Copy
Fourth straight week of gains
View this email in your browser
Episode 27 | Doug Haynes, Holly Newman Kroft, Michael Cahill
Forward
Share
Tweet
This Week on Wall Street
S&P climbs back into positive territory for 2015

US stocks finished higher for the fourth consecutive week, rallying in response to dovish monetary policy measures in Asia and Europe. Impressive late week gains pushed the S&P 500 up 2.1% and back into positive territory year-to-date. The NASDAQ set the pace for the week with a 3.0% gain, highlighted by Friday’s 2.5% climb driven by a slew of strong tech earnings. The blue chip Dow logged a weekly advance of 2.5% while the small-cap Russell 2000 lagged with only a 0.3% climb, both now standing out as the only major equity indexes still in negative territory for the year. 

Treasuries backed off slightly for the week amid strength in risk assets, with yields climbing three basis points on the 2-year to 0.64%, five basis points on the 10-year to 2.08% and three basis points on the 30-year to 2.90%. 

Although it did not spread to the broader market, crude oil succumbed to renewed weakness, starting and finishing the week on a negative note. WTI crude prices dropped 3.0% Monday and 1.8% Friday to finish the week down 5.7% ending below $45/barrel. China’s soft growth and news that Iran plans to boost production by 500,000 barrels in the coming months were factors in the commodity’s slide.

While Friday’s rally was impressive, bears could point to a lack of breadth as a sign to remain cautious about the market’s October resurgence. A handful of large rallies in individual stocks helped boost indexes, but less than 60% of NYSE-listed securities posted gains Friday. 

Asia

The week began with China’s official Q3 GDP report coming it at 6.9%, slightly above consensus expectations of 6.8% but below the communist government’s stated goal of 7.0% annual growth. Asian markets were muted in response. However, a surprise rate cut from the People's Bank of China, its sixth cut since November, spurred Friday’s global equities rally. The central bank lowered the one-year lending rate by 25 basis points to 4.35% and reserve requirement ratio by 50 basis points for qualifying investors in response to lackluster growth and tightening credit.

Europe

Late week strength in global equities was also attributed to comments from European Central Bank President Mario Draghi, who said his committee had discussed lowering the deposit facility rate and would re-examine the level of QE asset purchases at its December meeting. The comments triggered rallies of between 2.0% and 2.5% in major European markets. The Euro slid versus the dollar, with the dollar index climbing to its highest levels this month. 

Earnings

On Monday, IBM delivered a bottom-line earnings beat, but missed on top-line revenue and lowered guidance, sending the stock tumbling sharply lower. However, on Friday a trio of blockbuster earnings reports from major technology companies painted a very different picture. Alphabet (GOOGL) and Amazon (AMZN) delivered better than expected earnings and each rallied by more than 5%, while Microsoft blew estimates away thanks to strong demand for cloud computing products. MSFT finished the day up more than 10%. Retail stocks did not fare as well, with Skechers (SKX) and VF Corp (VFC) failing to meet expectations and sinking 31.5% and 12.9%, respectively.

Also of note, Morgan Stanley (MS) profits fell 40% due to lackluster trading revenue, although the stock was largely unaffected. General Motors (GM) reported record profits in North America thanks to resurgent demand for SUVs and trucks amid lower gas prices. Caterpillar (CAT) saw its earnings per share fall 54%, but the shortfall appeared to be baked into the price as the stock finished the week higher. The first increase in McDonald’s (MCD) same-restaurant sales in more than a year helped the golden arches beat top and bottom-line expectations, sending the stock up around 8% to new all-time highs. And to think, all it took was Egg McMuffins for dinner…

Biotech

Biotech, one of the strongest sectors since the financial crisis but under pressure over the past few months due to scrutiny of drug prices, suffered another blow Wednesday when Citron Research published a report highlighting potentially problematic business and accounting practices at Valeant Pharmaceuticals (VRX), a popular investment among hedge funds. The report sent Valeant crashing 40%, with responses from company management doing little to meaningfully buoy the stock. At its low, the Valeant was down nearly 70% from its highs in early August. After briefly dipping below $90 Wednesday, Valeant was able to bounce Friday to close at $116.16. The company plans to further address the claims at a news conference Monday.

Economic Data

The housing market continues to be the strongest component of the US economy amid a strengthening employment picture. Initial jobless claims ticked up 3,000 to 259,000 but remain at a more than 40-year low. US existing home sales grew 4.7% and housing starts grew 6.5% in September to their highest and second highest levels in eight years, respectively. The FHFA House Price Index registered 5.5% year-over-year growth while the NAHB Housing Market Index, a measure of homebuilder confidence, climbed to a 10-year high of 64.
 
Around the world, Russia’s Q3 GDP contracted 4.3% thanks to sanctions and persistently low energy prices, while on the flip side Spain’s unemployment rate, though hardly impressive, hit a four-year low of 21.2%.
 
