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Daily Scan: Stocks bounce; Pope takes on climate change in DC
Capital Markets
<p>&nbsp;</p> <p>Updated throughout the day</p> <p>September 23</p> <p>Good afternoon. U.S. stocks had an up and down day Wednesday. The Dow closed with a 0.3% loss, slightly better than the 0.66% dip it took around noon. The Nasdaq lost 0.1% and the S&amp;P 500 fell 0.2%. Oil dropped more than 3%, closing below $45/barrel. News that manufacturing activity in China has collapsed to a six-and-a-half year low has added fuel to concerns that the Asian giant's economic growth is shuddering to a crawl. The heavy sell-off seen yesterday in anticipation of this result and meant a lot the initial damage has been done. But buckle up because fears of a global slowdown are going nowhere.</p> <p>Here is what else you need to know:<br /> Pope kicks off U.S. visit in D.C. The pope has a packed schedule, chatting with the president and Congress about climate change before heading up the East Coast. Wall Street should be thrilled. When three previous popes have made four addresses to the U.N., as Pope Francis will do Friday, the Dow has gained an average of 1.23%. When Pope Benedict XVI visited in April 2008, the Dow gained 1.8% the day he spoke to the U.N. New York Post<br /> Mike Huckabee says President Obama "pretends to be" a Christian. GOP presidential candidate Huckabee says he's more concerned about the "authenticity" of a politician's faith and how it "plays out in their politics" than what they say they are. Huckabee was also critical of Obama not being welcoming enough to Pope Francis during his U.S. visit. CNN<br /> Serial may look at military disappearance in next season. The podcast became popular for its in depth reporting on the murder case of Adnan Syed. This time, Serial is looking at Sgt. Bow Bergdahl's disappearance from his base in Afghanistan in 2009, and subsequent captivity by a Taliban ally. BuzzFeed<br /> ECB ready to boost bond-buying program. ECB President Mario Draghi says the bank is ready if inflation weakens any more than expected. The bond buying is scheduled through September 2016, but could last longer if needed. Wall Street Journal<br /> Volkswagen CEO steps down. Martin Winterkorn is leaving the firm in the wake of the Volkswagen emissions scandal. Winterkorn says he isn't "aware of any wrongdoing on [his] part," but that the company needs a fresh start. A successor has not been named. Talking Points Memo<br /> Died: Baseball great Yogi Berra. Berra, a Hall of Famer and arguably one of the best catchers of all time, passed away Tuesday evening at age 90. Berra, who spent most of his career with the Yankees, was known for his Yogi-isms and larger than life personality. As he once said, it ain't over til it's over. USA Today<br /> Spending bill on track, but shutdown threat persists. The Senate took the first steps Tuesda</p>
Twitter rips on ex-hedgie over drug price surge
Lifestyle, 4:01
<p>Martin Shkreli may be the most hated man in America this month. The CEO of Turing Pharmaceuticals and former hedge funder, Shkreli raised the price of cancer and AIDS drug Daraprim by more than 5,000%. The world reacted with the anger maybe only Bernie Madoff can relate to.</p> <p>There is a reason for Twitter shaming - example #MartinShkreli<br /> — cheryl (@ehcsztin) September 22, 2015</p> <p>I hear @MartinShkreli is using all that money to fund research on how to get AIDS airborne. — Kumail Nanjiani (@kumailn) September 22, 2015</p> <p>Shkreli, frankly, doesn't give a damn. He openly admits that the pills cost him less than a dollar to manufacture. But the $13.50 a tablet price wasn't enough. He wanted $750 per tablet. </p> <p>I've purchased the rights to the world's orange supply. Oranges are now $10,000 each. Also, turns out you need them to live. #martinshkreli<br /> — Andrew Hibbard (@andrewhibbard) September 22, 2015<br /> Shkreli, whose tweets are protected, has responded to the haters with witty quips like "uh f u." "Protect ya goddamn neck." And "lots of paradoxes in life," reports Fusion.  </p> <p>After raising AIDS drug price from $13.50 to $750/tablet, Martin Shkreli announces he and his dog, Max, will steal XMas from Whoville. — Mark Campbell (@MrWordsWorth) September 21, 2015</p> <p>I have dealt with sociopaths in my life. Like @MartinShkreli, theyre good a putting on a mask of charm while engaged in self-centered evil.<br /> — Kurt Eichenwald (@kurteichenwald) September 21, 2015</p> <p>Martin Shkreli is the most punchable man in America. If you see him, please punch him. Thank you. — Craig Schaefer (@craig_schaefer) September 21, 2015</p> <p>After the outcry, Shkreli has finally decided to lower the price to something "more affordable." But, he also said the price will be at a level that “is able to allow the company to make a profit, but a very small profit, and we think these changes will be welcomed," reports Forbes. We're guessing he'll still be making a hefty profit in there.</p>
