If We Understood Markets We'd Do Something Else: Opening Line

Photographer: Jin Lee/Bloomberg

Traders work on the floor of the New York Stock Exchange in New York. Close

Traders work on the floor of the New York Stock Exchange in New York.

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Photographer: Jin Lee/Bloomberg

Traders work on the floor of the New York Stock Exchange in New York.

Seems like just a couple days ago we were discussing the greet-the-week column on investors who have been buying defensive stocks at the expense of missing the moves in biotech and small-cap shares, and how they were getting caught leaning the wrong way again.

Yeah, well.

In the long run, the stocks team will no doubt be vindicated, but this week’s not looking so good, with the S&P 500 and Dow industrials down about 1 percent, give or take, after two days, and the Nasdaq losing 2.1 percent. High-multiple stocks like those celebrated in Monday’s story are the main culprits.

And just like that, the flat water may be behind us.

With Chris Nagi on a beach somewhere, we turned to Mike Regan, stocks editor and the man behind the Market Line column to ask if there’s anything in this move that we haven't seen before many times.

“This reminds me almost identically to what happened in late March, early April, when you just saw the wind come out of the sails of these high-growth, momentum stocks,” Regan says. “Then and now, there isn’t really an obvious catalyst for it. It’s like all of a sudden people woke up and realized these P/Es were high.”

The stocks team gets “all these messages from traders and (one of them) offered up about eight different reasons for what happened. He pointed to the violence in Israel, weak German data, bad earnings from Samsung, Air France earnings, concern about more fines for European banks -- all sorts of stuff. When there are that many reasons being offered for a selloff, it’s a pretty good sign that there is no single reason,” Regan says.

A research note from Raymond James’s Jeffrey Saut, who predicts a short-term drop of 10 percent to 12 percent, was drawing a buzz, Regan says. But whether that motivated someone to what Regan says was “definitely an obvious rotation move,” we probably won’t know.

Unless one of you does and wants to tell us.

***

The Fed releases the minutes of the June 17-18 FOMC meeting at 2 p.m. Find the Fed watchers’ guide here. Otherwise, no major economic releases, earnings or corporate meetings.

Overnight, China reported producer prices fell 1.1 percent in June, the slowest pace of declines in more than two years, while the consumer price index rose 2.3 percent, below projections for a gain of 2.4 percent.

***

+ America Movil is being dismantled. + Alcoa’s second-quarter net income topped estimates. + Citigroup is near a settlement of at least $4 billion with the U.S. over its mortgage sales before the financial crisis. The Wall Street Journal and New York Times report the final amount could approach $7 billion. + Finra is asking retail stock brokerages for information about how they route their orders amid concern they’re motivated by payments, not the best price they can find, the Wall Street Journal reports. + Lyft has arrived in NYC to challenge Uber just in time to witness Uber’s wings getting clipped. + Allen & Co.’s Sun Valley conference begins, and the TV people will be there. Here’s a look at who’s going to it. Here’s a roundup of the deals that might be discussed at it. Here’s a guide on how to dress for it. Oh, and no drones. + Amazon.com is trying to bypass publishing house Hachette in its dispute over payments and is offering to make deals directly with authors. + Rick Perry, the governor of Texas, will join Obama in Dallas at a roundtable discussion on immigration. + Israel and the Palestinians are really trading blows now. + The U.S. economy is the topic of remarks Obama is scheduled to deliver in Denver at 12:15 p.m. EDT. + China and the U.S. begin the annual two-day Strategic and Economic Dialogue in Beijing. The talks are led by John Kerry and Jack Lew, Chinese Vice Premier Wang Yang and State Councilor Yang Jiechi. + Typhoon Neoguri’s approach to southern Japan has caused 90,000 to evacuate. + American Apparel was notified its $9.9 million loan has been called by Lion Capital. + Indonesians vote for president. + Donald Tusk, Poland’s prime minister, faces a no-confidence vote. + Markets are closed in Argentina and in Brazil’s Sao Paulo state.

***

Well, a record of roughly 85-1 still isn’t bad.

