News Feeds

JPMorgan breaks down how COVID-19 nearly destroyed one of the market's safest trades — and lays out 3 lessons to help investors tackle future crises

Tue, 06/30/2020 - 12:58pm  |  Clusterstock

  • A relatively obscure but cushioned part of the bond market nearly collapsed in March amid the coronavirus-induced crisis. 
  • JPMorgan strategists recently detailed the breakdown in so-called basis trading that spurred a rush to the exits among hedge funds.
  • They explained how the Fed intervened to prevent a wider liquidity crisis, and listed three lessons for investors to hold for future crises. 
  • Click here to sign up for our weekly newsletter Investing Insider.
  • Click here for more BI Prime stories.   

The historic market action that investors endured earlier this year nearly took down an erstwhile safe part of the fixed-income market had the Fed not intervened. 

Interest-rate derivatives strategists at JPMorgan arrived at this conclusion after conducting a postmortem into the crash, and penned their biggest takeaways for investors.

They had no shortage of superlatives to describe what the coronavirus outbreak spurred in the bond market. For one, consider that the move in 10-year swaps — instruments designed to protect from volatility in interest rates — moved by nearly six times more than what had been priced in by the options market. 

But that is not even the most unnerving development that caught JPMorgan's eye. The team, led by Joshua Younger flagged strategies that traditionally help traders reconcile the differences between bond futures and spot prices, otherwise known as basis trading. 

Here's an example of how it works: if a bond becomes much cheaper than its relative futures contract, a trader can buy it through a repurchase agreement and then use a futures contract betting on its decline as collateral. If the bond's price comes in line with the futures contract, the trader profits. If not, the futures contract on other end of the trade wins. 

If this all sounds niche and somewhat wonky, you're not alone. Even Younger, JPMorgan's head of US interest rate derivatives strategy, said as much in a recent note.

The market's relative obscurity is a key reason why it came under dire strain. Its low-risk nature meant that traders made ample use of leverage that in turn gave them access to more attractive opportunities in other parts of the market.

Additionally, the belief that basis trading was safe led to a massive build-up in net-short positions against Treasuries. This meant that during the crisis, traders became saddled with huge bets against Treasuries that were never intended as bets against the asset class itself. 

"These non-economic cash/futures basis positions were, in our view, the epicenter of the historic breakdown in market functioning in March — one which threatened to transform an economic event into a financial crisis which was likely only avoided with an equally historic Fed intervention," Younger said in a recent note. 

As is often the case in markets, there was widespread fear of a rush to the exit signs. For one, the transition to remote work stoked concerns that the repo market would lose some functionality just like it did after the 9/11 attacks.

In the waiting game to see what happened at an operational level, there were also risk-management concerns. If you acted too late, you would have been among the last out the door with far worse prices than if you de-levered early. 

Treasury data compiled by JPMorgan show that there was roughly $450 billion in net selling of Treasuries in the year through April. Nearly half of it originated in the Cayman Islands, a tax haven that has become the domicile of many hedge funds.

This was far from the first liquidity crunch in the fixed income market. But what made it even more threatening was that several other parts of the market were under strain at the same time.  

Thankfully, the Fed intervened decisively by expanding its asset purchases and increasing the size of its repo operations. And therein lies one of three lessons Younger deduced from the recent episode: the Fed is willing to do whatever it takes to solve liquidity crises in the bond market. 

The second lesson is that the post-2008 regulations that were put in place substituted liquidity crises for credit crises. While neither is desirable, at least the Fed has shown that it can and will decisively combat liquidity crunches in the future. The 2008 credit crisis, on the other hand, nearly collapsed the entire financial system.

And finally, Younger says this episode should spur a more flexible way of thinking about the Fed's regulation of banks in the future.   

SEE ALSO: Goldman Sachs has formulated a strategy that could triple the market's return within a year as volatility remains higher than normal — including 11 new stock picks for the months ahead

Join the conversation about this story »

NOW WATCH: Pathologists debunk 13 coronavirus myths

The Dow can hit 30,000 by 2021 if Republicans keep the Senate and the coronavirus is contained, Wharton professor Jeremy Siegel says

Tue, 06/30/2020 - 12:53pm  |  Clusterstock

  • The Dow Jones industrial average could surge to a record high of 30,000 if Republicans keep their hold on the Senate in November and the coronavirus pandemic is contained, the Wharton finance professor Jeremy Siegel said on Tuesday.
  • The market's rally from March has slowed, and the easiest stock gains have already been made, he said on CNBC's "Squawk Box."
  • "Great uncertainties" from elections and spiking coronavirus cases stand to either boost stocks through the second half of the year or pull them from their lofty valuations, the professor said.
  • The political unknowns are "a big one," Siegel said, as a reversal of President Donald Trump's corporate tax cuts would create "a strong headwind" for companies and their stock prices.
  • Visit the Business Insider homepage for more stories.

The Wharton finance professor Jeremy Siegel detailed on Tuesday the critical conditions needed for the Dow Jones industrial average to reach a record high of 30,000 before the year is out.

The stock market's rally from March lows has slowed as investors weigh reopening optimism with fears about a surge in coronavirus cases. The latest spike in infections and election outcomes represent the "great uncertainties" plaguing valuations, Siegel said on CNBC's "Squawk Box."

"If we get continued progress and lower virus figures for the US, a resolution of the political uncertainty in November ... I think the market would welcome a Republican-maintained Senate even if there is a Biden presidency," the professor said. "I think that would be favorable for the market, but that is in question."

The market's easiest gains have already been made, and November poses a key deadline for investors waiting on the sideline, he added.

Read more: BANK OF AMERICA: Buy these 8 retail stocks as they rake in revenues from an unprecedented surge in home-improvement spending

The Dow opened at 25,499.85 on Tuesday, down 10% year-to-date.

A Democratic sweep on Election Day would endanger one of the bull market's biggest drivers. Vice President Joe Biden recently pledged to reverse most of President Donald Trump's 2017 tax cuts. The lower corporate rates helped push the stock market to fresh highs for years, and removing them would place significant pressure on already lofty valuations, Siegel said.

"That uncertainty is a big one, because taxes — the tax cut, the corporate tax cuts are a major reason for a lot of the bull market since Trump was elected," he said. "If they're going to be reversed, that's a strong headwind."

Even if Democrats take the Senate and the White House, investors aren't without hope. Massive monetary and fiscal relief measures have flooded capital markets with liquidity in recent months and helped drive major indexes higher. In the event of a blue wave, "there's probably going to be more liquidity" to lift the economy from the coronavirus recession, the professor said.

Read more: Goldman Sachs has formulated a strategy that could triple the market's return within a year as volatility remains higher than normal — including 11 new stock picks for the months ahead

A final X factor for the stock market's second-half performance hinges on bringing a reliable COVID-19 treatment to market. Economists, investors, and Federal Reserve officials have said that consumer confidence cannot fully recover until Americans believe they can safely leave their homes and participate in the economy.

Whether it comes from virus containment or a miracle drug, lifted sentiment is crucial to reviving the economy and the US's largest companies, Siegel said.

"If the virus subsides, get some more therapeutics, get some more confidence in the economy, and if the Republicans can hold the Senate, we will see, I believe, Dow 30,000 by the end of the year," he said.

Now read more markets coverage from Markets Insider and Business Insider:

Real-estate investor Joe Fairless breaks down how he went from 4 single-family rentals to overseeing 7,000 units worth $900 million — and outlines the epiphany that turbocharged his career

The coronavirus' resurgence could drag the US recovery into an L- or W-shaped trend, Bank of America says

Fed's Powell says the US economy has bounced back quicker than expected — but warns failure to contain the virus will create new hurdles

Join the conversation about this story »

NOW WATCH: Here's what it's like to travel during the coronavirus outbreak

Uber paid cash to some laid-off employees for their unvested stock, but some of them are unhappy about the price it paid (UBER)

Tue, 06/30/2020 - 12:50pm  |  Clusterstock

  • When Uber laid off 7,000 people in May, it included an extra payment to some employees who were about to qualify for a tranche of stock to vest.
  • Employees who would have gotten the stock within three months had they not been laid off were paid about $27 a share for the stock instead, multiple sources tell us.
  • Some employees are not happy about this extra payment because the stock was worth more than that at the point of the layoff. 
  • They thought Uber should have paid a more current price for the stock, or given them the option to keep the shares.
  • An attorney who specializes in employee stock compensation says it doesn't work that way. If the stock hasn't vested, in most cases, employees likely aren't entitled to anything.
  • Visit Business Insider's homepage for more stories.

