Sam Bankman-Fried, founder of the cryptocurrency exchange FTX, which faced a colossal collapse this year, was arrested in the Bahamas on Monday, and is facing criminal charges in the United States, according to a Bahamian official.
The Attorney General of the Bahamas, through spokesman Latrae Rahming, posted a statement on Twitter detailing the arrest. Bankman-Fried, commonly known as SBF, lives in the Bahamas, where the cryptocurrency exchange was also based.
“SBF’s arrest followed receipt of formal notification from the United States that it has filed criminal charges against SBF and is likely to request his extradition,” the statement reads.
The U.S. Attorney for the Southern District of New York later tweeted that his office had filed a sealed indictment, which led to the arrest.
“We expect to move to unseal the indictment in the morning and will have more to say at that time,” Damian Williams said in a tweet from the office’s official Twitter account.
FTX, one of the largest cryptocurrency exchanges in the world, filed for bankruptcy protection in November, and Bankman-Fried resigned as CEO. The new CEO of FTX, John J. Ray III, is expected to testify in front of members of Congress on Tuesday, and in prepared remarks released Monday, he said that Bankman-Fried’s management of FTX was an “utter failure” that lacked any level of financial control.
MarketWatch staff writer Robert Schroeder contributed to this article.
U.S. stocks finished Friday’s choppy session with modest losses, capping off the worst week for stocks since September after a report on wholesale-price inflation challenged assumptions about slowing inflation in the U.S. The Dow Jones Industrial Average dropped 2.8% this week, its biggest pullback since at least the week ended Sept. 30, according to FactSet data. The blue-chip index finished Friday’s session DJIA, -0.90%
down 305.02 points, or 0.9%, at 33,476.46. The S&P 500 SPX, -0.73%
shed 29.13 points, or 0.7%, to 3,934.38, capping off a weekly drop of 3.4%, its biggest pullback since September. The Nasdaq Composite COMP, -0.70%
fell 77.39 points, or 0.7%, to 11,004.62.
Despite worries about inflation and an impending recession, there is at least one sign that some bullish market technical analysts might latch onto.
An upbeat golden cross appears to be forming in the Dow Jones Industrial Average DJIA, -0.90%,
more than nine months after a bearish death cross formed back in March, as the hawkish agenda of the Federal Reserve shattered bullishness on Wall Street.
A golden cross occurs when the 50-day moving average for an asset price trades above the 200-day MA, while a death cross, comparatively, is when the 50-day falls below the long-term average.
The 50-day moving average for the Dow stands at 32,200.32, at last check Friday afternoon, while the 200-day sits at 32,460.71, a roughly 260-point difference that could be traversed in the coming week or two, based on its current trajectory.
FactSet
A golden cross would mark the first for the Dow industrials since 2020 of August, according to Dow Jones Market Data.
The bullish chart formation also would appear at an odd time for investors, with an apparent uptrend materializing in the stock market, even as the threat of a recession in 2023 grows.
On top of that, MarketWatch columnist Mark Hulbert concludes that the U.S. stock market on average has performed no better in the wake of a golden crosses as it did at other times.
In many cases, a golden cross can help put an asset’s move into perspective, however, they tend to be well telegraphed.
Interestingly, the recession is also being widely predicted and some don’t think investors are getting the memo. As BlackRock notes, investors aren’t reflecting the damage that is to come, particularly as earnings expectations from American companies are right-sized.
So, it might be worth it for investors to take any golden crosses in assets with a grain of salt.
So far, the Dow industrials have outperformed over the past three months, up about 5%, compared with a decline of 2.5% for the S&P 500 SPX, -0.73%
and an 8.2% drop for the Nasdaq Composite COMP, -0.70%.
Over the past three months, the Dow industrials have recent in aggregate on the back of gains in shares of Caterpillar CAT, -1.56%,
Boeing Co. BA, +0.20%
Merck & Co. MRK, -1.86%,
IBM IBM, -0.47%
and Travelers Cos. TRV, -1.10%.
For the year so far, the Dow is down 7%, while the S&P 500 is off 17% and the Nasdaq is down nearly 30%.
Sen. Kyrsten Sinema announced Friday that she’s leaving the Democratic Party to register as an independent.
So what does that mean?
The initial reaction from analysts is that the Arizona lawmaker’s move won’t shake up how the Senate functions that much, and that it has more to do with her possible 2024 campaign for re-election.
“At this point, we don’t expect Sinema’s defection to formally change the balance of power in the Senate,” said Benjamin Salisbury, director of research at Height Capital Markets, in a note.
“Two independents, Senators Angus King [of Maine] and Bernie Sanders [of Vermont], formally caucus with Democrats,” Salisbury noted. “While Sinema declined to say which party she would caucus with, she did say that the change would not change how she votes, and she plans to keep her committee assignments, which is an indication to us that she will keep her affiliation with Democrats. In our view, the move is more about positioning herself for a tough 2024 reelection.”
