When it comes to U.S. stocks, growth trumps quality

NEW YORK (Reuters) – U.S. investors are not rewarding companies for generating good earnings consistently, opting instead for a stockpicking strategy that might be called “growth at a high cost.”

High-quality stocks selected for their strong balance sheets and stable earnings have appreciated just 12 percent this year, according to Goldman Sachs Group Inc (GS.N), while the broader S&P 500 .SPX benchmark index has returned 13.8 percent.

But investors cannot seem to stop throwing money at companies improving their sales fastest: a group of such equities tracked by Goldman Sachs has surged 20 percent. Put another way, discriminating investors who have chosen companies with stable earnings prospects are being punished.

This lagging interest in quality stocks has even whipsawed well-known fund managers; Whitney Tilson said this week he was shutting down his Kase Capital Management LLC hedge fund.

“Historically, I have invested in high-quality, safe stocks at good prices as well as lower-quality ones at distressed prices,” Tilson wrote to investors.

“Given the high prices and complacency that currently prevail in the market, however, my favorite safe stocks (like Berkshire Hathaway (BRKa.N) and Mondelez (MDLZ.O)) don’t feel cheap, and my favorite cheap stocks (like Hertz (HTZ.N) and Spirit Airlines (SAVE.O)) don’t feel safe. Hence, my decision to shut down.”

Yet some managers are betting that complacent markets could be shaken from their zombie-like slumber as easy monetary policy and its backdrop of lower interest rates comes to an end.

“In an environment like we’re in now – where no one really cares what things are worth – you may underperform, but over time reality will set in,” said Sean O‘Hara, director at Pacer Financial Inc. “It always does.”

REVERSAL OF STIMULUS

O‘Hara said quality investments underperform when investors are willing to buy stocks without regard to their value, and that markets have been supported by the U.S. Federal Reserve’s extraordinarily loose policies.

Earlier this month, the Fed, as expected, said it would begin to reverse some of those policies by gradually reducing its bond holdings.

Pacer Financial is one of a several investment firms betting that quality will matter again. Its “Cash Cows” ETFs buy companies with strong cash flows and healthy balance sheets.

Goldman Sachs’ global investment research unit included companies such as retailer Ross Stores Inc (ROST.O), pharmacist CVS Health Corp (CVS.N) and oil driller Schlumberger NV (SLB.N) in its high-quality group earlier this year.

Yet these companies have mostly not been star performers.

The market has been led by so-called “FANG” stocks – like Facebook Inc (FB.O), Amazon.com Inc (AMZN.O), Netflix Inc (NFLX.O) and Google parent Alphabet Inc (GOOGL.O) – and a small winner’s circle of lesser-known names like Celgene Corp (CELG.O) and Equinix Inc (EQIX.O).

These companies have all enjoyed robust sales growth in a U.S. economy that’s below its boiling point, even as many factors disqualify some of them as quality stocks. Netflix has had 12 straight quarters of negative free cash flow, and the company warned it may not see positive free cash flow “for many years” as it invests in original content like the science-fiction drama “Stranger Things.”

Still, its subscriber growth continues to exceed estimates, and the stock has rocketed more than 45 percent this year.

LUXURY OF GROWTH

Investors are paying a premium for the luxury of revenue growth: $24 for every dollar of earnings per share anticipated over the next 12 months, compared to $20 for quality names and $13 for high adjusted free-cash-flow yield equities, according to Goldman Sachs data.

Raffaele Savi, a portfolio manager for BlackRock Inc’s (BLK.N) $647 million Global Long/Short Equity Fund (BDMAX.O), said strong revenue growth is “more rare than at many points in the past,” given U.S. gross domestic product growth averaging around 2 percent annually. The fund’s recent performance commentary said investors have been shunning company fundamentals.

With the Fed’s interest-rate hiking cycle taking hold, investors are bracing for market dynamics to change.

“When you see these huge headlines on big investors and hedge funds throwing in the towel because they can’t make sense of the market, that is a sign that things are about to turn,” said Guggenheim Partners LLC global chief investment officer Scott Minerd.

Part of the reason quality does not work as well as it once did may be that more assets follow “quantitative” funds that rely on the same statistics measuring quality, said Brian Hayes, equity strategist at Morgan Stanley & Co LLC (MS.N).

Plus, it’s harder for investors to assess what an earnings report is saying. Technology giants, for instance, derive more of their worth these days from services, patents and brand value, intangibles that can be hard to value.

