Archive for Ethan Wu

Morgan Stanley, Interactive Brokers face probe by the SEC and FBI into $100 million in suspicious money from a former Venezuelan oil minister

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Morgan Stanley headquarters.
  • Federal agencies are probing $100 million in assets allegedly laundered by a former Venezuelan oil minister, the Wall Street Journal said.
  • Investigators want to know why Morgan Stanley and IAB were involved in handling possibly dirty money.
  • Neither Morgan Stanley nor IAB, the largest online brokerage, is currently accused of wrongdoing.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Morgan Stanley and Interactive Brokers are being investigated by several federal agencies, including the SEC and FBI, over $100 million in assets allegedly laundered by a former Venezuelan oil minister, according to a new report in the Wall Street Journal.

The report, citing government documents and people familiar with the matter, says the federal inquiry dates back almost a decade and was accelerated by a whistleblower complaint in 2019. Neither Morgan Stanley nor IAB, the largest online brokerage, is currently accused of wrongdoing.

The probe centers around two Venezuelan men who are cousins: businessman Luis Mariano Rodriguez Cabello and former oil minister Rafael Ramírez.

Rodriguez allegedly helped launder $2 billion in illicit funds on behalf of Ramírez, who is accused of stealing the money from Venezuela's state-owned oil company using inflated contracts.

Investigators want to know why Morgan Stanley and IAB were involved in handling Rodriguez's possibly dirty money, despite the US having designated Venezuela a high-risk money laundering country over a decade ago.

According to the Journal, Rodriguez wired $108 million to his Morgan Stanley account between 2014 and 2015. A Treasury Department report found that Morgan Stanley suspected the funds were part of a money-laundering scheme, but Rodriguez was still able to move the funds to a different bank in 2017.

Then, in 2018, an associate of Rodriguez moved the money to an IAB account, despite what investigators think were obvious red flags.

Morgan Stanley declined to comment to the Journal. IAB said it was "committed to compliance with all applicable laws and regulations" but couldn't comment on any specifics.

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Coal prices are skyrocketing as an energy crisis in China rages

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A coal-fired power plant.
  • Coal prices have nearly tripled in 2021, with analysts pointing to a confluence of factors.
  • It's fueling an energy crisis in China and threatening the supply chains of companies like Apple and Tesla.
  • The Chinese government has begun to slash power use in certain sectors, including the stainless steel and ceramics industries.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Coal prices have nearly tripled in 2021, fueling an energy crisis in China and threatening the supply chains of companies including Apple and Tesla.

Coal futures contracts have surged 31% in September and over 190% so far this year, driven by voracious demand and restricted supply. That has precipitated an electricity crisis in China, which gets around 70% of its power from coal sources.

Analysts have pointed to a confluence of factors to explain soaring coal prices. Chief among them is that Chinese coal production growth has lagged at just 6% so far this year, compared to a 14% rise in coal-fired power output over the same period, according to Reuters. That's come as Beijing has targeted steep carbon emission reductions.

In addition, while China could simply tap its 30% of non-coal energy sources, renewables like hydroelectric power have faltered in recent weeks due to one-off weather events.

Meanwhile, municipalities have been hoarding coal ahead of an often-harsh winter season. And importing coal has become political, after Beijing blocked Australian coal imports for demanding an investigation into the origins of COVID-19. Strict border controls in China make the problem worse.

Longer term, expectations that green-energy sources will displace coal have limited investment in new mines, meaning little spare capacity exists to make up for shortfalls in production elsewhere.

"The result has been a severe depletion of coal inventories which has contributed to low stocks at many power plants and upward pressure on coal prices," wrote Reuters analyst John Kemp on Tuesday.

Amid the soaring coal prices, the Chinese government has begun to slash power use in certain sectors, including the stainless steel and ceramics industries. At least 20 regions have announced some degree of power curb, according to Chinese-language industry publication BJX Power.

