Insider trading by ex-banker's father becomes focus in U.S. trial

Business

The relationship between a former Wall Street investment banker charged for insider trading and his father, who traded on information about mergers he learned from him, took center stage at the start of the son's trial on Wednesday.

Assistant U.S. Attorney Brooke Cucinella told jurors in Manhattan federal court that tips by Sean Stewart, an ex-banker at Perella Weinberg Partners and JPMorgan Chase & Co (N:JPM), enabled his father and another man to make over $1 million trading.

"It's not hard to get an A when someone has already given you the answers to the test," Cucinella said in her opening statement.

But Mark Gombiner, a defense lawyer, said while the father, Robert Stewart, did illegally trade on information he learned while talking to his son, Sean Stewart had no idea that his father was doing so.

"He ended up betraying his son, as he was weak and foolish and selfish," Gombiner said.

The trial stems from one several insider trading cases pursued by Manhattan U.S. Attorney Preet Bharara's office, which has charged 107 people since 2009.

The trial is his office's first since suffering a major setback in 2014, when an appellate court limited the scope of insider trading laws, causing charges against 14 people to be dropped or dismissed.

Prosecutors contend Sean Stewart, 35, tipped his father about five unannounced healthcare deals from 2011 to 2014, enabling Robert Stewart and an acquaintance, Richard Cunniffe to make $1.16 million.

The case has already resulted in guilty pleas by Robert Stewart, 61, and Cunniffe, 61, who, Cucinella told jurors, cooperated with the Federal Bureau of Investigation and secretly recorded the elder Stewart discussing the scheme.

In one recording, Cucinella said, Robert Stewart discussed how his son had been serving him up inside information on a "silver platter."

Sean Stewart kept tipping his father even after being questioned by JPMorgan in connection with a regulatory inquiry about trades by his father before the announcement of the 2011 buyout by Apax Partners of Kinetic Concepts Inc[CRGYHK.UL].

Gombiner acknowledged his client, worried about potential repercussions, lied to JPMorgan about telling his father anything about that deal.

But he said the investment banker loved his father and trusted him to not execute trades, which he did amid financial struggles based on names of companies his son mentioned while talking about his work.

"Sean Stewart is absolutely, unequivocally innocent," he said.

The case is U.S. v. Stewart, U.S. District Court, Southern District of New York, No. 15-cr-00287.

Source Reuters

Harvard University endowment chief Stephen Blyth resigns

Stock market

Stephen Blyth, who was appointed to oversee Harvard University's endowment only 18 months ago, has resigned, the Ivy League school said on Wednesday, creating further uncertainty about the management of its $37.6 billion pool of funds.

Blyth, who took a temporary medical leave in May, is departing for personal reasons, the school said.

Harvard, the richest U.S. university, has gone through several chief investment officers over the last decade and the endowment's once strong returns have ebbed in the wake of the 2008 financial crisis.

Robert Ettl, chief operating officer at Harvard Management Co (HMC), will continue to run the university's investment arm on an interim basis.

Blyth, 48, was tapped as investment chief in late 2014 as it become more apparent that the Harvard's investment returns, once the envy of the endowment world, were lagging rivals including Yale University, where David Swensen has overseen investments for more than three decades.

Harvard traditionally invested much of its money using in-house teams while many other schools, including Yale, use outside managers.

Blyth succeeded Jane Mendillo as chief executive officer at HMC in January 2015 and set out to overhaul performance.

Only last month, Harvard said that it will rely more on outside money managers. Earlier in the year Blyth cut a number of jobs on the public equities team. Several top executives, including Michael Ryan, who headed public markets and absolute return strategies, have left.

After having earned his PhD in statistics from Harvard, Blyth worked on Wall Street before arriving at HMC in 2006.

He will now serve as a senior advisor to the HMC Board and spend more time teaching, the school said.

Blyth's first months as investment chief were not seen as altogether successful, industry analysts have said, noting Harvard's endowment returned 5.8 percent during the fiscal year ended on June 30 2015, while Yale gained 11.5 percent.

Blyth could not immediately be reached for comment.

Harvard hired David Barrett Partners to find the next investment chief.

For the 380-year old school, which has educated U.S. presidents, world leaders and Wall Street financiers, it has been a rocky decade at the endowment. Jack Meyer, who more than quadrupled its size in 15 years as investment chief, quit in 2005 to run a hedge fund.

He was succeeded by former PIMCO executive Mohamed El-Erian, who left after less than two years. Mendillo arrived just as the financial crisis began.