Editing by Jennifer Ablan and Bernadette Baum

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Technology stocks drive S&P to record high

(Reuters) – Gains in technology stocks helped the S&P 500 eke out another record on the last trading day of the month, while the Dow was dragged down by losses in industrial stocks.

Nvidia (NVDA.O) was up 2.13 percent and was among the top boosts to the S&P after Citigroup raised its price target on the stock.

Market’s focus also remained firmly on President Donald Trump’s tax plan and his ability to push it through Congress.

Trump’s plan called for tax cuts for most Americans, but drew criticism that the plan favors business and the rich and could add trillions of dollars to the deficit.

“For the market the most important thing is tax cuts for the corporations and that, most likely, will not be tampered with,” said Peter Cardillo, chief market economist at First Standard Financial in New York.

“But any disappointment going forward, would certainly take the wind out of this market as it has rallied on hopes of cuts.”

The dollar was on track for its biggest weekly rise in 2017 after Trump’s tax plan, while the three major Wall Street indexes were set to lock in gains for the month and the quarter.

At 9:39 a.m. ET (1339 GMT), the Dow Jones Industrial Average .DJI was down 39.44 points, or 0.18 percent, at 22,341.76, the S&P 500 .SPX was up 0.75 points, or 0.03 percent, at 2,510.81 and the Nasdaq Composite .IXIC was up 15.91 points, or 0.25 percent, at 6,469.36.

Data earlier in the day showed cooling consumer spending in August and slowing pace of annual inflation growth.

Seven of the 11 major S&P sectors were lower, led by a 0.51 percent loss in the energy index .SPNY. Oil giants Exxon (XOM.N) and Chevron (CVX.N) were the biggest drags on the S&P.

Technology index .SPLRCT rose 0.41 percent.

Alphabet’s (GOOGL.O) 1.12 percent rise and Amazon’s (AMZN.O) 0.6 percent gains propped up the Nasdaq.

KB Home (KBH.N) jumped about 6 percent after the homebuilder’s profit and revenue came above estimates, prompting a slew of price-target raises.

Advancing issues outnumbered decliners on the NYSE by 1,357 to 1,137. On the Nasdaq, 1,391 issues rose and 892 fell.

Reporting by Sruthi Shankar in Bengaluru; Editing by Anil D’Silva

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U.S. second-quarter economic growth revised higher; jobless claims rise

WASHINGTON (Reuters) – The U.S. economy grew a bit faster than previously estimated in the second quarter, recording its quickest pace in more than two years, but the momentum probably slowed in the third quarter as Hurricanes Harvey and Irma temporarily curbed activity.

Gross domestic product increased at a 3.1 percent annual rate in the April-June period, the Commerce Department said in its third estimate on Thursday. The upward revision from the 3.0 percent rate of growth reported last month reflected a slightly faster pace of inventory investment.

Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent.

Harvey, which struck Texas, has been blamed for much of the decline in retail sales, industrial production, homebuilding and home sales in August. Further weakness is anticipated in September after Irma slammed into Florida early this month.

Rebuilding is, however, expected to boost GDP growth in the fourth quarter and in early 2018. Estimates for the growth rate in the July-September period are just above 2.2 percent.

However, they could be raised after another report from the Commerce Department on Thursday showed a decline in the goods trade deficit in August as well as large increases in both retail and wholesale inventories.

Harvey and Irma continue to impact the labor market and are expected to cut into job growth this month. In a third report, the Labor Department said initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 272,000 for the week ended Sept. 23.

Still, the labor market remains strong. Claims have now been below the 300,000 threshold, which is associated with a robust labor market, for 134 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller.

Prices for U.S. Treasuries held losses after the data and the dollar .DXY fell to a session low against a basket of currencies. U.S. stock index futures were trading lower.

ROBUST CONSUMER SPENDING

With GDP accelerating in the second quarter, the economy grew 2.1 percent in the first half of 2017. Still, economists believe growth this year will not breach President Donald Trump’s ambitious 3.0 percent target.

Trump on Wednesday proposed the biggest U.S. tax overhaul in three decades, including lowering the corporate income tax rate to 20 percent and implementing a new 25 percent tax rate for pass-through businesses such as partnerships to boost the economy.

But the plan gave few details on how the tax cuts would be paid for without increasing the budget deficit and national debt, setting up what is expected to be a bruising battle in the U.S. Congress.

