US SEC to finalize rules increasing transparency of short selling market

 Oct 13 (Reuters) - The U.S. Securities and Exchange Commission is set on Friday to adopt new rules that will increase transparency of short-selling, the controversial practice of betting against stocks that drew new scrutiny amid the GameStop saga.

The rules will require investors to report their short positions to the agency and for companies that lend out shares to report that activity to the Financial Industry Regulatory Authority (FINRA), a self-regulatory body that polices brokers.

The SEC's five commissioners will vote on the rules, which were first proposed in late 2021 and early 2022, on Friday morning.

Short selling involves borrowing a stock to sell it in the expectation the price will fall, repurchasing the shares and pocketing the difference. Should the price rise, the seller can be exposed to potentially unlimited losses.

The practice has long been divisive, with critics accusing short sellers of trying to hurt companies and short sellers arguing that they help root out fraud and corporate misconduct.

But it drew scrutiny from Congress in 2021 when retail investors drove up the price of shares in retailer GameStop , causing heavy losses for hedge funds that had shorted the company. In the wake of the saga, SEC chair Gary Gensler told lawmakers he would increase the transparency of the market.

Since at least 2021, the Justice Department and the SEC have also been investigating potential manipulation by short sellers and hedge funds around the publication of negative research reports.

SEC officials said the new rules would support its efforts to police the practice.

Specifically, institutional investors would have to report gross short positions to the SEC monthly and certain "net" short activity for individual dates on which trades settle. The SEC would then publish aggregate stock-specific data on a delayed basis.

Companies and other intermediaries involved in lending stock, as well as certain broker-dealers who borrow stocks, would have to report information about the loans, such as the name and volume of the stock, collateral, loan dates and termination dates to FINRA.

FINRA would then publish most of this data on an aggregate anonymized basis the following day. In a concession to industry, the final rule would see FINRA delay release of loan amounts by 20 business days.

Is This The End Of Naked Short Selling?

 American investors have been taken for a trillion-dollar ride by naked short sellers, in what could turn out to be the biggest financial regulatory scandal in North American history.

While what is now an all-out war on naked short sellers intensifies, there is a new flashpoint on the front line–a potentially devastating ruling targeting those who are alleged to make illegal naked short selling possible: The Facilitators: bankers and brokers. 

On September 29, Federal District Court Judge Lorna Schofield of the Southern District of New York issued a ruling that has the potential to significantly disrupt Wall Street compliance, and is a major first step towards protecting retail investors from fraud.

Stock Market Outlook For 2023

 It’s official, 2022 has been the worst year for the S&P 500 in more than a decade.

The index is on track to close out the year down more than 17%. That’s the S&P 500’s first double-digit percentage annual loss since the Great Recession, when the index slid 38.4% in 2008.

But if you take the long-term view, years like these are aberrations—and they can also be excellent long-term buying opportunities.

To put it into perspective, the S&P 500 hasn’t seen back-to-back down years since the bursting of the dot-com bubble in 2001 and 2002. The index has typically delivered an average annual gain of 9% since 1996.

Unfortunately, the dual headwinds of high inflation and Federal Reserve interest rate hikes won’t be going away in the near term. But if the Fed manages to get inflation under control and navigate a soft landing for the U.S. economy, analysts say 2023 could be a much better year.

2023 Outlook for Stocks

Higher interest rates are bad news for stock prices. They increase the cost of capital, which discourages companies from borrowing and investing to expand their businesses.

The bad news for investors is that earnings growth tends to stagnate. There’s also a negative impact on discounted cash flow valuations, which can hurt high-growth stocks.

Growth Stocks

It’s been a tough year for stock prices across the board in 2022, but rising rates have been particularly hard on growth stocks. In fact, the Vanguard Growth ETF (VUG) has significantly underperformed the S&P 500, generating a -27.8% total return year to date.

Since 2000, growth stocks have outperformed value stocks by a wide margin overall. But growth stocks underperformed value stocks from 2003 to 2007, another period of sharp interest rate increases.