Source Reuters

Fed keeps rates unchanged, says risks to outlook reduced

Economy

The Federal Reserve left interest rates unchanged on Wednesday but said near-term risks to the U.S. economic outlook had diminished, opening the door to a resumption of monetary policy tightening this year.

The U.S. central bank said the economy had expanded at a moderate rate and job gains were strong in June. It added that household spending also had been "growing strongly," and pointed to an increase in labor utilization.

While Fed policymakers said they continued to closely monitor inflation data and global economic and financial developments, they indicated less worry about possible shocks that could push the U.S. economy off course.

"Near-term risks to the economic outlook have diminished," the Fed's policy-setting committee said in its statement following a two-day meeting in which it left its benchmark overnight interest rate in a range of 0.25 percent to 0.50 percent.

It noted, however, that inflation expectations were on balance little changed in recent months.

The Fed has held steady on rates since December, when it raised them for the first time in nearly a decade and signaled another four rate increases were in the offing for 2016.

That was scaled back to two hikes this year after central bank policymakers issued new projections in which they also lowered their longer-term growth estimates for the U.S. economy. The Fed is most likely to wait until December to raise rates, according to a Reuters poll of economists.

Wednesday's decision had little impact on financial markets with stocks, bonds and currencies all holding close to their levels prior to the Fed's statement.

"It sounded a reasonably upbeat tone, not a big difference from last time, but a reasonably upbeat tone," said Kathy Jones, chief fixed income strategist at Charles Schwab(NYSE:SCHW) and Co.

ONE DISSENT

Despite a strong rebound in job growth last month and an economy near full employment, most Fed policymakers had urged caution in raising rates until there was concrete progress in moving inflation toward the central bank's 2 percent target.

The Fed's preferred inflation rate currently stands at 1.6 percent and has been below target for more than four years.

A global economic slowdown, financial market volatility and uncertainty over the impact of Britain's June vote to leave the European Union have repeatedly forced the Fed to delay another rate increase.

The U.S. economy, however, has suffered little initial impact from the so-called 'Brexit' vote. A string of better-than-expected economic data recently as well as an easing in financial conditions also have calmed nerves.

There are three more Fed policy meetings left this year - in September, November and December. A rate hike in November is generally seen as unlikely because that meeting would occur a week before the U.S. presidential election.

Fed officials will now turn their attention to this Friday's first initial estimate of second-quarter GDP, which is expected to show a healthy rebound from the previous quarter.

Kansas City Fed President Esther George was the only policymaker to dissent at this week's meeting. She has favored raising rates at three of the last four meetings.

Source Reuters

Gold erases losses amid soft U.S. data, ahead of Fed rate decision

Commodities

Gold erased slight overnight losses on Wednesday amid a slew of soft economic data in the U.S. as investors awaited the Federal Reserve's latest interest rate decision shortly after the close.

On the Comex division of the New York Mercantile Exchange, Gold for December delivery traded between $1,323.20 and $1,336.65 an ounce before settling at $1,334.25, up 5.95 or 0.45% on the session. Since hitting 28-month highs earlier this month, Gold has slid nearly 2% as investors have piled into global equities in broad risk-on trade. Still, the precious metal is up by approximately 25% year to date and is on pace for one of its strongest years in a decade.

Gold likely gained support at $1,253.70, the low from June 24 and was met with resistance at $1,368.60, the high from July 7.

Investors reacted to weak factory and housing data on Wednesday morning, ahead of the Fed's closely-watched decision. In June, new Durable Goods Orders slumped by 4.0% on the month, falling considerably below consensus estimates of a 1.3% decline. At the same time, core orders were also soft, falling by 0.5% as core capital goods posted their 17th year-over-year decline over the last 18 months. The sharp declines were slightly offset by a strong performance from vehicles, which reported a 2.6% gain on the month.

Also on Wednesday, the National Association of Realtors said its Pending Home Sales Index rose by 0.2% last month, far below consensus forecasts of 1.3%. The subdued reading also follows a decline of 3.7% in May. The losses were concentrated in the Western region of the U.S., which reported a 1.8% drop in sales from the same level 12 months ago.

On Wednesday afternoon, the Federal Open Market Committee (FOMC) is widely expected to leave its benchmark interest rate at a targeted range between 0.25 and 0.50% for their fifth consecutive meeting. The CME Group's (NASDAQ:CME) Fed Watch tool placed the probability of a July rate hike at 3.6%, up slightly from 2.4% during the previous session. Even if the FOMC stands pat, the Committee could provide hints on the timing of its next rate hike. There is currently a 20.3% chance the FOMC will raise rates at their September meeting along with a 40.4% probability the U.S. central bank will approve a rate hike at a meeting in December, according to the CME Group.