Growth in consumer spending, which makes up more than two-thirds of the U.S. economy, was unrevised at a 3.3 percent rate in the second quarter as an increase in spending on services was offset by a downward revision to durable goods outlays. Consumer spending in the second quarter was the fastest in a year.

Amid robust consumer spending, businesses accumulated a bit more inventory than previously reported to meet the strong demand. Inventory investment added just over one-tenth of a percentage point to GDP growth in the second quarter. It was previously reported to have been neutral.

Growth in business spending on equipment was unchanged at a rate of 8.8 percent, the fastest pace in nearly two years.

Investment on nonresidential structures was revised to show it increasing at a 7.0 percent pace, up from the previously reported 6.2 percent rate.

Both export and import growth were revised slightly lower. Trade contributed two-tenths of a percentage point to GDP growth last quarter. Housing was a slightly bigger drag on growth in the last quarter than previously reported, subtracting 0.3 percentage point from output.

The government also sharply revised down growth in corporate profits for the second quarter. Profits after tax with inventory valuation and capital consumption adjustments increased at a 0.1 percent rate instead of the previously reported 0.8 percent pace.

Reporting by Lucia Mutikani; Editing by Paul Simao

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Britain warns Boeing it might lose business over Bombardier row

BELFAST/LONDON (Reuters) – Britain told U.S. planemaker Boeing on Wednesday that it could lose out on British defense contracts because of its dispute with Canadian rival Bombardier which has put 4,200 jobs at risk in Northern Ireland.

The U.S. Department of Commerce on Tuesday imposed a 220-percent duty on Bombardier’s (BBDb.TO) CSeries jets, whose wings are made at a plant in Belfast, following a complaint by Boeing (BA.N) which accuses Canada of unfairly subsidizing Bombardier.

The ruling is a political headache for Britain’s minority Conservative government, which relies on support from a Northern Irish party to stay in power.

It also undermines the government’s assurances to Britons that free trade and London’s close ties with Washington will be pillars of Britain’s prosperity and global influence after it leaves the European Union in 2019.

“This is not the behavior we expect from Boeing and it could indeed jeopardize our future relationship with them,” British Defence Secretary Michael Fallon told reporters in Belfast.

“Boeing has significant defense contracts with us and still expects to win further contracts. Boeing wants and we want a long-term partnership but that has to be two-way.”

Bombardier is the largest manufacturing employer in Northern Ireland, which is the poorest of the United Kingdom’s four parts and is mired in political difficulties after emerging from decades of armed sectarian conflict.

“Bitterly disappointed by initial Bombardier ruling,” said British Prime Minister Theresa May, who had personally asked U.S. President Donald Trump to help resolve the dispute.

“The government will continue to work with the company to protect vital jobs for Northern Ireland,” she said on Twitter.

Boeing said in a statement it was committed to the UK, but gave no indication that it might change tack in the dispute.

“We have heard and understand the concerns from the Prime Minister and the Government about Bombardier workers in Northern Ireland,” the statement said.

Boeing said that since 2011 it had tripled its spending in the United Kingdom to 2.1 billion pounds ($2.8 billion) in 2016, while the firm and its suppliers accounted for more than 18,700 UK jobs.

“DOES NOT BODE WELL” FOR BREXIT

The row has come at a bad time for May, who was severely weakened by her party’s poor showing in an election in June and who has been struggling to contain infighting within her top team over Brexit.

Manufacturing Northern Ireland, an industry group, said the row was an ominous sign of the difficulties Britain could face after leaving the EU.

“What we could be witnessing is the fundamental difference between being a fully-fledged member of an internal market and a junior partner in a free trade agreement,” it said.

“This does not bode well for the UK’s plan to be a leader in global free trade nor indeed ambitions of a free trade agreement with the EU which cannot match the benefit we currently enjoy as part of the EU’s Single Market.”

At the Bombardier plant in Belfast, workers were nervous about what impact the dispute could have on their livelihoods.

“Nobody knows how it will end up,” said aircraft fitter George Burnside, 56, who has worked for Bombardier for 27 years. “I am concerned. I was shocked at the size of the tariff.”

The U.S. penalty will only take effect if the U.S. International Trade Commission (ITC) rules in Boeing’s favor. A final decision is expected early in 2018.

British Business Secretary Greg Clark said he was confident the initial Department of Commerce ruling would be overturned, arguing that Bombardier’s CSeries jets did not compete with Boeing.

But Boeing conceded no ground, accusing Bombardier of illegally dumping its products in the U.S. single-aisle airplane market out of desperation.