The crisis has begun to spill into the operations of US companies that make goods in China, including Apple and Tesla. A key Apple manufacturer said on Monday that its factories were being hit by the mandatory power curbs, according to Bloomberg, while Tesla suppliers were reporting similar impacts.

The state has usually preferred to cut industrial electricity use before it begins barging into consumers' lives. Fixed prices for electricity leave power plants with little incentive to boost output. But some voices are now advocating raising electricity prices to combat the shortfall.

"It should be clear that electricity is a type of commodity," Wang Gaofeng, a writer at a Chinese energy magazine, wrote on WeChat in Mandarin. "Having ups and downs is a market law, and a thousand years without movement is not normal!"

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Fund guru who won big with inflation ETF is now making opposite bet

Nancy Davis
Nancy Davis, CIO and portfolio manager of Quadratic Capital Management, is building a track record of identifying bubbles in the market.
  • A new ETF from Nancy Davis is betting on deflation ahead, cutting against a market consensus fixated on rising prices.
  • BNDD is a bet on Japanification - the fund should gain most if a low-growth, low-rates regime comes to US.
  • The options portion of the ETF promises exposure to interest rate derivatives not often available to retail investors.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A new ETF from influential hedge fund manager Nancy Davis is betting on deflation in the near term, cutting against a market consensus that has spent months fretting over rising prices.

The Quadratic Deflation ETF, run by Davis herself, will hold long-dated Treasuries as well as a mix of options, Quadratic Capital Management said in a statement. The fund has an expense ratio just under 1%.

Trading under the ticker BNDD, the ETF is explicitly a bet on Japanification - that is, the fund should gain most if a low-growth, low-rates regime comes to America.

"Some investors have expressed concerns that the US will experience an environment similar to Japan given the debt increase and labor market," Davis said in a statement. "It's prudent for investors to have tools available to them so that they are prepared for a wide range of economic outcomes and environments."

The company is also pitching investors on a democratization angle. The options portion of the deflation ETF promises exposure to rarer over-the-counter interest rate derivatives not often available to retail investors.

Davis made headlines in January when her inflation-hedging ETF hit $1 billion in assets under management, in a clear signal of investor fear. Her swift rise to prominence led Insider to put Davis on our Top 100 People Transforming Business list for North America.

But while Davis is now getting involved in betting on deflation, the conventional wisdom on future prices has remained much the same.

In fact, a Citi survey of big family offices and ultra-rich individual investors released on Tuesday found that 30% put inflation at the top of their list of concerns over the next 12 months, ahead of COVID-19 at 23% and social unrest at 17%.

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Volatile markets shouldn’t discourage investors from abundant buying opportunities as increasingly rich Millennials boost stocks, Fundstrat’s Tom Lee says

Tom Lee
Thomas Lee Managing Director and Head of Research at Fundstrat
  • Markets have seesawed in recent weeks but investors shouldn't be deterred from seeking buying opportunities, Tom Lee said.
  • Fundstrat's managing partner said that the long-term bull case for the stock market remains intact despite Monday's sell-off.
  • In the long run, Lee argued that increasingly wealthy Millennials will continue to boost stocks to new heights as they collectively inherit $2 trillion per year.
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Markets have seesawed in recent weeks but investors shouldn't be deterred from seeking buying opportunities, Tom Lee said in a Monday interview on CNBC.

Fundstrat's managing partner said that the long-term bull case for the stock market remains intact despite several recent bouts of volatility, including Monday's Evergrande sell-off.

"People are talking about Evergrande and the spill-over being like Lehman [but] I'm in the camp that this is going to prove to be a really good buying opportunity," said Lee, who cited "tame" bond yields and relatively muted VIX readings.

"We're at a moment where everyone's only seeing darkness and downside and usually that's when you want to be adding risk," he added.

Pressed on his long-term outlook for markets, Lee argued that increasingly wealthy Millennials will continue to boost stocks to new heights as they collectively inherit $2 trillion per year.