Any rate hikes by the FOMC this year are viewed as bearish for gold, which struggles to compete versus high-yield bearing assets in periods of rising rate environments.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, was relatively flat on Wednesday hovering at 97.28 in U.S. afternoon trading. The index remains near four-month highs.

Dollar-denominated commodities such as Gold become more expensive for foreign purchasers when the dollar appreciates.

Silver for September delivery surged 0.315 or 1.60% to $19.998 an ounce.

Copper for September delivery plunged 0.040 or 1.82% to $2.185 a pound.

Source Investing.com

SABMiller pauses integration work with AB InBev: sources

Stock market

SABMiller (L:SAB) has asked employees to pause the process of integrating its operations with those of Anheuser-Busch InBev (BR:ABI) as the brewer's board weighs its sweetened takeover offer, according to two sources familiar with the matter.

The pause in operations is not an indication of the board's thinking, said one of the sources, who declined to be identified as the matter is private.

Still, AB InBev's U.S.-listed shares fell nearly 4 percent and shares of Molson Coors(N:TAP), which is set to take over SAB's U.S. operations, fell nearly 7 percent in New York.

The world's top brewers agreed to merge late last year and for months have been engaged in back-office preparations, the sources said, aimed at smoothing the merger that was expected to start in the second half of the year when the deal was due to close.

The deal, however, has hit the rocks in recent weeks amid investor dissent over an offer made less attractive by a sharp fall in the pound following Britain's vote to leave the European Union.

In an effort to calm a stream of investor complaints about a perceived lack of fairness in the structure of the deal, AB InBev sweetened its offer on Tuesday.

SAB is currently meeting with shareholders to discuss the new offer before its board formally considers it.

SAB and AB InBev declined to comment on the pause in the integration, which was reported earlier on Wednesday by trade publication Beer Business Daily.

Denver-based Molson Coors, which on Monday announced leadership changes to take effect once it takes over the MillerCoors joint venture it has with SABMiller in the United States, declined to say whether it had paused integration too.

Source Reuters

Wall St. recovers after Fed keeps rates steady

Stock market

Wall Street cut losses on Wednesday after Federal Reserve left interest rates unchanged but opened the door to a resumption of monetary policy tightening this year.

The Fed had not been expected to move interest rates at its two-day meeting but investors have been anxious for hints about when a hike might come following concerns about potential fallout from Britain's vote in June to leave the European Union.

The U.S. central bank indicated less worry about possible shocks that could push the U.S. economy off course and noted that inflation expectations were little changed in recent months.

"It sounded a reasonably upbeat tone, not a big difference from last time, but a reasonably upbeat tone," said Kathy Jones, chief fixed-income strategist at Charles Schwab(NYSE:SCHW) and Co in New York.

Major stock indexes reversed losses following the announcement.

At 2:19 p.m. (1819 GMT), the Dow Jones industrial average (DJI) was up 36.22 points, or 0.2 percent, to 18,509.97, the S&P 500 (SPX) had lost 0.12 point, or 0.01 percent, to 2,169.06.

The Nasdaq Composite (IXIC) had added 27.61 points, or 0.54 percent, to 5,137.66.

Dow component Coke's (N:KO) revenue miss and forecast cut sent its stock down 3.6 percent, pulling down the S&P 500 index.

In contrast, Apple (O:AAPL) shares rose 7.2 percent after the company sold more iPhones than expected in the third quarter and gave an upbeat current-quarter forecast.

Oil prices (LCOc1) (CLc1) tumbled 3 percent after the U.S. government reported a surprise build in crude and gasoline inventories.

After a pause, U.S. fund investors resume rotation from stocks to bonds

Economy

Investors' zest for stock-buying ebbed in the latest week, data from the Investment Company Institute showed on Wednesday, one week after fresh appetite for riskier assets helped U.S.-based funds net the most cash this year.

Including exchange-traded funds, U.S.-based funds invested primarily in domestic shares bled $8.2 billion in the seven-day period through July 20, while bond funds attracted about the same amount. U.S.-based global stock funds were about flat, taking in $16 million, the fund trade group's data showed.

