pares gains after Trump disbands two advisory councils

(Reuters) – U.S. stocks pared gains on Wednesday afternoon after President Donald Trump said he is disbanding his manufacturing council as well as the strategy and policy forum.

Trump’s move comes after two more CEOs resigned from the manufacturing council on Wednesday in response to the president’s comments on the Charlottesville violence over the weekend.

At 13:18 p.m. ET, the Dow Jones Industrial Average .DJI was up 44.93 points, or 0.2 percent, at 22,043.92 and the S&P 500 .SPX was up 4.77 points, or 0.19 percent, at 2,469.38.

The Nasdaq Composite .IXIC was up 14.97 points, or 0.24 percent, at 6,347.99.

Investors will look for clues on future interest rake hikes this year from the minutes scheduled for release at 1400 ET (1800 GMT).

The New York Stock Exchange (NYSE) is pictured in New York City, New York, U.S., August 2, 2017.Carlo Allegri

Policymakers unanimously decided to keep interest rates unchanged in the July 25-26 meeting and said they planned to reduce the central bank’s massive holdings of bonds “relatively soon”.

“If the minutes suggest a deviation, whether them being more hawkish or more dovish, that may cause the market to change direction,” said Adam Sarhan, chief executive of Sarhan Capital in New York.

A slide in inflation readings in recent months, which remain below the Fed’s 2 percent target rate, have made the markets skeptical about a rate hike by December.

However, recent hawkish comments by New York Fed chief William Dudley advocating for another rate hike this year and strong retail sales data on Tuesday have upped the odds.

Chances of a December hike rose to 49.2 percent, up from 42 percent at the start of the week, according to CME Group’s FedWatch tool.

Advancing issues outnumbered decliners on the NYSE by 1,793 to 1,016. On the Nasdaq, 1,762 issues rose and 1,019 fell.

Reporting by Sruthi Shankar in Bengaluru; Editing by Arun Koyyur

 

Published at Wed, 16 Aug 2017 17:29:28 +0000

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ETFs are hot everywhere but workplace retirement plans

 

ETFs are hot everywhere but workplace retirement plans

NEW YORK (Reuters) – Low-cost exchange-traded funds are a favorite of individual investors. ETF assets reached $2.9 trillion in 2017, up 32 percent in the last year, according to Investment Company Institute, a trade group.

So why are so few ETFs offered in workplace retirement plans?

Of the $5 trillion in assets in company-sponsored 401(k) plans, two-thirds are held in mutual funds, the ICI says. ETF assets, meanwhile, are a mere fraction of the pool left over, with the exact percentage not tracked publicly.

Among retail investors, ETFs are favored for tax efficiency, intraday trading and cheap fees. There are more than 2,000 varieties available in the U.S., ranging from plain-vanilla S&P indexes to niche offerings like an ETF that follows whiskey and spirits company stocks.

In a tax-advantaged 401(k) plan, where investors are in it for the long-haul, those advantages matter less. Many retirement investors do not understand the differences between ETFs and mutual funds.

Research shows that investors do better in managed accounts, rather than selecting their own funds, says Steve Anderson, president of Schwab Retirement Plan Services.

Most managed target-date funds, which are geared toward a particular retirement date, are mutual funds.

One hurdle has been technological. ETFs trade throughout the day, while mutual funds do not; mutual funds are typically priced on a daily basis at 4 p.m. Adding ETFs to a retirement plan means a change in record-keeping systems.

ETF shares are also sold whole. But investors usually buy fractional mutual fund shares in a retirement plan, which are better for handling the random-dollar, bimonthly contributions most employees make to retirement accounts.

Dan Egan, director of behavioral finance at the online investment company Betterment, says that one thing that is stopping other providers from switching from mutual funds to ETFs is how they are paid – partly by commissions from mutual fund companies.

“It puts them in an awkward place. If they start offering ETFs, without the revenue, they’d need to start charging more for the service itself,” Egan says.

But it is possible to invest in ETFs in your 401(k), and some providers have forged ahead in the last five years.

Vanguard, one of the largest money managers in the U.S., says it has does not have much demand for ETFs in retirement plans, but it does have an offering through its Vanguard Retirement Plan Access, which is for small businesses.

Charles Schwab has been offering an all-ETF product called Index Advantage since 2012. While it is just a small portion of the firm’s overall 401(k) business that it declined to specify, the company is bullish on future prospects. The plan design opts-in participants and offers them a low fee-structure of under 10 basis points. The plan also offers low-cost advice. That’s cheap compared to a traditional mutual-fund based 401(k) which costs about 50 basis points, according to ICI.

At Betterment, the ETF options come in the Betterment for Business 401(k), which now has a waitlist for small companies wishing to add the platform.

For a company deciding among offerings, one key is to consider your objectives, says Steve Schweitzer, senior vice president of product and marketing at Ascensus, a provider of 401(k) plans.

If your company does not offer ETF options and you want them, see if your plan offers a brokerage window within the 401(k). That would allow the participant to trade whatever they want, at their own risk.