"Over the next 20 years, Millennials will inherit collectively something close to $70 trillion," said Lee. "That's a great combination for risk assets, especially stocks and crypto, because Millennials generally are buying disruptors [and are] less interested in bonds."

In a note to clients on Monday, Lee added that his fund's "central view remains that stocks will exit the month with gains," pointing to the past week of rising bond yields and crude oil as indicative of a reflationary environment.

"That suggests we should be taking a more 'half-full' view on incoming economic data," said Lee.

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Tencent-backed podcasting giant Ximalaya drops plans for US IPO after Chinese regulators pressured it to list in Hong Kong

Red flags fly in front of the Great Hall of the People as the third session of the 13th National People's Congress (NPC) holds opening meeting on May 22, 2020 in Beijing, China.
Great Hall of the People in Beijing, China.
  • China's biggest podcasting platform Ximalaya announced on Thursday that it was abandoning US IPO plans.
  • After Ximalaya filed for a New York IPO in April, regulators began urging the company to shift its listing to Hong Kong.
  • Ximalaya may have worried regulators on account of its troves of user data.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

China's biggest podcasting platform Ximalaya announced on Thursday that it was abandoning plans to go public in America following regulatory pressure, according to Reuters.

Ximalaya filed in late April for a New York IPO, boasting 250 million monthly listeners in the first quarter of 2021 and over 160,000 podcasters in 2020, according to its SEC filing.

But regulators began urging Ximalaya to shift its listing to Hong Kong, according to a Reuters report in May, which also said the company would decide where to list "within the next two weeks."

Ximalaya - which enjoys backing from Tencent, Baidu, Sony, and others - may have worried regulators on account of its troves of user data, according to Reuters. Similar concerns motivated China's cyber regulator to knock Didi from app stores, sending the stock plunging just days after its much-vaunted IPO.

Recent months have seen regulatory pressure on industries from tech to tutoring, but China's crackdown on podcasting began in earnest in 2019 when the cyber regulator banned 26 Chinese podcasting and other audio apps, according to Quartz. At the time, it said that alleged social ailments like porn, anime and gaming culture, and "historical nihilism" were pervasive on these apps.

In 2020, a competing podcasting platform, Lizhi, debuted on the Nasdaq stock exchange. But the stock has lost nearly 66% since the IPO amid the broad tumble in Chinese shares.

Other Chinese companies that had planned IPOs are now voluntarily eyeing a move from New York to Hong Kong as uncertainty remains heightened.

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Nio falls as the EV maker plans biggest US stock sale by a Chinese company since Didi IPO

Nio

Electric-vehicle maker Nio slid as much as 6.8% on Wednesday after it announced plans to sell up to $2 billion in US-based shares, the biggest such offering since Didi's IPO.

NYSE-listed shares in Nio fell as low as $37.81 on Wednesday from the previous day's close of $40.59.

Shanghai-based Nio had previously signaled it would pursue a second listing in Hong Kong, following the lead of rivals like XPeng, which did so in June.

Analysts cited by Bloomberg disagreed on whether the $2 billion in US shares indicated further hurdles in the Hong Kong listing process. Deutsche Bank's Edison Yu said delays in Hong Kong might've spurred the company to turn to American markets. But Bloomberg Intelligence's Steve Man differed, saying the most likely rationale is curbing the company's debt costs.

The $2 billion dollar share sale would be the biggest US offering by a Chinese company since Didi Global raised $4.4 billion from US investors in June - just days before its share price tanked.

Nio's fundraising push comes as the auto industry continues to feel the squeeze of the global chip shortage. Last week, Nio announced vehicle deliveries had fallen around 25% from July to August thanks to the "uncertainty and volatility of semiconductor supply." XPeng reported a similar drop - although Li Auto, another Chinese EV rival, saw 10% month-over-month delivery growth.

Also last week, Ford slashed production of its flagship F-150 pickup truck, blaming a lack of chip components, while Elon Musk said the next-gen Tesla Roadster would likely be pushed back to 2023.

