Market Report and High Frequency Trading

Last week, March 31-April 4, all three of the major indexes fell; NASDAQ -2.6%, DOW -1%, S&P 500 -1%. Much of the decline took place the afternoon of April 4, when investors rushed for the exits. Stocks such as Facebook(-4.6%), Priceline(-4.79%), Amazon(-3.18%), LinkedIn(-6.29%), and Tesla(-5.84%) all fell dramatically as questions about future prospects arose. In addition Bio-tech and Healthcare stocks all fell and the technology sector fell -0.5% with Microsoft, IBM, and Oracle all experiencing losses of some degree.

The much anticipated job report was also released last week, revealing that for the month of March 192,000 jobs were created, which was less than expected. However this is unlikely to influence the Federal Reserve to adjust its policy of slowly drawing down the economic stimulants. It was also revealed that the unemployment rate has held steady at 6.7%.

This week in the market has been very significant as the Federal Open Market Committee’s minutes from their March meeting were released, revealing a more dovish stance that expected. In response U.S. Stocks rebound from the past week with all three major indexes reaching session highs; NASDAQ +1.72%, DOW +1.11%, S&P 500 +1.09%. The Chief Investment Strategist at ING U.S. Investment Managements, had two major takeaways; 1. Rates will stay low and 2. When they do rise, it will be a slow process. Other notable takeaways from the minutes are that Real GDP has been lower than previously projected, partly due to the unusually harsh winter and downward surprises in the unemployment rate.

The NASDAQ bio-tech index (+3.6%) and the Global X social media index (+2.9%) were most responsive to the release of the minutes. Especially Facebook, which shot up +7.3% yesterday. Facebook was aided not only by the minutes but a JP Morgan Analyst who pointed out that the social media giant was still very early on in the monetization of its huge 1.2 billion person user base.

Now that we’ve summed up the recent news in the market we can begin addressing a major issue that has been coming up recently.

High Frequency Trading (HFT) is a type of algorithmic trading that uses highly sophisticated technology and advanced algorithms to trade large quantities of securities in a fraction of a second. Recently both the FBI and the SEC have opened up investigations into this trading technique which controls more than half of the $23 trillion dollar U.S. Market. In response to this HFT leaders have made connections with lobbyists in Washington D.C. in order to protect their interests. Lobbyist have managed to convince the investigative bodies to take a wait-and-see approach to the investigation, giving HFT leaders a chance to prove their worth. The debate on the legality of HFT was spurred by the recently released book “Flash Boys” by financial journalist Michael Lewis, in which he accused the stock market of being rigged by stock exchanges, banks, and HFTs.

The big issue with HFT is the idea of front-running. Front-running is when a stockbroker executes and order on a security of their own account before processing pending large orders from their customers. In doing this, the broker gets in at a low price, and upon executing a large trade the price of the stock shoots up and they are able to get out making a quick easy profit while the average investor ends up paying more or getting crowded out.

Charles Schwab has described this form of front-running as a “cancer undermining confidence in the free enterprise system.” In addition Bloomberg Businessweek stated pointed out that while high frequency trading has little effect on “mom and pop investors” it has a huge effect on individuals who have invested in large pension funds and retirement funds. That is, you average person’s investments in their futures is being diminished because HFT are driving the prices up.

Front-running by individual brokers and asset managers is illegal, but not all types of front running is. The most common example of front running is when a traders buys shares of stocks just before large orders are processed driving the price up. This information can be obtained legally by monitoring bids and asks on the market and the investing transactions of institutional investors like hedge funds. This is something that anyone can do if they so choose.

High Frequency Trading has its positives in that it keeps volume up and can help drive the price to its equilibrium but is it really worth it when the majority of the population is getting crowded out of the opportunity to make big gains?

Below Is a Link to the 60 Minutes video on Front-Running and High Frequency Trading.

https://www.youtube.com/watch?v=BweADB78tBY

Tech Acquisitions by Facebook and Others

by Sardar Hedayati and Cooper Strickland


In the news last week, the Federal Reserve announced that it will keep short-term interest rates low for the coming six months. New Federal Reserve chairwoman Janet Yellen also announced a continuing wind down of its asset purchases program.

When asked when the Federal Reserve would consider raising interest rates, Yellen hinted this debate within the Fed could come within the next six months. These comments lead to a sell off on Wall Street, even though the Fed’s policy statement attempted to give assurances that rate increases are not to come this year. The Federal Reserve has vowed to keep rates low until the unemployment rate hits 6.5%. It remains to be seen what the Fed will do when that time period comes. Some worry that a mismatch between EU and US policies could lead to a slower recovery for Europe.