That’s what Preet Bharara’s scorecard looks like today after Raj Rajaratnam’s brother Rengan was acquitted yesterday of conspiring with big brother Raj on insider trading.

But it’s the lingering aftertaste of the prosecution’s case that’s likely to get the most attention in the days to come. There’s been more than just idle chatter about overreaching in the insider-trading jihad from the U.S. attorney’s office. A case that started with seven counts and wound up as just one, the most innocuous one, lends some weight to those who thought the evidence was weak against Rengan.

Today, jury members pretty much confirm it.

This U.S. attorney has proven he’s serious about cleaning up the Street, and you’ve got to know how to lose one every once in a while. But this isn’t sport.

Congratulations, Rengan, for not being guilty. Don’t show up in this space again.

***

It’s not like the high-frequency trading firms and the exchanges and the dark pools all got religion all of a sudden yesterday in Washington, and it’s not like a lot of what executives like Joseph Ratterman or Jeffrey Sprecher were saying was new, but as today dawns it feels like something has changed in that world.

These men and others testified before the Senate Banking Committee that the SEC’s plans for greater transparency in dark pools and the limitations of some high-frequency trading were necessary, and that mapping order routes for the benefit of investors was appropriate.

Just like that. Is Michael Lewis reading this?

“It does feel like stuff is coming to a head,” says Nick Baker, team leader for market structure. Referring to Ken Griffin and Citadel, Baker says “the biggest surprise is that an HFT firm says HFT should be reined in. That’s kind of interesting.”

Isn’t it?

Yet, Baker reminds us to be careful what we wish for. There are benefits to dark pools and to HFT, he says, and to hammer those out with all the other imperfections could costly down the road. Literally.

“If someone was really paying attention to high-frequency trading in the year 2001 and was noticing what was happening, they probably would have said, wow, these firms are providing liquidity with far greater efficiency than five guys named Vinnie on the floor of the New York Stock Exchange, to borrow a phrase used by Duncan Niederauer years ago,” Baker says. “It’s only much later that you say, oh, there are some ugly sides to it.

‘‘And dark pools -- they were created so investors could trade a million shares of Apple in private so that they could get a little bit better price, in theory,’’ he says. Now those ‘‘big juicy orders’’ aren’t ‘‘dangling out there for everyone to see. Allowing them (dark pools) to exist provided that benefit, but on the other side we see what happens.’’

Maybe they can get this right, whatever right will be.

***

Earnings season is upon us and banks are in for a rough one. Wells Fargo is up first, reporting Friday, July 11, and it may be the only one of the six largest banks not to report a decline.

If it doesn’t, it might be that it has found another couple silver bullets to sacrifice. Dakin Campbell’s preview today of the banks’ quarterly results mentions that Wells Fargo has been leaning more on one-time boosts from reserve releases or investment gains to make up for any shortcomings.

Yet analysts have been predicting an end to its streak of beating estimates for three straight quarters now, so who knows.

At the other big banks, which report next week, declines are likely, with a drop of 15 percent expected at JPMorgan Chase, of 14 percent at Citigroup and of 5 percent at Bank of America.

***

Bureaucratic run-arounds are the worst. The dread of sliding down the rabbit hole into telephone hell can turn even the sharpest minds numb and their owners irrational with hatred.

It’s one thing when the bank has lost your mortgage payment or the cable goes out, or when your computer is on the fritz and the computer guy does everything in his power to run you through a gauntlet of questions you know have nothing to do with the problem. He’ll waste your time trying to uncover a possible -- possible -- reason that might deflect his responsibility before eventually resigning himself to the realities. Computer guys are bred for this.

It’s another thing entirely when your health and perhaps your life is on the line, which is why Manuela Hoelterhoff’s interview with a friend, whose tale of botched insurance coverage of expensive drugs treating damaged kidneys should make your head explode.

The story is an odyssey of being bounced from pharmacy to pharmacy-benefits provider to insurer to doctors and more doctors, taking hours and days and weeks, all while the clock is winding down on the likelihood that the woman will wake up one day without the medicine that keeps her alive and for which she is duly insured. It’s a shocking tale of ineptitude.