Sinema, who has been criticized frequently by progressive Democrats for moves such as opposing changes to the so-called carried-interest loophole, was expected to face a challenge from the left in a Democratic primary. But as an independent, she can avoid a primary and focus on the general election in her battleground state.
Her calculation is that “the progressive Democratic ‘brand’ won’t help her to reelection in Arizona, but centrists and some from each party will,” Terry Haines, founder of Pangaea Policy, wrote in a note. “So there’s no percentage in doing anything but emphasizing her independence, and this is a high-profile, direct, and effective way of doing it.”
Haines said the senator’s move isn’t an earthquake for the Senate: “Sinema herself says it’s not so, that she’ll continue to do the job in the same way — and there’s no reason to dispute it.”
He also wrote that the “basic result for 2023-24 is as it was before Sinema’s announcement: domestic gridlock, basic fiscal/government spending stability, and continued foreign policy unanimity, particularly on China and Ukraine.”
The Biden White House offered a similar reaction on Friday, saying that Sinema’s decision to “register as an independent in Arizona does not change the new Democratic majority control of the Senate, and we have every reason to expect that we will continue to work successfully with her.”
“I believe she’s a good and effective Senator and am looking forward to a productive session in the new Democratic majority Senate,” Schumer, a New York Democrat, also said. “We will maintain our new majority on committees, exercise our subpoena power, and be able to clear nominees without discharge votes.”
For the past two years, Democrats have controlled the 50-50 Senate only because Vice President Kamala Harris can cast tiebreaking votes.
Following Georgia Democratic Sen. Raphael Warnock’s win on Tuesday over Republican challenger Herschel Walker in their closely watched runoff election, Democrats were expected to enjoy a 51-49 majority in the Senate.
There’s talk that Sinema’s announcement on Friday may have changed that, but analysts such as Salisbury and Haines are pushing against that view.
“Sinema’s defection is another sign of the tentative rise of overt bipartisanship in Congress,” Haines wrote. “There’s an increasing view that solving issues is what the vast majority of voters want, and some legislators seem prepared to risk the wrath of their party establishments to achieve it.”
Most U.S. senators have been affiliated with a major political party, but more than 70 have been independents or represented a minor party, according to Senate records.
Former Sen. Joe Lieberman of Connecticut is a recent example of that group, as he started out as a Democrat, then became an independent but still caucused with his former party. That’s even as Democratic leaders criticized him for backing the late Republican John McCain in the 2008 presidential race.
What worked well during the years-long bull market through 2021 — a focus on growth, regardless of price — has ground to a halt this year. The rebirth of the value style of investing — and modest valuations overall — has taken hold.
The approach taken by the Invesco S&P 500 GARP ETF has paid off through both bull and bear markets.
Let’s begin with a 10-year chart comparing total returns with dividends reinvested for the Invesco S&P 500 GARP ETF SPGP, +0.67%
and the SPDR S&P 500 ETF Trust SPY, +0.78%,
which tracks the benchmark S&P 500:
FactSet
So far this year, SPGP is down 12%, while SPY is down 16%. But the long-term chart shows significant and consistent outperformance for SPGP, even during the bull market.
The S&P 500 GARP Index
GARP stands for “growth at a reasonable price.” SPGP tracks the S&P 500 GARP Index, which is reconstituted and rebalanced twice a year, on the third Fridays of June and December. The next change occurs Dec. 16.
S&P Dow Jones Indices assigns a growth score to each component of the S&P 500 by averaging the three-year compound annual growth rate (CAGR) for earnings and sales per share.
The top 150 components of the S&P 500 by growth score are eligible for inclusion in the GARP index. Those 150 are ranked by “quality/value composite score,” which is the average of these three ratios:
Financial leverage — total debt to book value.
Return on equity — trailing 12 months’ earnings per share divided by book value per share.
Earnings-to-price — 12 months’ earnings per share divided by the share price.
The top 75 of the 150 by QV rankings are then included in the GARP index and weighted by the growth score, with portfolio weightings ranging from 0.5% to 5%.
There is a weighting limitation of 40% to any one of the 11 S&P sectors.
Addressing concentration risk
The benchmark S&P 500 Index SPX, +0.75%
is weighted by market capitalization, which means it is more heavily concentrated than you might expect — success is rewarded, with rising stocks more heavily weighted over time.
That can backfire during a bear market, with Amazon.com Inc. AMZN, +2.14%
down 47% and Tesla Inc. TSLA, -0.34%
down 51% this year, to name two prominent examples.