In other news this week, the U.S. and the EU announced tougher sanctions against top Russian diplomats and top financial institutions. VISA and MasterCard, the two top credit card companies in the world, have reportedly stopped providing payment transactions to a few Russian banks altogether. This is most likely because these banks have connects to businesspeople or diplomats subject to the travel bans or asset freezes. This will have more effect on private individuals, who rely on these payment services to fund their everyday operations and because a lot of Russian individuals like to have their assets transferred in cash. These sanctions have been viewed as a joke in Moscow, and Russian financial markets have actually risen as sanctions news unfolds.

The last big news story we’ll cover is the news the IRS announced on Tuesday about Bitcoin, the digital currency that has gained much attraction over the last year. ON Tuesday, the IRS announced they will treat Bitcoin as property, not a currency.  Many view this news as not surprising, considering Bitcoin has no form of regulation. Users must now deal with tax issues and file a W-2 Form. The product will also be subject to the capital gains tax. People who buy and sell Bitcoin must now report it as part of their income.

Our topic covered the wave of tech acquisitions by FB and a few other large tech companies. Last month, FB announced their largest acquisition to date, as well as the largest tech acquisition in more than a decade with the purchase of WhatsApp, the most popular message app for smartphones. The acquisition was not surprising to investors, but the price tag certainly was. WhatsApp allows users to send messages over their data plan, rather through an SMS service. This makes the service free to users for the first year, followed by a $0.99 yearly subscription. The response to the purchase was mixed, but positive for the stock. The stock initially declined in after-hours trading the day the deal was announced, but was up over 2% on closing the next day. Some analysts view the deal as a move by FB to appeal to younger audiences, as figures have shown that FB is losing market share among youth. The acquisition also strengthens FB’s position in the mobile market, which has been a light revenue stream for the company. It is very hard for financial analysts to make conclusion on what WhatsApp's revenue stream is, considering they are a private company. This means they don't have to disclose any financial records to the public.

What we believed appealed WhatsApp to Facebook was the amount of users who log on to the service on a daily basis. According to the company, approximately 70% of its users log onto WhatsApp at least once a day, compared to 61% for Facebook. The details of the WhatsApp deal include $4 billion in cash, $12 billion in stock options, and $3 billion to the founders and employees should they remain with the company for four years.

On Tuesday, FB announced another acquisition in virtual reality headset maker OculusVR. The Oculus Rift headset, OVR’s main product, is targeted at simulation gamers and 3D modelers, but is still a few years away from the consumer market. This announcement came as more a shock to investors compared to WhatsApp, because Oculus is not a social platform. Most analysts view this purchase as an imperfect fit with Facebook’s portfolio. This is the first company Facebook has acquired that makes hardware. Zuckerberg has high hopes for the product’s applications outside of gaming, saying: “Oculus has the potential to be the most social platform ever,” he said. ‘“Imagine sharing not just moments with your friends online, but entire experiences and adventures.” Other key figures at Facebook also hold high hopes for OVR. Marc Andreessen, owner of a $2.5 billion VC firm which provided most of OculusVR’s funding, sits on the boards of both companies. What was viewed as a positive was the way FB purchased the company. $400 million of the $2 billion was paid in cash, while the remaining sum was paid in stock options.

While after-hours trading saw FB’s stock price fall 7%, it closed today .77% above its previous close. Perhaps the market likes Zuckerberg’s bright (and 3D) future.

Think Twice Before Shorting Shale

In a move that may rattle and shake energy stocks, a head honcho at Korea Gas Corporation signaled limits on future US imports. Despite South Korea’s voluptuous appetite for natural gas, the senior executive called for the US share of liquified natural gas (LNG) imports to be capped at twenty percent. With Korean eyes fixed on emerging Canadian, Australian, Russian, and East African liquefaction projects, there is reluctance to have, “too much exposure to shale-gas LNG [from the US].”

But which companies stand to lose from Eastern quotas?

Cheniere Energy Inc., the up-and-coming shale export powerhouse, may take a hit. To be clear, Korea Gas’s contract to purchase 3.5 million tons of LNG per annum from Cheniere’s Sabine Pass venture is not in doubt. There is, after all, a twenty year sale and purchase agreement between Cheniere and “Kogas” that guarantees continued production out of Sabine Pass.

The real problem lies with Cheniere’s more infant projects.