(This version of the article corrects the fee structure for Schwab’s plan to show it charges separately for advice and that advice is not included in the 10 bps fee in paragraph 14,)

Editing by Lauren Young and Bernadette Baum

Published at Tue, 15 Aug 2017 14:14:37 +0000

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How Bitcoin Works

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How Bitcoin Works

By David Floyd | August 15, 2017 — 12:28 PM EDT

How exactly to interpret bitcoin is a matter of controversy: as a currency, a store of value, a payment network, an asset class?

Fortunately, leaving the economic debates aside, it’s pretty easy to answer what bitcoin actually is. Software. Don’t be fooled by stock images of shiny coins bearing modified Thai baht symbols. Bitcoin is a purely digital phenomenon, a set of protocols and processes. It is the most successful of hundreds of attempts to create virtual money through the use of cryptography – the science of making and breaking codes – though competition is heating up.

(Check out our new Bitcoin Page for real-time price quotes and news)

The Blockchain

Bitcoin is a network that runs on a protocol known as the blockchain. A 2008 paper by a person or people calling themselves Satoshi Nakamoto first described both the blockchain and bitcoin, and for a while the two terms were all but synonymous. The blockchain​ has since been conceptually divorced from its first application, and thousands of blockchains have been created using similar cryptographic techniques. This history can make the nomenclature confusing. “Blockchain” sometimes refers to the original, bitcoin blockchain; other times it refers to blockchain technology in general, or to any other specific blockchain, such as the one that powers Ethereum​.

The basics of blockchain technology are mercifully straightforward: any given blockchain consists of a single chain of discrete blocks of information, arranged chronologically. In principle this information can be any string of 1s and 0s – emails, contracts, land titles, marriage certificates, bond trades – and this versatility has caught the eye of governments and private corporations. In bitcoin’s case, though, the information is mostly transactions.

Bitcoin is really just a list. Person A sent X bitcoin to person B, who sent Y bitcoin to person C, etc. By tallying these transactions up, everyone knows where individual users stand. Another name for a blockchain is a “distributed ledger,” which emphasizes the key difference between this technology and a well-kempt Word doc. Bitcoin’s blockchain is public. Anyone can download it in its entirety or head to any number of sites that parse it. You can see, for example, that 15N3yGu3UFHeyUNdzQ5sS3aRFRzu5Ae7EZ sent 0.01718427 bitcoin to 1JHG2qjdk5Khiq7X5xQrr1wfigepJEK3t on August 14, 2017, between 11:10 and 11:20 a.m. If you were law enforcement or otherwise very sophisticated, you could probably figure out who controlled these addresses (the long strings of numbers and letters). Bitcoin’s network is not totally anonymous, in other words, though taking certain precautions can make it very hard to link individuals to transactions.

Post-Trust

Despite being absolutely public – or rather because of it – bitcoin is extremely difficult to tamper with. It has no physical presence, so you can’t protect your bitcoin by locking it in a safe or burying it in the Canadian wilderness. In theory, all a thief would need to do to take it from you would be to add a line to the ledger: you paid me everything you have. A related worry is double spending. If a bad actor could spend some bitcoin, then spend it again, confidence in the currency’s value would quickly evaporate.

To prevent either from happening, you need trust. In this case, the accustomed solution would be to transact through a central, neutral arbiter. A bank. Bitcoin has made that unnecessary, however. (It is probably not a coincidence Satoshi’s original description was published in October 2008, when trust in banks was at a multigenerational low.) Rather than having a reliable authority keep the ledger and preside over the network, everyone in the bitcoin network keeps an eye on everyone else. No one needs to know or trust anyone; assuming everything is working as intended, the cryptographic protocols ensure that each block of transactions is bolted onto the last in a long, immutable chain.

Mining

The process that maintains this trustless, public ledger is known as mining. Undergirding the network of bitcoin users, who trade the cryptocurrency among themselves, is a network of miners, who record these transactions on the blockchain.

Recording a string of transactions is trivial for a modern computer, but mining is difficult, because bitcoin’s software makes the process artificially time consuming. Without the added difficulty, someone could spoof a transaction to enrich themselves or bankrupt someone else. They could log it in the blockchain and pile so many trivial transactions on top of it that untangling the fraud would become impossible. By the same token, it would be easy to insert fraudulent transactions into past blocks. The network would become a sprawling, spammy mess of competing ledgers, and bitcoin would be worthless.

Combining “proof of work” with other cryptographic techniques was Satoshi’s breakthrough. Bitcoin’s software adjusts the difficulty miners face in order to limit the network to one new, 1-megabyte block of transactions every 10 minutes. That way the volume of transactions is digestible. The network has time to vet the new block and the ledger that precedes it, and everyone can reach a consensus about the status quo. In there is a “fork” – the chain splits into divergent versions – the longest chain is considered the most valid, since the most work has gone into it.

The size of a block may soon double to 2 megabytes, but the plan is controversial and there is no guarantee that it will be implemented. (See also, Bitcoin vs Bitcoin Cash: What’s the Difference?)