Value Stocks

While growth in stock valuations has tumbled in 2022, value stocks have held up relatively well. In fact, the Vanguard Value ETF (VTV) has generated a total return of just -1.7% year to date.

As far as investors are concerned about market volatility, geopolitical and economic uncertainty, and rising interest rates, they will likely continue to seek relative safety in value stocks.

Thomas Shipp, quantitative equity analyst for LPL Financial, says value stocks will likely continue to outperform until interest rates fall significantly from current levels.

“A slower pace of smaller rate hikes, and ultimately a pause in the hiking cycle, will be headwinds to value’s relative performance,” Shipp says. “But until there is a clear path that inflation is sustainably headed toward the Fed’s 2% long-term target, value has a good chance to outperform growth.”

Shipp notes that LPL’s Strategic & Tactical Asset Allocation Committee continues to tilt toward value from an asset allocation perspective.

Stock Market Sectors

Elevated inflation and rising interest rates have hit some stock market sectors harder than others.

Global energy shortages linked to the Russo-Ukrainian war have helped the energy sector post record gains. The S&P 500 Energy sector is up 70.3% in 2022, and it’s the only market sector that has generated positive year-to-date gains.

In addition, defensive market sectors that have relatively stable earnings outlooks—consumer staples, utilities and health care—are all down less than 6% on the year.

Darren Colananni, wealth management advisor at Centurion Wealth Management, says the S&P 500 may struggle in gaining much traction in 2023 as interest rates remain high. Colananni’s year-end 2023 S&P 500 price target is only 3,700, around 7% below current levels.

Colananni says investors should focus on sectors that have the most projected earnings growth in 2023. In particular, he is bullish on consumer discretionary stocks and industrials.

“For consumer discretionary, we are thinking of companies like Starbucks, McDonald’s, Amazon, and Disney. For industrials, we are thinking of companies like 3M, FedEx, and Waste Management,” Colananni says.

Wells Fargo anticipates a weak economy in the first half of 2023. Samana prefers the earnings power of energy stocks, tech and health care.

“These companies have strong quality and profitability characteristics that should help them weather rising rates and the recession we see in the first half of next year,” he says.

While recession can be a scary word for investors, Wells Fargo sees a light at the end of the tunnel in the second half of 2023. The firm’s year-end S&P 500 price target is 4,300 to 4,500, implying roughly a 10% upside from current levels.

Global Stock Market Dip or Peak ?

 After a week of wild turbulence, stocks are likely to remain volatile as investors await fresh data on inflation and watch the course of bond yields.  The three major indexes started the week with three straight positive sessions, then plunged in a sharp selloff after investors decided the Federal Reserve's implied policy tightening cycle ahead was still very hawkish, even as Chairman Jerome Powell took 75-basis point rate hikes off the table. In its biggest one-day loss in two years, the benchmark S&P 500 Index plunged 3.6% on Thursday, the Dow lost 1,063 points and the tech-heavy Nasdaq closed the session down 5%.

The S&P 500 index has now declined for five straight weeks, its longest streak since mid-2011, and closed at 4,123, down just .2% for the week.  The Nasdaq lost -1.5% to close at 12,145 and is now down almost 25% from its record set last November.  The DOW lost -.2% to 32,899 and the Russell 2000 lost -1.3% to 1,839.  With all the volatility the market experienced, the CBOE VIX actually dropped -9.6% on the week to 30.19.

More volatility could be in store if this week's monthly consumer price index reading exceeds expectations, potentially propping up the case for even more aggressive monetary policy tightening from the Fed.  The Fed raised its fed funds target rate by 50 basis points, the largest increase in 22 years, and signaled similar hikes are on the way. They also said it would start next month to reduce the roughly $9 trillion stash of assets accumulated during its efforts to fight the economic impact of the coronavirus pandemic as another lever to bring inflation under control.  Markets will be closely watching Wednesday’s April consumer price index to see if it will impact the Fed’s future decisions. Economists expect another high inflation reading but most likely lower than the 8.5% year over year pace of March.  The producer price index, which is a gauge of wholesale prices will be released Thursday.