A new Corpus Christi location holds promise for Cheniere as a major LNG terminal hub. If granted approval by the Federal Energy Regulatory Commission (FERC), , Corpus Christi Liquefaction, LLC will have the potential to export 13.5 million tons of shale gas a year overseas by 2017. Yet, the federal approval process is a major hassle. A recent Oxford University study notes that detailed review and assessment of “all the potential LNG hazards,” as well as “emergency response plans” and “scheduled plant performance” are needed for FERC approval.

But even this is not enough for aspiring exporters; additional Department of Energy clearance is needed before a product is ready for shipping. And this process only allows a shale-production company to export to countries that have signed free trade agreements with the US! Given South Korea’s status as the US’s only FTA partner that imports a significant quantity of natural gas, Kogas’s recent position spells trouble. As for domestic competition, Cheniere executives and shareholder alike closely follow FERC rulings on seven other natural gas export projects. In the shale footrace, Sempra threatens to steal the lead. Their affiliate, Cameron LNG, is in the midst of a $6 billion proposed venture to export to FTA and non-FTA countries alike by 2016. Given Sempra’s existing binding agreements with non-FTA countries Japan and France (through Mitsubishi and GDF Suez respectively), Cheniere likely feels pressure to expand their market.

Despite considerable uncertainty and long-run problems, Cheniere Energy Inc. remains a solid stock. In just six months, stock value appreciated from $31 to $54 per share. The yearly trend is even more encouraging, with a 107% valuation. At the end of 2013, the company reported $329.0 million in yearly operating losses. Yet this is seen by investors as an encouraging sign; necessary investments in regasification facilities and personnel are being made.

As a shale producer with large export potential, our featured company is a bright star in an economic constellation poised for meteoric growth. Should governments recognize that limits of production and trade serve none and hurt many, energy portfolios will be a focal point in a resurgent economy.

As for the broader stock market, its been a rocky week-and-a-half (from March 17th to the present). The DJI creeped up .18%, but this masks significant fluctuations due to international unease. March 18th saw a .55% gain, due to encouraging February manufacturing data from the government and reduced fears of Crimea annexation. However,  the DJI took a .33% hit in the March 20th-24th period, owing to greater unease over the Crimea situation. There was also a decline in biotechnology stocks, reflecting a correction to earlier investor optimum. If we look at the NASDAQ biotech composite (NBI), we see a 7.3% decline in share price. The broader NASDAQ composite (IXIC) follows an up-down trend similar to the DJI, but ended down 1.3% for the March 17th-24th period.

Sources:

<http://online.wsj.com/news/articles/SB10001424052702303725404579458573832497930?mg=reno64-wsj&url=http%253A%252F%252Fonline.wsj.com%252Farticle%252FSB10001424052702303725404579458573832497930.html&fpid=2,7,121,122,201,401,641,1009>
<http://blogs.marketwatch.com/energy-ticker/2013/05/29/cheniere-going-ahead-with-more-lng-plants-at-sabine-pass/>
<http://www.prnewswire.com/news-releases/cheniere-and-kogas-sign-20-year-lng-sale-and-purchase-agreement-138317064.html>
<http://www.cheniere.com/corpus_christi/corpus_project.shtml>
<http://www.ourenergypolicy.org/wp-content/uploads/2013/10/NG-68.pdf>
<http://www.oilandgastechnology.net/downstream-news/us-shale-gas-revolution-trickles-down-brics-%25E2%2580%2593-doe>
<http://www.hamiltonproject.org/files/downloads_and_links/06_exports_levi.pdf>
<http://www.marketwatch.com/story/going-gold-in-the-cloud-saasplaza-named-a-gold-hosting-partner-for-microsoft-2013-02-21>

Stock Markets
As mentioned, the Fed indicated that stimulus cuts would continue and this contributed to the drop in US stocks.   Essential Quantitative easing would slowly decrease unless significant economic surprise.

the S&P500 fell 0.7% after climbing to 1 point off of record high last month- Peak of 1847.3.

The Fed is confident about the market and investors also have a positive outlook even though US stocks have had the worst start of the year since 2010

S&P500 slumped as much as 5.8 percent since reaching a record on Jan 15.

In addition, about 75% of S&P 500 companies that have posted their results for the fourth quarter have beaten estimates for profit and 64% have exceeded sales projections.

Not only has the Fed's tapering of its stimulus resulted in falling stocks but so has the impact of emerging markets. Currently there is political unrest in Ukraine and Thailand and also there has been a slowdown in China's markets.

Global investors are essentially pulling money out of emerging-market stock and bond funds

Ukraine





Ukraine in Crisis

In recent news, violence has erupted in Ukraine, dozens of people are being killed at protests in the capital. The protests first broke out after President Viktor Yanukovych's government rejected a far-reaching agreement with the European Union in November 2013 in favour of stronger ties with Russia. There essentially is tension between the East and the West. In western Ukraine, a significant portion of the people speak Russian.

