Chinese authorities have escalated their involvement in the ongoing Evergrande crisis, detaining personnel from the property giant’s financial subsidiary. The Shenzhen police disclosed the detentions in a social media statement on September 16 evening but provided minimal details. Among the detainees, only one was partially identified — someone with the surname ‘Du’, Bloomberg reported.
No, it has not all of a sudden become easier to beat the market.
Keep that in mind as you come across recent arguments to the contrary. It’s always tempting to believe you can beat the market in your 401(k)s, IRAs, and other retirement portfolios. But this temptation becomes irresistible when—as a recent report suggests—well more than half of actively managed funds and ETFs are beating their benchmarks.
The report to which I refer, recently published by Morningstar, finds that 57% of actively managed funds and ETFs beat their benchmarks in the first half of 2023. Some specific style categories did especially well, furthermore: Morningstar calculates that 74.7% of funds/ETFs in the “U.S. Small Blend” category—nearly three out of four, in other words—beat their benchmarks. These percentages are far higher than what we have become used to over the years.
The true picture is a lot less rosy than what this recent report suggests, however. That’s not because Morningstar’s calculations aren’t accurate. But if one group of active managers is beating the market, then it must be the case that another group is lagging. And once transaction costs are taken into account, the average market-weighted return of all active managers must—of necessity—be below the return of the market as a whole.
So it’s not the case that the market has become easier to beat.
This in essence is the argument advanced in a seminal article in the January/February 1991 issue of the Financial Analysts Journal by William Sharpe, the 1990 Nobel laureate in economics. In the article, “The Arithmetic of Active Management,” Sharpe showed that active managers, on average, must lag broad market indexes. He furthermore showed that this conclusion depends “only on the laws of addition, subtraction, multiplication and division. Nothing else is required.”
Sharpe’s analysis counters the many arguments that many are making about why so many funds and ETFs have beaten the market so far this year. One is that because index funds have come to represent such a large share of all mutual funds, the stock market has become less efficient—and therefore more easily beaten. Another argument is that managers are smarter and more sophisticated than they were in the past. Still others assert that artificial intelligence is enabling everyone who bothers to beat the market.
Sharpe’s arithmetic-based argument does allow for this or that individual manager beating the market, especially over the short term. But for every active manager who comes out ahead, of necessity another active manager must be lagging the market. That’s because beating the market is a zero-sum game before transaction costs, and a negative-sum game after transaction costs. That’s why, as you can see from the accompanying chart, the percentage of large-cap growth funds beating their benchmarks averages is well below 50%.
Given what I’ve learned from my 40+ years in this business, I doubt many of you will be persuaded by Sharpe’s argument, and will instead continue to believe the odds are in your favor when trying to beat the market. One good solution, which both recognizes your belief and takes Sharpe’s argument to heart, was proposed decades ago by the late Harry Browne, editor of a newsletter called Harry Browne’s Special Reports.
His advice was to create two separate portfolios—one Permanent and one Speculative. The former would contain the bulk of your assets and would be invested in index funds and held for the long term with little or no change. The Speculative portfolio would contain your play money in which you try your hardest to beat the market.
Browne’s advice is shrewd because it recognizes both the arithmetic truth of Sharpe’s argument and the psychological reality that you probably believe you’re above average. Since most of your assets will be in the Permanent portfolio, you’re not risking your retirement financial security by trying to beat the market—and (almost certainly) lagging the market over the long term. But with your Speculative portfolio you will get to indulge that part of your psyche that believes you’re above average.
There will be times, like this year for actively managed mutual funds and ETFs, when your Speculative portfolio will outperform your Permanent one. However, I’m willing to bet that over the long term the latter will come out ahead. But, provided you structure your two portfolios correctly, there’s no harm in trying to prove me wrong.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].
- Nearly 16% of home sale deals in August were canceled, the highest rate since last October, Redfin reported.
