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Two strategists weigh odds of correction

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The S&P 500 and Nasdaq held near records to end the week despite a disappointing jobs report.

Both those indices reached all-time highs on Thursday and hovered near those on Friday. Markets have extended a relentless rally that has stretched through the summer despite a resurgence in Covid cases across the U.S.

But, Miller Tabak chief market strategist Matt Maley has a warning.

“There’s a huge amount of froth in the marketplace right now much like we’ve seen in other important tops of the market that only became obvious in hindsight,” Maley told CNBC’s “Trading Nation” on Thursday.

Maley sees warning signs in today’s market that look similar to red flags during the 1999-2000 and 2007-2008 peaks. During the dotcom bubble, for example, he says stocks shot sky-high no matter the fundamentals much like AMC and GameStop have this year.

“Now we have a very similar situation,” said Maley. “You have the meme stocks which are flying, … they’re not going to change the world and these stocks are going up 2,000% in just a few days, you have these SPACs that are going crazy here. We have a stock market that’s very, very expensive, and a market that is overbought.”

Take the tech-heavy Nasdaq 100, he says. The QQQ Nasdaq 100 ETF now trades at a 70% premium to its 200-week moving average, well above where it was before the last several corrections.

While he does not foresee a crisis as significant as in the 2000s, Maley says it does serve investors to be cautious and adjust strategy accordingly.

“It doesn’t mean sell everything, go to 50% cash, or even 20% cash, but if you raise a little bit of cash, you’ll be able to buy stock if it corrects, but more importantly, you won’t be selling when the market is down 15% or 20%, when everybody else is selling at the exact wrong time, you’ll be the one keeping your head, holding on to your winnings and be able to take advantage of the market when it goes back up,” said Maley.

Investors should be looking out for the catalyst that could prompt the downturn, says Gina Sanchez, chief market strategist at Lido Advisors and CEO of Chantico Global. She sees two potential triggers.  

“The first catalyst I see is just the fact that we have priced in very strong expectations. We’re going to hit huge GDP growth this year. Next year, we’re going to have lower GDP growth. Will it still be strong? Yes, but it will be less than now,” Sanchez said during the same interview.

Like GDP estimates, Sanchez says earnings growth will also likely weaken as companies face stronger comparable past quarters. While still strong, she says there is room for disappointment.

“The second and more important catalyst I’m looking for is when the liquidity starts to get dialed in and stepped out of the market. When that happens, I think that’s when you could have a real potential correction,” said Sanchez.

The Federal Reserve, one of the biggest sources of excess liquidity in the market, has signaled it could begin to taper its bond-buying program by year’s end. The central bank will next meet on Sept. 21 and 22.

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Suspicious bets made before Goldman’s $2.2 billion acquisition of GreenSky

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Sam Edwards | Getty Images

The day before Goldman Sachs announced its $2.2 billion purchase of fintech lender GreenSky, someone placed options trades that immediately soared in value, moves that market participants say indicates advance knowledge of the deal.

On Sept. 14, the trader bought 8,000 options that would only pay off if the price of GreenSky rose above $10, according to the market participants. The options were out of the money —  meaning that GreenSky was trading well below the strike price —  and cost just a nickel per share.

After news of the deal hit, the value of the contracts, each allowing for the purchase of 100 shares of GreenSky, skyrocketed. The trader made an astounding 3,900% gain in a single day, the market sources say. That means a $40,000 bet would’ve turned into about $1.6 million.

Acquisitions are complicated transactions involving teams of bankers, lawyers and other specialists with access to market-moving information. With that many sets of eyes on a deal, information often leaks. As many as one quarter of all public company deals result in some form of insider trading, often involving out-of-the-money calls in the options market, according to a 2014 study by professors at the Stern School of Business at New York University and McGill University.

Although there have been insider-trading cases ensnaring high-profile perpetrators, instances in which people used material, non-public information in the markets, most times the activity goes unpunished, according to the 2014 study.

Goldman Sachs declined to comment for this article. A GreenSky representative didn’t respond to voice messages. The Securities and Exchange Commission and the Financial Industry Regulatory Authority didn’t immediately return calls seeking comment.

Goldman was its own financial advisor and used Sullivan & Cromwell as legal counsel. JPMorgan Chase and FT Partners advised GreenSky, who also used law firms Cravath, Swaine & Moore and Troutman Pepper Hamilton Sanders.

GreenSky’s board also retained its own bankers and lawyers at Piper Sandler and Wilson Sonsini Goodrich & Rosati. The banks and law firms declined to comment or didn’t immediately respond to messages.