Looking at the SPDR S&P 500 ETF Trust SPY, +0.78%,
which is the first and largest exchange traded fund and tracks the benchmark index by holding all of its components, six companies (Apple Inc. AAPL, +1.21%,
Microsoft Corp. MSFT, +1.24%,
Amazon, both common share classes of Alphabet Inc. GOOGL, -1.30%
That percentage has come down this year, but a lot of risk remains concentrated in a handful of companies. (Apple alone makes up 6.4% of the SPY portfolio. Tesla is now the ninth-largest holding, making up 1.4% of the portfolio.)
One way to address high concentration in an index fund is to use an equal-weighted approach, which Mark Hulbert recently discussed.
For the Invesco S&P 500 GARP ETF, the underlying index’s selection methodology has resulted in much less portfolio concentration than we see in SPY, with the top five holdings making up 10.9% of the portfolio.
FTX founder Sam Bankman-Fried is being investigated by federal prosecutors over whether he manipulated prices of two cryptocurrencies to benefit his companies, according to a new report, and has also been ordered to testify before a Senate committee about the collapse of his crypto platform.
The New York Times reported Wednesday night that Manhattan-based federal prosecutors are investigating whether Bankman-Fried steered prices of TerraUSD and Luna to benefit FTX and his Alameda hedge fund. Terra and Luna saw more than $50 billion in market value wiped out when they collapsed in May. That contributed to a wider crypto crash, and eventually the implosion of FTX.
The Times reported the probe is in its early stages, and is part of a wider investigation into FTX’s collapse and the potential misappropriation of billions of dollars of customers’ funds, which are now missing. Additionally, the Times confirmed a November Bloomberg report that FTX was also being investigated for potentially violating U.S. money-laundering laws months before FTX’s collapse.
FTX, once one of the world’s largest cryptocurrency exchanges, collapsed and filed for Chapter 11 bankruptcy protection in November after running into liquidity issues. Bankman-Fried resigned as CEO, and saw his personal fortune of about $23 billion all but evaporate. About $8 billion remains missing from FTX’s balance sheet; Bankman-Fried said in a Bloomberg interview the funds were “misaccounted,”
Separately, the Senate Banking Committee late Wednesday ordered Bankman-Fried to testify about the collapse of FTX on Dec. 14, and said it is prepared to issue a subpoena if he does not voluntarily agree to comply by the end of the day Thursday.
“FTX’s collapse has caused real financial harm to consumers, and effects have spilled over into other parts of the crypto industry. The American people need answers about Sam Bankman-Fried’s misconduct at FTX,” Sens. Sherrod Brown, D-Ohio, and Pat Toomey, R-Pa., said in a statement.
“You must answer for the failure of both entities that was caused, at least in part, by the clear misuse of client funds and wiped out billions of dollars owed to over a million creditors,” the senators said in a letter to Bankman-Fried.
Sam Bankman-Fried opened up his wallet to Washington in a big way during the 2022 election cycle, donating about $40 million publicly.
So which politicians got money from the founder and former CEO of collapsed cryptocurrency exchange FTX?
MarketWatch has compiled an interactive list below of the candidates and committees who received funds from Bankman-Fried based on the latest disclosures to the Federal Election Commission.
Overall, he gave almost all of the $40 million to Democratic politicians or groups, and just over $200,000 to Republicans, according to the disclosures.
At least two Democratic senators received over $20,000 each from Bankman-Fried through joint political action committees tied to their candidacies. Those are Michigan’s Debbie Stabenow and New Hampshire’s Maggie Hassan. New York Democratic Sen. Kirsten Gillibrand got at least $10,000. Gillibrand is the co-sponsor of a crypto bill that would have the Commodity Futures Trading Commission oversee bitcoin, ether and most other digital assets and give a secondary regulatory role to the Securities and Exchange Commission.
In the wake of FTX’s collapse, politicians have been saying they will donate or have donated the money that they received from SBF to charities or other groups, or they’re giving it back.
Gillibrand spokesman Evan Lukaske said the senator donated her funds to Ariva Inc., a Bronx-based nonprofit that offers free financial counseling. Stabenow, whose own bill empowering the CFTC to regulate crypto was backed by Bankman-Fried, plans to donate the contributions to a local charity. A representative for Sen. Hassan did not respond to requests for comment.
Another FTX exec, Ryan Salame, became known as a Republican megadonor earlier this year, with a MarketWatch analysis in October finding that he publicly gave about $17 million to GOP groups.
Use our interactive below to search through donations as reported to the FEC.
The S&P 500 and Nasdaq Composite indexes recorded their worst day in almost a month on Monday,after a hotter-than-expected U.S. services-sector reading fueled concerns that the Federal Reserve may need to be even more aggressive in its inflation battle.
How stocks traded
The Dow Jones Industrial Average DJIA, -0.26%
finished down 482.78 points, or 1.4%, at 33,947.10.
The S&P 500 SPX, -1.79%
ended 72.86 points lower, or 1.8%, at 3,998.84.