- Soaring mortgage rates, which climbed as high as 7.23% last month, are giving homebuyers cold feet.
- “I’ve seen more homebuyers cancel deals in the last six months than I’ve seen at any point during my 24 years of working in real estate.”
Surging mortgage rates are not only keeping potential homebuyers out of the market, they’re pushing away those who were ready to sign.
In August, 15.7% of home-purchase deals set to go under contract that month were canceled, equal to nearly 60,000 of agreements, Redfin reported. That’s the highest rate since cancellations peaked in October 2022 and up from 14.3% a year earlier.
“I’ve seen more homebuyers cancel deals in the last six months than I’ve seen at any point during my 24 years of working in real estate. They’re getting cold feet,” Jaime Moore, a Redfin real estate agent quoted by the release, said.
“Buyers get sticker shock when they see their high rate on paper alongside extra expenses for maintenance, repairs and closing costs. Many of them would rather back out, even if it means losing their earnest money. A lot of sellers are also willing to let buyers slip away because they don’t want to concede to repair requests.”
But the key reason homebuyers are backing out is today’s mortgage rate environment,
The 30-year fixed mortgage rate averaged 7.07% in August, but jumped as high as 7.23% during the month, the highest in 22 years, according to Redfin.
That surge contributed to the average monthly mortgage payment hitting an all-time high of $2,632, according to a separate Redfin report.
Rising home prices added to headwinds faced by buyers. Median home sale prices saw the largest annual increase since October, rising more than 3% last month.
Though rising rates would traditionally put downward pressure on home prices, buyers are competing amid a significant supply shortage. And while construction has picked up, it will take time for the supply-demand imbalance to settle.
Retail investors are reportedly treating them like lottery tickets. Large funds are using them to tactically shield their portfolios from potential hazards. Sophisticated traders are using them to siphon profits from daily market swings.
They are called zero-day to expiry options, or “0DTEs,” and they have captured the attention of both professional and amateur traders alike while helping to fuel a boom in options trading that is transforming markets.
Over the past 18 months, activity in the 0DTE options market has hit record after record, with the most recent one arriving during August, when 0DTE options tied to the S&P 500 accounted for half of all average daily trading volume in the complex, according to Cboe, the largest U.S. options exchange operator.
What’s more, since the beginning of 2023, they have accounted for 43% of average daily volume, up from 36% in 2022, and just 5% in 2016.
Their growing popularity has already inspired the first in what’s expected to be a trio of 0DTE-focused ETFs, which started trading on Thursday. European exchanges have also tried to get in on the action by introducing daily expirations for options tied to the Euro Stoxx 50
one of the most popular European equity benchmarks.
Despite all the hype surrounding 0DTE, there are a lot of misconceptions surrounding how they work, what’s driving the boom and the potential risks that could be associated with these products. Here’s a rundown of what we know, and what we don’t.
What’s a 0DTE?
Simply, a 0DTE option is an option contract with 24 hours or less until it expires.
The short lifespan of these products means they are relatively cheap to purchase. This is because the probability of them paying off is low relative to options with more time left on the clock. Some have likened them to lottery tickets, but Cboe and CME Group have told MarketWatch that these products are intended to give investors the power to tactically hedge their portfolios against economic data like Wednesday’s U.S. August consumer-price index report.
Options contracts give investors the right, but not the obligation, to buy or sell a stock, currency or other asset at a given price before a set expiration date. Contracts linked to the S&P 500 index are typically settled in cash, meaning investors holding “in the money” options can exercise them for a cash payout, or sell them for a profit.
What are they used for?
Much attention has been paid to traders using 0DTEs like “lottery tickets,” pouring money into high-risk bets where they either lose everything or reap massive returns, sometimes in the space of an hour or less, as The Wall Street Journal recently reported.
Derivative experts say this extreme volatility is why retail traders and nonprofessionals should approach with caution. Of course, this lopsided risk profile has been akin to catnip for speculators, who congregate on Reddit and Discord, platforms where small-time investors swap tips and share stories about mammoth gains and losses.