Thousands of people in Ukraine were outraged that the decision to join with the European Union was discarded overnight. They poured into Kiev, the coital, for peaceful protests

Vladamir Putin and Moscow definitely have a strong influence over the Ukrainian President and many people believe that Moscow was buying off President Yanukovych when it bought billions of dollars worth of Ukrainian Government Bonds and provided it with cheaper gas supplies on December 17th.

Ukrainian securities suffered the worst selloff on record on February 18th as concern the country is plunging into civil war escalated after clashes between police and anti-government activists killed at least 25 people.

The yield on the government’s $1 billion of notes maturing in June increased 19 percentage points to 42 percent, an all-time high yesterday. Russia's economic lifeline was put on hold until Ukraine changed its government to be more suitable for Moscow. but was set to resume on the 18th which kickstarted the violence to some extent.

Ukraine’s benchmark equity gauge slid 3.2 percent today, extending yesterday’s 4.2 percent decline.

The Ukranian stock index dropped 2% on the 18th as well.
Ukraine's currency obviously also becoming weaker. he hryvnia tumbled 1.2 percent to 8.95 per dollar, the weakest level in five years. weakened 7% this whole year.

President Yanukovych moved to quell a growing insurgency by granting sweeping powers to the army and police after a region declared independence from his government, risking wider conflict. At least 26 people died and hundreds were injured in clashes, which culminated in a police attempt to clear their main protest camp in central Kiev, which was repelled.

India

SENSEX rose 0.2% to 20676.19, rising for the fourth straight day amid optimism on the government’s pledge to reduce the fiscal gap and cut import and excise duties, improving imports to India. The gains are led by software and industrial companies, such as Bharat Heavy Electricals and Infosys Technologies.

The value of the Rupee is falling as importers demand the dollar due to relative volatility.

China Concerns and Ukraine Crisis Update

Samantha Salant and Rachel Sullivan

Recently, the market has been pretty stable and underwent a week of gains. A bigger-than-expected rise in February nonfarm payrolls extended the weekly winning streak. The U.S. economy generated 175,000 jobs in February, and analysts say that although we are not seeing a boom quite yet, the underlying trend in the labor market is fairly good. This raised the unemployment rate, because analysts say that usually, people thinking that more jobs are available leads to more people searching for them. This lead to U.S. equities ending mostly higher. On Friday, March 7^th, the S&P 500 reached record territory.

However, on Monday, March 10, 2014, the U.S. stock market opened significantly lower as caution prevailed following a surprise drop in Chinese exports on Friday. A very much-delayed report from China was released that showed its exports unexpectedly skidded 18.1% in February 2013, which has been over a year ago. Economists had expected an increase of 5%, so this news was extreme and the opposite of what was expected. This swung China’s trade balance into a deficit and added to fears of a worldwide economic slowdown, since China has the world’s second-largest economy. China’s CSI300 index slid to its lowest in nearly nine months, and Hong Kong’s Hang Sen Index shed 1.8%. Back home, U.S. stock futures fell 0.4% on Monday from their record closing high on Friday. Fortunately, the caution prevailed in the US was more intense than reality. Stocks recovered most of their losses but still finished Monday generally lower, with S&P 500 ending the day less than a point lower, DJIA closing 0.2% lower, and Nasdaq closing down 1.77 points. Furthermore, this unexpected news caused a decrease in copper prices because China was the largest importer of copper. The now lower demand for copper lead to a price decline of that commodity.

Tensions and elevated violence in Ukraine have led to lower stock prices in world markets, higher energy prices, slower growth of European economies, higher gold prices, and lower US Treasury yields. Short-term traders in gold have been hurt since expectations were not met; both spot and futures increased. European markets fell because of geopolitical uncertainty and reliance on Russian resources for energy. The price floor for crude oil has risen, as well as volatility among most commodities. Russia’s markets, which have been poor over the past few months, decreased abruptly following the outbreak of violence in Ukraine, and the ruble’s devaluation continued to the point that interest rates were raised 1.5%. Pending sanctions on Russia will have a negative impact to be seen in the near future; however the entire market situation is unpredictable. Asian, Russian, European, and US markets have all seen considerable downturns in the past week.

In addition to Chinese data releases and the Ukraine conflict, other current events have had smaller market impacts. The missing Malaysian flight has had a negative impact on Boeing stock and thus a negative impact on international stock markets. This blow, in conjunction with the aforementioned factors, has be mediated by various mergers among industries, such as the banana merger between Chiquita and Irish company Fyffes.

