All Exchange Traded Products Are NOT Created Equal

Exchange traded products have exploded in both popularity and size. While most of these investments are ETFs (or Exchange Traded Funds), a handful are ETNs (or Exchange Traded Notes). ETFs actually hold assets in the underlying index the fund is designed to track. ETNs, on the other hand, are debt securities issued by the provider, whose return is intended to track a particular index. Because it is a debt instrument, however, there are additional credit risks, and many providers have pulled back their support of such products, leaving some investors holding illiquid securities. See article here, WSJ.

Massive Futures Trade

On December 7, 2016, a single trader apparently took a position of $1.8 billion in S&P500 futures. This was the largest trade of the year, more than doubling the size of the next largest trade. There is speculation regarding the reason behind the trade, but the result was an increase in buying across other traders, driving the market to high levels. See article here, WSJ.

Under Armour Share Classes

Under Armour has three share classes. The B-class is held by the founding owner (Kevin Plank), giving him control of about 65% of the voting rights. The A-class and C-class shares are both publicly traded, with the C-class having no voting rights. While this should imply a lower valuation, the C-class shares are trading at a 25%+ discount, which is more than expected. So, some hedge funds are undertaking a long-short arbitrage, going long in the C-class and short in the A-class. See article here, WSJ.

Issuers Continue to Use Long Term Bonds

The government of Austria just issued a 70-year bond, locking in a low rate of 1.5%. Issuers are taking advantage of low borrowing costs, with some even going out 100 years (so-called century bonds). See article here, Bloomberg.

Passive Investing Continues to Gain Momentum

Actively managed mutual funds have lagged passively managed funds, particularly over longer investment periods. Much of this is likely due to the lower fees charged by passively managed funds. As investors have become more knowledgeable about this relationship, money has flowed at a faster rate into passively managed funds. See article here, WSJ.

What's in a Name? Does Ticker Symbol Matter?

A recent study reveals that companies with ticker symbols that are easier to pronounce (and remember) generally trade at higher values. See article here, WSJ.

Stock Splits Fade

In the past, most companies used stock splits to keep share prices within "acceptable" levels. This facilitated trading and made round lot transactions easier. However, with more efficient trading tools, such benefits no longer exist. Further, recognizing that splits are value neutral, many companies have shunned their use. See article here, WSJ.

Exchange Consolidation Continues

The CBOE (Chicago Board Options Exchange) announced a deal to acquire upstart Bats Global Markets. The acquisition will combine an "old school" options exchange with a firm focused on high frequency and global stock trading. See article here, WSJ.

Restructured Trading Halts

In light of the "Flash Crash" in May 2010, exchanges implemented circuit breakers for individuals stocks. Using what has been learned from more recent events, the intent is to further restructure the responses to such trading halts. See article here, WSJ.

Mutual Fund Managers Miss Out on Apple Rebound

Apple stock has had a strong return this quarter, rising over 20%. However, almost 300 mutual funds sold their positions in Apple prior to this rebound. So, are professional managers really better than individual investors? Is this evidence in favor of market efficiency? See article here, Bloomberg.

Dividend Stock Valuations

In a search for yield, investors have actively purchased dividend paying stocks. As a result, prices have risen (and dividend yields have fallen). The question has thus become whether these prices are too high. See article here, WSJ.

REITs Break-Out from Financials

REITs have historically been considered part of the financial sector. With its growth and relative importance, however, REITs have been carved out to create a new industry sector, the first in almost 20 years. See article here, Investment News.

Contrarian ETF

Contrarian investors seek to buy stocks that other investors are selling. An extreme example would be buying stocks that have high levels of short interest. A recently created ETF intends to do just that, with the goal of benefiting from potential price reversals, as well as from potential short squeezes that occur as short sellers rush to cover their positions. See article here, ETF.com.

Can We Rely on Accounting?

Determining firm value relies on estimating items such as cash flows and discount rates. Much of this stems from basic accounting statements. However, as a recent WSJ article  notes, the backward focus of accounting is often unreliable in predicting future values necessary for valuation.

Interest Rates and Intrinsic Value

In theory, the intrinsic value of a financial asset is simply the present value (PV) of its future cash flows. As in any PV calculation, the discount rate is determined by the market interest rate plus a risk premium. With lower interest rates, all else equal, PV is higher. Thus, if market interest rates rise, asset values (and associated market prices) could be set for a fall. See article here, WSJ.

Rate Increase Creates Risk for Both Bond and Equity Buyers

Long-term U.S. bonds continue to be in demand, even in the face of a potential increase in interest rates. Duration, which measures a bond's price sensitivity to interest rate changes, is higher for longer-term bonds, suggesting that buyers could be in for a big surprise if the Federal Reserve proceeds with the rate increase. See article here, WSJ. At the same time, equity markets fell with the renewed expectation of a rate increase. See article here, WSJ.

Yield Curve Flattens

The spread between short- and long-term government bonds has decreased, creating a so-called flatter yield curve. This move has been driven by two factors. First, there is an increased belief that the Federal Reserve will raise interest rates, which has driven up the yields on shorter-term bonds. Second, foreign buyers have been acquiring longer-term U.S. bonds as they have a higher yield than their home country offers. This has pushed down the yield of longer term bonds, creating the flatter yield curve. See article here, WSJ.