While their utility for gambling on short-term market swings has captured the attention of the financial press, Cboe and its main rival, CME Group, maintain that the products are mostly being used for more mundane purposes like hedging larger stock portfolios.
“Most traders are taking a very systematic approach to trading SPX 0DTE,” said Jonathan Zaionz, senior derivatives analyst at Cboe, in a recent report.
Retail vs. institutional: who’s driving the 0DTE boom?
Despite their growing popularity, there is some confusion about which class of investors is driving all this activity. According to Cboe, 0DTEs are averaging $500 billion in notional value traded a day in 2023 in the S&P 500 complex alone. Some have put the total average notional volume in 0DTE at around $1 trillion.
Brent Kochuba, founder of Spotgamma, an options market analytics service, has said these numbers are simply too large to be driven by mostly retail flow. Others say they haven’t gotten a straight answer from the exchanges.
“We’re still trying to get to the bottom of who is doing this stuff. We’re getting conflicting messages from the exchanges,” said Larry Tabb, head of market structure research at Bloomberg Intelligence, in a phone interview.
“Cboe said 90% of the flow is coming through retail channels. But that doesn’t necessarily mean that you and I are buying all these options. It could be RIAs or small hedge funds,” Tabb said.
A representative for Cboe didn’t reply to a question from MarketWatch asking for a breakdown of trading flow by investor type. But Zaionz says growth is being driven by both small-time and professional traders.
“Volume growth has been coming from diverse types of investors. From large institutions, to midsize hedge funds to small retail traders, volumes have been increasing across the board,” he said in a report.
What inspired the 0DTE boom?
Traders have been using strategies revolving around 0DTEs for years. But they started to see wider appeal in 2022 after Cboe and its main competitor, CME Group, introduced weekly S&P 500 options expiring on Tuesdays and Thursdays, enabling traders to trade 0DTE every day of the week.
This was the culmination of a shift toward offering more short-dated options that began in 2005 when Cboe introduced its first weekly S&P 500 contracts expiring every Friday. They later expanded this to every Monday and Wednesday in the second half of 2016.
It is also worth noting that popularity of 0DTEs is part of a broader postpandemic surge in speculative trading. During the meme-stock frenzy of 2021, trading in single-name options including contracts on Tesla Inc.
and AMC Corp.
drove much of the growth in options trading. But more recently, the momentum has shifted back to index options.
To be sure, volume is growing across the entire U.S. listed options space. Options Clearing Corp., the main clearinghouse for U.S. options, show the pace of growth in overall U.S. listed options trading has accelerated to 24% annualized since 2019.
Are 0DTEs a threat to stock-market stability?
Some options-market experts and academics have blamed 0DTEs for making the U.S. stock market more volatile, a notion that Cboe and CME have vigorously disputed. Others contend that they could trigger a blowup akin to the “Volmageddon” incident from February 2018.
Much of this speculation centers on the potential impact of option market makers needing to hedge their exposure to options that can go from worthless to extremely valuable in the span of hours, if not minutes.
A team of researchers at the University of Utah said it found a relationship between elevated 0DTE volume and exaggerated intraday market swings in a study released in 2023.
Meanwhile, Kochuba and other options-market experts have told MarketWatch that it is reasonable to be concerned that 0DTEs could exacerbate a shock during an extreme market event like the volatility seen during the advent of the COVID-19 pandemic in March 2020.
Some on Wall Street have already blamed 0DTEs for more modest bouts of volatility. One notable example occurred on Aug. 15, when the S&P 500 dropped roughly 0.4% during a 20-minute period shortly before markets closed, seemingly out of nowhere.
Goldman Sachs Group analysts blamed 0DTEs for triggering the move. But analysts at both Cboe and Bank of America have disputed this. In a recent report, Mandy Xu, head of derivatives market intelligence at Cboe, said the exchange’s data simply don’t support this.