The Nasdaq Composite COMP, -11.01% closed down 221.56 points, or 1.9%, at 11,239.94.
Those were the largest declines for the S&P 500 and Nasdaq Composite since Nov. 9, according to Dow Jones Market Data.
Strong wage growth numbers released Friday were followed up on Monday by a robust reading for the U.S. services sector — both of which helped to stoke fears that the Fed’s interest-rate hikes, along with the central bank’s modest balance-sheet unwind, haven’t had much of an impact on the tight labor market.
“If nothing else, the ISM services report is being interpreted as very strong, and thus the economy is overheating and that means more Fed tightening,” said Will Compernolle, a senior economist at FHN Financial in New York. “Consumer resilience has proven to be more intense than I would have expected. In the two most interest-rate sensitive sectors — housing and autos — tightening has channeled into markets in meaningful ways.”
But there has been so much pent-up demand, that higher interest rates haven’t been cooling overall spending as much as the Fed would like because companies are still having to fill a backlog of orders, he said via phone.
In other economic data, the final November S&P Global U.S. services PMI edged up to 46.2 from 46.1, but remained in contractionary territory.
November jobs data released on Friday showed average hourly wages grew over the past year by more than 5% as of November, beating economists’ expectations and stoking concerns that robust wage growth would continue to fuel inflation, market strategists said.
Worries about a more-aggressive Fed also helped to drive Treasury yields higher, adding to the pressure on stocks. The yield on the 10-year note rose 9.6 basis points to 3.6% on Monday. Treasury yields move inversely to prices, and yields had fallen sharply over the past month, driven by shifting expectations about the pace of Fed rate hikes.
Monday’s ISM services figure “surprised to the upside, suggesting that the economy is still running above its long-run sustainable path and that the Fed is going to have to slow the economy more than expected in 2023,” Bill Adams, the Dallas-based chief economist for Comerica Inc. CMA, said via phone.
Meanwhile, oil futures ended lower on Monday, a day after Sunday’s decision by OPEC and its allies to keep production quotas unchanged.
Falling equity prices helped drive the CBOE Volatility Index VIX, +8.87%,
also known as the VIX, back above 20 on Monday. The volatility gauge had fallen sharply in recent weeks as stocks rallied, potentially signaling complacency that could ultimately hurt stocks, said Jonathan Krinsky, chief market technician at BTIG, in a note to clients.
GameStop Corp.‘s Class A shares GME, -7.12%
ended down by 7.1% ahead of the company’s third-quarter results, which are set to be released after the market closes on Wednesday. Analysts are looking for a narrowing loss from the videogame retailer.
Shares of U.S. airlines and aircraft makers traded higher on Monday, bucking the broader trend in stocks. Boeing Co. BA, +1.22%
and United Airlines Holdings Inc. UAL, +2.60%
were among the best performers in the S&P 500, finishing up by 1.2% and 2.6%, respectively.
The stock market’s bounce off the October lows is running out of room, and it is time to take profits, according to Morgan Stanley’s Michael Wilson.
The chief equity strategist who correctly predicted this year’s stock-market selloff, now expects the S&P 500 SPX, -1.79%
to resume declines from the beginning of the year, after the benchmark last week crossed above its 200-day moving average.
“This makes the risk-reward of playing for more upside quite poor at this point, and we are now sellers again,” a team of strategists led by Wilson wrote in a Monday note.
Wilson went from one of Wall Street’s most outspoken bears to a tactical bull in October, when he anticipated a December rally of U.S. equities with the S&P 500 reaching up to 4,150 points. However, as the large-cap index now trades near the bank’s original tactical target range of 4,000 to 4,150, the strategist said investors should consider taking profits and get prepared for the new bear-market lows.
Wilson also said in November the S&P 500 will set a new price trough of 3,000 to 3,300 in the first quarter of 2023, before jumping back to the 3,900-level by the end of the year.
From a very short-term perspective, Wilson and his team think the S&P 500 could achieve 4,150, or about 3.8% above current levels, “over the next week or so.” However, a break of recent intraday lows of 3,938 would provide some confirmation the bear market is ready to reassert the downtrend in earnest, Wilson said.
Morgan Stanley’s bearish call was echoed by other Wall Street banks. JP Morgan Chase & Co.’s Marko Kolanovic, once one of Wall Street’s most vocal bulls, called for equity prices to stumble early next year. He also argued that the rebound in stocks was overdone after October. Meanwhile, strategists at BofA Global Research said it is time to sell the stock-market rally ahead of a potential surge in the unemployment rate next year.
Wilson recommends investors stay defensive in healthcare, staples and utilities as falling rates from here should be viewed as “a growth negative rather than valuation/Fed pause positive.” In addition, growth stocks are unlikely to benefit from falling rates because of the risk to corporate earnings, especially for tech and consumer-oriented companies, which are large weights in growth indices.