The benchmark S&P 500 index is now down 13.5% year-to-date and valuations stand at their lowest levels in two years, putting the index's forward price-to-earnings ratio at 17.9 times from 21.7 at the end of 2021, according to the latest data from Refinitiv Datastream.

Higher yields in particular dull the allure of technology and other high-growth sectors, as their cash flows are often more weighted in the future and diminished when discounted at higher rates.  The 10-year Treasury yield broke through 3% for the first time since November 2018 and on Friday hit a high of 3.13%, up from 2.94% a week earlier. The 10-year was approximately 1.5% at the start of the year. This has caused the forward P/E for the S&P 500 technology to decline from 28.5 times to 21.4 so far this year, according to Refinitiv Datastream.

States Begin to Drop Orders For Masks in Public Settings

 Nine states outlined plans this week to roll back requirements that people wear masks at indoor venues—including businesses and, in some cases, schools—as Covid-19 case numbers decline and pressure to return to normal life rises.

Officials in New York, Illinois, Massachusetts and Rhode Island said Wednesday that rules requiring masks or proof of vaccinations intended to curb the spread of the Covid-19 pandemic would end by March. Earlier in the week, California, Oregon, New Jersey, Connecticut and Delaware officials made public similar rollbacks.

All of those states voted for President Biden in the 2020 election and are now not following recommendations from the federal Centers for Disease Control and Prevention, after previously hewing to guidance to continue requiring face covering indoors and in schools.

“The Covid clouds are parting,” New York Gov. Kathy Hochul, a Democrat, said after announcing requirements to wear masks in restaurants and offices would lapse on Thursday.

Federal public-health officials said Wednesday that they are considering changes, but continue to recommend mask-wearing in public indoor settings in much of the country.

Why 7% Inflation Today Is Far Different Than in 1982

 Consumer price inflation in December, at 7%, was last this high in the summer of 1982. That’s about all the two periods have in common.

Today, the inflation rate is on the rise. Back then, it was falling. It had peaked at 14.8% in 1980, while Jimmy Carter was still president and the Iranian revolution had pushed up oil prices. Core inflation that year reached 13.6%.

Upon becoming Federal Reserve chairman in 1979, Paul Volcker set out to crush inflation with tight monetary policy. In combination with credit controls, that effort pushed the U.S. into a brief recession in 1980. Then, as the Fed’s benchmark interest rate reached 19% in 1981, a much deeper recession began. By the summer of 1982, inflation and interest rates were both falling sharply. Four decades of generally low-single-digit inflation would follow.

“We have had dramatic success in getting the inflation rate down,” one Fed official observed that August. But Mr. Volcker had other problems to contend with: His high interest rates had pushed Mexico into default, touching off the Latin American debt crisis, and unemployment would climb to a post-World War II high of 10.8% that fall.

Unemployment took out that record in the early months of the Covid-19 pandemic in 2020. Since then, it has been falling rapidly as the economy roars back thanks to vaccines, fewer restrictions on mobility and ample fiscal and monetary stimulus. In December, unemployment sank to 3.9%, closing in on the 50-year low of 3.5% set just before the pandemic.

Monetary policy then and now couldn’t be more different. Back in 1982, the Fed was still targeting the money supply, causing interest rates to fluctuate unpredictably. Today, it largely ignores the money supply, which expanded dramatically as the Fed bought bonds to hold down long-term interest rates. Its main policy target, the federal-funds rate, is close to zero.

Rather than 1982, two previous episodes when inflation reached 7% might hold more useful lessons for today. The first was in 1946. The end of the war had unleashed pent-up demand for consumer goods, and price controls had lapsed. Inflation reached nearly 20% in 1947 before falling all the way back. Today, consumption patterns have similarly been distorted and supply chains disrupted by the pandemic.

The Federal Reserve is expected to take a very big step toward its first rate hike

 The Federal Reserve is expected to announce a dramatic policy shift Wednesday that will clear the way for a first interest rate hike next year.

Markets are anticipating the Fed will speed up the wind-down of its bond buying program, changing the end date to March from June.