“Any claimed economic threat to Bombardier is due to the weakness of its product in the marketplace,” said Boeing.

“SABRE-RATTLING”

Arlene Foster, leader of the DUP, the Northern Irish party that is propping up May’s minority government, signaled she would put pressure on May to act.

“Everyone realizes how important Bombardier is to Northern Ireland and we will use our influence with our government to make sure that continues,” she told Sky News.

However, London’s options in fighting Bombardier’s corner may be limited because of the importance of Boeing to its defense industry.

Boeing says the United Kingdom is its third largest supply base after the United States and Japan. It has recently begun constructing its first European parts manufacturing site in Sheffield, northern England.

Britain recently ordered the Boeing P-8 maritime surveillance plane and a new fleet of Apache attack helicopters made by the U.S. giant. Its armed forces have deployed Chinook helicopters, the C-17 transport plane and the E-3 Sentry airborne early warning and command post.

British defense analyst Howard Wheeldon said it was unlikely that Britain would pursue any reprisals against Boeing.

“I think there is a lot of saber-rattling, but in practical terms it is not on,” he said when asked whether Britain could cancel or reduce Boeing defense orders.

“They can play politics, but can’t actually walk away from what they need and have committed to buying from Boeing.”

Additional reporting by Tim Hepher and Conor Humphries in Belfast, Padraic Halpin in Dublin, Guy Faulconbridge, Kate Holton and Michael Holden in London; Writing by Estelle Shirbon; Editing by Angus MacSwan and Robin Pomeroy

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U.S. consumer confidence falls; new home sales hit eight-month low

WASHINGTON (Reuters) – U.S consumer confidence fell in September and home sales dropped to an eight-month low in August due to the impact of Hurricanes Harvey and Irma, supporting the view that the storms would hurt economic growth in the third quarter.

The economy, however, remains on solid ground as other data on Tuesday showed a strong increase in house prices in July.

The Conference Board said its consumer confidence index declined to a reading of 119.8 this month from 120.4 in August, which was the highest reading in five months. It said confidence in Texas and Florida “decreased considerably.”

The survey showed consumers’ views of the labor market were less upbeat. The share of consumers saying jobs are “plentiful” fell to 32.6 percent from 34.4 percent in August.

However, the proportion of those stating jobs are “hard to get” slipped to 18.1 percent from 18.4 percent. The number of consumers expecting an improvement in their incomes rose marginally to 20.5 percent this month from 19.9 percent in August. The share expecting a drop in income was unchanged at 8.3 percent.

Despite being near full employment, the labor market has struggled to generate strong wage growth, frustrating both consumers and policymakers. But rising home prices should continue to underpin consumer spending, even though the housing market is slowing.

A second report on Tuesday showed the S&P CoreLogic Case-Shiller composite index of house prices in 20 metropolitan areas rose 5.8 percent in July on a year-over-year basis after increasing 5.6 percent in June.

An acute shortage of homes on the market and strong demand are pushing up house prices. While rising house prices are boosting equity for homeowners, tight inventories are hurting home sales.

The U.S. dollar .DXY rose to its highest level since Aug. 31 against a basket of currencies after the data. U.S. stocks were trading higher while prices of U.S. Treasuries fell.

HOUSING SLOWING In a third report, the Commerce Department said new home sales decreased 3.4 percent to a seasonally adjusted annual rate of 560,000 units last month, which was the lowest level since December 2016.

Economists polled by Reuters had forecast new home sales, which account for 9.5 percent of overall home sales, rising 3.3 percent to a pace of 588,000 units last month.

New home sales, which are drawn from permits, are volatile on a month-to-month basis. Sales were down 1.2 percent on a year-on-year basis in August. The Commerce Department suggested Harvey and Irma likely impacted new home sales data last month.

It said “information on the sales status at the end of August was collected for only 65 percent of cases in Texas and Florida counties” affected by the hurricanes. That compared to a normal response rate of 95 percent.

Harvey hurt sales of previously owned homes in August and held back the completion of houses under construction. With Irma slamming Florida in September, housing market activity could remain weak. The areas in Texas and Florida affected by the storms accounted for 14 percent of single-family home permits in 2016.

Even before the hurricanes struck, the housing market was softening. Housing is being buffeted by headwinds, including shortages of homes available for sale, skilled labor and suitable land for building. Rising prices for building materials are also undercutting housing.