An obscure and arcane economic indicator suggests that Federal Reserve Chairman Jerome Powell was wrong when he said at his Nov. 30 news conference that “There is a path to a soft, a softish landing” for the U.S. economy.
This indicator traces to the large divergence between consumers’ views about the economy in general and their immediate personal financial circumstances in particular. A recession has occurred each time over the past four decades in which this divergence even approached its current level.
To measure this divergence, this indicator focuses on the Conference Board’s Consumer Confidence Index (CCI) and the University of Michigan’s Consumer Sentiment Survey (UMI). While there is some overlap between what these two indices measure, there is a significant difference in emphasis, according to James Stack of InvesTech Research, from whom I first heard about this indicator. The CCI more heavily reflects consumers’ attitudes towards the overall economy, according to Stack, while the UMI is more heavily weighted towards their immediate personal circumstances.
Perhaps not surprisingly, the CCI currently is higher than the UMI. Even as American consumers’ attitudes towards their immediate financial situations continue to sour, due to everything from inflation to higher mortgage rates to a softening housing market, the overall economy has proven to be remarkably resilient. Yet more evidence of this resilience was the Dec. 2 jobs report, in which the Labor Department reported the creation of a much-higher-than-expected number of new jobs.
What is more surprising is the magnitude of the current divergence. According to the latest data releases from the Conference Board and the University of Michigan in late November, the CCI is 43.4 percentage points higher than the UMI. That’s close to a record; the latest reading stands at the 98th percentile of all monthly readings of the past four decades.
Furthermore, as you can see from the chart above, a recession was in the economy’s not-too-distant future (shadowed bars) the past four times this difference rose to even 25 percentage points.
Consumer sentiment and the stock market
Stark as this chart’s correlations are, it’s difficult for a sample with just four observations to be statistically significant. To test this indicator’s potential, I next measured its ability to predict the S&P 500’s SPX, -1.96%
inflation-adjusted total return over the subsequent one- and five-year periods. The table below reflects data since 1979, which is when monthly data for both of these consumer indices first began to be reported.
When divergence between CCI and UMI was…
S&P 500’s average total real return over subsequent 12 months
S&P 500’s average total real return over subsequent 5 years (annualized)
In the highest 10% of monthly readings since 1979
-0.4%
-3.1%
In the lowest 10% of monthly readings since 1979
+14.3%
+14.8%
The differences shown in this table are statistically significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.
The bottom line? It’s not good news, for the economy in general or the U.S. stock market in particular, that consumers are so much more upbeat about the overall economy than they are about their immediate financial circumstances.
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 mark@hulbertratings.com
Saudi Arabia’s crown prince and a U.S. private-equity firm run by Barclays PLC’s former chief executive are among investors preparing to invest $1 billion or more into Credit Suisse’s CSGN, +6.61%
CS, +9.39%
new investment bank, people familiar with the matter said.
Crown Prince Mohammed bin Salman is considering an investment of around $500 million to back the new unit, CS First Boston, and its CEO-designate, Michael Klein, some of the people said. Additional financial backing could come from U.S. investors including veteran banker Bob Diamond‘s Atlas Merchant Capital, people familiar with that potential investment said. Credit Suisse previously said it had $500 million committed from an additional investor it hasn’t named.
Credit Suisse has received a number of proposals from investors interested in CS First Boston. Credit Suisse Chairman Axel Lehmann at a conference on Thursday said it has other firm commitments in addition to the $500 million from the unnamed investor. The bank hasn’t received a formal proposal from any Saudi entity, some of the people familiar with the matter said.
Credit Suisse is spinning off the New York-based investment bank as part of a fresh start after being buffeted by scandals, regulatory scrutiny and steep losses. It is raising $4.2 billion in new stock that separately will make Saudi National Bank its largest shareholder. It isn’t clear if Prince Mohammed would make the investment through that bank, or another investment vehicle. He is chairman of the country’s sovereign-wealth fund, Public Investment Fund, which along with another government fund is Saudi National Bank’s main owner.
Hedge-fund titan Bill Ackman appears to be walking back comments he made via Twitter last week about Sam Bankman-Fried that some interpreted as implicit support for the 30-something who presided over one of the most epic bankruptcies in financial markets in recent memory.
Last week, Ackman tweeted that Bankman-Fried’s statements made during a widely watched interview, streamed to New York from the crypto founder’s location in the Bahamas, was “believable.”
“Many have interpreted my tweet to mean that I am defending SBF or somehow supporting him. Nothing could be further from the truth,” Ackman wrote Saturday, referring to Bankman-Fried by his initials SBF.
Ackman went on to describe the implosion of Bankman-Fried’s crypto exchange FTX, and some of its associated businesses, as “at a minimum, the most egregious, large-scale case of business gross negligence that I have observed in my career.”
