MORNING BID – I was dreaming when I wrote this…

Aug 25, 2014 14:37 UTC

The move by Roche to buy biotech company Intermune for $8.3 billion at a 38 percent premium isn’t going to make Janet Yellen happy, given her thoughts on the valuation of certain biotechnology and Internet retailing names. Still, with the Fed chair on board for low rates for some time given the slack situation in the labor market that the Fedsters keep talking about (basically, the unemployment rate, like the old grey mare, ain’t what she used to be), the long march to 2,000 on the S&P looks like it’s probably going to be over before long (it’s been done on an intraday basis, and now we’re just waiting on a close above that level), representing a tripling in that average in a bit more than five years and raising again all those questions about whether this all makes sense and if anyone cares anyway.

On the first point, well, nobody knows anything – earnings were generally strong in this most recent quarter, particularly when one expands the universe to the Russell 1000, where Credit Suisse points out more companies that are beating analyst expectations are growing sales, a sign of improved demand.

About 70 percent of the Russell 2000 beat on earnings estimates (about 62-65 percent if you exclude the ones that only beat due to reducing share counts through buybacks), and of that group, 84 percent did so while growing sales, pointing at least to some hope on improved demand. But there’s always weakness out there somewhere, and it appears to be among the true small-caps – the Russell 2000, which has been trailing the S&P and yet still looks overvalued based on a number of measures and has been seeing more negative revisions even as the stocks struggle.

The weakness in those names, along with some lackluster stock performance out of consumer discretionary stocks, explains in part why hedge funds are once again struggling, up less than 1 percent for the year compared with about an 8 percent gain in the S&P 500 for the year (after 2013’s ridiculous rise, of course, when hedge funds wouldn’t have been expected to keep up in the first place).

Still, it’s been a rough outcome this time this year – heavy overconcentration in a lot of the social media names early in the year dampened performance when those stocks went belly-up, and after that heavy exposure to discretionary shares did them in, so just kind of an uphill battle ever since – which actually suggests the desire to catch up may result in more gains for the rest of the market throughout the rest of the year. To wit – Credit Suisse’s most recent data shows health care becoming a net overweight position among hedge funds, with long exposure increasing in the last few months.

MORNING BID – To my brother Russell…

Jun 27, 2014 14:35 UTC

The index business is a big business, so it’s not for nothing that the London Stock Exchange agreed on Thursday to buy Frank Russell Co and its Russell Indexes.

Those indexes are benchmarked to more than $5 trillion in index funds and puts the LSE in the third position behind S&P Dow Jones and MSCI in the ETF world as well, a lucrative business that involves using their well-known indexes like the Russell 2000 and its “value” and “growth” versions into a multitude of funds.

The iShares Russell 2000 ETF is generally in the top five in terms of daily trading volume among ETFs, and the Direxion triple-short Russell ETF hovers around the top 10; several other leveraged ETFs linked to the small-cap index are big ones too, and we haven’t even gotten to all of the regular funds that index to the Russell.

With that in mind the market awaits the big rebalancing of Russell Indexes which will cross at the end of the day in a massive trade (Credit Suisse estimates about $42 billion in trading on the “cross,” that is, the moment when everything rebalances all at once in an event that sometimes seems like it should be a Y2K-style debacle, only it isn’t).

Of course, big index desks have been preparing for this for months, with some of the preliminary trading to position for companies they expect to see a bigger weighting even starting as early as January. Credit Suisse notes that some index trading desks likely make most of their profit-and-loss for the year as a result of this trade.

That said, this year’s notable additions to the Russell 1000 index are a bit underwhelming: Tyco has come back to the fold not long after being banished due to domicile concerns, while Ally Financial and CBS Outdoor Americas are also among those coming into the index.

The Tyco addition will produce a trade of about $648.3 million, the largest of the day, and significant buying will also be notable in Twitter and Facebook – $495.6 million and $452.8 million, respectively, ranking them fourth and fifth.