Housing weighed on the economy in the second quarter and economists expect the sector to be a drag on gross domestic product in the July-September period.

In August, new single-family homes sales fell in the Northeast, South and West. They were unchanged in the Midwest.

The inventory of new homes on the market rose 3.6 percent to 284,000 units, the highest level since May 2009. Still, new housing stock is less than half of what it was at its zenith during the housing bubble.

At August’s sales pace it would take 6.1 months to clear the supply of houses on the market, up from 5.7 months in July. A six-month supply is viewed as a healthy balance between supply and demand.

Reporting by Lucia Mutikani; Editing by Paul Simao

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Wall St. lower as technology stocks drag

(Reuters) – A selloff in technology stocks, led by Facebook and Apple, drove down major Wall Street indexes on Monday.

Apple (AAPL.O) fell more than 1 percent, extending its losses from last week due to a lukewarm response to its iPhone 8 globally.

Facebook’s (FB.O) 3.2 percent was the biggest drag on the S&P 500 and the Nasdaq.

Heightened expectations of another interest rate hike this year following comments from a Federal Reserve official also added to the downbeat sentiment.

The central bank is on track to gradually raise interest rates as factors depressing inflation are fading and the U.S. economy’s fundamentals are sound, New York Federal Reserve President William Dudley said.

Investors are also awaiting a speech by Fed Chief Janet Yellen later in the week for more guidance on the monetary policy.

“Investors would like to get more clarity as far as what the Fed is going to do as they move forward with the unwinding of the balance sheet and how they are going to move forward next year,” said Robert Pavlik, chief market strategist at Boston Private Wealth in New York.

The U.S. central bank left interest rates unchanged in its September policy meeting, as expected, but signaled it still expects one more increase by the end of the year, despite a recent bout of low inflation..

At 9:39 a.m. ET, the Dow Jones Industrial Average .DJI was down 8.21 points, or 0.04 percent, at 22,341.38, the S&P 500 .SPX was down 3.1 points, or 0.12 percent, at 2,499.12 and the Nasdaq Composite .IXIC was down 36.20 points, or 0.56 percent, at 6,390.72.

Five of the 11 major S&P sectors were lower.

General Motors (GM.N) rose 2.46 percent after Deutsche Bank upgraded the automaker’s stock to “buy”, pointing to its autonomous vehicles, which could be ready for deployment within quarters.

Allergan (AGN.N) was up more than 2.6 percent after the drugmaker authorized a $2 billion buyback of its shares and said its chief financial officer would retire.

Chicago Chief Charles Evans and his Minneapolis counterpart, Neel Kashkari are scheduled to speak later in the day.

Advancing issues outnumbered decliners on the NYSE by 1,391 to 1,085. On the Nasdaq, 1,279 issues fell and 1,061 advanced.

Reporting by Sruthi Shankar in Bengaluru; Editing by Anil D’Silva

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Fidget spinners and squishies: some Toys ‘R’ Us toymakers cut ties

(Reuters) – This summer, toy supplier Product Launchers delivered 100,000 specially ordered DC Comics fidget spinners to Toys ‘R’ Us, unaware that the biggest U.S. toy store chain was in financial trouble.

Now Product Launchers, which supplies other novelty items like squishies from five toymakers to Toy ‘R’ Us, expects it will not be paid for the $500,000 fidget spinner order and other items following the chain’s Chapter 11 bankruptcy filing on Sept. 19, Product Launchers Chief Executive Linda Parry Murphy told Reuters.

“These toymakers were very reliant on Toys ‘R’ Us. It’s their primary account, or the account that they were leaning on to make inroads in the toy industry, looking at the long term down the road,” Parry Murphy said.

“But we’ve made a decision not to sell to Toys moving forward.”

Meanwhile Barbie maker Mattel Inc (MAT.O), toy and board game company Hasbro Inc (HAS.O) and other large vendors like Lego could get full payment after Toys ‘R’ Us asked a bankruptcy judge to approve $325 million of special financing to pay top suppliers owed before the Chapter 11 filing.

The unequal vendor treatment is not unusual in a Chapter 11 bankruptcy, but it shows the tough decisions vendors face when retailers file for bankruptcy, as dozens have in recent years, succumbing to competition on price and convenience from Amazon.com Inc (AMZN.O).

The beneficiaries of the financing package are still unknown, but smaller vendors like Product Launchers do not expect to make the list. Its claim tops $1 million but the amount is well below the $2.5 million to $135 million listed as Toys ‘R’ Us’ 50 largest claims.