By nearly all accounts, when Uber laid off 7,000 people in May, the severance package it gave employees was a generous one: at least 10 weeks of pay, health care until year's end and other benefits.

For instance, Uber paid employees an extra lump sum if they were about to have a tranche of restricted-stock units vest within three months had they not been terminated, as long they signed waivers and non-disparagement agreements.

Tech companies like Uber include stock compensation as part of an employee's total pay package. Often the amount of stock is negotiated when an employee first joins the company. An employee may even take less cash salary and more stock, which then vests over a number of years, typically four. So as employees contribute to the company's overall success and the stock price rises, employees can earn more on the stock than on their other pay. 

Dozens of employees qualified for this extra payment, according to an analysis of the public list of laid-off employees, and possibly more people qualified than we could find on the list, because participation on that list is voluntary, and doesn't include all the people who were laid off.

Uber paid these employees about $27 for each share of stock. 

Yet some employees were not happy about this payment because of the method Uber used to come up with the $27/share price. 

Uber calculated the average price across the month of April, a point in time when COVID-19 had ransacking the travel industry and the stock was down but starting to inch back up. Uber conducted the layoffs in May and left everyone on the formal payroll for a month, until June 17, source say, aka four weeks of garden pay.

If it had used May's average share price, or even the days before employees were formally off the payroll, those employees would have be paid about $32 a share.

For some people who were due to have a large tranche vest, those couple of bucks per share added up to thousands of dollars, one person told us.

"Due to pandemic, the entire stock market sold off in March and April, so that was an artificially deflated value. They are choosing a value to pay least amount," one former employee told us. 

Uber did not offer the option of early vesting, allowing employees to keep the stock instead of a cash payment. This person feels that it was like forcing employees to sell shares at a loss or get nothing, on top of losing their jobs during a pandemic.

Uber confirmed the RSU payout was based on the average closing stock price for the month of April and says using the prior month has been its standard for layoffs for practical reasons, so the company can determine the total payout amount in advance when it issues the severance agreement papers. 

The interesting thing is that companies typically have no obligation to do anything about unvested stock during a layoff, says Mary Russell, attorney and founder of Stock Option Counsel, an employee stock-option specialist in Palo Alto, California. 

Employee stock compensation tends to be "survivor-style." If a person's employment ends prior to the vesting date for any reason including a layoff, the employee typically has no rights to the shares unless those rights were negotiated in advance, she says.

So Uber offering any payment on unvested stock could be seen as another way Uber was being generous to its employees, an effort to enrich its reputation as a good employer, another former employee believes.

So, why are some people upset about it? Russell believes it's because equity compensation is complicated and based on an idea of  "fairness," she says. "I mean, it's in the name: equity. It's about building something that makes people feel a part of."

On top of that, a lot of tech companies really play up the stock compensation part of the pay package.

"There's so much room for misunderstanding. You have a recruiter making promises and a hiring manager and HR talking about equity. When there are layoffs, you have that [layoff] team talking about equity. Yes, there's money involved, but also a sense of fairness," she says.

SEE ALSO: These are the 19 Airbnb execs rebuilding the company for growth and an IPO amid the biggest travel industry crisis in decades

Join the conversation about this story »

NOW WATCH: Pathologists debunk 13 coronavirus myths

Zynerba plummets 51% after its CBD gel fails trial for rare disease (ZYNE)

Tue, 06/30/2020 - 12:39pm  |  Clusterstock

  • Zynerba, a small biotechnology company, plummeted 51% on Tuesday after its CBD gel failed a pivotal trial for a rare disorder called Fragile X syndrome.
  • The company said its experimental cannabis-based gel, called Zygel, did not meet its primary endpoint in improving aberrant behavior when compared to a placebo.
  • Additionally, Zygel failed to meet any of its three secondary endpoints.
  • Visit the Business Insider homepage for more stories.

Zynerba plummeted as much as 51% on Tuesday after the company said its experimental cannabis-based gel failed to meet its primary endpoint in a pivotal trial for a rare disorder called Fragile X syndrome.

Fragile X syndrome is a rare genetic disorder that is characterized by mild to moderate intellectual disability.

Zynerba had developed a CBD gel, called Zygel, to test its ability to treat patients of Fragile X syndrome.

In addition to failing to meet its primary endpoint in improving aberrant behavior when compared to a placebo, it also failed to meet its three secondary endpoints.

Read more: BANK OF AMERICA: Buy these 8 retail stocks as they rake in revenues from an unprecedented surge in home-improvement spending

Zynerba said it would meet with the FDA to discuss the trial results as soon as possible, as well as continue to run ad hoc analysis on the trial data. The company also delayed top-line Phase 2 data from its INSPIRE trial to the end of 2020 due to COVID-19 travel restrictions.

Shares of Zynerba fell from a close of $6.54 on Monday to a low of $3.20 on Tuesday, representing a decline of 51%. The company's cash per share is $2.43, according to data from Yahoo Finance. 

Join the conversation about this story »

NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid

Goldman Sachs says national mask mandate could save US from a 5% hit to GDP

Tue, 06/30/2020 - 12:37pm  |  Clusterstock

  • A national mask mandate could potentially substitute for lockdowns to curb the spread of coronavirus, Goldman Sachs Chief Economist Jan Hatzius wrote in a Monday note. 
  • Goldman's baseline estimate is that a national mandate could raise the percentage of people who wear masks by 15 percentage points and cut the daily growth rate of confirmed cases by 1 percentage point to 0.6%. 
  • That could save the US from a 5% hit to gross domestic product that could result from renewed lockdowns, according to Goldman Sachs. 
  • Visit Business Insider's homepage for more stories.

A national mask mandate could potentially slash coronavirus infections in the US and save the country from a 5% hit to its gross domestic product, according to Goldman Sachs. 

In a Monday note, chief economist Jan Hatzius and his team investigated the link between wearing a mask and certain economic and health outcomes of COVID-19. 

"We find that face masks are associated with significantly better coronavirus outcomes," Hatzius wrote. Face mask use lowered infection growth rates and death rates, the team found. The causal relationship was not weakened when controlling for avoiding large gatherings or avoiding public interactions.

A national mandate would also "likely increase face mask usage meaningfully," Goldman said. Goldman's baseline estimate is that a national mandate could increase the percentage of people who wear masks by 15 percentage points, and cut the daily growth rate of confirmed cases by 1 percentage point to 0.6%. 

Read more: Goldman Sachs has formulated a strategy that could triple the market's return within a year as volatility remains higher than normal — including 11 new stock picks for the months ahead

"These calculations imply that a face mask mandate could potentially substitute for lockdowns that would otherwise subtract nearly 5% from GDP," said Hatzius. 

The US currently does not mandate mask wearing — instead, it issued a national recommendation in April. While some states adopted stricter measures, some such as Texas and Florida opposed a state-wide mask mandate. 

By analyzing state-level mask usage, Goldman found that mandates gradually raise the percentage of people who "always" or "frequently" wear masks by 25 percentage points in the 30 days after signing.

In addition, the percent of people who say they "always" wear a mask jumped by nearly 40 percentage points more than 30 days after signing, "reflecting some people switching from 'frequently' and other categories to 'always'," according to the note. 

Read more: BANK OF AMERICA: Buy these 8 retail stocks as they rake in revenues from an unprecedented surge in home-improvement spending

The US fell into a recession in February due to the impact of coronavirus, which has had a huge negative impact on gross domestic product. US GDP fell nearly 5% in the first quarter of 2020, and is estimated to slump more than 30% in the second quarter due to the pandemic. 

To determine how a mask mandate would impact US GDP, Goldman considered how severe government lockdowns would have to be to have the same outcome — lowering infections by 1 percentage point. 