Nio shares closed at $38.15 on Wednesday, falling 6% on the day.

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The SEC is putting retail investors at the center of its agenda as the agency joins Biden’s push for more corporate competition, report says

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Gary Gensler is the new head of the Securities and Exchange Commission.
  • The SEC will put equal access for retail investors front and center at a White House meeting on Friday, according to Yahoo Finance.
  • The report said that Chairman Gary Gensler will raise the agency's focus on transparency and low-cost market access.
  • Gensler will hit on the SEC's examination of the payment for order flow business model used by brokers like Robinhood.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The SEC will put equal access for retail investors front and center at the White House on Friday, according to a Yahoo Finance report.

The report, citing a senior SEC official, said that Chairman Gary Gensler will raise the agency's focus on transparency and low-cost market access at the first-ever meeting of the White House Competition Council.

He will hit on the SEC's examination of the payment for order flow business model used by brokers like Robinhood. Last week, Gensler said a PFOF ban was "on the table," prompting a denunciation by Robinhood's chief legal officer that the suggested move was "draconian" and ultimately harmful to retail investors.

The White House committee, established in July, is part of Joe Biden's attempt to combat rising corporate consolidation and rekindle competition. The anti-consolidation effort is still in its early stages and leans on regulators to consider rule changes that would boost competition.

Gensler's transparency push has been wide-ranging, touching on issues like Chinese equity listings, climate, PFOF, SPACs, and crypto.

In the wake of Friday's meeting, new rules on climate risk disclosures could come this fall, according to Yahoo Finance.

In July, the SEC froze all US IPOs of Chinese companies, pending new disclosure requirements on an obscure corporate structure that Gensler fears retail investors don't widely understand. Likewise, Gensler has advocated greater investor protection in the crypto space, which he called the "Wild West."

"At about $2 trillion of value worldwide, [crypto] at the level and the nature that if it's going to have any relevance five and 10 years from now, it's going to be within a public policy framework," Gensler told the Financial Times last week.

"Finance is about trust, ultimately."

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The biggest DeFi exchange is being investigated by the SEC, report says

Ether
Ether

Uniswap Labs, owner of the biggest decentralized finance exchange Uniswap, is under investigation by the Securities and Exchange Commission as DeFi breaks into the mainstream, according to a new Wall Street Journal report.

The Journal report, citing people familiar with the matter, said the SEC was looking into "how investors use Uniswap and how it is marketed." The SEC didn't comment to the Journal, while Uniswap said it was committed to complying with the law.

At this point, the SEC's investigation is under civil law, rather than criminal law, and it may or may not lead to charges. But the probe coincides with a separate SEC effort to gain insight into crypto lending platforms, asking in letters for information on whether digital assets should be SEC-registered securities, according to the Journal.

Uniswap pitches investors on its freedom of design, letting users make their own currency trades without central approval. But as crypto and DeFi have come into regulators' sights, Uniswap has been forced to pare back some of that freedom.

In July, Uniswap restricted certain trades in assets like tokenized stocks, citing the "evolving regulatory landscape." Uniswap said at the time that while its exchange restricted these trades, the underlying protocol, developed by Uniswap Labs on ethereum, is open source and would not be affected.

The Uniswap trading restrictions came shortly after SEC Chair Gary Gensler made remarks that clearly hinted that digital assets like tokenized stocks were likely to count as securities - and thus platforms offering them were likely running afoul of the law.

"Make no mistake: It doesn't matter whether it's a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities," Gensler told the American Bar Association.

"These platforms - whether in the decentralized or centralized finance space - are implicated by the securities laws and must work within our securities regime."