Toy ‘R’ Us declined to comment on specifics about its relationship with Product Launchers or its other vendors.

Toys ‘R’ Us spokeswoman Nicole Hayes said in an email: “So far, we have seen great support from our vendors and look forward to continuing working with them for many years to come.”

She said the company will rely on $2 billion in new financing to fund operations.

TOUGH CHOICES

Hundreds of vendors have faced similar concerns in their dealings with bankrupt retailers such as Sports Authority and hhgregg, which ended up going out of business. Toys ‘R’ Us is an extraordinary case, retail consultants said, because of the large number of toy vendors it relies on to fill its big-box stores.

Typically in bankruptcy proceedings, even small vendors like Product Launchers can expect to receive payment for orders made after a bankruptcy filing, but not for past-due bills. As a result, Product Launchers is ending ties with the toy chain.

“We’ve taken down all connections to them,” said Parry Murphy. “I would rather focus on retailers that have strong financials and that we have a good comfort level about doing long-term business with.”

At this point, she thinks Toys ‘R’ Us is too far behind the curve to catch up with deep-pocketed competitors like Amazon and Wal-Mart Stores Inc (WMT.N).

HOT ITEMS

The loss of Product Launchers and other vendors, coming on the verge of the holiday season when Toys ‘R’ Us generates about 40 percent of annual sales, shows one of the risks facing the big toy retailer during bankruptcy.

If consumers discover the chain is not stocking a hot seasonal item, they will not visit its stores or website, Toys ‘R’ Us said in court filings.

Toys ‘R’ Us relies on hundreds of small vendors to give its stores the appearance of plenty.

“Your store won’t be attractive with just Mattel and Lego,” said Israel Shaked of the Michel-Shaked Group consultancy.

Retail specialists agreed that the 2017 holiday season could determine the fate of many brick-and-mortar retailers that have struggled to remain relevant in a growing era of e-commerce.

“This holiday season will be a true litmus test for the in-store experience,” said bankruptcy lawyer Corali Lopez-Castro. “The products have to be exciting and worthy of visiting the store or online. But really you want people in the store. That’s where they can pick up the widget, the Lego, and the Barbie.”

Toys ‘R’ Us’ success in retaining vendors likely will hinge on confidence in its turnaround plan, dubbed “Project Sunrise,” which envisions improved and integrated online and in-store shopping experiences.

Michael Araten, the chief executive of creative construction company K‘NEX, is optimistic.

“The potential upside is massive,” Araten said, adding that Toys ‘R’ Us would emerge from bankruptcy a “nimbler and stronger company that delights kids for generations.”

Reporting by Tracy Rucinski in Chicago; additional reporting by Tom Hals in Wilmington, Delaware and Jessica DiNapoli in New York; Editing by Lisa Shumaker

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Shorting volatility: Rising risks mean itchier trigger fingers

NEW YORK (Reuters) – A long stretch of low volatility for U.S. stocks has made betting on continued calm a popular and lucrative trade, but traders and strategists warn that risks to the trade have mounted, while the potential for profits has shrunk.

U.S. equity market volatility – the daily fluctuations in stock prices – has hovered near record lows for much of this year.

The CBOE Volatility Index .VIX, a gauge of the degree to which investors expect share prices to fluctuate, has averaged 11.4 this year. That is lower than for any comparable period over its nearly three-decade history.

Robust corporate earnings, encouraging economic growth and a view that world central banks are available to rescue markets if trouble strikes, have helped mute stock market gyrations and spell success for those betting on calm.

The VelocityShares Daily Inverse VIX Short-Term ETN (XIV.P), which makes money as long as the volatility drops or holds in place, is up about 100 percent this year.

Some traders, however, have grown more wary of increased risks to the trade.

“I think a lot of folks have gotten lulled into a false sense of security because the short trade has gone so well for so long,” said Matt Thompson co-head of Volatility Group at Typhon Capital LLC, in Chicago.

“We are still shorting volatility but we have an itchier trigger finger.”

VOLATILITY-LINKED ETPs

While there are many ways to short volatility – bet on lower stock gyrations – investors’ hunger for this trade is particularly apparent in the growth in volatility-linked exchange traded products (ETPs).

Assets under management for the top two short volatility products is at $2.8 billion and their exposure to volatility is at an all-time high, according to Barclays Capital.

But the very popularity of the trade has cranked up the risk.