Luckily she’s still permitted a glass of wine or two.

***

World Cup WTF?

For almost three stupid World Cup weeks we’ve been subjected to scores of 1-0 and 1-1 and 2-1, once in a while some team might score three goals, which is just overkill, or our personal favorite, the 0-0 game.

Then out of the blue, as we’re down to the nitty-gritty in the semifinal, the Brazilians, on their home turf, allowed the Germans to score a touchdown plus the extra point?

Sure, Brazil’s captain and best defender, Thiago Silva, was disqualified for the match, and Neymar was out -- although he’s not really there for defense -- but is it really possible that a game so conventionally taught in scoring, and this match in particular, with so much riding on it, could turn into a laugher?

If it weren’t for the scuzz quotient around everything FIFA touches, we’d say, well, Brazil had given up before they walked onto the field, or perhaps after that first goal. Which would be a pretty shameful way to show up in front of your fellow countrymen and women -- and children, who tend to view these things with unjaundiced eyes and worship their athletic idols. But there is, in fact, a scuzz quotient around everything FIFA touches, and this outcome, crazy as it sounds, does not smell good.

The loss was so bad, it’s a national humiliation that analysts are predicting will reverberate through the national psyche and into its economics and politics. It also broke Twitter’s record for messages sent during a sporting event.

Today we get Netherlands-Argentina at 4 p.m. EDT. The final score will be of great interest, for not the usual reasons.

***

The world championship of the J.P. Morgan Corporate Challenge, a 3.5-mile (5.6-kilometer) race through London’s Battersea Park, goes off today at 6:45 p.m. local time/1:45 p.m. New York time, and it just so happens a quartet from Bloomberg LP is seeded fifth among the 13 squads running in the mixed team category.

Joining Ani Kavookjian from sales, Paul Winterhalter from R&D, and the redoubtable Dylan Cohen, who works in media licensing and who runs like Gale Sayers, and for full disclosure, Mrs. Opening Line. But we’d be writing this even if she weren’t on the team because the Bloo Crew has never made it this far before since the competition became actually, really competitive about a decade ago.

It’s a pretty big achievement. This is not your after-work softball league. The fastest male runner this year clocked in at a 5K equivalent of 14:55, compared with the 2013 USA Track & Field champion’s time of 13:49, and the fastest woman in the Corporate Challenge finished with a similar margin to her counterpart in the USA championships.

Regional versions of the race, which was started in Central Park in 1977, were held in 13 cities and run by more than 250,000 participants. These have been winnowed down to the 148 representing seven countries who race tomorrow, and competitors in the team division include Fidelity Investments, Westpac (WBC), BSkyB (BSY), Accenture (ACN) and PricewaterhouseCoopers.

It won’t be easy for the home team. The two fastest runners from the version of the team that qualified have since left Bloomberg. The forecast is partly sunny and a high of 71 degrees Fahrenheit/22 Celsius, which is better than rain.

Go Bloomberg.

***

Giant-Shimano’s Marcel Kittel won his second straight Tour de France stage victory and his third in four days with another sprint-finish leg of the tour. Are there no other sprinters? It’s getting so regular with the German that we’re almost beginning to miss Mark Cavendish.

Almost.

Today things look to get ugly. The 155.5-kilometer/97-mile Stage 5 begins in Ypres, Belgium, and ends in Arenberg Porte du Hainaut, France, but in between the riders will contend with 15.4 kilometers of cobblestone roadway in nine separate locations over the final 70 kilometers. And the forecast is for rain.

Considering 2013 winner Chris Froome went down hard yesterday on a flat, sunny road (he’s OK), the prospects for disaster and injury today look pretty high.

Astana’s Vincenzo Nibali is still in the yellow jersey.

To contact the reporter on this story: C. Thompson in Wilmington at cthompson1@bloomberg.net

To contact the editor responsible for this story: Marty Schenker at mschenker@bloomberg.net

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