Hashes

Here is a slightly more technical description of how mining works. The network of miners, who are scattered across the globe and not bound to each other by personal or profession ties, receives the latest batch of transaction data. They run the data through a cryptographic algorithm that generates a “hash,” a string of numbers and letters that serves to verify the information’s validity, but does not reveal the information itself.

Given the hash 000000000000000000c2c4d562265f272bd55d64f1a7c22ffeb66e15e826ca30, you cannot know what transactions the relevant block (#480504) contains. You can, however, take a bunch of data purporting to be block #480504 and make sure that it has not been tampered with. If one number were out of place, no matter how insignificant, the data would generate a totally different hash. If you run the declaration of independence through a hash calculator, you get 839f561caa4b466c84e2b4809afe116c76a465ce5da68c3370f5c36bd3f67350. Delete the period after “submitted to a candid world,” and you get 800790e4fd445ca4c5e3092f9884cdcd4cf536f735ca958b93f60f82f23f97c4. Which is more than a little different.

This technology allows the bitcoin network to instantly check the validity of a block. It would be incredibly time consuming to comb through the entire ledger to make sure that the person mining the most recent batch of transactions hasn’t tried anything funny. Instead the previous block’s hash appears within the new block. If the minutest detail had been altered in the previous block, that hash would change. Even if the alteration was 20,000 blocks back in the chain, that block’s hash would set off a cascade of new hashes and tip off the network.

Generating a hash is not really work, though. The process is so quick and easy that bad actors could still spam the network and perhaps, given enough computing power, pass off fraudulent transactions a few blocks back in the chain. So the bitcoin protocol requires proof of work.

It does so by throwing miners a curve ball: their hash must be below a certain target. That’s why block #480504’s hash starts with a long string of zeroes – it’s tiny. Since every string of data will generate one and only one hash, the quest for a sufficiently small one involves adding nonces (“numbers used once”) to the end of the data. So a miner will run [allthedata]. The hash is too big, try again. [allthedata]1. Too big. [allthedata]2. Finally, [allthedata]93452 yields a hash beginning with the requisite number of zeroes. The mined block will be broadcast to the network to receive confirmations, which take another hour or so – though occasionally much longer – to process.

Depending on the kind of traffic the network is receiving, bitcoin’s protocol will require a longer or shorter string of zeroes, adjusting the difficulty to hit a rate of one new block every 10 minutes. Current difficulty is around 923 billion, up from 1 in 2009.

Mining is intensive, requiring big, expensive rigs and a lot of electricity to power them. And it’s competitive: there’s no telling what nonce will work, so the goal is to plow through them as quickly as possible. Miners have begun to form pools, divvying the rewards up among themselves. And the rewards are juicy. Every time a new block is mined, the successful miner receives a bunch of newly created bitcoin: at first it was 50, then it halved to 25, now it is 12.5 ($53,500 at the time of writing). The reward will continue to halve every 210,000 blocks – around four years – until it hits zero, at which point all 21 million bitcoin will have been mined, and miners will depend solely on fees to maintain the network.

That miners have begun to organize themselves into pools worries some. If a pool exceeds 50% of the network’s mining power, its members could potentially spend coins, reverse the transactions, and spend them again. They could also block others’ transactions. That could spell the end of bitcoin, but even a so-called 51% attack would probably not enable the bad actors to reverse old transactions, because the proof of work requirement makes that process so labor intensive. To go back and alter the blockchain at leisure (a time-consuming process under any circumstances), a pool would need to control such a large majority of the network that it would probably be pointless. When you control the whole currency, who is there to trade with?

A 51% attack is a financially suicidal proposition, from miners’ perspective. When Ghash.io, a mining pool, reached half of the network’s computing power in 2014, it voluntarily broke itself up in order to maintain confidence in bitcoin’s value. Other actors, such as governments, might find such an attack interesting, though.

Another source of concern related]]ing to miners is the practical tendency to concentrate in parts of the world where electricity is cheap, such as China.

Keys and Wallets

Bitcoin ownership boils down to two numbers, a public key and a private key. A rough analogy is a username (public key) and password (private key). A hash of the public key, called an address, is the one displayed on the blockchain (using the hash provides an extra layer of security). To receive bitcoin, it’s enough for the sender to know your address. The public key is derived from the private key, which you need to send bitcoin to another address. In other words, the public key corresponds to inputs, the private key to outputs; the system makes it easy for you to receive money, but requires you to verify your identity to send it.

To access bitcoin, you use a wallet, which is a set of keys. These can take different forms, from private web applications offering insurance and debit cards, to QR codes printed on pieces of paper. The most important distinction is between “hot” wallets, which are connected to the internet and therfore vulnerable to hacking, and “cold” wallets, which are not connected to the internet.

Many users opt to use exchanges such as Coinbase, putting the exchange in control of the private keys.