Schwarzmans give $40M to inner-city student scholarship
Lifestyle, 4:01
<p>Blackstone CEO Stephen Schwarzman and his wife Christine have donated $40 million to the "Kids Are Our Capital" program in New York City.</p> <p>The record gift will make up a chunk of the Roman Catholic Archdiocese of New York's $125 million scholarship program for inner-city kids, reports the New York Daily News. The scholarship fund was founded in 1971 to provide financial assistance for Catholic school students in low-income neighborhoods. Most to the 7,000 students in the program are minorities. The majority are able to graduate from high school and attend college, the diocese reports.</p> <p>The Schwarzman donation is thought to be the largest of its kind in the U.S., Cardinal Timothy Dolan says.<br /> Photo: Heather Paul</p>
Wall Street-worthy Yogisms
Lifestyle, 4:01
<p>Yogi Berra, Hall of Fame Yankee's catcher, died Tuesday at age 90. Through his career and until his death, Berra was known for his "Yogisms," or witty, disjointed one-liners he'd come up with in seconds. In honor of the great Yogi, here are some of the top Yogisms Wall Streeters can use at work:</p> <p> It ain't over 'til it's over.<br /> If you don't know where you're going, you'll end up somewhere else.<br /> You can observe a lot just watching.<br /> The future ain't what it used to be.<br /> Nobody goes there anymore. It's too crowded.<br /> We made too many wrong mistakes.<br /> If you can't imitate him, don't copy him.<br /> If the world were perfect, it wouldn't be.<br /> I really didn't say everything I said.<br /> It's deja vu all over again!</p> <p>Photo: Baseball Collection</p>
Who invented the term EBITDA? Was it KKR? Milken?
Capital Markets
<p>Contrary to popular belief, the term EBITDA as a measure of a company’s cash flow was not invented by the early buyout shops. Neither KKR &amp; Co. L.P. (NYSE:KKR) nor any of the other pioneers of the 80’s-style mega LBOs introduced EBITDA into the financial lexicon. Junk bond pioneer Michael Milken wasn’t the inventor either.</p> <p>EBITDA was introduced into the vocabulary by John Malone. He is currently the largest landowner in America. But he’s more well-known as the billionaire who earned his fortune by becoming the “King of Cable.” Malone started working in the mid-70’s at a cable TV provider called TCI which was purchased by AT&amp;T Corporation in 1999. AT&amp;T kept TCI’s broadband internet services, and TCI’s cable TV systems were sold to Cablevision Systems Corporation (NYSE:CVC) and then to Comcast Corporation (NASDAQ:CMCSA) (NASDAQ:CMCSK). Malone is likely to have something to do with your current internet connection and what you’re watching on TV today.</p> <p>Regarding Malone’s introduction of “EBITDA” into the financial lexicon here is an excerpt from The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success discussing Malone’s role in the birth of EBITDA:</p> <p> In lieu of EPS, Malone emphasized cash flow to lenders and investors, and in the process, invented a new vocabulary, one that today’s managers and investors take for granted. Terms and concepts such as EBITDA (earnings before interest, taxes, depreciation, and amortization) were first introduced into the business lexicon by Malone. EBITDA in particular was a radically new concept, going further up the income statement than anyone had gone before to arrive at a pure definition of the cash-generating ability of a business before interest payments, taxes, and depreciation or amortization charges. Today EBITDA is used throughout the business world, particularly in the private equity and investment banking industries.(1) [emphasis added]</p> <p>So why did Malone invent “EBITDA”? Long story short, Malone had a key insight about the cable industry. While Wall Street and most of his peers were obsessed with net income and EPS, he wanted to minimize net income. Higher net income meant higher taxes. Also, to grow as a cable company, you wanted scale to achieve more purchasing power and lower costs, and in turn this led to the ability to pay higher prices (often financed by leverage) for assets while earning the same or higher returns. The key was to fund internal growth and acquisitions with pretaxcash flow. More details from The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success:</p> <p> Malone, the engineer and optimizer, realized early on that the key to creating value in the cable television business was to maximize both financial leverage and leverage with suppliers, particularly programmers, and that the key to both kinds of leverage was size. This was a sim</p>
