It’s no secret the stock market has been in shambles of late. While the mayhem has been disappointing to many, what has been even more disappointing is the flaws in Wall Street that are now being exposed. Many traders have struggled in buying and selling exchange-traded funds (ETFs). An ETF is marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. An ETF trades like common stocks Netflix (NFLX) or Apple (AAPL) would.
Many ETFs exchanged at steep discount compared to their components worth. This led to investors who hit the panic button looking to sell with heavy losses. In this time of a plummeting stock market, it was hard for traders to consistent prices on contracts that offer insurance against S&P 500 declines.
To give you an idea of just how volatile the market has been, circuit breakers, which are put in place to halt trading in a single stock or ETF during big moves, were set off 1,300 times Monday. Stocks that have experienced the most growth year to date were faltering. Disney (DIS), which on August 4th was valued at $121.69 fell to as low as $95.36 on Monday August 24th. It has had a bit of a bounce back trading near $102 per share. On August 6th, Netflix (NFLX) was trading at $126.45 but plummeted to $96.88 on August 24th. Netflix has also experienced a bit of a bounce back since currently trading at $116. It was believed that only about 18 total stocks had net gains on Friday in the Dow Jones. In a six day span, United States stocks have erased $2.1 trillion.
For more on this topic, check out this article here on wsj.com.
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In regards to bond markets, one thing has been growing in popularity and in the newspapers, that one thing is liquidity. Investors, traders, and regulators are now constantly thinking about the ability to trade fixed-income securities without affecting prices too much. There are however plenty of people that disagree with the liquidity issue in this situation.
According to new regulations that have been enacted, it has become more and more difficult and expensive for banks to hold bolds on their balance sheets. It is also expensive and difficult to facilitate trades for their clients in certain areas, but the major growth of the investors that would and do buy these types of assets is another factor to consider.
Citigroup has recently published a new report based on the liquidity issue which argues the issue being a something that expands beyond fixed income and cannot be only attributed to the shrinking bank balance sheets. The presentation is a whopping 42 pages of information the Citigroup Strategist Matt King conducted and displays his view on the positioning of large investors as a major variable behind the current liquidity issue.
King’s argument centers around the data surrounding the fact that markets used to be “self-limiting” and prices of securities would go up to a certain point whereupon their yield would become unattractive. At this point investors would cut some of their positions and have the prices decrease as a result forcing the yields to recover. Now however the strong search for returns has skewed this idea where investors now chase inflows so they can get higher prices and higher profits.
King goes on to exclaim that investors are starting to move together where they did not used to move together thus causing many markets to become more homogeneous. The basic essence of the report and King’s point of view circles around the fact that investors that work with different asset classes are being attracted to different things as the one-way positioning continues to control.
GE continues to grow and extend its finance portfolio. GE has officially agreed to an $8.5 billion deal in the sale of its healthcare finance unit with Capital One. As you already know Capital One is one of the most successful banks in the US as well as one of the fastest growing.
The deal is set to have Capital One pay a 6% premium to the value of the unit’s loans in order to acquire the business. This move will help Capital One become a major contender in the commercial bank space. The healthcare unit provides specialized financing to companies, developers, investors, and many sectors within the industry including hospitals and medical device organizations.
Since the financial crisis a few years ago, Captial One has been aggressively pursuing new deals in order to re-grow and recuperate their losses. Between this deal and the acquisition of ING’s online banking business in the United States, they are on the right track. For your reference, at the end of June 2015, Capital One had grown its assets to $311 billion.
Michael Slocum, President of Capital One’s commercial banking division went on record with his thought regarding the deal saying, “This is a strategic investment in a specialty industry segment that we have been building out for the past several years. This addition will catapult us to a leading market position in providing financial services to the healthcare sector.” On the other hand, Jeff Immelt, GE’s Chief Executive said back in April that the “conglomerate” would dispose of most the company’s financial services in order to make the company return to their foundational business.
Although GE is trying to get back to its roots as quick as possible it is still trying to sell most of its domestic and foreign commercial lending businesses as well as its global consumer business. Both Wells Fargo and Blackstone have come out as major interests and potential future buyers of these assets.