Published at Tue, 15 Aug 2017 16:28:00 +0000

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Wall Street stages biggest rally in nearly 4 months

Wall Street stages biggest rally in nearly 4 months

  @mattmegan5

The S&P 500 rallied 1%, notching its biggest gain since late April. The Dow climbed 135 points.

Worries about saber-rattling between President Trump and North Korea helped drive U.S. stocks last week to their worst performance in nearly five months.

“This is a sigh-of-relief rally. It appears calmer heads will prevail here,” said Art Hogan, chief market strategist at Wunderlich Securities.

Investors poured back into tech stocks, which had tumbled last week as people cashed out of winning stocks like Apple(AAPL, Tech30). The Nasdaq jumped 1.3% on Monday.

There were other signs that fear is fading: Gold retreated for the first time in four days. The VIX(VIX) volatility index plunged by 22% after springing back to life last week.

Prices for ultra-safe government bonds also fell, lifting yields on Treasuries after they hit a six-week low on Friday. CNNMoney’s Fear & Greed Index remains in “fear” mode, though it edged away from the “extreme fear” territory it neared last week.

Wall Street seemed to mostly shrug off Trump’s attack on Kenneth Frazier after the Merck CEO quit the president’s manufacturing council in protest of the president’s response to the events in Charlottesville. Trump said that now Frazier “will have more time to LOWER RIPOFF DRUG PRICES!”

But Merck(MRK) shares rose modestly, while the iShares Nasdaq Biotechnology ETF(IBB) climbed 1%, in line with the rest of the market.

 

Published at Mon, 14 Aug 2017 20:11:21 +0000

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Is NVIDIA Stock Topping Out?

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Is NVIDIA Stock Topping Out?

By Alan Farley | August 11, 2017 — 11:37 AM EDT

NVIDIA Corporation (NVDA) shares sold off more than 5% in the first hour of Friday’s U.S. session, hitting a four-week low at $153.65 after the company reported a strong quarter but disappointed the momentum crowd with lower-than-expected guidance. The decline reinforces a three-month trading range between $138 and $175 while increasing the odds that the graphics giant is grinding through the middle stages of a long-term topping pattern.

The stock traded as low as $150.20 in pre-market action, forcing a supply of weak-handed shareholders back to the sidelines. Modest technical improvement since that time has eased bearish sentiment, but it will take a very strong close to draw fresh buying power into this market leader. That seems unlikely given the broad retreat generated by growing geopolitical risk. (See also: NVIDIA Shares Fall as Investors Fret Over Data Center Growth.)

It has been unwise to bet against NVIDIA in 2017 despite 2016’s parabolic uptrend, but gains have slowed considerably in recent months, with the stock now trading at the same level it did in early June. That is not an issue for long-term shareholders, but the momentum crowd is also holding positions while keeping one finger on the exit button at all times. An orderly decline could turn into a full-scale rout if this group tries to exit positions at the same time.

NVDA Weekly Chart (2011 – 2017)

A post-bear market bounce ended at the .618 Fibonacci sell-off retracement level in the mid-$20s in 2011, giving way to a long-term rounded correction that returned to resistance in the second half of 2015. The stock broke out into the end of that year and took off in a vertical trend advance fueled by the company’s strategic advantages in the growing virtual reality market. The rally continued its incredible trajectory into the end of 2016, posting greater than 300% annual gains. (For more, see: Figuring Out What NVIDIA Is Really Worth.)

NVIDIA shares pulled back in a bull flag pattern in the first quarter of 2017, undercutting the 50-day exponential moving average (EMA), and took off in a May rally wave that reached $168.50 in early June. Slightly higher highs in July and earlier this week failed to attract significant buying interest, while the bearish post-earnings reaction has dropped the price back into a broad trading range that could eventually yield a trend reversal.

Weekly and monthly stochastics oscillators will remain in buy cycles when the trading week comes to an end, indicating that bulls are still in charge. As a result, bearish observations serve as warning signs and red flags rather than sell signals that demand immediate action. However, that will change when the weekly indicator crosses into a sell cycle because the technical dominoes could then fall and generate long-term sell signals. (See also: NVIDIA Stock Risks Falling Below Key Support.)

NVDA Daily Chart (2016 – 2017)

The trading range between the July low at $138 and August high at $175 now becomes the dominant technical feature because a breakdown could drop the stock into the unfilled May 10 gap between $103 and $114. There is plenty of room for bulls and bears to get it wrong within this range-bound pattern, especially if price action fails to hold the 50-day EMA at $155. Shorter-term resistance now lies between $162 and $165 following the breakdown through the July 27 swing low.

The on-balance volume (OBV) indicator looks nearly bulletproof, grinding sideways close to the rally high. However, the stock has posted more than 100% of its average daily volume in the first hour of Friday’s session, telling us to watch for a downturn that will gain significance if it carries through the July low (red line). While that is unlikely to happen in one day, the decline could easily continue into the coming week, especially if geopolitical factors continue to weigh on the broad tape. (For more, see: NVIDIA’s Way to Win AI Chip Share: Give Them Away.)