They found that their effective lockdown index would have to increase 16 percentage points to lower infections 1 point. This jump might reduce US GDP by nearly 5%, according to the note. 

And, even taking into account any uncertainty in Goldman's analysis, it "suggests that the economic benefit from a face mask mandate and increased face mask usage could be sizable," he said. 

Read more: Real-estate investor Joe Fairless breaks down how he went from 4 single-family rentals to overseeing 7,000 units worth $900 million — and outlines the epiphany that turbocharged his career

Join the conversation about this story »

NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid

Goldman Sachs has formulated a strategy that could triple the market's return within a year as volatility remains higher than normal — including 11 new stock picks for the months ahead

Tue, 06/30/2020 - 11:45am  |  Clusterstock

  • Goldman Sachs strategists anticipate that stock-market volatility — which is already higher than normal — will remain elevated in the months ahead. 
  • The implication is that returns adjusted for the risk and volatility investors tolerate will be lower.
  • Goldman preemptively rebalanced its basket of stocks with the highest expected risk-adjusted returns and flagged the 11 names atop the list. 
  • Click here to sign up for our weekly newsletter Investing Insider.
  • Click here for more BI Prime stories.

Don't expect the stock market's whipsawing to subside anytime soon. 

That's the message from Goldman Sachs' top equity strategists to clients as coronavirus-related headlines continue to fling the market around. 

While the strategists do not expect a return of the ugly days in March, when the economy first shut down, they foresee stocks being more fickle than normal in the months ahead.

Two key gauges show that volatility remains historically high in the wake of the historic crash in March. First, the S&P 500's price variation on a one-month basis — so-called realized volatility — is near 28, which is above its long-term average of 13.

Similarly, the CBOE Volatility Index, or VIX, that tracks options-market activity is near 33, higher than its long-run average of 19.   

The investing implication of these trends is that equity investors are poised to get less bang for their buck after returns are adjusted for the risks taken. 

"Consensus expects 9% upside to the typical stock over the next 12 months and volatility should remain elevated through the rest of the year, suggesting low risk-adjusted returns in the coming months," David Kostin, Goldman Sachs' chief US equity strategist, said in a recent note.

Goldman Sachs has preemptively updated its strategy that targets stocks with the highest risk-adjusted returns based on a gauge known as the Sharpe ratio. The strategists led by Kostin calculated it by dividing the consensus 12-month price target among analysts with the six-month volatility implied by options traders. A higher ratio indicates a more attractive return relative to risk-taking and the prevailing level of volatility.

What makes this strategy even more attractive is that marketwide Sharpe ratios are near their lowest levels in history. Before the steep sell-off in stocks on Friday, the S&P had returned -5% year to date with annualized realized volatility of 46% for a risk-adjusted return of -0.1 — in the 27th percentile since 1950. 

Kostin said the high Sharpe ratio basket has underperformed the S&P 500 this year by 6 percentage points largely because it held a large number of value stocks.

But since May, the basket has beaten the benchmark index by 441 basis points because of the improvement in economic data and value-stock performance. Its longer-term track record is also promising: The basket has beaten the S&P 500 in 66% of semiannual periods since 1999 by 271 basis points on average, Kostin said. 

The freshly rebalanced basket includes 31 new stocks that are mostly in the healthcare, media, IT services, aerospace, and defense industries.

"The median constituent in the basket is expected to generate roughly 3x the absolute return of the median S&P 500 stock during the next 12- months (+24% vs. +9%)," Kostin said. 

Listed below are the 11 new additions Kostin flagged because they have the highest Sharpe ratios:

  1. Edwards Lifesciences (EW
  2. Northrop Grumman (NOC)
  3. Western Digital (WDC
  4. Merck (MRK)
  5. Cigna (CI)
  6. Ulta Beauty (ULTA)
  7. Concho Resources (CXO)
  8. Hartford Financial Services (HIG)
  9. Allstate (ALL)
  10. Universal Health Services (UHS)
  11. Boston Scientific (BSX)

Read more: 

SEE ALSO: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Join the conversation about this story »

NOW WATCH: Pathologists debunk 13 coronavirus myths

Read the pitch deck that helped Divvy raise $30 million to provide alternate financing for prospective homebuyers

Sun, 06/28/2020 - 8:01pm  |  Clusterstock

Buying a home, particularly for Millennials, is a complicated and expensive process – at times it can be complicated and expensive enough to discourage potential buyers from even trying.

Enter Divvy, one of the many Silicon Valley startups working to change the way people buy homes. The company is specifically interested in providing alternative financing options for prospective homebuyers who don't qualify for traditional mortgages.

Divvy accomplishes this by purchasing homes outright and allowing customers to pay the company back through monthly installments — 25% of the total goes toward building equity and 75% goes toward paying "rent."

And some top venture capitalists have bought into Divvy's mission as well. In October 2018, Divvy raised a $30 million series A round led by Andreessen Horowitz, with participation from Caffeinated Capital, DFJ, and Affirm CEO Max Levchin.

Divvy helped purchase homes for more than 100 buyers in its first year, but it has much higher hopes. The startup's official mission is to put 100,000 families into their first homes within five years.

To really understand Divvy's strategy, Business Insider Prime has published the investor deck the company used to acquire that $30 million in funding. Simply enter your email address to receive a FREE download of the full deck!

BI Prime is publishing dozens of stories like this each and every day, chock full of exclusive content and industry analysis. Get started by reading the full investor deck.

Join the conversation about this story »

The Future of Fintech: AI & Blockchain

Sun, 06/28/2020 - 1:03pm  |  Clusterstock

Sweeping global regulations, the growing penetration of digital devices, and a slew of investor interest are catapulting the fintech industry to new highs.

Of the many emerging technologies poised to transform financial services, two of the most promising and mature are artificial intelligence (AI) and blockchain.

74% of banking executives believe AI will transform their industry completely, and 46% of global financial services employees expect blockchain to improve transparency and data management.

In The Future of Fintech: AI & Blockchain slide deck, Business Insider Intelligence explores the opportunities and hurdles of adopting the two technologies within financial services.

This exclusive slide deck can be yours for FREE today.

Join the conversation about this story »

German fintech star Wirecard said $2 billion went 'missing' from its bank accounts. Analysts and accounting professors explain how it could have happened.

Sun, 06/28/2020 - 12:40pm  |  Clusterstock

  • Wirecard is a German digital payments business. It was, until recently, one of the country's most successful tech companies. 
  • This week Wirecard announced that $2 billion had gone "missing" from its balance sheet. The company's former CEO, Markus Braun, resigned and was arrested on suspicion of false accounting and market manipulation.
  • Business Insider spoke to fintech analysts and academics who study accounting fraud to figure out how that $2 billion might have disappeared.
  • One possibility is that Wirecard committed financial fraud and its auditor, EY, didn't thoroughly evaluate the company's financial statements, according to the analysts and academics. The German regulator BaFin has also come under fire for failing to detect evidence of financial fraud at Wirecard.
  • Wirecard likely buckled under the pressure of the coronavirus recession, the experts we spoke with said, and it could no longer keep up the charade about the growth of its business.
  • Visit Business Insider's homepage for more stories.

Wirecard AG was a German tech darling.

In September 2018, the Munich-based digital payments company replaced Germany's second-largest lender, Commerzbank AG, on the Dax 30. That's the stock-market index for the 30 major German companies trading on the Frankfurt Stock Exchange, all of which are automatic investments for pension funds. Wirecard, which counts Apple Pay and Google Pay as clients, reported a net revenue of €2.1 billion that year.

This week, Wirecard announced that it was "missing" €1.9 billion, or about $2.1 billion, in cash, later saying it likely never existed. EY, Wirecard's auditor, called it "an elaborate and sophisticated fraud." Former CEO Markus Braun resigned and was arrested on suspicion of false accounting and market manipulation. Authorities are searching for Wirecard's former chief operating officer, Jan Marsalek, who is also suspected of market manipulation. The company said it would file for insolvency. 

The downward spiral comes more than a decade after suspicions were first raised about Wirecard's financials, and five years after The Financial Times started reporting on red flags in the company's accounts.