Synthetic Mortgage Backed Security

Put-Call Parity describes an equality relationship that must exist across call and put options on a given security, assuming the same expiration date and exercise price. Given this relationship, traders are able to create "synthetic" positions. Such positions allow investors to mimic the payoffs of an actual position in the underlying investment. Recently, the lack of available liquidity in CMBS (commercial mortgage backed securities) has led investors to create synthetic positions in these assets. See article here, Reuters.

Short Interest at High Levels

Short interest has been high even though the market has recovered significantly. In fact, in the wake of the recovery, short sellers have increased their positions. If they are correct, we could see a market pullback. Their short positions, however, create a large "sideline" demand, which has actually made market moves more positive in the wake of neutral news (due to short covering). See article here, Yahoo/Bloomberg.

China Looks to Add Credit Default Swaps

Credit Default Swaps (CDSs) enable investors to hedge the risk of bond (or other credit securities) default. Like any derivative, they essentially allow investors to transfer risk -- from hedgers to speculators (or even between hedgers or speculators with different exposures). See article here, Reuters.

Income and Spending

Normally higher incomes lead to higher spending, but recent increases in income seem to be headed into savings. This creates a mixed picture for consumer stocks. See article here, LA Times.

Conflict of Interest in 401(k) Funds

Companies often hire third party administrators (TPAs) to manage their respective 401(k) plans. Some companies simply provide documentation and advice; however, other TPAs actually offer their own proprietary (in-house) funds as investment alternatives. New research (see Journal of Financial Research) shows that these funds often carry higher fees and have lower returns, illustrating the impact of a conflict of interest. This is particularly pronounced for banks and insurance companies acting as TPAs.

The Rise of the Robo-Advisor

In response to high fees and varying levels of quality/service across traditional human advisors, new firms are transitioning to a fully automated framework. These so-called "Robo-Advisors" provide fully automated allocation and management strategies. This approach significantly reduces costs and standardizes risk-return matching strategies. See article here, CFA Institute.

Nasdaq to Acquire ISE

Nasdaq is set to acquire the International Securities Exchange (ISE). The combined firm will manage six exchanges, representing 38 percent of US options trading. This will surpass the CBOE, which manages about 27 percent of the option trading market. See article here, Bloomberg.

Target Date Funds and Dollar Cost Averaging

Target Date Funds simplify the investment process for investors, as such funds oversee changing asset allocations through time. A secondary benefit is that with these "set it and forget it" funds, investors are less likely to try to time the market. This is good since such activity generally hurts (rather than helps) most investors. In fact, staying the course allows investors to benefit from downside market volatility, as continued investment enables investors to buy more shares at lower prices, so-called dollar cost averaging. See article here, WSJ.

Correlation Concerns

Modern Portfolio Theory (MPT) is based on the notion that diversification creates better (a.k.a., more efficient) portfolios. The benefit of the diversification stems from less than perfect correlations between asset classes. However, during times of extreme stress, and even in recent years with market integration, correlation values have increased. This calls into question whether diversification will bring the full benefit that it is expected to provide. See article here, Bloomberg.

Negative Interest Rates

Sweden's central bank has followed other major countries and further reduced its interest rate -- making it even more negative. With negative interest rates, banks that store money with the central bank must pay to do so (rather than earning interest as would normally be the case). The goal is to induce banks to hold less money (thereby lending more and increasing economic activity). See article here, The Telegraph.

Credit Default Swaps Signal Warning

Credit Default Swaps allow investors to hedge the risk of default on underlying debt, essentially acting as put options. Recently, CDS prices on the debt of banks such as Goldman Sachs and Deutsche Bank have increased in price, signaling a larger possibility of default. Many investors view CDS prices as a barometer of faith, thereby suggesting that bank stocks are poised for further declines. See article here, WSJ.

Short Covering in Oil Drives Prices

Suppliers reported an increase in crude oil inventories, yet contrary to supply and demand fundamentals, prices rose. Much of this is attributed to short sellers covering their positions at what is expected to be the low point in prices. See article here, Reuters.

Yield Curve Irrelevant?

When longer term interest rates fall below shorter term interest rates (a so-called inverted yield curve), economists generally warn of an impending recession. However, with short term rates so low, the usefulness of this indicator may be fading. See article here, Bloomberg.

Mutual Fund Fees Continue to Fall

Passive funds have historically outperformed active funds, and much of this difference is likely driven by the lower fees charged by passive funds. A recent article (Financial News) discusses the impact on both investors and the industry. Moreover, the industry has begun to eliminate questionable fees, such as the 12b-1 fee (see WSJ article here).

David Bowie: Finance Genius?

Famous musician David Bowie just passed away. While most people remember him for his music, he is also famous in the finance area. Bowie was among the first to offer an asset-backed security, which in his case was based on future royalties from his songs. In recognition, this type of asset is often referred to as a "Bowie-bond." See article here, Bloomberg.

Mutual Fund Fees

As we all know, fees impact net returns. For mutual funds, aside from any load, the two primary fees charged are management fees and 12b-1 fees. The management fees are easy to understand. The 12b-1 fees, however, are not. They are designed to cover distribution costs, but this is a broad term. In reality, much of this fee is used to pay brokers/advisors for directing client business to the funds. As a recent article (Investment News) suggests, the SEC may begin to limit such payouts.

China Suspends Circuit Breakers

Circuit breakers are designed to slow down (or even halt) panicked selling. However, Chinese authorities recently suspended their newly implemented circuit breakers, as they seemed to be increasing panic (as opposed to reducing it). See article here, Finance Asia.