Aberdeen looks for redemption in China
Asset Management
<p>China and its emerging markets trading partners got roughed up pretty badly this summer. Aberdeen Asset Management is betting that the sector is hitting a trough -- and is essentially asking for investors to buy into their view.</p> <p>Aberdeen itself got hit by the market mayhem. In just the second quarter of this year, it has lost $30.5 billion in assets and its stock has tumbled 23% so far this year.  Total assets under management have fallen 7%. The firm has been bleeding assets for nine straight quarters, and a possible rate rise in the U.S. later this year could just make that worse. Competitors, such as Schroders and Henderson, are seeing outflows, boosted by their exposure to European assets, reports the Financial Times. About 30% of Aberdeen client assets are in emerging markets, and about 5% is in Chinese companies.</p> <p>“We’ve got to sit this out. All we can do is control what we can control, which is [to] look at the costs in the business [and] try and manage money well for our clients,” said Aberdeen CEO Martin Gilbert in late July.  “What we can’t do is manage market sentiment.”</p> <p>Aberdeen has pushed to counter asset outflows with acquisitions, most recently snapping up the London-based Advance Emerging Capital, reports BBC. In August the firm looked to the U.S. and bought U.S. hedge fund investor Arden Asset Management, boosting its hedge fund unit's assets from $2 billion to $11 billion. Aberdeen also purchased U.S. private equity firm Flag Capital Management in May. Late last year, the firm acquired Scottish Widows Investment Partnership (SWIP) in an attempt to diversify its business away from such an emerging market focus. But the firm hasn't seen much benefit from that move yet.</p> <p>At an all-day conference for media, the head of equities Devan Kaloo says there's a light at the end of this long and dark tunnel. "Perspective matters," he says. Yes, GDP in China has been slowing, but it has been for some time. Emerging market investors have a right to be skittish, especially as the U.S. looks to raise interest rates, says Kaloo. Investment outflows for emerging markets year-to-date have already surpassed the outflows for all of 2014. But Kaloo is confident that many of these issues are signalling the bottoming of the economic cycle that can only recover from here.</p> <p>Investors pulled 31.5 billion yuan of shares of Shanghai-listed stocks in July, as the market spiraled. The Shanghai Composite Index fell 40% from its high June 12. But last month investors bough 21.4 billion yuan worth of the market's listed stocks through a trading link with Hong Kong, reports The Wall Street Journal. Some sectors, such as insurance, healthcare, and technology, are thought to be ready to benefit from the transitions in the Chinese economy away from raw materials to boosting middle class needs.</p> <p>Kaloo says the news is unlikely to get much worse: withdrawals from emerging market stocks are nearing their peak, in his view; and China is trying to discipline its markets. And the currency has already gotten crushed by the strengthening dollar. If the Fed raises rates by 25 basis points, he doubts EM will get very hurt. The damage is done.</p> <p>There are some actively good signs. Set aside the SOEs -- the ginormous zombies of the economy -- and there's some good stuff happening in the private sector. Emerging market stocks are attractively valued, he says. And investors could benefi</p>
BlackRock: Market segments to consider while the Fed holds
Asset Management