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Didi surges 12% and leads other Chinese stocks higher as investors eye a bottom for the recent free-fall

Didi Global stock symbol
  • Didi Global surged as much as 12% on Wednesday, leading a broad rebound of US-listed Chinese stocks as some investors see a bottom for the recent free-fall.
  • The Invesco Golden Dragon China ETF, which tracks a range of US-listed Chinese equities, rose 4%. The broader Shanghai Composite Index was up just around 1%.
  • The uptick comes as some analysts and investors are eyeing a bottom to the steep decline in Chinese equities.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Didi Global finished Wednesday 12% higher, leading a broad rebound of US-listed Chinese stocks as some investors see a bottom for the recent free-fall.

Other prominent US-listed Chinese companies were lifted on Wednesday as investors mulled the implications of the government regulatory crackdown. Baidu finished the day up 6%, Tencent 5%, Alibaba 4%, and JD.com 3%. The Invesco Golden Dragon China ETF, which tracks a range of US-listed Chinese equities, rose 3%.

The broader Shanghai Composite Index was climbed roughly 1%.

The slight reprieve for Didi - and for other US-listed Chinese giants - still pales in comparison to this year's tumble amid an escalating regulatory campaign. Didi is around 34% below its June 30 IPO price, while the Golden Dragon China ETF has given up more than 20% over the same period.

Even still, the uptick comes as some analysts and investors are eyeing a bottom to the steep decline in Chinese equities.

"We may have seen the near-term bottom of the market, after months of selloffs," Castor Pang, head of research at Core Pacific Yamaichi, told Bloomberg recently. "Although investors are still very sensitive about negative regulations, shares managed to bounce back recently despite negative news from time to time."

In a note out on Wednesday, JPMorgan analysts pointed out that some of the harshest selling signals had let up.

"It appears that after briefly contributing to the sell-off in Chinese equities in late July both domestic and foreign institutional investors … have exhibited buy-the-dip behavior," the analysts wrote. "Retail investors have also behaved in a somewhat contrarian manner."

But the JPMorgan team added that there remain significant headwinds in the medium term for Chinese stocks.

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GameStop’s soaring market value has it big enough to enter the S&P 500 – but the company faces still faces other hurdles before it can be included

Gamestop.
Gamestop.
  • While some stock indices follow systematic criteria, which names get included in the S&P 500 is set by a committee of anonymous staffers at S&P Dow Jones Indices.
  • GameStop, which was S&P 500-listed as recently as 2016, now once again meets a number of S&P's rules.
  • But GameStop's biggest hurdle to index inclusion could be its lack of profitability.
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GameStop's stunning run up in 2021 has given the company a market value that more than exceeds the threshold for S&P 500 inclusion. But it still faces significant hurdles, due largely to a handful of factors outlined in a new Wall Street Journal report.

While some stock indices follow systematic criteria, which stocks get included in the S&P 500 is set by a committee of anonymous staffers at S&P Dow Jones Indices. The committee leans on a number of rules but has ultimate discretion over the process.

GameStop, which was S&P 500-listed as recently as 2016, now once again meets a number of S&P's rules. The stock's market capitalization, currently around $16 billion, is well above the required floor of $13.1 billion. GameStop shares are also highly liquid and held largely by the public.

But GameStop's biggest hurdle to index inclusion could be its lack of sustained profitability. S&P rules say listed companies must have positive earnings in both the most recent quarter and the past year. The game retailer, however, generated a loss in the first quarter of 2021 as well as three of four quarters in 2020.

In principle, the S&P committee could look past GameStop's soft earnings for one reason or another - perhaps on account of its towering market value. But given the speed of GameStop's rise, the committee could be nervous about approving its inclusion too soon, Art Hogan, chief market strategist at National Securities Corporation, told the Journal.

"While the company may check most of the boxes, it is hard to know how long that will be the case," he said.

The S&P committee has also seemed to downplay raw market cap in certain cases. Several of the S&P 500's smallest players have markets caps well below the supposed minimum, such as NOV Inc.'s $5 billion market valuation.

"Entrance to the S&P 500 is a combination of both art and science," Hogan told the Journal.

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