Still, debates like these are a testament to the unproven nature of 0DTEs. For now, Kochuba said he expects they could continue to be blamed when markets move suddenly with little explanation.
Whether they deserve to be, or not, is another matter entirely.
Stock futures pointed higher Thursday after the
closed up following a U.S. inflation report that makes it unlikely the Federal Reserve will boost interest rates when it meets next week. Investors on Thursday will get another inflation reading, this time in the form of the producer price index, which measures inflation at t…
- Arm is going public on the Nasdaq.
- Higher gas prices led inflation up.
- Citigroup and Google are cutting jobs.
Here are the most important news items that investors need to start their trading day:
1. All mixed up
Investors will be watching for another inflation report Thursday. The August reading of the producer price index comes on the heels of a hotter-than-expected consumer price index report. The market reaction to the CPI report was mixed. The Dow lost 0.20%, dragged down by 3M, which lost 5.7%. Meanwhile, the S&P 500 rose 0.12% and the Nasdaq Composite added 0.29%. The August PPI release on Thursday is expected to show prices have risen 0.4%, according to economists polled by Dow Jones. Follow live market updates.
2. What’s leading inflation?
Consumers are facing higher prices on gas and housing. The August consumer price index report — released by the U.S. Department of Labor on Wednesday — showed that inflation posted its biggest monthly increase this year. CPI, which measures costs across a broad array of goods and services, rose a seasonally adjusted 0.6% for the month and was up 3.7% from a year ago, according to the labor department. Core CPI — which excludes food and energy costs and is the number Fed officials focus on — increased 0.3% for the month and 4.3% from a year ago, compared with analyst estimates for 0.2% and 4.3%, respectively. Economists said higher gas prices, while notable, should be temporary.
3. Arm time
It’s time for one of the biggest initial public offerings of the year. Arm is going public Thursday in a long-awaited debut on the Nasdaq. The chip designer’s IPO was priced at $51 a share, the top of its expected range of $47 to $51 per share. That puts its fully diluted market cap, which includes outstanding restricted stock units, at more than $54 billion. Arm provides chip designs to tech giants including Apple, Google, Nvidia, Samsung, AMD, Intel and Taiwan Semiconductor Manufacturing Company, and many of them said they will buy shares as part of the offering.
Citigroup CEO Jane Fraser announced Wednesday that the bank would undergo a reorganization. Fraser said Citigroup would be divided into five main business lines that report directly to her, a move she said will cut down management layers and speed up decisions. Jobs will also be cut as part of the changes, but Citigroup is still deciding how many people will be laid off. Citigroup is the third-largest bank in the U.S. by assets but has struggled to rebound in the post-2008 financial crisis era and has been dealing with a slumping stock price.
5. Recruiting hit
Google is cutting hundreds of jobs from its recruiting organization as part of a bigger pullback in hiring that’s set to take place over the next several quarters. The move comes after Alphabet-owned Google announced in January that it was getting rid of 12,000 jobs, or roughly 6% of the full-time workforce. “It’s not something that was an easy decision to make, and it definitely isn’t a conversation any of us wanted to have again this year,” Brian Ong, Google’s recruiting vice president, told employees in a Wednesday video meeting of which CNBC obtained a recording. “Given the base of hiring that we’ve received the next several quarters, it’s the right thing to do overall.”
— CNBC’s Sarah Min, Brian Evans, Jeff Cox, Greg Iacurci, Leslie Picker, Kif Leswing, Hugh Son and Jennifer Elias contributed to this report.
— Follow broader market action like a pro on CNBC Pro.
- Arm is expected to begin trading Thursday in the year’s biggest listing. Instacart and Klaviyo are expected to list as soon as next week.
- While they each operate in vastly different parts of the tech universe, the companies have one important thing in common: Goldman is a key advisor.