Week Ahead

  • Monday: US new home sales
  • Tuesday: US durable goods orders
  • Wednesday: Federal Reserve policy statement
  • Thursday: Advance Q3 US GDP, US jobless claims, Japan CPI and unemployment rate
  • Friday: US personal income and outlays
Episode Playback
Doug Haynes on the present and future for Point72
Did you miss Sunday's show featuring Point72 President Doug Haynes with Holly Newman Kroft and Michael Cahill? Watch all segments, extended interviews and web extras at WallStreetWeek.com 
Episode Feature
The role of big data in the investment process

With the rise of technologies like social media, mobile devices and cloud computing, the amount of information available on the internet has grown exponentially over the past decade. Technology companies have taken the lead in building and leveraging so-called “big data,” but within the last few years Wall Street has begun to grow wise to big data’s potential applications. Point72 President Doug Haynes, a former CIA data engineer, said the firm’s big data initiative is perhaps its single most exciting project right now.

“We launched an initiative to use big data in investing. We call it Aperio, and we're very pleased with the progress,” Haynes said. “I would say that we're just now beginning to really understand how to incorporate, or how to fuse together heavy data analytics with fundamental research.”

First of all, what is big data? Big data has largely become a marketing buzz word for tech companies, but generally the term describes the capture and analysis of large sets of information. Technology has not only increased the amount of data available for consumption, but also improved our ability to store and distill it.

Whereas traditional investment managers have relied on quarterly earnings reports to analyze business trends, analysts now have avenues to process information on a more granular level. One example Haynes highlighted is the ability to look at real-time flow of transactional data from retailers rather than relying on infrequently reported metrics. This type of information can give the manager valuable insights into not only transaction volume, but also things like where and when sales take place and the demographics of purchasers.

Social and clickstream data has also been shown to have predictive powers. For example, in 2008 Google created a web service called Google Flu Trends which attempted to predict flu activity based on search queries associated with flu symptoms. While no longer publishing current flu estimates over privacy concerns, Google Flu Trends data was generally consistent with surveillance data from national health agencies. The same concept has been applied by data scientists to search queries relating to public companies.

Twitter, because of its concise and rudimentary nature, has also become a popular source of data into which financial engineers plug for sentiment-related insights. In fact, this week a company called Markit Prophet revealed it is in discussions to create an ETF that holds the 25 most-tweeted-about stocks, reconstituted quarterly but rebalanced daily.

The challenge for investors, as Haynes points out, is figuring out how big data flow fits into a fundamental investment strategy. For short-term and high-frequency traders, real-time sentiment data would seem to have more straight-forward applications. However, value investors are largely taught to tune out “noise” and focus on longer-term trends. Haynes said learning how to effectively incorporate big data analytics into Point72's investment process has taken time, but recent breakthroughs have revealed a world of possibilities. 

“In a way they’re not competing, but actually constructive. And we have several of our portfolio managers using pretty sophisticated analytics and data sources that you wouldn't have imagined a few years ago,” Haynes said. “…And actually we had the worst combination, which is we had some early successes that convinced us it was like magic, followed by a bunch of failures that sort of revealed the problems. We really had a big learning curve we had to push through. What we learned is when you first start applying data, the data will try to override your fundamental analysis. What we found was by sticking with it, and then beginning to see the patterns in the data over time, like looking at the data longitudinally, it became a lot more informative. But it took time and a pretty big learning curve.”

An even more progressive use of big data Haynes calls anticipatory insight. The more Wall Street firms invest in big data analytics, the more efficiently the market prices reflect those inputs. The Holy Grail in terms of generating alpha is being a step ahead of the market.

A traditional form of anticipatory insight would be examining a company’s supply chain as a predictor of production demand. Data analysts are now seeking ways to more deeply analyze supply chains, as well as examine more peripheral factors driving and reflecting business activity. In 2014, the Financial Times interviewed a private equity firm that analyzed sales data from a drug-test manufacturer to help paint a preemptive picture about US employment growth. Investment managers are using things like satellite data to draw conclusions based on parking lot images and weather forecasts. Firms are also using big data as part of the due diligence process to scan for potential red flags, mismatches between changes in independent data and reported numbers.

Buy-side analysts seeking to glean insights from diverse sources of information is nothing new, but firms’ ability to process large amounts of unstructured data has grown exponentially, according to Haynes. The main takeaway from the Point72 President is that neither big data analytics nor surface-level fundamental analysis alone are enough anymore to generate consistent returns and manage risk in today’s hypercompetitive landscape. For investment firms, a comprehensive, integrated approach appears the best way to preserve their slice of the alpha pie. 

Investment Primer
Point72 rises out of the ashes of S.A.C. Capital

Point72 Asset Management is a multibillion dollar investment firm formerly known as SAC Capital Advisors LP. SAC Capital, founded in 1992 by Steven A. Cohen, was one of the top performing hedge funds in the industry for more than 20 years. After eight current and former SAC employees were convicted of securities fraud in 2013, the firm settled a civil suit alleging failure to supervise its traders, agreeing to pay a $1.2 billion fine and stop managing outside capital.