Ackman, who is the chief executive of Pershing Square Capital, a prominent investor in traditional markets, and an advocate of crypto, last week, tweeted this message following the widely watched interview of Bankman-Fried at the New York Times Dealbook Summit:
“Call me crazy, but I think SBF is telling the truth.”
Ackman has been chastised by some for seemingly offering verbal succor to a person who some have accused of, at the least, an epic mismanagement of client assets.
Speaking against the wishes of his lawyers, Bankman-Fried on Wednesday, during the Dealbook interview, admitted to making mistakes but said that he never intended to mingle client funds with those of the firm to make leveraged bets on crypto via hedge fund Alameda Research, which he founded before he started FTX.
“I didn’t know exactly what was going on,” Bankman said at the time.
At least one response to Ackman’s Saturday tweet, questioned whether the hedge funder might be responding to blowback from his own clients.
It isn’t the first time that Ackman has cast Bankman-Fried’s actions in a positive light. As the implosion of FTX was unfolding, Ackman said, in a now-deleted tweet, that he’d never before seen a CEO take responsibility as the crypto exchange operator did and that he wanted to give him “credit” for his actions. “It reflects well on him and the possibility of a more favorable outcome” for FTX, he wrote.
On Saturday, one Twitter user asked Ackman if had any ties to Bankman-Fried, which the investor bluntly said he doesn’t.
Bankman-Fried had been viewed as a financial darling inside and outside the crypto industry until his empire collapsed on Nov. 11 and it was revealed that affiliated hedge fund Alameda lost billions in FTX client money in leveraged crypto bets.
John Ray, the new chief executive of FTX, in a filing to the U.S. Bankruptcy Court for the District of Delaware, described the state of the crypto platform “as a complete failure of corporate controls and such a complete absence of trustworthy financial information.”
Golden Dragon China ETF pulls back after record monthly rally in November
The Invesco Golden Dragon China ETF started December with a pullback, after enjoying a record monthly rally in November amid increasing signs that China was starting to back off from the zero-COVID policy. The ETF, which tracks American depositary shares (ADS) of China-based companies that only list in the U.S., slipped 0.9% in premarket trading Thursday, after running up 9.6% on Wednesday and 41.8% in November. The pullback comes as futures for the S&P 500 tacked on 0.4%, after the index jumped 3.1% on Wednesday. The Golden Dragon ETF’s biggest decliner ahead of Thursday’s open was electric vehicle maker XPeng Inc.’s stock, which dropped 6.0% after rocketing a daily record 47.3% on Wednesday. Elsewhere, shares of Nio Inc. fell 2.0%, Alibaba Group Holding Ltd. shed 2.5%, Li Auto Inc. gave up 3.6%, Tencent Music Entertainment Inc. declined 0.9% and Pinduoduo Inc. was down 2.3%.
After outperforming both the S&P 500 and Nasdaq Composite in November, the Dow Jones Industrial Average has exited bear-market territory, based on oft-cited criteria, on the final trading day of the month.
But before investors get too excited about a new bull market for equities, there’s plenty of reason for caution.
The Dow DJIA, +2.18%
finished Wednesday’s session at its highest closing level since April 21, according to Dow Jones Market Data. Thanks to the gains spurred by Fed Chairman Jerome Powell’s comments at the Brookings Institution, the blue-chip gain has now risen 20.4% from its Sept. 30 closing low, meaning it has technically exited bear-market territory. It’s the only major equity index to do so.
Typically, when a given index or asset has risen 20% or more off a recent bear-market low, it is said to have technically exited bear-market territory.
Throughout the history of financial markets, there have been many examples where stocks have rallied during a bear market, only to eventually turn lower and erase all of those gains.
During drawn-out recessionary bear markets, stocks often rip higher, only to see their gains fizzle again and again. This has already happened more than three times since the start of 2022, including notable counter-rallies that occurred in March, in July and August, and again since mid-October, according to FactSet data.
Looking further back, market history over the last couple of decades is replete with similar examples, as MarketWatch has reported.
Following the bursting of the dot-com bubble, the Nasdaq Composite endured at least seven rallies of 20% or more before reaching its ultimate cycle low in 2002.
Market strategists are especially cautious considering that the Fed still raising interest rates, although Fed Chairman Jerome Powell suggested on Wednesday that senior Fed officials will likely opt for a smaller hike in December after four consecutive 75 basis point hikes — remarks that helped fuel a broad stock-market surge.
This ultimately underscores a simple point: it’s difficult to say when a bear market has truly ended, since the start of a new bull market is often only crystal-clear in retrospect — not unlike the challenge of determining the start of a recession.
A similar precept holds true for the economy. While consecutive quarters of contracting gross domestic product are often described as a “technical” recession, this is not the criteria used by the National Bureau of Economic Research when determining whether the U.S. economy is actually in recession or not.