These products hold first and second month volatility futures, buying and selling these contracts daily to keep their volatility exposure in line with the level of stock swings in the market.

Managers of these leveraged and inverse products are required to buy volatility futures as they go up and sell when they decline.

Strategists fear that this rebalancing – which needs be even more pronounced if a shock follows a period of unusually muted volatility, such as now – may be akin to adding fuel to fire.

“There could be a feedback effect and maybe selling begets more selling,” said Salil Aggarwal, equity derivatives strategist at Deutsche Bank in New York.

“Risk/reward considerations would imply cutting positions to more manageable levels,” he said.

RISK VS REWARD

Meanwhile, investors are not reaping as much for taking on risk as they did in the past, said Anand Omprakash, director of equity and derivative strategy at BNP Paribas, in New York.

What traders are being paid to take on the short volatility risk currently, is slightly below their average historical take since January 2013, and roughly 6 percent lower than what they were paid monthly in mid-2016, Omprakash estimates.

“You were being paid much better for much of 2016 than for much of 2017,” he said. “I don’t know if I would necessarily say the trade has run out of steam, but I don’t think it offers the kind of risk adjusted return that it offered last year.”

And the stakes are high. Strategists warn that one or two big shocks could wipe away months of profits.

The inverse volatility product XIV, while having doubled in price this year, logged an 11.4 percent decline in August as stock gyrations picked up briefly amid escalating worries about the ability of the administration of President Donald Trump to push through its economic agenda.

“The risk/reward of the trade as a buy and hold proposition is not the same as it was before the U.S. election or in the middle of the oil crisis in 2015 and early 2016,” said Stephen Aniston, president of investment adviser Black Peak Capital, in Connecticut.

Positioning in these products, primarily driven by retail players, may be more skewed to the short side than the broader market where institutional investors hold sway.

“I don’t think the risk is necessarily as big on the institutional side as it is on the retail side,” said Omprakash.

To be sure, not everyone is rushing to bet on a spike in volatility, but experts do warn that investors should tread carefully when shorting volatility from here.

Additional reporting by Terence Gabriel; Editing by Bernadette Baum

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Uber stripped of London license, plans to appeal

LONDON (Reuters) – London stripped Uber on Friday of its license to operate from the end of next week in a huge blow to the taxi service and 3.5 million users in one of the world’s wealthiest cities.

The capital’s transport authority said the Silicon Valley technology giant was not fit and proper to hold a private vehicle hire license and it would not be renewed when it expires on Sept. 30.

Uber, whose 40,000 drivers in London account for a third of private vehicles hired, said it would contest the decision and regulator Transport for London (TfL) will let it operate until the appeals process is exhausted.

”Uber’s approach and conduct demonstrate a lack of corporate responsibility in relation to a number of issues which have potential public safety and security implications,“ TfL said. ”TfL must also be satisfied that an operator is fit and proper to hold a license.

Specifically, TfL cited Uber’s approach to reporting serious criminal offences, background checks on drivers and software called Greyball that could be used to block regulators from gaining full access to the app.

“Transport for London and the Mayor have caved in to a small number of people who want to restrict consumer choice,” said Tom Elvidge, Uber’s general manager in London. “We intend to immediately challenge this in the courts.”

The loss of the license comes after a tumultuous few months for Uber, including a string of scandals involving allegations of sexism and bullying at the San Francisco-based start-up that forced out former CEO and co-founder Travis Kalanick.

Uber, which is valued at about $70 billion and whose investors include Goldman Sachs, has faced protests around the world for shaking up long-established taxi markets.

The taxi app has also been forced to quit several countries, including Denmark and Hungary, and faced regulatory battles in multiple U.S. states and around the world.

HATED BY CABBIES LOVED BY USERS

London’s traditional black cab drivers have attacked Uber, saying it has undercut safety rules and threatened their livelihoods. Uber has been criticized by unions and lawmakers too and been embroiled in legal battles over workers’ rights.

A photo illustration shows the Uber app on a mobile telephone, as it is held up for a posed photograph in central London, Britain September 22, 2017. REUTERS/Toby Melville

London police also complained in a letter published that Uber was either not disclosing, or taking too long, to report serious crimes including sexual assaults and this put the public at risk.

Uber said then its drivers passed the same rigorous checks as black cab drivers and it has always followed TfL’s rules on reporting serious incidents and it had a dedicated team that worked closely with London’s police.

London Mayor Sadiq Khan, a Labour politician who has criticized Uber in the past, said he backed the decision to reject its application for a new license.