But how, precisely, does $2 billion go missing? 

We talked with fintech analysts and professors of accounting to find out what might have happened. 

Fabricating cash is much rarer than fudging revenues

Wirecard appears to have counted cash held in escrow accounts on its financial statements, The Financial Times reported. Money in escrow is held and disbursed by a third party, which would theoretically explain why Wirecard didn't have immediate access to the cash.

The Financial Times also reported that an internal whistleblower at Wirecard alleged that the company had used a strategy called round tripping. That involves repeatedly buying and selling shares of the same security in order to make it look like a lot of transactions are taking place.

Enron, the disgraced Houston-based energy company that filed one of the largest corporate bankruptcies in American history after several executives were charged with conspiracy, insider trading, and securities fraud, was famously accused of round tripping.

In Wirecard's case, reports indicate that the company appears to have funneled money through three third-party companies in the Philippines, Singapore, and Dubai.

It's hard to fabricate transactions "inside your own major operations," said Ruben Davila, a forensic accountant and a professor of clinical accounting at the University of Southern California's Marshall Business School. That's because "there would be a record of them." Instead, Wirecard said the transactions had gone through offsite entities. "It makes it more plausible that you don't have the detail," Davila said.

Now it appears, per further reporting, that transactions that supposedly took place between Wirecard and those third parties were falsified. When KPMG asked Wirecard to produce records of those transactions, Wirecard failed to come up with the original bank records for €1 billion of payments.

Wirecard did not respond to a request for comment. It has previously denied any financial impropriety.

EY, Wirecard's auditor, reportedly didn't request bank statements for three years 

The professional-services firm EY had been auditing Wirecard since 2008, when suspicions about Wirecard's financials were first raised. During that time, Wirecard received clean audits from EY. 

Then, in June 2020, Wirecard announced that it was postponing reports for 2019 and the first quarter of 2020. These reports had already been delayed three times, Markets Insider's Shalini Nagarajan reported. Wirecard said on June 18 that EY could not find "sufficient audit evidence" of $2 billion on Wirecard's balance sheet. 

EY has since faced criticism for failing to spot what it has called "an elaborate and sophisticated fraud." Bloomberg reported that EY was sued in Germany, in June. The lawsuit alleges that the firm didn't flag that Wirecard improperly booked $1.1 billion in assets in their 2018 accounts.

On Friday, The Financial Times reported that for three years EY did not request statements from a Singapore bank where Wirecard claimed it had up to $1 billion in cash. EY instead relied on screenshots and documents from Wirecard and from a third-party trustee, according to The Financial Times. (Wirecard told auditors that in late 2019, it moved that money to banks in the Philippines.)

At another company that EY audited, Chinese coffee chain Luckin Coffee, an internal investigation found that employees had fabricated part of its reported 2019 revenue. EY said it flagged this fraud when auditing Luckin Coffee's 2019 financials, The Wall Street Journal reported

Public accounting firms do make mistakes

A recent report from the Public Company Accounting Oversight Board found that in 2018, 27.3% of EY's audits had "deficiencies," meaning the auditor didn't have sufficient evidence at the time to support its opinion on the company's financials. A deficiency doesn't necessarily mean the auditor's assessment of the company's financials was wrong. EY isn't alone: The PCAOB found that Deloitte's rate of deficiencies was 20% and KPMG's was 50% in 2018. (The "Big Four" public accounting firms are EY, Deloitte, KPMG, and PwC.)

It's possible that EY did conduct a thorough audit of Wirecard's internal controls and found them sufficient, said Daniel Taylor, an associate professor of accounting at the Wharton School of the University of Pennsylvania. (Taylor has also not studied Wirecard specifically.) Taylor said even robust internal controls are designed to catch one or two people in an organization who are engaged in fraud. If, as Taylor said is likely, there were multiple people at Wirecard engaged in fraud, the company's internal controls may not have been able to pick up on that.

Cash fraud is uncommon, Taylor said, "mainly because of the thought that it's relatively straightforward to audit cash holdings." Presumably, the cash is either in the bank or not. That's what makes Wirecard's fraud "unparalleled," he added.

In an email to Business Insider, a spokesperson for EY Germany said, "Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail. Professional standards recognize that even the most robust and extended audit procedures may not uncover a collusive fraud."

The spokesperson added, "With knowledge that 2019 bank statements, confirmations and other routine documentation were falsified, we cannot rule out that prior years' documents and confirmations are suspect."

Wirecard called on the professional-services firm KPMG to conduct a special investigation in late 2019. In its April 2020 report (the text is in German), KPMG said that it couldn't verify that the "lion's share" of Wirecard's profits between 2016 and 2018 were authentic, and that there were "obstacles" to the investigation. On Wirecard's website, the link to the report is posted along with the statement that KPMG had found no incriminating evidence for allegations of balance-sheet manipulation.

German financial regulator BaFin has also received criticism for its oversight of Wirecard

The German financial regulator BaFin has also come under fire for potentially failing to detect evidence of financial fraud at Wirecard. In 2016, short sellers using the pseudonym Zatarra published a report alleging that Wirecard had engaged in money laundering. BaFin responded by investigating Zatarra for alleged market manipulation. In 2019, when The Financial Times reported on Wirecard's legal staff at its Singapore headquarters who were investigating three members of the finance team, BaFin opened an investigation into The Financial Times over an allegation of market manipulation.

It's possible that BaFin was concerned that short sellers were influencing the Financial Times. "Regulators have always been very skeptical of the incentives of short sellers," said Taylor, the Wharton professor, though he's not familiar with BaFin's approach specifically.

On Monday, BaFin President Felix Hufeld said at a conference in Frankfurt, "I completely accept the criticism that all of us including BaFin have to review a couple of strategies and measures, which we have taken or have not taken, once we sort out the immediate crisis."

Now, the European Union is investigating BaFin to determine whether BaFin responded appropriately to allegations of financial fraud at Wirecard, Reuters reported.

In an email to Business Insider, a spokesperson for BaFin said it does not and did not supervise Wirecard AG. Instead it supervises Wirecard Bank AG, within the Wirecard group.

Wirecard likely buckled under the financial pressure of the coronavirus recession

The house of cards likely came down this week because Wirecard was facing increased pressure due to the global recession underway. "The company wasn't doing as well as it was projected to everybody and they did everything they could to hide that," said Sarah Kocianski, the head of research at the consultancy 11:FS. (Kocianski previously worked at Insider Inc.) But it could no longer maintain the charade.

Once KPMG indicated that it couldn't verify the authenticity of the bulk of Wirecard's profits, "Wirecard has no option but to come clean," Kocianski said.

Wirecard has seen roughly 99% of its market value erased in just the last six trading days as its stock has plummeted from 104 euros, or about $116, to less than 2 euros as of this writing.

SEE ALSO: Here's how Wirecard went from analyst darling to a $2.2 billion accounting scandal - and cost SoftBank hundreds of millions in the process

Join the conversation about this story »

NOW WATCH: Here's what it's like to travel during the coronavirus outbreak

Warren Buffett has warned about the dangers of speculating for years. Day traders aren't listening.

Sun, 06/28/2020 - 8:55am  |  Clusterstock

  • Day traders have recklessly bought into bankrupt and distressed companies in recent weeks.
  • Billionaires Mark Cuban and Howard Marks compared the buying frenzy to the dot-com bubble.
  • Warren Buffett has warned against speculating and discussed market bubbles many times.
  • "Normally sensible people drift into behavior akin to that of Cinderella at the ball," he said.
  • Visit Business Insider's homepage for more stories.

Day traders have piled into bankrupt and distressed companies in recent weeks, thumbing their noses at experts and proclaiming that "stocks only go up."

Warren Buffett, perhaps their favorite punching bag, has warned for years about the dangers of mindless buying.

Taking on the 'suits'

Thousands of people, stuck at home during the coronavirus pandemic with casinos closed and live sports suspended, have turned to playing the stock market on Robinhood and other zero-commission trading platforms.