The Bottom Line

NVIDIA is struggling on Friday morning after a sell-the-news reaction dropped the stock more than 5%. It has now dropped back within the prior trading range, denying breakout buyers while raising the odds that it will carve a longer-term topping pattern. (For additional reading, check out: Is NVIDIA Too Dependent on Bitcoin?)

 

Published at Fri, 11 Aug 2017 15:37:00 +0000

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The Curse of Years Ending in Seven

The Curse of Years Ending in Seven

By: David Chapman | Sat, Aug 12, 2017


“Same as it ever was”
Talking Heads — “Once in a Lifetime”

Ok, maybe it is not fair to call years ending in seven a curse. But years ending in seven have had a checkered record. Since 1830, the Dow Jones Industrials (DJI) has recorded nine up years and nine down years ending in seven. Years ending in seven have the second worst year record for the DJI. The leader or, in this case, the biggest loser is years ending in three. Its record is nine up years and ten down years. As to the biggest winner, well, that honour goes to years ending in five with a record of sixteen up years vs. three down years.

Years ending in seven are the leader in one category. They have the most losses totalling 20% or more. The total is four. 1857 saw the DJI lose 31%, in 1907 the DJI was down 37.7%, in 1917 the DJI dropped 21.7%, and finally in 1937 the DJI fell 32.8%. Years ending in seven have also been, overwhelmingly, associated with stock market panics and crashes. Note the following:

Year Panic or crash What happened
1837 Panic of 1837 A financial crisis, major recession/depression deflation, bank collapses, high unemployment. The panic was triggered by a collapse of speculative lending, the bursting of a land bubble, and a collapse in cotton prices. Lasted from about 1837 to 1844. The Mexican-American war followed from 1846–1848.
1847 Panic of 1847 This panic was short-lived. It centered mainly in Great Britain and was associated with the end of the 1840s railway boom. It was also triggered by a change in banking that required banks to shore up their reserves with gold and silver. The panic shattered a vast number of businesses.
1857 Panic of 1857 The first worldwide financial crisis. Businesses failed, banks collapsed, railways declined, thousands lost their jobs. The collapse was triggered after the sinking of the SS Central America that was carrying an important shipment of gold needed to shore up currencies. A major trust company collapsed which triggered a series of bankruptcies. The American Civil War followed from 1861–1865.
1907 Panic of 1907 The Panic of 1907 was also known as the Banker’s Panic or the Knickerbocker Crisis. Stock markets fell almost 50%. There were runs on banks and trust companies. Many state and local banks and businesses went bust. It was started by a failed attempt to corner the market by the United Copper Company. NYC’s third largest trust, the Knickerbocker Trust Co., was at the heart of the panic. The panic was saved by J.P. Morgan who led bankers to shore up the financial system. The panic led to the formation of the Federal Reserve in 1913. WW1 followed from 1914–1918.
1937 Crash of 1937 The stock market crash of 1937 was a secondary collapse within the context of the Great Depression. The DJI fell about 40% in 1937/1938. It was triggered by a negative reaction to Roosevelt’s New Deal. A weak stock market persisted until 1942 when the final bottom was seen. WW2 followed from 1939–1945.
1987 Crash of 1987 October 19, 1987 was known as “Black Monday.” The stock market peaked in August 1987, up some 44% from the previous year’s close. Rising interest rates and a growing US trade deficit helped trigger the crash, but program trading exacerbated it. The expectation was it was going to result in another Great Depression. It didn’t, and by 1989 the DJI had recovered its 1987 high. The Gulf War followed in 1990. The DJI lost upwards of 40% in the crash, but 1987 ended the year with a small gain.
1997 Asian financial crisis, October 1997 mini-crash Overheated stock markets and the busting of currency pegs in Asia triggered an Asian financial crisis, starting with the collapse of the Thailand Bhat and subsequent stock market crashes in Thailand, Indonesia, South Korea, and Philippines as well as Hong Kong. The DJI followed with a mini-crash in October 1997, but the year 1997 ended in the black for the DJI. A bigger mini-panic was sparked in 1998 with the Russian financial crisis. This resulted in huge liquidity injections into the financial system to prevent a collapse, leading directly to the dot.com bubble that culminated in 2000 leading to the High-Tech/Internet collapse of 2000–2002.
2007 Financial crisis of 2007–2009 No, there was not a financial panic in 2007, but the genesis of the financial panic of 2008 was sown in 2007 in July with the collapse of some hedge funds managed by Bear Stearns because of collateralized sub-prime mortgage loans. The market peaked in October 2007. In 2008, the financial panic saw markets fall over 50%.
Source: David Chapman

An interesting side note to the above panics dating from the 19th through to the 21st century was the famous tulip mania panic which ended in 1637 after four years of sharply rising tulip prices. There was also a panic in 1797 after the collapse of a land speculation bubble in 1796. Numerous merchant firms collapsed in both the US and Britain. Panics and crashes are words that could easily be associated with years ending in seven.