As the Dow charged higher late last week, one UBS markets strategist warned that investors should anticipate more volatility.
“We remain skeptical that the recent rally marks the start of a new market regime. The priority of the Fed is likely to remain the fight against inflation, pending a more consistent stream of softer prices and employment data. Against this backdrop, we favor adding to defensive assets in both equity and fixed-income markets,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
The blue-chip gauged finished Wednesday’s session at 34,589.77, having risen 737.24 points, or 2.2%. The S&P 500 SPX, +3.09%
and Nasdaq COMP, +4.41%
also recorded strong gains of 3.1% and 4.4%. It was the best session for all three indexes in roughly three weeks.
CrowdStrike Holdings Inc. shares dropped in the extended session Tuesday after the cybersecurity company said new subscriptions came in below expectations amid macro headwinds and longer customer buying cycles.
Given concern that businesses are cutting back on spending, CrowdStrike CRWD, -1.04%
shares plummeted nearly 20% after hours, following a 1% decline in the regular session to close at $138.
George Kurtz, CrowdStrike’s co-founder and chief executive, told analysts on a conference call that the company reported $198.1 million in net new annual recurring revenue, or ARR, in the quarter, not as much as it had hoped.
ARR is a software-as-a-service metric that shows how much revenue the company can expect based on subscriptions. That grew 54% to $2.34 billion from the year-ago quarter, while the Street expected $2.35 billion. Kurtz said that about $10 million was deferred to future quarters.
“We expect these macro headwinds to persist through Q4,” Kurtz told analysts.
Burt Podbere, CrowdStrike’s chief financial officer, explained that the company relies on ARR because it’s “an X-ray into the contract sales.”
“As George mentioned, even though we entered Q2 with a record pipeline, and we are expecting the elongated sales cycles due to macro concerns to continue, we’re not expecting to see the typical Q4 budget flush given the increased scrutiny on budgets.”
Podbere said it is “prudent to assume” fourth-quarter net new ARR will be up to 10% below the third quarter’s. That would mean about a 10% year-over-year headwind going into the first half of next year, and “full-year net new ARR would be roughly flat to modestly up year over year.”
“This would imply a low 30s ending ARR growth rate and a subscription revenue growth rate in the low to mid-30s for FY 2024,” Podbere said.
The company expects adjusted fiscal fourth-quarter earnings of 42 cents to 45 cents a share on revenue of $619.1 million to $628.2 million, while analysts surveyed by FactSet forecast earnings of 34 cents a share on revenue of $633.9 million, according to analysts.
CrowdStrike expects full-year earnings of $1.49 to $1.52 a share on revenue of $2.22 billion to $2.23 billion. Wall Street expects $1.33 a share on revenue of $2.23 billion.
The company reported a fiscal third-quarter loss of $55 million, or 24 cents a share, compared with a loss of $50.5 million, or 22 cents a share, in the year-ago period. Adjusted net income, which excludes stock-based compensation and other items, was 40 cents a share, compared with 17 cents a share in the year-ago period.
Revenue rose to $580.9 million from $380.1 million in the year-ago quarter.
Analysts expected CrowdStrike to report earnings of 28 cents a share on revenue of $516 million, based on the company’s outlook of 30 cents to 32 cents a share on revenue of $569.1 million to $575.9 million.
So far in November, cloud software stocks have been getting trashed. While the S&P 500 SPX, -0.16%
has gained 2%, and the tech-heavy Nasdaq Composite COMP, -0.59%
is flat, the iShares Expanded Tech-Software Sector ETF IGV, -0.78%
has fallen more than 2%, the Global X Cloud Computing ETF CLOU, -1.12%
has declined more than 4%, the First Trust Cloud Computing ETF SKYY, -0.74%
has fallen more than 6%, and the WisdomTree Cloud Computing Fund WCLD, -1.05%
has dropped more than 11%.
Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.
Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.
REIT prices may turn a corner in 2023
REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.
And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.
During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.
When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”
Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates
In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500 SPX, -0.29%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.
REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.
The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.
Industry numbers
The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.
The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.
FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.
The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.
Screen of high-yielding equity REITs
For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.
Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.
This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.
For a broad screen of equity REITs, we began with the Russell 3000 Index RUA, -0.04%,
which represents 98% of U.S. companies by market capitalization.
We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.
If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.
For example, if we look at Vornado Realty Trust VNO, +1.03%,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.
Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.
Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:
Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.
Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.
Largest REITs
Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:
Just hours after filing for Chapter 11 bankruptcyin New Jersey on Monday, cryptocurrency lender BlockFi filed a lawsuit against a holding company by FTX founder Sam Bankman-Fried over his shares in trading platform Robinhood, the Financial Times reported.