The figure reinforces the rotation this year from equities to bonds but reverses last week's result, when investors stocked up on riskier ETFs and helped U.S.-based funds overall attract the most cash in more than a year. [nL1N1A6124]

This year, investors have pulled an estimated $61 billion from U.S.-based stock mutual funds and ETFs, while pouring $126 billion into bonds, the data shows.

"U.S. equity markets have trended higher in 2016, but mutual-fund investors have been rotating away from these products," said Todd Rosenbluth, director of ETF & mutual-fund research at S&P Global Market Intelligence. "While some of this has gone into ETFs, investors appear to be getting nervous as the bull market ages."

The S&P 500 Total Return Index, which includes dividend payouts, has returned 7.4 percent this year.

In the latest week, nearly $2.8 billion moved into investment-grade bond mutual funds in the United States. Lower-credit, high-yield mutual funds attracted $1 billion, and government bond mutual funds took in $323 million, according to ICI's data.

Corporate bonds have posted strong returns as well, with the widely held iShares iBoxx $ Investment Grade Corporate Bond ETF up 9.7 percent this year.

"Investors continue to take on some credit risk through investment grade corporate bonds and greater risk with high yield bond mutual funds, rather than the lower yielding and safer government bond funds," said Rosenbluth.

The following table shows estimated ICI flows for the past five weeks, excluding ETFs (all figures in millions of dollars):

7/20 7/13 7/6 6/29 6/22/2016

Total equity -12,618 -7,988 -2,880 -5,193 -4,078

-Domestic -10,349 -7,218 -4,315 -2,001 -4,104

-World -2,269 -770 1,435 -3,192 26

Hybrid -779 -1,106 -275 -2,582 -616

Total bond 7,612 6,115 1,276 -2,488 3,267

-Taxable 6,156 4,344 170 -3,664 1,398

-Municipal 1,457 1,771 1,106 1,176 1,869

Total -5,784 -2,979 -1,879 -10,263 -1,428

The following table shows estimated ICI flows, including ETFs (all figures in millions of dollars):

7/20 7/13 7/6 6/29 6/22/2016

Equity -8,142 9,504 531 -10,033 -3,203

-Domestic -8,158 8,837 1,156 -8,041 -4,378

-World 16 667 -625 -1,992 1,175

Hybrid -761 -1,078 -291 -2,485 -547

Bond 8,178 11,491 7,355 -155 4,437

-Taxable 6,491 9,575 5,998 -1,410 2,354

-Municipal 1,687 1,916 1,357 1,255 2,083

Commodity 486 -268 2,158 2,098 689

Total -240 19,649 9,754 -10,575 1,376

Source Reuters

Federal Reserve holds rates steady for fifth consecutive meeting

Economy

Business, Investing

The Federal Reserve as expected stood pat on Wednesday afternoon at its July monetary policy meeting, holding short-term interest rates steady for their fifth consecutive meeting this year.

In a 9-1 vote, the Federal Open Market Committee (FOMC) left the target range on its benchmark Federal Funds Rate unchanged at a level between 0.25 and 0.50%. In December, the FOMC abandoned a seven-year zero interest rate policy by lifting the Fed Funds Rate by 25 basis points. It represented the first rate hike by the Fed in nearly a decade.

Notably, the FOMC said in its July monetary policy statement that near term risks to the economic outlook have diminished while economic activity has expanded at a moderate rate. Kansas City Fed president Esther George served as the lone dissenter.

Following the release, the Dow Jones Industrial Average stood at 18,467.65, down 0.03% on the day, while the S&P 500 Composite index lost 0.28% to 2,157.50. Both indices were relatively flat before the Fed issued its statement. The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other currencies, rose to 97.37, extending slight gains from earlier in the session. EUR/USD fell slightly to 1.0984, flat on the session.

Yields on the U.S. 10-Year, meanwhile, remained largely unchanged at 1.528%, down three basis points for the day.

The FOMC is scheduled to meet next on September 20-21.

Source Investing.com

Investors chasing dividends find easy, but risky, pickings

Stock market

Business, Investing

 Investors disappointed with tepid bond yields have been hunting for income in the stock market - boosting to near record highs the outperformance of dependable dividend paying companies and going beyond those usual suspects to corners of the market not typically known for their payouts.

In doing so, investors may be taking on added risk, analysts are warning. That is because some companies may be paying out more than they afford, or because the shares are getting overly expensive.

"A yield grab is under way that we think will likely persist," said Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America-Merrill Lynch Global Research in New York, in a July note to clients.

"Stocks with the highest dividend yields could continue to attract a disproportionate amount of assets," she said, recommending that investors focus on high-yielding companies in sectors such as telecommunications and technology that could comfortably cover their dividends and weren't overpriced.