Black Friday Analysis

Black Friday marks one of the most profitable days of the retail sector right behind Cyber Monday. Every year shoppers mark this day as a bargain festival with door buster deals from stores like Best Buy and Target. However consumer expectations change and consumers have more information on hand than before. More shoppers are switching to online marketplaces such as Amazon and Ebay for better deals and non-taxable purchases. We will identify the winners of the biggest holiday shopping weekend.



Of the brick and mortar stores, Wal Mart was king. It had the most sales compared to every other store. Best Buy came a far second while the rest lagged far behind. 

Analysts predicted that holiday sales would be only a 1.6% in holiday sales versus last year's 3.5%. The reasoning is that consumer confidence is lower and that the holiday environment is too intense and possibly violent. Gift spending is smaller per consumer, but that is due to the increase of holiday shoppers, both online and offline. 51% of those people polled said economic concerns would affect their holiday spending plans and 79.5% said they plan to spend less overall during the Holiday.

$12.3 billion was the overall brick-and mortar store sales for Thanksgiving and Black Friday 2013 - up 2.3% from 2012

$1.964 billion was the overall online sales for Thanksgiving and Black Friday - up over 18.5% from 2012


Also important to note is that social media does not correlate with sales. Although there is a high likelihood of indirect impacts such as viral marketing and referrals.

With the advent of smartphones and mobile devices, there is less asymmetrical information. Shoppers are information rich and can easily do arbitrage shopping with extreme convenience, defeating impulsive buying and panic sales.

Increase of 46% for Amazon and 20% for eBay compared to last year’s ‘Cyber Weekend’.

Mobile sales reached 21.8% of total online sales - that’s an increase of nearly 43% from last year.


Therefore the winners relative to last year are the online marketplaces which accounted for the most sales. Amazon and Ebay are responsible for the highest sales during Cyber Monday and will continue to do so with their cost-cutting prices and increased convenience (Same-day shipping, Sunday shipping).

Shanghai Free Trade Zone

Shanghai Free Trade Zone

by: Amanda Casey & Colin Whitaker 

Since the Chinese industrial revolution, the People's Bank of China has enforced strict expansionary monetary policy. Key features of this were capital controls which placed cash outflow and investment restrictions on individuals and corporations. Currently individuals cannot move more than $50,000 out of the country per year, and businesses need special permission to invest outside of China. These policies served to keep money cheap and depreciate the value of CNY in order to encourage growth and exports. However, China has started to move towards a more market driven economy.

China announced on 9/29/2013 that they would be establishing a 29 km free trade zone (FTZ). On 12/2/2013 a detailed report of economic reforms in the FTZ was released. In the FTZ, foreign companies will be allowed to sell yuan denominated bonds, foreigners can buy and sell Chinese bonds and equities directly, Chinese investors can buy overseas financial products without going through the QDII, and the capital account will be deregulated. Furthermore, restrictions on social media will be lifted and foreign communications companies will be allowed to get service licenses. All of this comes on top of news that Chinese IPO laws will also be reformed which will end the 13 month moratorium on IPO's and get rid of the restrictions on foreign investment. The announcement of the reform came with an 8.3% drop in the Shanghai Composite Index. This may have been caused by worries of oversupply amongst investors. Despite the short run drop, economists believe that the reform will cause enhanced long-run expectations.


The FTZ is an experiment by the Chinese and as such will most likely not have a major effect to the Chinese economy on a large scale. However, residency is not required to set up an account within FTZ and could therefore become used much more than authorities intended. But the expectations is that there will be large economic growth within the FTZ which after some time may spread to the surrounding areas. Despite this, there is still the possibility of macroeconomic effects.

China wants to continue expanding its economy, to do this they need to keep investment and exports high, seeing as they are an export economy. The negative outcomes of deregulation include a drop in the money supply, a drop in domestic investment, and then a reduction in GDP. There is also concern over what will happen to the value of the CNY. The Chinese want to keep the CNY depreciated to make Chinese goods cheaper to foreign consumers. If the value of the CNY increases, Chinese exports would drop. Despite these risks there is still good reason for China to open up its markets.

Currently China is experiencing a credit crunch. Rapid growth has led to bad loans, white elephant projects, and large amounts of debt held by the government, companies, and lenders. Even with the large money supply, it has become very difficult in the last year to get loans from Chinese banks. The reforms may provide new and much needed financing options for Chinese companies.

References:
Chinese Credit Binge

Chinese IPO Reforms

South China Morning Post

New Geography Article on FTZ

Bloomberg FTZ analysis