They have sent shockwaves through the investment community with their contrarian moves. Those include plowing cash into struggling businesses such as airlines and cruise lines, and snapping up shares in Hertz, JCPenney, and other bankrupt companies despite the high risk of getting wiped out.

These irreverent amateurs have also taken swipes at industry veterans. Dave Portnoy, their self-proclaimed captain, has dismissed Buffett as "washed up" and wrong in his decisions. The "suits" who whine about him and his followers are just jealous of their success, he says.

Read more: Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

Billionaire investors and market commentators have rushed to sound the alarm on the trend.

"Shark Tank" star Mark Cuban and Oaktree Capital chief Howard Marks both said the buying frenzy reminds them of the dot-com bubble.

Meanwhile, "Mad Money" host Jim Cramer, Omega Advisors boss Leon Cooperman, and Wealthfront investment chief Burton Malkiel have all warned the new market entrants that wildly speculating will almost certainly lose them money and might accelerate a market crash.

'One helluva party'

Buffett hasn't publicly commented on the day-trading boom, but he's discussed similar behavior in the past.

The billionaire investor and Berkshire Hathaway boss defined speculation in his letter to shareholders in 2000 as focusing "not on what an asset will produce but rather on what the next fellow will pay for it."

Speculators may knowingly pay more than what a stock is worth in the hope of selling it for an even higher price, he said in his 1992 letter.

Buying Hertz shares with the goal of dumping them before the stock becomes worthless fits that description.

Read more: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Amateur traders who cashed in during the recent stock rally may also be overconfident and greedy for more profits. Buffett described the phenomenon in his 2000 letter.

"Nothing sedates rationality like large doses of effortless money," he said. "Normally sensible people drift into behavior akin to that of Cinderella at the ball."

"They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice," Buffett continued.

"But they nevertheless hate to miss a single minute of what is one helluva party," he said. "Therefore, the giddy participants all plan to leave just seconds before midnight."

"There's a problem, though: They are dancing in a room in which the clocks have no hands," Buffett added.

In other words, speculators don't know when the music will stop and reality will set in, wrecking their portfolios.

Learning their lesson

Buffett compared the tech-stock fever in the late 1990s to a contagious infection in his 2000 letter.

"It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them," he said.

However, irrational exuberance and boundless optimism is never sustainable.

Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

"A pin lies in wait for every bubble," Buffett said.

When a bubble pops, "a new wave of investors learns some very old lessons," he continued. One of those is that "speculation is most dangerous when it looks easiest."

Gambling versus investing

Buffett also discussed rampant speculation during Berkshire's annual meeting in 2017, according to a transcript on Sentieo, a financial-research site.

"There's nothing more agonizing than to see your neighbor, who you think has an IQ about 30 points below you, getting richer than you are by buying stocks," he said.

"Markets have a casino characteristic that has a lot of appeal," Buffett continued. "People like action and they like to gamble."

"If they think there's easy money to be made, you get a rush," he added. "And for a while, it will be self-fulfilling and create new converts until the day of reckoning comes."

Read more: From a late-night infomercial to a 1,040-unit empire worth $188 million, how Jacob Blackett perfected his real-estate-investing strategy after losing $70,000 on his first deals

The good news about bubbles inevitably bursting is that investors can profit, Buffett said. Those who resist the hype and keep their nerve when the market crashes may find themselves with ample cash and opportunities to invest it, he said.

The Berkshire boss put his philosophy to work during the financial crisis, when he struck lucrative deals with Goldman Sachs, General Electric, Harley-Davidson, and other companies hungry for cash.

He was far less active during the coronavirus crash because he worried about the pandemic's fallout, the US Treasury and Federal Reserve swiftly moved to help companies and shore up markets, and private-equity firms lined up to offer cheaper bailouts than Berkshire.

Day traders are ruling the roost for now, but Buffett is likely shaking his head at their reckless behavior and waiting for his moment to shine.

Read more: The chief strategist of $2.5 trillion State Street recommends 7 ETFs for investors looking to profit from a permanently altered post-coronavirus landscape

Join the conversation about this story »

NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence

Wirecard is 'beyond salvageable,' according to one analyst, who says the company's rivals won't be able to benefit from its downfall

Sun, 06/28/2020 - 8:53am  |  Clusterstock

  • Munich-based Wirecard, founded in 1999, was established with the intention of assisting websites with credit card payment collections from customers.
  • In the past week, the company has witnessed a spectacular fall from grace amid a massive accounting scandal, its former CEO's arrest, and an insolvency filing.
  • But can fintech rivals benefit from its downfall? One analyst says that it is possible.
  • Wirecard is "beyond salvageable," Neil Campling, Head of TMT Research at Mirabaud Securities said.
  • Visit Business Insider's homepage for more stories.

German fintech group Wirecard became one of the hottest European stocks while battling endless allegations of fraud.

The former-CEO Markus Braun claimed a clean sheet for the company until as recently as May 17 when he tweeted: "When all the noise and dust settles, Wirecard will still be a company that generates a billion Euro of EBITDA this year and is one of the fastest growing in its industry."

The allegations intensified when the company claimed €1.9 billion from its balance sheet probably never existed, and Braun was arrested. Wirecard filed for insolvency on Thursday, ending a dizzying few days for the scandal-hit company.

Read more: Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

When the company's shares dropped by nearly 90%, it would have been easy for hedge funds with short positions to take a profit and run, said Peter Hillerberg, co-founder of Ortex Analytics.

But data shows that a vast majority of short sellers held on to their positions, and in some cases increased them, in anticipation of a further reduction in share price.

"It looks like their patience will pay off," Hillerberg said. 

Some hedge funds have already won big, however, with the Financial Times reporting that UK and US funds have reaped more than $1 billion in profits this week from the stricken fintech.

But how did things go so wrong for Wirecard? No one can know for sure right now, but questions are now being asked about whether the company's rivals will be able to benefit from its spectacular fall from grace.

Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

A Boon for fintech peers? 

Rivals can expect only a "very small opportunity" for some incremental business since most of Wirecard's transactions were fictitious, according to Neil Campling, Head of TMT Research at Mirabaud Securities.

Wirecard's peers do not stand to gain from its insolvency, he said.

"Yes there could be scraps for Adyen, Square and PayPal to pick up but do you really think Wirecard has 300,000 paying customers as they claimed? There never was €1.9 billion." 

Its insolvency is "not a boon," he continued.

Side note: Boon was the name of Wirecard's app at the centre of their "ecosystem". 

Read more: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Mirabaud Securities does not expect Wirecard to continue as a going-concern since it no longer has any assets of value.

In all likelihood, Visa and MasterCard may revoke their licences as the firm is in breach of their code of conduct, and only few "real" customers will seek alternative payment providers. 

Wirecard is "beyond salvageable," Campling said.

Here's how Wirecard went from analyst darling to a $2.2 billion accounting scandal — and cost SoftBank hundreds of millions in the process

SEE ALSO: Alexandria Ocasio-Cortez fought off a Wall Street-backed election challenge. Here are some of the titans of finance who backed her opponent, Michelle Caruso-Cabrera.

Join the conversation about this story »

NOW WATCH: Here's what it's like to travel during the coronavirus outbreak

Renowned strategist Tom Lee says investors should take a 'leap of faith' on select stocks despite a crisis that's 'worse than the Great Depression'

Sun, 06/28/2020 - 8:50am  |  Clusterstock

  • The coronavirus pandemic is a crisis that's "worse than the Great Depression," but investors should take a "leap of faith" and invest in stocks that would benefit from the reopening of the US economy, Tom Lee said in a CNBC interview on Friday.
  • Lee did not waver on his bullish call on stocks, but did say that in the short term, stocks are overbought and the market needs to digest its recent gains.
  • While a spike in coronavirus cases in some states is a valid concern, Lee is constructive on the fact that individual states can open safely, pointing to states like New York and New Jersey, among others.
  • Lee said he expects a "binary reaction" in the markets if there is a breakthrough in a COVID-19 vaccine or even cure, and the stocks that stand to perform the best if that happens are the "reopening stocks" like airlines, casinos, and hotels.
  • "The best-performing stocks after the dot-com crash were the internet names, because the ones that survived were structurally long-term winners," Lee said, in defense of why he is bullish on the stocks.
  • Visit Business Insider's homepage for more stories.