That would free the central bank to start raising interest rates from zero, and Fed officials are expected to release a new forecast showing two to three interest rate hikes in 2022 and another three to four in 2023. Previously, there had been no consensus for a rate hike in 2022, though half of the Fed officials expected at least one.

At the end of its two-day meeting Wednesday afternoon, the central bank should also acknowledge that inflation is no longer the “transitory” or temporary problem officials had thought it was, and that rising prices could be a bigger threat to the economy. The consumer price index rose 6.8% in November, and it could be hot again in December.

“I think getting out of the easing business is very much overdue,” said Rick Rieder, chief investment officer of global fixed income at BlackRock.

The Fed put its quantitative easing program in place to combat the effects of the pandemic in early 2020, and it also slashed its fed funds target rate back to zero.

Stocks making the biggest moves premarket - GME AMC BYND TSLA

 GameStop (GME) – The videogame retailer – one of the so-called “meme” stocks – lost another 3.1% in the premarket following a nearly 14% tumble yesterday to its lowest close since March. GameStop had seen its stock slide last week after reporting a wider quarterly loss.

AMC Entertainment (AMC) – The movie theater operator’s stock slid 6% in premarket trading, after extending a losing streak to 3 days with a more than 15% plummet Monday. Last week, CEO Adam Aron sold all his holdings in AMC while CFO Sean Goodman sold the bulk of his AMC stock.

Beyond Meat (BYND) – The maker of plant-based meat substitutes saw its stock jump 4.8% in premarket action, putting it in a position to break a 3-day losing streak. Piper Sandler upgraded the stock to “neutral” from “underweight,” saying a nationwide launch at McDonald’s (MCD) could happen within less than 3 months.

Tesla (TSLA) – Tesla shares slid 1.5% in premarket trading after CEO Elon Musk sold more of his holdings to cover tax bills generated by the exercising of stock options. Tesla has dropped more than 20% from its all-time high and its overall market value has fallen back under the $1 trillion mark.

China set to tighten foreign funding rules for tech companies

 

• China's crackdown on its technology sector looks set to continue following nearly a year of unwieldly regulatory efforts. It all began in November 2020, when Jack Ma's Ant Group was forced to cancel what would have been the world's largest IPO. Regulatory efforts then turned to data security and protection - with large fines imposed on Alibaba (NYSE:BABA) and food-delivery giant Meituan (OTCPK:MPNGY) - and culminated in a New York Stock Exchange delisting announcement last week by DiDi Global (NYSE:DIDI).
• The latest: China is said to be drawing up a blacklist that will make it harder for new technology companies to raise foreign funding and list overseas, FT reports. The blacklist could be published as early as this month, and would include startups that use a so-called variable interest entity structure, which are controlled by a company by means other than a majority of voting rights. VIEs have been used for decades by Chinese tech groups, such as Alibaba (BABA) and Tencent (OTCPK:TCEHY), to circumvent foreign investment restrictions and raise funds internationally.
• Prompting the decision is the Chinese Communist Party's move away from the proliferation of the private sector, to a more state-owned enterprise economy (or at least having more involvement and control of the business environment). Compared to prior decades, the new economic order is more concerned about the control of data and flows of capital vs. economic liberalization and reforms. The CCP is also fearful that foreign investment could lead to "disorderly capital expansion," which means that foreign interests influence what goes on inside China.

Do Hedge Funds Love The Boeing Company (BA)?

According to Insider Monkey's hedge fund database, Ken Griffin's Citadel Investment Group has the largest call position in The Boeing Company (NYSE:BA), worth close to $1.9354 billion, corresponding to 0.4% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies, which holds a $329.6 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Remaining peers with similar optimism consist of D. E. Shaw's D E Shaw, Israel Englander's Millennium Management and Phill Gross and Robert Atchinson's Adage Capital Management. In terms of the portfolio weights assigned to each position Symmetry Peak Management allocated the biggest weight to The Boeing Company (NYSE:BA), around 8.17% of its 13F portfolio. Heard Capital is also relatively very bullish on the stock, dishing out 5 percent of its 13F equity portfolio to BA.