<p>Investors have spent much of the last couple of months fixated on the Federal Reserve (Fed). In the end, last Thursday, the central bank did exactly what most had come to expect: nothing.</p> <p>After a day to deliberate how to interpret the Fed’s decision to hold off on raising interest rates, investors took the Fed’s hesitancy as a sign of global economic fragility. Stocks reversed course on Friday, giving up their gains for the week, and market volatility (as measured by the VIX index) quickly spiked back to above average levels after dropping below 20 early in the week, according to data accessible via Bloomberg.</p> <p>Amid renewed volatility and the Fed’s continued delay, are there any moves to consider? As I write in my new weekly commentary, “With the Fed Holding, an Opportunity to Make Moves,” after the recent selloff, two areas of the market may now be worth added exposure.<br /> Two Market Segments to Consider<br /> Rate sensitive parts of the market, such as U.S. utilities<br /> Were interest rates rising, one would expect these bond market proxy segments to suffer. However, with long-term rates clearly stuck, utilities look less vulnerable. This is particularly true when you consider that this sector, represented by the S&amp;P 500 Utilities Index, has dramatically underperformed the rest of the broader S&amp;P 500 market this year, according to Bloomberg data. So, it may be time to consider bringing exposure to U.S. utilities back up toward a market weight.<br /> Emerging market (EM) stocks<br /> A more contrarian play could be revisiting EMs. Last week’s soft economic data out of China led to another selloff in China’s equity market. Domestic Chinese stocks were down between 3 percent and 6 percent, although H-Shares, traded in Hong Kong, managed to end the week higher, as market data from Bloomberg show.</p> <p>However, other EMs fared better, according to the data. Markets posted solid gains in India, South Korea, Turkey and even Brazil. The turn in performance was also accompanied by a marginally positive week of flows into broad EM funds, according to market flow data.</p> <p>It’s too early to call a bottom in EM, and there could be more volatility ahead, but valuations now appear attractive. At the recent lows, EM equities were trading at less than 1.3 times book value, and the current price-to-book ratio is the lowest it has been since the end of the financial crisis. It also represents a 35 percent discount to developed markets, the largest discount in 12 years, according to my analysis using Bloomberg data. For investors with little or no exposure to this asset class, now may be a reasonable time to consider slowly establishing or reestablishing positions. The bottom line: With the Fed on hold, there may be an opportunity to make some contrarian moves.</p> <p>Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock.</p> <p>This article was originally published by Advisor Perspectives. <br /> Photo: Kurtis Garbutt</p>
The buzzsaw aimed at blockchain
<p>Karen Petrou's memorandum to Federal Financial Analytics clients on the buzzsaw aimed at blockchain.<br /> &nbsp;</p> <p>Earlier this week, an NPR story fired up a campaign to force banks to absorb customer losses when business accounts are hacked. It remains to be seen if legislation will change the Electronic Funds Transfer Act, but the campaign is a sharp reminder of what happens when law falls behind technological reality. Regulators know this all too well – see our analysis of Treasury’s new inquiry into online marketplace lending as a critical case in point. Blockchain processing, take warning. The most exciting change in years for clearing and settlement will come to pass only if regulators come to love it.</p> <p>There’s been a lot of buzz about blockchains in the past few months, and buzz turned into a strong signal when nine global banks earlier this week announced a new consortium to figure out ways to make blockchain processing work for them. Several freestanding start-ups are also attracting significant industry and investor interest, with all of these ventures aimed at turning digital ledgers into the double-entry bookkeeping of tomorrow.</p> <p>Regulators really like this in theory – current market infrastructure is prone to breakdowns that pose severe operational risk, cost a lot, and concentrate risk into the hands of the largest dealers and exchanges. Banks used to make buckets from their central role across the clearing-and-settlement spectrum, but a raft of new rules has combined with an array of empowered competitors (CCPs, anyone) to restructure clearing-and-settlement into a losing proposition. In theory, large banks could simply shutter clearing-and-settlement operations, but then the lights would go out across the financial system.</p> <p>The upside of blockchain processing thus is evident, especially to the largest banks and their regulators. Customers need to have clearing-and-settlement services and banks have long perched higher-margin products atop their infrastructure edifices. Regulators very much want banks in the clearing-and-settlement business – if banks don’t do it, then others – such as they may be and whatever bits and pieces of the business they might do – won’t be under strong prudential supervision (if any).