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“It would be wrong if TfL continued to license Uber if there is any way that this could pose a threat to Londoners’ safety and security,” he said.

Drivers of London’s black cabs, who have snarled up the city’s streets in protest at the app over the last few years, welcomed Friday’s decision.

“Their standards are not up to scratch,” said 71-year-old Walt Burrows, who has driven a black cab for 39 years. “The black cab is an iconic part of London. What you get with a black cab is a metered fare and you know you’re safe.”

Uber is likely to come under more fire next week when it appears in court to appeal a verdict that granted two of its drivers rights such as the minimum wage, the latest “gig economy” battle between firms lauding the flexibility enjoyed by self-employed drivers and unions accusing them of exploitation.

Uber has, however, announced a series of changes over the last few months to improve conditions for its drivers, including the introduction of in-app tipping and plans to increase some fees.

Alongside Uber’s drivers, some of London’s 3.5 million registered users expressed concern as to how TfL’s decision would affect their lives.

“It will definitely impact my life,” said 43-year-old event planner Rimi Char, who users the app at least once a week. “I have got used to the ease and cost effectiveness of using Uber and I’ve always had positive experiences.”

One of Uber’s British competitors in London, Addison Lee, is also awaiting a decision from TfL about a longer-term license. The company declined to comment on Friday.

Additional reporting by Michael Holden, Kylie MacLellan, James Davey, Elizaabeth O’Leary and Elaine Hardcastle; editing by Guy Faulconbridge/David Clarke

Our Standards:The Thomson Reuters Trust Principles.

Wall St. lower as investors assess Fed’s hawkish stance

(Reuters) – U.S. stocks pulled back from their all-time highs on Thursday as investors assessed the Federal Reserve’s policy statement, which hinted at raising interest rates for the third time this year and laid out plans to roll back its monetary stimulus.

The Fed said it would begin to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities – acquired in the years after the 2008 financial crisis – from October.

While the central bank left rates unchanged, it cited low unemployment, growth in business investment and an economic expansion that has been moderate but durable this year to build its case for another rate hike in 2017.

Interest rate futures are now pricing in about a 70 percent chance of a December hike, according to CME’s FedWatch tool, up from above 50 percent prior to the Fed meeting.

Fed Chair Janet Yellen said the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.

“The hint of a rate hike in December was no surprise to us and we reiterate our stand, that it is not likely to unravel the market’s bullish posture in anticipation of tax cuts,” said Peter Cardillo, chief market economist at First Standard Financial.

At 9:41 a.m. ET (1341 GMT), the Dow Jones Industrial Average .DJI was down 11.45 points, or 0.05 percent, at 22,401.14, the S&P 500 .SPX was down 4.63 points, or 0.18 percent, at 2,503.61.

The Nasdaq Composite .IXIC was down 24.52 points, or 0.38 percent, at 6,431.53.

Nine of the 11 major S&P sectors were lower, with the technology index’s .SPLRCT 0.50 percent fall leading the decliners.

Apple (AAPL.O) was down 1 percent and was the biggest drag on all the three major indexes.

The financial sector .SPSY was among the two gainers as banks tend to perform better in a higher rate environment.

Citigroup (C.N), Bank of America (BAC.N), JPMorgan (JPM.N) and Goldman Sachs (GS.N) were all higher in early trading.

U.S. stocks have continued to climb this year, with the S&P up about 12 percent so far, helped by strong corporate profits and optimism that U.S. President Donald Trump will cut business taxes.

Economic data showed the number of Americans filing for unemployment benefits fell unexpectedly to 259,000, but the data continued to be influenced by Hurricanes Harvey and Irma, muddying the labor market picture in the near term.

Shares of Calgon Carbon (CCC.N) soared 61.5 percent after Japanese chemical manufacturer Kuraray (3405.T) agreed to buy the carbon materials firm for $1.107 billion.

Advanced Micro Devices (AMD.O) was up 1 percent after a report that Tesla (TSLA.O) is working with the chipmaker to develop its own artificial intelligence chip for self-driving cars. Rival chipmaker Nvidia (NVDA.O) was down 2.8 percent, while Tesla was flat.

Declining issues outnumbered advancers on the NYSE by 1,331 to 1,140. On the Nasdaq, 1,378 issues fell and 915 advanced.

Reporting by Tanya Agrawal; Editing by Arun Koyyur

Our Standards:The Thomson Reuters Trust Principles.