With roughly 60 percent of the S&P now paying out more in dividends than 10-year Treasuries yield, it is not hard to find high-yielding stocks. But that is mainly a reflection of unusually low bond yields and not of bargain priced stocks, with the forward price-to-earnings ratio of the S&P 500 a somewhat pricey 17.2.

The S&P dividend aristocrat index, made up of S&P 500 companies that have raised their dividends every year for the last 25 consecutive years, has been outperforming the S&P 500 handily as investors buy up component company shares. At 0.45, the ratio of the aristocrats index to the S&P is well above its average of 0.4 and just a hair below its all time high of 0.46, touched earlier this month.

But investors have also been eagerly buying up just about any stock outstripping the 1.54 percent yield of the benchmark 10-year Treasury.

BlackRock data for June showed high dividend funds had the highest inflows of any equity category of exchange traded products, with flows of $3.8 billion the best month on record. Almost 300 stocks in the S&P 500 are yielding more than 10-year Treasuries; that is the most in five years and second-most in the past 30 years, according to Bank of America Merrill Lynch (NYSE:BAC).

While names in the energy, healthcare and telecom sectors are known for their dividend payouts, non-traditional names like retailers Staples and Kohl's have seen their dividend yields climb to, or near, record highs. Roughly one of every five companies in the benchmark S&P index is paying out over 3 percent now.

Analysts warn investors should be picky with regard to high-dividend payers, as some may be borrowing cash to pay for them instead of basing the payout on earnings.

An interest rate hike from the U.S. Federal Reserve - not widely expected until December - could signal the beginning of the end of the dividend run on Wall Street. A Fed rate hike would increase Treasury yields, diminishing the comparable attractiveness of stocks.

"As you see the prospect of a rate hike come into play, then these stocks don’t necessarily decline but they stop going up and they sort of level off and go sideways," said Randy Frederick, managing director of trading and derivatives for Charles Schwab (NYSE:SCHW) in Austin.

Source Reuters

U.S. June pending home sales disappoint consensus

Economic Indicators

Business, Investing

Pending home sales in the U.S. rose less than expected in June, dampening optimism over the health of the housing sector, industry data showed on Wednesday.

In a report, the National Association of Realtors (NAR) said its pending home sales indexrose by a seasonally adjusted 0.2% last month, missing expectations for an increase of 1.4%.

Pending home sales in May declined 3.7%.

Source Investing.com

The biggest flaws in Fed statements — according to an economist who used to write them

Economy

The Federal Reserve is set to release another policy statement later on Wednesday, explaining its view of the US economy.

It will likely be about 500 words long.

Just the length is a problem for the Fed's key means of communicating with markets, according to Vincent Reinhart, chief economist at Standish Mellon Asset Management, the fixed-income investment boutique of BNY Mellon Asset Management.

The first-ever Fed statement released right after a policy meeting, was issued on February 4, 1994. It was three paragraphs and 99 words long.

Reinhart spent 24 years on staff a the Fed, and for six of those he was secretary and economist of the Federal Open Market Committee. That meant he helped draft the statements on policy decisions.

"I'm proud to say that when I was drafting the FOMC statements, you needed a high school diploma to understand them," he told Business Insider on Tuesday. "Now you need a postgraduate degree."

The statement's length is problematic because investors have become ultra-sensitive to every word change. Fed statements are torn apart for any sign that might indicate a change in thinking — even if small.

That in turn has made the Fed hyper-sensitive about how changes to the language will be recieved.

So, it is reluctant to do anything to the statement's wording or structure.

"I don't think that a reasonable description of the economy, done eight times a year over the last two years, would have stayed so unchanged," Reinhart said. "And that's because they are worried about their communications."

The statement is so predictable that some economists publish mock-ups containing their predicted changes. These are rarely that far off the mark.

Reinhart also does not think the dot plot works — or ever worked — as a communication tool. The graphic shows where each voting FOMC members thinks the fed funds rate should be at the end of the year for the next few years and in the longer run.

"That is something that makes you think more about the differences across people rather than the commonalities across the group," Reinhart said.

Other critics note that markets interpret the dot plot as the Fed's firm forecast for interest rates, even though they really reflect an expectation for where rates would likely be.

Reinhart said that Fed guidance works best when it's conveying what the Fed would not do, not what it's likely to do. That vastly reduces the odds that the Fed has to lower its forecasts later, or disappoint markets.

Source BusinessInsider