Gold too seems to respond to years ending in seven. While gold’s free trading history commenced only in the 1970s, it is interesting to note that of thirteen times gold saw gains of 20% or more in a year, three of them occurred in years ending in seven—1977, 1987, and 2007. And while gold has had only four years where it lost more than 20%, one of them naturally occurred in a year ending in seven—1997. Gold thus far in 2017 is up around 12%. Could gold see another 20% plus gain in 2017? Time will tell. So far, every year ending in seven since the 1970s has seen gold make a 20% or more move up or down.

Given the years ending in seven and their propensity for panics and crises, it might not be a surprise that seasonality also plays a role. According to research carried out by Don Vialoux and Jon Vialoux of Equity Clock and Timing the Market www.equityclock.com, www.timingthemarkets.com the markets’ ten-year cycle seasonality for years ending in seven is quite negative. The two charts below draw this phenomenon quite nicely.

DOW 10-Year Cycle Seasonality - Years ending in 7
Source: www.equityclock.com

S&P500 10-Year Cycle Seasonality - Years ending in 7
Source: www.equityclock.com

The pink line on both the DJI and S&P 500 chart is normal seasonality for an average year. Markets tend to rise in the early part of the year until May and then over the next four months the markets tend to be choppy (sell in May and go away?) August tends to see tops and the market sells off and is weak into October/November before regrouping and starting another rise into the first few months of the New Year. Remember, seasonality is an observation over a long period and there are years where it might not work.

But when the seasonality is applied to years ending in seven, things have a tendency to get “nasty” following the July/August top. It ends up being a free fall into the October/November period. Again, this is not an “every year ending in seven” occurrence. But there is strong tendency for the markets to react negatively in years ending in seven. Given our history of panics, crashes, and financial crisis in years ending in seven the seasonality of years ending in seven does not seem to be much of a surprise.

So here we are in a year ending in seven in August and we have two world leaders threatening to blow each other and the world to smithereens. Madmen we say? Time will tell. But if the tale of the tape is correct, expect a market sell-off that could take us into October/November before we find a low. The sell-off may already be underway.

If our wave count is correct, this should only be a minor wave 4 up from the February 2016 low. The February 2016 low was, we believe, an intermediate wave (4) up from the major low of March 2009. Intermediate wave (2) was the 2011 EU crisis. If this is correct, then we know we are now in intermediate wave (5). Following a correction now for wave 4 we should then have one more run-up to new highs. That could be a blow-off top that carries us into the first quarter of 2018. But it could also be a feeble rise to a small new top or a double top scenario as we saw in 2007 following the initial breakdown in July of that year. We presume it would get underway with an easing of world tensions and the madmen not blowing each other (and us) to smithereens. Saner heads prevail (we hope). Once the fifth wave is complete, however, a major bear market could well get underway. But that is not expected until sometime in 2018.

Dow Jones Industrial Average 2016-2017
Source: www.stockcharts.com

A normal correction now could take us down to at least 21,165 or the uptrend line from the February 2016 low currently near 20,750. A worst-case scenario could drop us to 19,525, the Fibonacci 61.8% retracement level of the move from the November 2016 low to the recent top. Something bigger would be in play if we took out the top of wave 1 at 18,167. But we doubt that at this time. It is, however, a consideration.

We also note that this is the first year of the Presidential cycle and the first year tends to be the weakest in the four-year Presidential cycle. Not helpful is the failure to see any major legislation since Trump took office in January, the looming US debt limit, budget and tax reform that also could prove difficult to pass given the record to date. Add in the ongoing conflict with North Korea that is grabbing the headlines and the markets could see a rough ride into the fall.

So, are years ending in seven a curse for the stock markets? Well, the record is not good. Panics, crashes, and financial crises have been frequent. The seasonality is negative, more negative than average seasonality. One might even say the market reaction is “the same as it ever was.”


David Chapman

David Chapman
The Chapman Report

Disclaimer: David Chapman is not a registered financial advisor, nor
an exempt market dealer (EMD). We do not and cannot give individualized market
advice. The information in the newsletter is only intended for informational
and educational purposes. It should not be considered a solicitation of an
offer or sale of any security. The reader assumes all risk when trading in
securities and David Chapman advises consulting a licensed professional financial
advisor before proceeding with any trade or idea presented in this newsletter.
David Chapman may take a position and sell a position in any security mentioned
in this newsletter. We share our ideas and opinions for informational and educational
purposes only and expect the reader to perform due diligence before considering
taking a position in any security. That includes consulting with your own licensed
professional financial advisor.

Copyright © 2017 David Chapman

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Published at Sat, 12 Aug 2017 09:16:48 +0000

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Capturing Value and Momentum in the Stock Market

 

Capturing Value and Momentum in the Stock Market

In mid-2014 I hit upon an idea for analyzing the strength and weakness of the overall stock market. Suppose we took every stock in the New York Stock Exchange and assessed whether it gave a buy signal, a neutral signal, or a sell signal for a standard technical indicator, such as Bollinger Bands. Such a measure would capture the breadth of strength and weakness for stocks as a whole, not just for the index itself.  Would this be a useful measure?  It turns out that the measure was indeed useful and I began collecting the data daily from the Stock Charts website.