Tom Lee is not wavering one bit on his bullish call on stocks despite the global coronavirus crisis being "worse than the Great Depression."

In a CNBC interview on Friday, the strategist said investors should take "a leap of faith" and invest in the "reopening" stocks that stand to benefit from the US economy opening back up.

Lee's FundStrat prepared a list of these "epicenter" stocks that investors should consider buying as the economy slowly reopens. The "reopening" stocks include airlines, cruise lines, hotels, and casinos, among others.

Read more: Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

"If these companies aren't destroyed on both the equity and credit side, especially credit, I think they're a lot more resilient than people realize," said Lee. "If they're showing durability here, these are actually really attractive companies because they survived the greatest stress test in over 100 years," he continued.

"The ones that survive are going to be unkillable," Lee explained.

Lee pointed out that "the best-performing stocks after the dot-com crash were the internet names, because the ones that survived were structurally long-term winners," in defense of why he is bullish on the stocks.

Read more: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Lee is also bullish due to individual states being able to safely open, pointing to New York and New Jersey as recent examples. Alternatively, surging coronavirus cases in states like Florida and Texas prove that the reopening process for states is a delicate process.

Lee said that it makes sense for stocks to cool off, given that they are overbought in the short term and consolidation is healthy for markets. Additionally, Lee expects selling into quarter-end as investors rebalance their portfolios following a strong quarter for stocks.

But as long as the markets continue to hold their 200-day moving average, that's "good news," said Lee. The economy is resilient and we can still get a recovery "even if we're wearing masks and social distancing," Lee added.

Read more: From a late-night infomercial to a 1,040-unit empire worth $188 million, how Jacob Blackett perfected his real-estate-investing strategy after losing $70,000 on his first deals

Lee concluded the interview by observing that from the market's perspective, any breakthrough in the development of a vaccine or cure for COVID-19 will help "investors see a real path to normalcy" and will benefit the reopening trade. 

Lee pointed to $5 trillion in cash on the sidelines and bearish sentiment as all the more reason to stay bullish.

"The lack of a vaccine has kept people really cautious, that's why there's $5 trillion of cash on the sidelines, and AAII investor sentiment is the 3rd worst negative reading since this crisis started so people are as bearish today as they were when we nose dived to 2,200," said Lee.

Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

Join the conversation about this story »

NOW WATCH: Tax Day is now July 15 — this is what it's like to do your own taxes for the very first time

Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

Sun, 06/28/2020 - 8:43am  |  Clusterstock

  • Strategist Steven DeSanctis of Jefferies says companies with lower returns on equity have done shockingly well in the last few months, but he says the trend is about to break.
  • He notes that those low returners have gotten expensive, and recent earnings and economic trends are good news for higher-returning stocks.
  • Rounding up a series of key market trends, he's created a list of 14 buy-rated small-company stocks that are high returners, look inexpensive compared to their future earnings, and are financially healthy.
  • Click here to sign up for our weekly newsletter Investing Insider.
  • Visit Business Insider's homepage for more stories.

Jefferies Strategist Steven DeSanctis is probably speaking for a lot of people when he says stock performance "has been very odd during this rebound."

One odd but well-known issue is that ultra-low interest rates unleashed huge returns from stocks that were in bad financial shape, since the easy financial conditions helped them the most. But he adds that stocks with low returns on equity are actually outperforming stocks that are more efficient at returning money to investors.

In a recent note to clients, he explains that a big rally in health care stocks, which are generally lower returners, is one key reason for that strange result. The lower returners are much more expensive than usual while higher returners look cheap compared to their own histories.

DeSanctis, a small- and mid-cap strategist, says the market is coming to a turning point and it might be time to look elsewhere.

"The lowest ROE names held up better in the downturn but the gap with the highest ROE names is now above the one-standard deviation line," he wrote. "When we touched this level in the past, High ROE outperforms by an average of 5.5% over the subsequent three months, by 11.1% over the next six months, and a whopping 43.4% for the full year."

DeSanctis thinks smaller and less expensive companies are likely to stay on top, as easy money and an economic rebound are very good news for both of those groups of companies.

"Cheap stocks are still very cheap on an absolute basis despite rising 50+% from the market lows," he said. "The Fed has the credit markets' back and this really helps small caps more than large caps."

To bring those trends together, DeSanctis offers this list of high-returning small-company stocks that are financially healthy and fairly inexpensive based on their projected earnings.

Specifically, the companies have market capitalizations between $1 billion and $30 billion and returns on equity of 10% or more. Their debt-to-capital ratios are either falling or have risen by less than 5%, which shows that their financial health is stable or improving.

Lastly, they're all cheaper than at least 60% of stocks based on their expected earnings for next year. All 14 have "Buy" ratings from Jefferies analysts.

Read more:

SEE ALSO: A high-growth fund manager is tripling her peers' returns in 2020 while targeting nontech industries like beer and restaurants. She breaks down how she picked out 5 of the most innovative companies.

1. Lithia Motors

Ticker: LAD

Sector: Consumer discretionary

Market cap: $3.1 billion

Price-to-earnings ratio: 11.7

Return on equity: 19.3

Source: Jefferies Group



2. Core-Mark

Ticker: CORE

Sector: Consumer discretionary

Market cap: $1.1 billion

Price-to-earnings ratio: 13.5

Return on equity: 10.6

Source: Jefferies Group



3. LKQ

Ticker: LKQ

Sector: Consumer discretionary

Market cap: $7.4 billion

Price-to-earnings ratio: 11.6

Return on equity: 12.0

Source: Jefferies Group



4. BorgWarner

Ticker: BWA

Sector: Consumer discretionary

Market cap: $6.8 billion

Price-to-earnings ratio: 10.4

Return on equity: 15.9

Source: Jefferies Group



5. Signature Bank

Ticker: SBNY

Sector: Financials

Market cap: $5.4 billion

Price-to-earnings ratio: 9.9

Return on equity: 11.6

Source: Jefferies Group



6. Synchrony Financial

Ticker: SYF

Sector: Financials

Market cap: $13.5 billion

Price-to-earnings ratio: 8.1

Return on equity: 21.9

Source: Jefferies Group



7. LPL Financial Holdings

Ticker: LPLA

Sector: Financials

Market cap: $5.9 billion

Price-to-earnings ratio: 13.7

Return on equity: 55.4

Source: Jefferies Group



8. Virtu Financial

Ticker: VIRT

Sector: Financials

Market cap: $2.8 billion

Price-to-earnings ratio: 11.2

Return on equity: 15.1

Source: Jefferies Group



9. McKesson

Ticker: MCK

Sector: Healthcare

Market cap: $24.4 billion

Price-to-earnings ratio: 9.2

Return on equity: 13.7

Source: Jefferies Group



10. Oshkosh Truck

Ticker: OSK

Sector: Industrials

Market cap: $4.7 billion

Price-to-earnings ratio: 13.0

Return on equity: 18.7

Source: Jefferies Group



11. HD Supply

Ticker: HDS

Sector: Industrials

Market cap: $5.3 billion

Price-to-earnings ratio: 11.9

Return on equity: 29.8

Source: Jefferies Group



12. Alliance Data Systems

Ticker: ADS

Sector: Information technology

Market cap: $2.1 billion

Price-to-earnings ratio: 3.7

Return on equity: 25.1

Source: Jefferies Group



13. Eastman Chemicals

Ticker: EMN

Sector: Materials

Market cap: $9 billion

Price-to-earnings ratio: 10.1

Return on equity: 13.5

Source: Jefferies Group



14. Celanese

Ticker: CE

Sector: Materials

Market cap: $9.8 billion

Price-to-earnings ratio: 9.6

Return on equity: 27.1

Source: Jefferies Group



The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead

Sun, 06/28/2020 - 8:41am  |  Clusterstock

There were a few days in March when investor fear was so rampant that trading halts became commonplace.

That unnerving period of frequent circuit breakers is long gone now — but there still remains a palpable sense of uncertainty about what the future holds for publicly traded companies. 