</p> <p>What’s the downside? In thinking through blockchains, it’s critical at the start to work through what it fixes and how its fixes could go wrong. For starters, skeptics will look at the new big-bank venture, review research about collusion risk in anonymized, digital-ledger systems, and think LIBOR. That’s the first thing an expert in this field asked me about when the word “banker” came up, and he didn’t even know until I told him just how big they are.</p> <p>Another unanswered question is the extent to which counterparties – especially banks – will aggregate data when using digital ledgers. Data aggregation is a top regulatory priority not now faring well at any of the big banks. Will blockchains make this better? If so, that’s a big plus, but if so isn’t it even harder to tell one systemic counterparty from another until losses warp out of control?</p> <p>An even bigger plus would come if blockchain design addresses operational risk and, thus, systemic resilience. It is possible – certainly hopeful – that digital ledgers could erase all the speedbumps that can destroy financial-market axles under stress. However, would blockchain processes rev up high-frequency trading across the markets to the point at which trades couldn’t be halted by automatic stays in a regulatory resolution? If it does, then orderly resolutions are even more remote.</p> <p>Blockcha</p>
Is this Chinese start-up disrupting the world's oldest profession?
Venture Capital
<p>A Beijing-based start-up called Zubowa - meaning "rent me" -  has raised a $1.5 million angel round for a platform that allows users to sell themselves for a day... or a night.</p> <p>Of course, many uses for this service are purely innocent: perhaps you need someone to teach you piano, another player on your soccer team, or just someone to play bridge with your grandma. But there are other - potentially murkier - services also being offered: dating.</p> <p>According to Tech in Asia, the app is not shy about it either. The description attached to the app even boasts: "there are a ton  of beautiful girls and handsome guys waiting for you."</p> <p>It doesn't take a massive leap of the imagination to see how a platform such as this opens itself for exploitation. It will also be interesting to see how this startup navigates clear regulatory and cultural pitfalls.</p> <p>In any case, online-to-offline services is a fast-growing sector in China right now. Given that China's unemployment rate is the rise - the National Bureau of Economic Research recently put it at 10.9% -  a platform like this could still gain traction.</p> <p>&nbsp;</p> <p>&nbsp;</p>
Aberdeen Asset Management receives ambiguous award
Asset Management
<p>As Chinese securities brokerages and fund managers sweat under the intense scrutiny of the local authorities for alleged stock manipulation, Aberdeen Asset Management must be wondering if it has just been handed a poisoned chalice.</p> <p>The U.K. money manager is the first overseas asset management firm to be granted a wholly foreign-owned enterprise (WFOE) license in China, allowing it to operate as a private domestic securities firm, reports AsianInvestor.</p> <p>The award by the finance ministry followed a meeting between UK chancellor of the exchequer George Osborne and China’s vice-minister Ma Kai on Monday.</p> <p>Previously, WOFEs could only advise and had to attach “Overseas” or “Investment Consulting” designations to their names. Alternatively, they could form joint-ventures with local firms, but a 49% limit on their stakes meant they ceded control of the investment process – a not inconsequential concession when trying to cope with the volatile A-share market.</p> <p>Aberdeen Investment Management (Shanghai) was set up on September 14 in the Shanghai Free Trade Zone. Subject to final approval by the China Securities Regulatory Commission it will be able to create and distribute its own products into the private market of wealthy individuals and also service institutional investors.</p> <p>Hugh Young, Aberdeen Asset Management’s veteran managing director in Asia, is the Shanghai entity’s legal representative. But, bosses at Citic and several other Chinese investment firms have been taken into police custody during the past couple of week, so perhaps it would safer for Young to stay in Singapore.<br /> Photo: Javier Kohen<br /> &nbsp;</p>