Then I hit upon another idea.  The signals from cumulated stock performance on one indicator (such as Bollinger Bands) were different from the signals from other indicators (such as RSI and Parabolic SAR).  Might it be useful to create an indicator of indicators? This would show occasions when we have strength and weakness across all stocks *and* all indicators.  

The resulting cumulative indicator measure is charted above from 2016 forward (indicator in red; SPY in blue).  Even within the considerable uptrend we’ve had over that period in SPY, we’ve seen relative periods of overbought and oversold in the measure.  Note that we currently stand at a significantly oversold level.

Going back to June of 2014, when I first began accumulating these data, next ten day returns in SPY have averaged +.01% when we have been in the top half of the distribution for the cumulative measure.  When we have been in the bottom half of the measure, next ten day returns in SPY have averaged +.63%.  This is a significant value effect.  Returns have been significantly better over a swing period when we’ve been oversold than when we’ve been overbought.  If we break down returns by quartiles, the upside returns are even more striking in the weakest (most oversold) quartile, which is where we stand now. Interestingly, when the indicators have been simultaneously strong, we’ve seen superior upside returns over the same ten day horizon.  

In other words, the cumulative measure is capturing both a value effect (buy when things have gotten weak) and a momentum effect (buy when there is a broad thrust higher). Returns have been subnormal if we are not broadly weak or broadly strong.

This is a nice illustration of the value of “big data” and especially the value of well-conceived unique data sets.  As a discretionary trader, I find it crucial to be quantitatively informed.  I observe that integration of discretionary and quantitative among the great majority of the successful traders and portfolio managers I work with.  Even for longer time frame active investors, timing market entries and exits with shorter-term measures that capture value and momentum can meaningfully enhance returns.

 

Published at Sat, 12 Aug 2017 10:30:00 +0000

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6 Important Retirement Plan RMD Rules

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6 Important Retirement Plan RMD Rules

By Denise Appleby | Updated August 12, 2017 — 6:00 AM EDT

The IRS requires that you begin receiving required minimum distributions (RMD) in the year you reach age 70½. That sounds simple enough, but unfortunately, calculating these distributions is not always easy, as there are a number of factors to consider. While a tax professional can certainly help you with this, it’s a good idea to get to know the requirements that must be met in order to avoid IRS penalties. Here’s a look at some of the key rules that affect RMD calculations.

Rule 1: RMD Amounts Are Not Rollover Eligible

Amounts representing RMDs must not be rolled over to an IRA or other eligible retirement plan and cannot be converted to a Roth IRA. If you roll over or convert your RMD, it will be treated as an excess contribution, which must be removed from the account by a certain time in order to avoid taxes and penalties. The first distribution from your IRA for any year an RMD is due is considered to be part of your RMD for that year and is therefore not rollover eligible.

“Be careful if you decide to roll an IRA over after the age of 70½. Take your distribution first!” says Patrick Traverse, founder of MoneyCoach, Charleston, S.C. (For background reading, see Preparing for Retirement Plan RMD Season.)

Example
Mary reached age 70½ in 2017. Her RMD for 2017 is $15,000. Since 2017 is the first RMD year for Mary, she may wait until April 1, 2018 to distribute her RMD for 2017. During 2017, Mary received a distribution of $7,000 from her IRA. Even though Mary is not required to take her 2017 RMD until April 1, 2018, the amount she received in 2017 cannot be rolled over as it is attributed to her RMD for 2017: Any amount distributed during a year for which an RMD is due is considered to be part of the RMD until the full RMD amount has been distributed. If Mary had taken a distribution of $17,000, the amount that is in excess of the RMD amount ($2,000) is rollover eligible because the RMD for the year would already have been satisfied.

Rule 2: Aggregation of RMDs

If you participate in more than one qualified plan, your RMD for each plan must be determined separately, and each applicable amount must be distributed from the respective plan. RMD amounts for qualified plans cannot be distributed from IRAs and vice versa. However, if you own multiple IRAs or multiple 403(b) amounts, you may aggregate the RMD for all similar plans (Traditional IRAs or 403(b)s) and then take the amount from one account of each type of plan.

Example
Sam, a 75-year-old retiree, has two Traditional IRAs and two 403(b) accounts. Sam also has assets in a profit-sharing plan and a 401(k) plan with past employers. The RMD amount for each of Sam’s retirement accounts is the following:

IRA No. 1 – $15,000

IRA No. 2 – $8,000

403(b) No. 1 – $6,000

403(b) No. 2 – $4,500

Profit-sharing account – $10,000

401(k) account – $12,000

Here are Sam’s options for his various accounts:

  • For IRA No. 1 and IRA No. 2, Sam may either distribute each amount from each IRA account, total the amounts and distribute it from one IRA, or take any portion of the combined amounts from one of the IRA accounts.
  • For 403(b) No. 1 and 403(b) No. 2, Sam may either distribute the amount from each 403(b) account, total the amount and distribute it from one 403(b) account, or take any portion of the combined amounts from one of the 403(b) accounts.
  • The amount of $10,000 must be distributed from the profit-sharing plan account and the amount of $12,000 must be distributed from the 401(k) account. These amounts cannot be combined.