For proof, look no further than Wall Street's so-called fear gauge formally known as as the CBOE Volatility Index, or VIX. It was near 36 on Friday, up 11 percentage points while stocks slumped, in keeping with its inverse relationship with the S&P 500. At that level, it was well above its long-run average of 19, according to data compiled by BTIG.

Perhaps the VIX was itself a tell-tale sign of the decline. After all, a rising VIX indicates that various S&P 500 index options that offer insurance against future losses are commanding higher premiums.

If history is any guide, the relatively elevated VIX may be signaling that more losses are afoot in the stock market. 

"Investors should be mindful of the 2020 declines in stocks as VIX rose through 25 in late February, past 45, to peak at 85.47," said Julian Emanuel, BTIG's chief equity and derivatives strategist, in a recent client note.

He added, "In 30 years of data, VIX between 25 and 45 has been accompanied by large net declines for the S&P 500."

Emanuel's analysis of the VIX from its inception in 1990 through June 2020 showed that when it traded in a range between 25 and 45, the S&P 500 fell by a cumulative 79%. On a daily basis, the losses averaged out to -0.1%. 

To be sure, the VIX traded in this range roughly one-fifth of the time under consideration, notes David Rosenberg, the chief economist & strategist of Rosenberg Research & Associates. But that does not make the VIX any less prophetic, in his view.

He noted that when the VIX traded between 30-35, the average monthly change in the S&P 500 was -1.1%. At 40 and above — where the index was trending towards on Friday — monthly losses averaged -4.3%.

Rosenberg further noted that the market's impressive 45% jump from its coronavirus-driven trough did not sufficiently drive down the VIX — at least when compared to history. 

In 1990, the S&P 500's first 40% rally pushed the VIX down to 12. In 2002, a comparable rally compressed it to 13. In 2009, the VIX retreated to 24. 

But in 2020, the VIX briefly bottomed near 25 before advancing to the zone in the 30s that Rosenberg and Emanuel consider dangerous. The historic volatility in March likely kept the VIX higher than usual this time around.

However, other experts are keeping close tabs on elevated levels of fear and uncertainty on Wall Street. After all, there is a lot to still worry about, including the recent rise of hospitalization rates in several states.

"While equity volatility should normalize further with a better macro backdrop, it is likely to remain elevated compared with long-run history in the coming months," said Christian Mueller-Glissmann, a managing director of portfolio strategy and asset allocation at Goldman Sachs.

He continued: "Our volatility regime model, which aggregates macro, macro uncertainty and market indicators, suggests that the high vol regime might linger. Uncertainty indicators in particular are still high due to the COVID-19 newsflow."

In other words, this is no time to be complacent. Emanuel reminded clients that unemployment is still historically high and the so-called second wave of infections is actually a fast-rising first wave in many states.   

He recommends that investors cash in on lingering greed by identifying stocks where traders are overwhelmingly bullish, and then selling near-term, out-of-the-money calls. Boeing, Tesla, Delta Air Lines, and Spotify are a few of the companies he spotted with relatively flat skew, meaning traders are paying a greater premium for upside calls versus downside puts. 

SEE ALSO: Morgan Stanley handpicks 10 stocks to buy now for the richest profits as travel and outdoor activities transform in the post-pandemic world

Join the conversation about this story »

NOW WATCH: How waste is dealt with on the world's largest cruise ship

The pandemic decimated the flex office space. Here's how companies like Convene and Industrious are getting creative to bounce back.

Sun, 06/28/2020 - 7:54am  |  Clusterstock

  • Flexible office providers are adapting their businesses to meet the different demands of their clients as offices across the country begin to reopen.
  • Serendipity Labs has launched a subscription service that is targeted at big companies that are looking for individual private office space close to employees' homes.
  • Convene is launching a digital conference tool that will facilitate both all-digital and hybrid digital and in-person conferences as the virus has led to cancellations of large events.
  • The pandemic has also spurred flex office players to create an industry council to share best practices.
  • Visit Business Insider's homepage for more stories.

Coronavirus, and the massive remote work expansion that followed it, has massively destabilized the office. While it is unclear what the long-term effects will be, companies are reimagining how their real estate footprint responds to the challenges of social distancing in a pre-vaccine world, and what that will look like in the longer term. 

For flex office providers, this could be a major opportunity to snap up customers who don't want to sign long-term leases while the world is so uncertain. 

The pandemic has put the flex office industry at an inflection point. The coronavirus pandemic rocked the sector as the startups and entrepreneurs that it counted on as clients have decided to either stop using their workspaces or just stopped paying rent. Big players like Convene and Industrious announced layoffs in March and April as America worked from home, and even as the hardest-hit cities reopen, the rise of remote work risks continues to be an existential threat to the business.

Now, flex office providers are becoming even more flexible in an attempt to align more closely with their customers' needs during this period of immense uncertainty.

"For now, companies are listening to their employees and everyone wants something different – so rather than a future that favors either office or remote-centered work, I believe flexibility will be the real long-term shift we see," Michelle Killoran, a real estate investor at OMERS Ventures, told Business Insider.

Serendipity Labs, a nationwide flex office provider that has a majority of its spaces in suburban and smaller cities, like Kansas City and Nashville, has launched a subscription service aimed at employers who want to supplement their staffs' home office with another flexible workspace. Convene, which offers flexible offices as well as meeting and event spaces has quietly launched digital conferencing tools and workplace consulting services to serve a wider range of clients.

Companies are also looking to highlight how they can provide an even safer workplace experience during the pre-vaccine period, with enterprise-focused flex provider Industrious helping to launch an industry group focused on cleanliness and hygiene.

Subscriptions and suburban office space

The buzziest terms in the office world are "distributed work" and the "hub and spoke" model, ideas that look to find a middle ground between one central office and the fully-remote workspaces. By providing a variety of working locations, firms hope to see higher employee satisfaction and more resiliency during crises like the pandemic. 

The strategy gives workers options to work closer to their home, whether in the outskirts of a city itself or in the suburbs. While large coworking spaces in an urban center may come to mind when discussing the flex industry, many companies already operate flex centers outside of the central business district. 

Office Evolution, a flex provider that focuses on suburban markets and smaller cities has seen an increase in demand for private office space, according to CEO Mark Hemmeter.

Hemmeter said that most demand so far has come from small businesses and freelance workers, but that he expects larger corporations to start renting more space as employees push their employers to offer a workplace somewhere between the downtown office and the employees' home.

Read more: The coronavirus is a 'nuclear bomb' for companies like WeWork. 10 real-estate insiders lay out the future of flex-office, and how employers are preparing now.

"Where we're going to see is the driver of the individual versus the employer that is going to really change the landscape of real estate strategy in the future," Charlie Morris, the leader of Avison Young's US Flexible Office Solutions, told Business Insider.

Serendipity Labs operates both suburban and urban locations. CEO John Arenas told Business Insider that inquiries for suburban locations are up to 90% of pre-COVID levels, while urban locations are only at 40% of pre-COVID levels. He said that 35% of demand is coming from companies reevaluating their office space after the pandemic. 

The company has launched a temporary subscription program that allows companies to provide individual workspace for employees close to where they live. The plan is fungible between employees and locations and has a rolling start date. Unlike coworking companies, the space is a private, enclosed office but offers coworking-like flexibility on use and location. 

The company also offers by-day desk rentals to support those who only occasionally need to leave the house for work. 

"We knew that large company clients, it makes less economic sense for them to be in a traditional lease for a secondary market and suburb, but they also have to react to and support a more mobile and remote workforce," Arenas told Business Insider about the origins of the plan. 

Breather, a flex office and meeting space company, has always had just-in-time and subscription booking models. CEO Bryan Murphy told Business Insider that this model has attracted a lot of interest.

"The number of leads, phone calls coming in looking for flexible has doubled in the last thirty days," Murphy said. "There are no traditional leases being done right now." 

Flexible business models and a flexible industry

Others in the industry are exploring digital means of keeping clients. 