In response, last year SAC rebranded to Point72 and restructured into a family office that would manage only Cohen’s personal fortune, which is estimated at around $12 billion. Family offices are prohibited from managing outside capital, but as a result are exempt from certain aspects of financial regulation. George Soros is another high-profile financier who years ago restructured his investment firm into a family office.

Over the past 18 months, Point72 has continued to generate strong returns while working to rehabilitate its image. This week the firm got a boost on the latter front as the U.S. was forced to abandon insider trading charges against former SAC fund manager Michael Steinberg and six other people who had pleaded guilty and cooperated in the case. Steinberg had been convicted by a federal jury and sentenced to 3½ years in prison, but a recent major appeals court ruling rendered insider trading prosecutions more difficult, resulting a dismissal of the charges. While the government sought to challenge the decision, the Supreme Court declined to hear the case.

On Thursday, news also broke that Point72 was in talks to rehire one of its former fund managers, Stanislas de Caumont, as it looks to reopen its London trading operation. SAC shuttered its London office and de Caumont left the firm for Balyasny Asset Management two years ago amid post-lawsuit restructuring.

Even during its SAC Capital days, the firm always maintained a low public profile. Haynes' appearance on Wall Street Week, this week’s legal news and the return of de Caumont could be signs the firm, after two years of retrenchment, is ready to increase its visibility and grow more aggressively. However, with access to Cohen’s considerable fortune, Haynes said the firm has no plans to begin accepting outside capital. “In fact, right now we have more than enough capital. We probably struggle more to deploy it effectively than we do to feed the opportunities we have.”

In August, the firm launched a 15-month training program known as Point72 Academy designed to train college graduates as investment professionals for the fund. Like SAC Capital, Point72 places a strong emphasis on culture and seeks to promote from within. While Point72 appears content operate to grow in a measured way right now, Cohen’s “restless desire for innovation that is insatiable,” as Haynes described it, would suggest there is much more to come from Point72. 

Week Links
Biotech beatdown

Financial Advice

The Ballad of the Breakaway Broker (The Reformed Broker, Joshua M. Brown)

Financial Advice for My New Son (The Motley Fool, Morgan Housel)

Asset Management

The Difference Between a Portfolio Manager & Portfolio Management (A Wealth of Common Sense, Michael Santoli)

Dumb Alpha: The Ignoramus’s Guide to Asset Allocation (CFA Institute Enterprising Investor, Joachim Klement)

Hedge Funds

Hedge fund performance fees decline sharply (Financial Times, Madison Marriage)

For Hedge Funds, a Can’t-Miss Trade Goes Bust (The Wall Street Journal, Rob Copeland)

Tech

Crowdfunding: Exciting, Expensive, Tough to Exit (The Wall Street Journal, Jason Zweig)

How an F Student Became America's Most Prolific Inventor (Bloomberg Business, Ashlee Vance)

Theranos’ Scandal Exposes the Problem With Tech’s Hype Cycle (Wired, Matthew Scott)

Where did all the tech IPOs go? (Fortune, Lise Buyer)

Clay Shirky explains how Xiaomi became China’s Apple overnight (Quartz, Clay Shirky)

Policy

Draghi in the spotlight amid growth worries (Reuters, Sarah White)

Great. Now Washington Wants to Ruin Coding Boot Camps. (Money Box, Jordan Weissmann)

CFTC chief outlines proposals to fight market disruptions (Marketwatch, Francine McKenna)

Fixed Income

Get Used to It. Low Rates Are Here to Stay. (Bloomberg View, Noah Smith)

The Case for Minimizing Risk in Your Bond Holdings (The Wall Street Journal, William J. Bernstein)

US junk debt regains high-yield status (Financial Times, Eric Platt)

China

China Ponders Tool Deemed Too Risky Post 2008 to Cut Bad Loans (Bloomberg Business, Bloomberg News)

China's watchdogs step in to avert Sinosteel bond default (South China Morning Post, Liz Mak)

Biotech

The ‘Short’ Who Sank Valeant Stock (The Wall Street Journal, Matt Wirz)

Valeant plunge spotlights cracks in specialty pharma's M&A facade (Reuters, Carl O’Donnell)

Potpourri

Quash Your Bad Habits by Knowing What Triggers Them (Harvard Business Review, Peter Bregman)

The Strongest El Nino in Decades Is Going to Mess With Everything (Bloomberg Business, Brian K Sullivan)

Why What You Learned in Preschool is Crucial at Work (NY Times, Claire Cain Miller)

Socialize with us
Facebook
Facebook
Twitter
Twitter
Instagram
Instagram
SoundCloud
SoundCloud
YouTube
YouTube
Tumblr
Tumblr
Website
Website
Email
Email
Copyright © 2015 SkyBridge Insights, All rights reserved.


unsubscribe from this list    update subscription preferences