Rule 3: Transferring Your IRA in an RMD Year

Prior to 2002, many IRA custodians would not allow an IRA owner to transfer an RMD amount to another IRA custodian. The IRA owner would have been required either to distribute the RMD amount prior to the transfer or leave the RMD amount behind to be distributed by the applicable deadline. This is no longer required. As allowed by the final RMD regulations, you may transfer your entire IRA balance even if an RMD is due, provided you take the RMD from the receiving IRA by the applicable deadline.

Rule 4: Death and Divorce Do Not Affect the Current Year’s Calculation

If you were married on January 1 of the year for which the calculation is being done, you are, for RMD calculation purposes, treated as married for the entire year even if you divorce or your spouse dies later in that year. This means that if your spouse beneficiary is more than 10 years younger than you, you may still use the “Joint Life and Last Survivor Expectancy” Table II in Appendix B of IRS Publication 590-B. Any new beneficiaries are taken into consideration for the following year’s calculation. (For more insight, read Life Expectancy: It’s More Than Just a Number.)

“Upon divorce, RMDs and retirement assets in general can become very tricky, and can vary from state to state,” says Dan Stewart, CFA®, president, Revere Asset Management, Inc., Dallas Texas. “And community property states would have different rules than other states. So competent council is important, especially to avoid or minimize taxes.”

Rule 5: Family-Attribution Rule

An individual who owns more than 5% of a business is not allowed to delay beginning the RMD for a non-IRA retirement plan beyond April 1 of the year following the year he or she reaches age 70½, even if the individual is still employed. If you own more than 5% of a business and your spouse and/or children are employed by the same business, your ownership may be attributed to them. This means that they, too, may be considered owners and could be subject to the same deadline as you.

Rule 6: IRA Custodian Reporting Requirement

Each year the custodians/trustees of your traditional IRA, SEP and/or SIMPLE IRA must send you an RMD notification as long as they held your IRA on December 31 of the preceding year. This notification must be sent to you by January 31 of the year for which the RMD applies. Some custodians will include a calculation of your RMD amount for the year, while others will inform you that an RMD is due and only offer to compute the amount upon your request.

The Bottom Line

If you know someone who has reached RMD age, be sure to tell him or her about the rules. Bear in mind that the rules discussed here are certainly not exhaustive. Individuals should check with their tax professionals to ensure that RMD calculations and distributions meet regulatory requirements.

 

Published at Sat, 12 Aug 2017 10:00:00 +0000

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Schedule for Week of Aug 13, 2017

 

Schedule for Week of Aug 13, 2017

by Bill McBride on 8/12/2017 08:11:00 AM

The key economic reports this week are July retail sales and Housing Starts.

For manufacturing, July industrial production, and the August New York and Philly Fed manufacturing surveys, will be released this week.

—– Monday, Aug 14th —–

No major economic releases scheduled.
—– Tuesday, Aug 15th —–

Retail Sales 8:30 AM ET: Retail sales for July will be released.  The consensus is for a 0.3% increase in retail sales.This graph shows retail sales since 1992 through June 2017.

8:30 AM: The New York Fed Empire State manufacturing survey for August. The consensus is for a reading of 10.0, up from 9.8.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for June.  The consensus is for a 0.4% increase in inventories.

10:00 AM: The August NAHB homebuilder survey. The consensus is for a reading of 65, up from 64 in July. Any number above 50 indicates that more builders view sales conditions as good than poor.

—– Wednesday, Aug 16th —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.Total Housing Starts and Single Family Housing Starts8:30 AM: Housing Starts for July. The consensus is for 1.225 million SAAR, up from the June rate of 1.215 million.

This graph shows total and single unit starts since 1968.

The graph shows the huge collapse following the housing bubble, and then – after moving sideways for a couple of years – housing is now recovering.

2:00 PM: FOMC Minutes for the Meeting of 25 – 26, 2017

—– Thursday, Aug 17th —–

8:30 AM ET: The initial weekly unemployment claims report will be released. The consensus is for 241 thousand initial claims, down from 244 thousand the previous week.8:30 AM: the Philly Fed manufacturing survey for August. The consensus is for a reading of 17.0, down from 19.5.

Industrial Production9:15 AM: The Fed will release Industrial Production and Capacity Utilization for July.

This graph shows industrial production since 1967.

The consensus is for a 0.3% increase in Industrial Production, and for Capacity Utilization to increase to 76.7%.

—– Friday, Aug 18th —–

10:00 AM: University of Michigan’s Consumer sentiment index (preliminary for August). The consensus is for a reading of 93.9, up from 93.4 in July.10:00 AM: Regional and State Employment and Unemployment (Monthly) for July 2017

 

Published at Sat, 12 Aug 2017 12:11:00 +0000

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