- But with the sought-after title of lead advisor comes added scrutiny if the deals flop.
The return of large tech IPOs this week after a prolonged drought isn’t just a test of investors’ appetite for risky new offerings — it’s a key moment for Wall Street’s top advisor, Goldman Sachs.
While they each operate in vastly different parts of the tech universe, the companies have one important thing in common: Goldman is a key advisor.
The stakes are high for everyone involved. Last year was the slowest for American IPOs in three decades, thanks to sharply higher interest rates, rising geopolitical tensions and the hangover from 2021 listings that fared poorly. Successful IPOs from Arm and others will boost confidence for CEOs waiting on the sidelines, and activity there would help revive other parts of finance including mergers and financing.
That would be meaningful for Goldman, which is more dependent on investment banking than rivals JPMorgan Chase and Morgan Stanley. Amid the industry’s slump, Goldman has suffered the worst revenue decline this year among the six biggest U.S. banks, and CEO David Solomon has contended with internal dissent and departures tied to strategic errors and his leadership style.
“This is the core of the core of what Goldman Sachs does,” Mike Mayo, Wells Fargo banking analyst, said in a phone interview. “Expectations are high, and they’re likely to meet those expectations. Should they fall short, there will be far more questions than anything we’ve seen so far.”
Goldman is lead-left advisor on Instacart and Klaviyo, meaning their bankers drive decisions, coordinate other banks and typically earn the biggest portion of fees. On Arm, Goldman shares top billing with JPMorgan, Barclays and Mizuho. Goldman also was named the deal’s allocation coordinator.
But the sought-after title of lead advisor comes with added scrutiny if the deals flop.
If shares of Arm or the other two IPOs fail to trade for a premium to the list price in coming weeks, dark clouds could form over the nascent market rebound. For Goldman, perceptions of a bungled process would feed doubts about the company under Solomon.
Unlike the bank’s unfortunate foray into consumer finance, Goldman’s position atop Wall Street’s league tables hasn’t budged. The bank has actually gained share in advisory and trading since Solomon took over in 2018.
What’s Arm worth?
Initial public offerings can be tricky transactions to navigate. Advisors need to properly gauge interest in shares and balance demands from clients while pricing shares so investors see upside.
While Arm’s offering is reportedly seeing high demand, there are nagging doubts about the company’s valuation, its large exposure to China and its ability to ride the artificial intelligence wave. The SoftBank-owned company’s valuation has waxed and waned in recent weeks, from as high as $70 billion initially to the roughly $55 billion that represents the top end of a target share price of $47 to $51.
“We believe investors should avoid this IPO, as we see very limited upside ahead,” David Trainer, CEO of research firm New Constructs, wrote Tuesday in a note. “SoftBank is wasting no time by offering Arm Holdings to the public markets, and at a valuation that is completely disconnected from the company’s fundamentals.”
Further, Arm is selling an unusually small slice of its overall stock, about 9%, which helps drive scarcity. That small public float means new investors will have fewer rights related to voting power and corporate governance, Trainer noted.
The IPO is expected to raise more than $5 billion for Arm and generate more than $100 million in fees for its bankers.
There are more than 20 tech companies weighing whether to go public in the next year or so if conditions remain favorable, according to bankers with knowledge of the market. While some have begun taking steps to list in the first half of 2024, according to the bankers, the situation is fragile.
“If those three don’t go well, it doesn’t bode well for the rest of the IPOs or M&A because people will lose confidence,” one of the bankers said.
LONDON, Sept 13 (Reuters) – Oil output cuts which Saudi Arabia and Russia have extended to the end of 2023 will mean a substantial market deficit through the fourth quarter, the International Energy Agency (IEA) said on Wednesday, as it largely stuck by its estimates for demand growth this year and next.
OPEC and its allies, known as OPEC+, began limiting supplies in 2022 to bolster the market. This month, benchmark Brent crude breached $90 a barrel for the first time this year after OPEC+ leaders Saudi Arabia and Russia extended their combined 1.3 million barrel per day (bpd) cuts until the end of 2023.