Convene, which provides office space but largely focuses on events and meetings, has launched a digital conference tool. The tool, which CEO Ryan Simonetti described to Business Insider as "the digital twin to Convene's onsite experience," will facilitate both entirely online conferences and "hybrid" events, that combine a smaller in-person meeting with a digital stream of the events.

Convene employees will stand in as consultants who can help to prepare and test the technology before the meeting and provide support for any tech hiccups along the way. The company will also offer comprehensive post-event data that analyzes the attendees. 

Convene CEO Ryan Simonetti said that the company's funnel of confirmed events at the last half of the year makes it seem like "we're going back to normal in September," but that larger events are also still being affected. The digital conferencing tool allows for conferences to have smaller in-person events for local attendees while also reaching a larger, farther away audience. 

Read more: WeWork is bringing corporate staff back to New York offices in 3 waves as the city enters the next stage of reopening. Here are the details the coworking giant just gave workers.

Flex companies also starting to interact with each other for the first time to create industry standards, which they hope will make clients more comfortable about returning to their spaces. Industrious has led the formation of a Workplace Operator Readiness Council, which is sharing best practices for cleanliness and preventing disease transmission across 25 international operators, such as IWG, CBRE's Hana, Convene, and Serendipity Labs.

Industrious CEO Jamie Hodari told Business Insider that the council was created because flex companies, who tout their ability to create the best places to work, need to actually share best practices in order to deliver a quality, and safe experience to their customers. 

"We need to be in the 98th and 99th percentile of American businesses in how we approach the return to work," Hodari said. 

In the spirit of flexibility, Hodari hopes that the council will eventually evolve beyond sharing best practices for hygiene, to operating as an industry-wide council that promotes standards across companies. 

Read more: 

SEE ALSO: WeWork is bringing corporate staff back to New York offices in 3 waves as the city enters the next stage of reopening. Here are the details the coworking giant just gave workers.

SEE ALSO: The coronavirus is a 'nuclear bomb' for companies like WeWork. 10 real-estate insiders lay out the future of flex-office, and how employers are preparing now.

Join the conversation about this story »

NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid

Accenture is laying people off as Wall Street braces for big cuts next year

Sat, 06/27/2020 - 12:14pm  |  Clusterstock

 

Welcome to Wall Street Insider, where we take you behind the scenes of the finance team's biggest scoops and deep dives from the past week. 

If you aren't yet a subscriber to Wall Street Insider, you can sign up here.

Accenture is cutting US staff, and top execs just warned of more pain to come as the consulting giant promotes fewer people and looks to control costs, Meghan Morris and Dakin Campbell first reported. Their story got a lot of attention this week, and for good reason. It could be an indicator for how the firm's own clients are weathering a downturn, and consulting likely won't be the only industry to feel the crunch.

We also took a look at who's most at risk once Wall Street kicks off the tidal wave of layoffs many banks had put on pause — and why boutique firms without a strong restructuring practice could be "dead in the water," as one recruiter put it. 

Dakin along with Casey Sullivan got an inside look at Egon Durban, who became co-CEO of Silver Lake Partners in December. They spoke with more than 40 people who have worked with Durban, or across from him on deals, to understand his rise at the tech-focused private-equity firm he joined as a young banker in 1999.  

Read the full story here: 

40 insiders reveal the meteoric rise of Silver Lake's Egon Durban, the tech-focused PE firm's No. 1 dealmaker who strong-armed his way to the top and is about to get $18 billion more to invest

Keep reading for a look at why one of the earliest forms of alt-data is breaking down; a rundown of Amazon's rapid-fire moves to scoop up warehouses; and a deep dive into the culture at BTIG. 

Have a great weekend, 

Meredith 

Inside BTIG

The financial-services industry has tried to clean up its image in recent years, but shades of an earlier era on Wall Street have lingered at the firm BTIG, a Business Insider investigation by Nicole Einbinder and Rebecca Ungarino has found. 

Read the full story here: 

Former employees say BTIG had a toxic party culture that was stuck in the '80s Why alt-data fans are struggling

As Dan DeFrancesco and Bradley Saacks report, one of the earliest and most popular forms of alternative data is proving more difficult to handle these days. Investors like hedge funds have long leaned on credit-card data to uncover everything from new retail trends to the health of specific businesses.

But the pandemic has transformed shopping habits and made data unreliable. Vendors have been forced to do more hand-holding with clients, while banks are using techniques like post-stratification weighting and "swarming" to help make sense of the information. 

Read the full story here:

Credit-card data is broken. Here's how hedge funds and banks are being forced to rethink one of the earliest alt-data plays. Amazon adds to its warehouse empire

As Dan Geiger reports, Amazon just signed its largest lease ever in New York City. It's also negotiating to lease a 620,000-square-foot office and warehouse space in Red Hook, Brooklyn, that is under construction, a source with direct knowledge of the negotiations told Business Insider.

The moves mark the latest in a dramatic expansion of the $1.3 trillion company's logistics operations — which serve as the backbone for Amazon's booming e-commerce business.

Read the full story here: 

Amazon just signed its largest-ever warehouse lease in NYC. Here's how it's been making deals left and right to grow its massive storage and distribution network. What's next for buy now, pay later fintechs

Buy now, pay later, also known as point-of-sale financing, has been surging as consumers shift their spending online. Fintechs like Affirm, Afterpay, and Klarna are now looking to expand beyond their installment-lending roots. Affirm is exploring more financial products with the launch of a high-yield savings account, and Klarna just rolled out a loyalty program for users.

As Shannen Balogh reports, with growth comes new challenges, like managing consumer credit at scale. The fintechs could start looking for partnerships with banks, or find themselves to be acquisition bait.

Read the full story here:

From Affirm to Klarna, buy now pay later startups are booming. But experts warn juggling explosive growth with responsible lending is a tricky balance. FA recruiting is transforming 

As Rebecca Ungarino reports, elements of virtual financial adviser recruiting will stay with the industry post-pandemic as wealth management firms have adapted during remote work. 

"All of this is going to be much easier to move advisers, clients; all of this happening together is going to support a whole lot more movement," one veteran adviser recruiter said. 

Read more:

Wealth managers could save millions in costs from a snappier recruitment process. An analyst lays out the 3 firms that could benefit most. On the move

Citigroup has poached a top exec from Wells Fargo to run operations and anti-fraud within its Global Consumer Banking division — a unit that has been remodeled over the past year with ambitions of growing revenues and better competing with other top US banks. 

Titi Cole, previously EVP and head of operations and contact centers for the consumer and small business division at Wells Fargo, will join Citi in August as head of global operations and fraud prevention in the consumer bank, according to memo from Jane Fraser, president of Citi and CEO of GCB. 

Banking Deals Real estate Wealth management Hedge funds and investing  Fintech  Markets

Join the conversation about this story »

NOW WATCH: How waste is dealt with on the world's largest cruise ship

30 Big Tech Predictions for 2020

Sat, 06/27/2020 - 12:02pm  |  Clusterstock

Digital transformation has just begun.

Not a single industry is safe from the unstoppable wave of digitization that is sweeping through finance, retail, healthcare, and more.

In 2020, we expect to see even more transformative developments that will change our businesses, careers, and lives.

To help you stay ahead of the curve, Business Insider Intelligence has put together a list of 30 Big Tech Predictions for 2020 across Banking, Connectivity & Tech, Digital Media, Payments & Commerce, Fintech, and Digital Health.

This exclusive report can be yours for FREE today.

Join the conversation about this story »

30 Big Tech Predictions for 2020

Sat, 06/27/2020 - 12:02pm  |  Clusterstock

Digital transformation has just begun.

Not a single industry is safe from the unstoppable wave of digitization that is sweeping through finance, retail, healthcare, and more.

In 2020, we expect to see even more transformative developments that will change our businesses, careers, and lives.

To help you stay ahead of the curve, Business Insider Intelligence has put together a list of 30 Big Tech Predictions for 2020 across Banking, Connectivity & Tech, Digital Media, Payments & Commerce, Fintech, and Digital Health.

This exclusive report can be yours for FREE today.

Join the conversation about this story »



About Value News Network

Value is the only commonality in an increasingly complex, challenging and interdependent world.
Laurance Allen: Editor + Publisher

Connect with Us