The suit was filed against Bankman-Fried’s vehicle Emergent Fidelity Technologies, of whom BlockFi is seeking to recover unpaid collateral.
The filing – also lodged in New Jersey – says BlockFi entered into a pledge agreement with Emergent on Nov. 9 stating that an unnamed borrower was obliged to pledge “certain shares of common stock” and has breached the agreement by failing to comply with its payment obligations.
The Financial Times reports the collateral in question is Bankman-Fried’s 7.6% stake in Robinhood which he bought earlier this year.
“Emergent has defaulted on its obligations under the pledge agreement and failed to satisfy its obligations thereunder despite written notice of default and acceleration,” the lawsuit filing says.
The lawsuit also named London-based brokerage ED&F Man Capital Markets for refusing to “transfer the collateral” to BlockFi.
“This is a highly complex matter,” a spokesperson for ED&F Man Capital Markets told MarketWatch in an emailed statement.
“We cannot comment on matters that are subject to legal proceedings but will of course comply with any direction given by the judge,” they added.
On Monday, BlockFi, who was once valued at $3 billion, filed for bankruptcy protection after becoming the latest company to be pushed over the edge from the collapse of crypto exchange FTX.
The lawsuit is the latest headache for Bankman-Fried, who is already the subject of a number of investigations in the U.S. and the Bahamas – where FTX was based. The downfall of FTX has triggered a chain reaction of crypto-casualties including crypto financial-services firm Genesis.
U.S. stocks finished sharply lower on Monday as several senior Federal Reserve officials hurt demand for stocks with hawkish commentary, while worries about the burgeoning protest movement in China rippled across global markets. The S&P 500 SPX, -1.54%
finished down 62.17 points, or 1.5%, to 3,96395. The Dow Jones Industrial Average DJIA, -1.45%
closed off 497.57 points, or 1.5%, to 33,849.46. The Nasdaq Composite COMP, -1.58%
closed 176.86 points, or 1.6%, lower at 11,049.50.
Several headwinds that pummeled the stock market in 2022 have turned into tailwinds, setting the stage for a rally in U.S. equities heading into year-end, according to Tom Lee, head of research at Fundstrat Global Advisors.
“The Thanksgiving holiday has ended and now markets are entering the final key weeks of 2022,” said Lee, head of research at Fundstrat, in a note Monday. “While many may be tempted to ‘close the books’ for the year, we think the final 5 weeks will be ‘fireworks.’”
In Lee’s view, 11 headwinds that this year helped drive the S&P 500 index to a 2022 low in October, including surging oil prices and the Federal Reserve’s hurry to lift interest rates higher to battle soaring inflation, “have all flipped.” On Monday morning, U.S. oil was trading at the lowest price of 2022 amid protests in China over the country’s strict rules aimed at curbing the spread of COVID-19, restrictions that investors fear will hurt consumption and economic growth.
Lee said he saw the easing of inflation in October, as measured by the consumer price index, as a “game changer” for markets, with the case for “a sustainable rally in equities” being the strongest that it’s been so far this year. Here are the 2022 headwinds that Lee sees becoming tailwinds.
FUNDSTRAT NOTE DATED NOV. 28, 2022
Lee said that softer inflation seen in October appears “repeatable” and that the easing of price pressures should be “sufficient” for the Fed to slow its rapid pace of rate hikes, with December potentially being the last increase. Also, “if inflation is ‘as bad as 1980s’ I would have thought midterms would have been an incumbent massacre,” Lee said of the recent U.S. elections.
He said that other recent signals point to “a far different path forward for markets,” including “collapsing” volatility in the bond market and a relatively large decline in the U.S. dollar. Lee pointed to the plunge in the CBOE 20+ Year Treasury Bond ETF Volatility Index, saying he anticipated that a further decline would support the S&P 500 soaring to 4,400 to 4,500 by year-end.
The S&P 500 ended Friday down 15.5% for the year, but up more than 12% from its 2022 closing low on Oct. 12, according to Dow Jones Market Data.
U.S. stocks traded lower on Monday, with the S&P 500 SPX, -1.54%
down 0.8% at around 3,995, according to FactSet data. In the bond market, 10-year Treasury yields TMUBMUSD10Y, 3.712%
were flat at 3.69% around midday Monday, while two-year yields TMUBMUSD02Y, 4.467%
fell about five basis points to 4.43%.
U.S. yields have recently seen a “massive decline ranking in the bottom 1% largest downside moves in the past 50-years,” said Lee. The odds are rising that 10-year and 2-year yields may be past their peaks, potentially supporting an expansion in price-to-earnings multiples in stocks, according to his note.
“Skeptics will say “growth is the problem now” and point to downside” in the S&P 500’s earnings per share, or EPS, said Lee. But the index historically has “bottomed 11-12 months before EPS troughs,” he said. “So EPS is lagging.”