Output curbs by OPEC+ members of more than 2.5 million bpd since the start of 2023 have so far been offset by higher supplies from producers outside the alliance, including the United States, Brazil and still under-sanctions Iran, the agency said.
“But from September onwards, the loss of OPEC+ production… will drive a significant supply shortfall through the fourth quarter,” it said in its monthly oil report.
However, the lack of cuts at the start of next year would shift the balance to a surplus, the agency said, highlighting that stocks will be at uncomfortably low levels, increasing the risk of another surge in volatility in a fragile economic environment.
Broader economic concerns, led by China’s sluggish post-pandemic recovery, have been amplified by worries that interest rates will remain high in the United States.
Still, oil demand at the world’s biggest oil importer has so “far remained remarkably unaffected by its economic downturn”, the IEA said.
“China is the main wild card,” it added. “Any abrupt weakening of China’s industrial activity and oil demand is likely to spill over globally, making for a more challenging climate for emerging markets in Asia, Africa and Latin America.”
Estimates of global demand and supply this year and next differ markedly depending on the forecaster.
Both the IEA and OPEC – in its monthly report published on Tuesday – are optimistic about Chinese demand over the course of 2023, leaving their global demand estimates for this year and next largely unchanged.
The IEA estimates 2023 global demand to grow by 2.2 million bpd, while OPEC expects growth of 2.44 million bpd.
For 2024, the contrast is wide. The IEA expects growth to slow sharply to 1 million bpd, while OPEC has a far rosier estimate of 2.25 million bpd.
Meanwhile, the U.S government’s Energy Information Administration has forecast demand growth at 1.81 million bpd for 2023 and 1.36 million bpd next year.
“Welcome to the chaotic world of forecasting,” Tamas Varga of oil broker PVM said.
Reporting by Natalie Grover and Alex Lawler in London; editing by Louise Heavens and Jason Neely
Our Standards: The Thomson Reuters Trust Principles.
- Shares of Warren Buffett’s Berkshire Hathaway ended Monday’s trading at all-time highs.
- That’s boosted the investment conglomerate’s market value to an unprecedented high of almost $800 billion.
- Buffett has overseen a roughly 4,300,000% gain in Berkshire stock since becoming CEO in 1965.
Shares of Warren Buffett’s Berkshire Hathaway ended Monday’s trading at all-time highs as the investment conglomerate continues to outperform itself.
Berkshire’s Class A stock closed at $555,309, and its Class B closed at $365.52. The record highs in both share classes saw the company’s market capitalization hit an eye-watering $797 billion, topping its previous peak of $794 billion on March 28, 2022.
The most recent advances in the stock mean that the Oracle of Omaha has overseen a gain of more than 4,300,000% in the value of Berkshire’s original Class A shares since he became CEO in 1965.
Berkshire’s sprawling investment empire is effectively a microcosm of the US economy, with businesses spanning insurance, energy, railroads, manufacturing, industrials, retail, and other sectors. The conglomerate earns about 80% of its operating profits from consumer-sensitive businesses, one analyst has estimated.
Apple shares continue to drive the rally in Berkshire stock. Buffett’s firm owns 5.8% of the world’s largest company – a stake worth around $162 billion as of Monday’s close.
Apple’s stock price has surged 43% this year as it rides the wave of investor excitement surrounding artificial intelligence.
AI bulls expect Apple and other Big Tech companies like Microsoft, Alphabet, and Tesla to boost productivity and bolster corporate profits by harnessing the disruptive power of the cutting-edge technology.
Buffett’s firm is famed for biding its time before pouncing on bargains – now more than ever. Berkshire’s current cash mountain totals more than the entire value of Disney – a reflection of both the legendary investor’s financial prudence and the dramatic decline in the media behemoth’s stock price.