Those two stocks are seeing their share in the Russell 1000 increase as well – explaining the adjustment there.
Some of the trading, meanwhile, will relate specifically to shifts in a stock’s growth/value profile, such as American Airlines, expected to see an index trade worth about $558.7 million, second only to Tyco – the result of it being classified as 100 percent growth, rather than the 58/42 split from last year, according to Credit Suisse.

MORNING BID: Rebalancing act

Mar 21, 2014 13:37 UTC

There have been a few quiet days of trading lately, but today will not be one of them. Friday includes the quarterly expiration of index options and futures and single stock options and futures, and also a huge index rebalancing that will result in a lot of trading at today’s close.

Credit Suisse strategists estimate about $14 trillion in gross trading for SPX indexers and an additional $6 billion for other indexes, including the Nasdaq, Dow Jones total market index and a couple of FTSE benchmarks as well. This kind of trading is usually pretty methodical, but it will kick volume into the stratosphere – for the day, anyway.

What’s notable is where the trading is expected to take place and the stocks most affected. The biggest net adds for the day are Facebook, with an estimated $604 million in net purchases needed, thanks to its increased float, and Keurig Green Mountain at $564 million. Other notable names seeing their representation in the various averages grow include Google, Tesla Motors and Zoetis.

On the flip side, IBM leads the list of the names expected to see selling, with a net reduction of about $807 million in representation in index funds. That could lead to a bit of selling pressure among those funds, and other big share-buyback companies like Exxon Mobil, Apple, and Cisco Systems. Most of this may be on the margins, but with markets unlikely to get too long in front of the weekend, thanks to true uncertainty over the Russia-Ukraine tensions, this kind of activity could take a front seat, if only for a day.

Optimism in Facebook options, with rebalancing at day’s end

Dec 20, 2013 15:06 UTC

Okay, the year *really* ends today, as the next two weeks will feature a market holiday and some real thin liquidity. Options activity was brisk on Thursday as investors dumped positions ahead of today’s quadruple-witch expiration of index futures and options.

One of the more interesting aspects of the trade today will involve Facebook, which is being added officially to the S&P 500 and therefore should have a big trade upon the close of action when the index funds will have to add the stock officially to their funds. Howard Silverblatt, S&P’s index analyst, puts the estimated share buy at about $10.5 billion (so it’s convenient that Mark Zuckerberg & Co are selling a 70-million-share secondary, much of which is going to go to index managers who need to make room by selling everything else).

Still, this buy is only a part of it, as the stock has been subject to significant upward pressure in recent weeks, thanks to emulators who try to mimic the index – or beat it by buying most of the index and then using call options or other structures to try to come out ahead of it. (Silverblatt says they’re index managers in all but name, because then, “I’d have to charge them a licensing fee.”)

It’s helped the stock – whose disastrous May 2012 IPO still stands as a black mark for Nasdaq OMX – which is now trading near all-time highs and has gotten past several months of underperformance that followed the ridiculous first day of trading. Shares have more than doubled this year and there’s been heavy activity in the options market as well, where Schaeffer’s Investment Research analyst Beth Gaston pointed out Thursday that 9 of the 10 most popular options contracts were in the front-month December contract.

The optimism has been increasing in the options world as well when it comes to these shares – its current put-to-call option interest ratio is higher than 89 percent of readings in the last year, implying expectations for more gains going forward.

Overall action is going to be mostly interesting at the close, as the market gets a big rebalancing with about $31 billion in share rebalancing for the S&P 500 index and smaller rebalancings for a number of other major averages. The biggest net buy for the S&P is, as said, Facebook – though Credit Suisse analysts note this morning that some of this has been now offset by the secondary offering. Other big net buy-on-close names are going to be General Motors ($1.05 billion), Alliance Data Systems ($464 million), while the net sales will be led by Apple ($739 million) and Pfizer ($532 million).