‘Nobody’s that lucky’

The Sept. 14 trades weren’t the only unusually prescient bets made ahead of the Goldman deal.

Options activity for GreenSky is typically muted, with fewer than 1,000 calls making up the average daily volume. Wagers in soon-to-be-profitable $10 call options surged over the last two weeks, however, indicating that it’s possible multiple traders had knowledge of the deal.

Volumes went from 153 calls on Sept. 7 to 7,175 calls by Sept. 9, according to Jon Najarian, a veteran trader and CNBC contributor. By Sept. 13, two days before the announcement, call volumes hit 12,755. The contracts were mostly sold for a profit on Sept. 15, he said.

“When we see unusual activity like that, we tend to think that somebody had tomorrow’s newspaper today,” Najarian said. “Nobody’s that lucky. Whoever bought those calls will probably face regulators.”

The trades were so brazen — with some of the calls set to expire in just days — that whoever made them must be inexperienced, according to a former Wall Street executive with more than four decades of markets knowledge. There are ways to structure the bets that would make them less obvious to regulators, he said.

“This looks like a 22-year-old kid who didn’t know what they were doing,” he said. “But it’s a no brainer, they had inside information.”

The financial columnist Matt Levine, a former Goldman banker who has written extensively about insider trading, has a few guidelines when it comes to the prohibited activity. His first rule (“don’t do it”) is followed by a second:

“If you have inside information about an upcoming merger, don’t buy short-dated out-of-the-money call options on the target,” Levine wrote in a 2014 column. “The SEC will get you!”

With reporting contribution from CNBC’s Bob Pisani.

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JPMorgan to launch digital bank in the UK next week

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Signage outside a Chase bank branch in San Francisco, California, on Monday, July 12, 2021.

David Paul Morris | Bloomberg | Getty Images

LONDON — JPMorgan Chase is gearing up to debut its hotly anticipated digital bank in the U.K. next week.

The move will see the U.S. banking giant take on major British lenders including HSBC, Barclays, Lloyds and NatWest, as well as start-ups like Monzo and Starling.

JPMorgan will also step up its rivalry with Goldman Sachs, which launched its Marcus digital bank product in the U.K. in 2018.

New York-based JPMorgan first unveiled plans to launch its Chase brand in the U.K. earlier this year. Rather than establishing physical branches, JPMorgan will only offer its services through a mobile app.

It marks the first international expansion of JPMorgan’s consumer bank brand in its 222-year history.

The news was initially reported by the Financial Times and later confirmed by CNBC.

Sanoke Viswanathan, CEO of JPMorgan’s international consumer division, said the bank’s U.K. expansion was a “very big strategic commitment.”

“We will spend hundreds of millions before we get to break-even and get to a place where this is a sustainable business, and we’re not in a rush,” he told the FT.

Chase will initially offer checking accounts along with a rewards program. It also plans personal loans, investments and mortgages further down the line.

The U.K. is home to an increasingly crowded retail banking market. Fintech-friendly regulations have enabled challengers like Monzo, Revolut and Starling — which offer checking accounts and other services via smartphone — to flourish and become billion-dollar companies.

These digital banks have gained millions of customers between them, while some have even tried their luck at entering the U.S. market. Revolut, which now has over 15 million customers, was last valued at $33 billion, making it the U.K.’s most valuable tech start-up.

JPMorgan’s arrival in the U.K. will place further pressure on the country’s traditional lenders. State-backed lender NatWest notoriously tried and failed to take on fintech challengers with a competing digital bank called Bó.

Under CEO Jamie Dimon, JPMorgan has sought to combat the threat of fintech stars like PayPal and Square through a number of acquisitions.

As part of its effort to expand in the U.K., the bank agreed to acquire online wealth manager Nutmeg in June. Later that month, it announced a deal to buy OpenInvest, an ethically-minded investment platform based in San Francisco.

Earlier this month, JPMorgan said it plans to buy a majority stake in Volkswagen’s online payments unit.

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UAE real estate shows signs of recovery as Aldar predicts sales surge

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An Emirati woman paddles a canoe past skyscrapers in Abu Dhabi, United Arab Emirates, on Wednesday, Oct. 2, 2019.

Christopher Pike | Bloomberg | Getty Images

Abu Dhabi’s property market is showing signs of steady growth, as the oil rich capital of the United Arab Emirates recovers from the deep blows of the coronavirus pandemic.

“Business in Abu Dhabi and the real estate sector is actually very buoyant,” Aldar Properties Chief Financial and Sustainability Officer Greg Fewer told CNBC’s “Capital Connection” on Wednesday. 

“We’ve just come off a strong second quarter where we announced growth across all our major business lines,” Fewer said. 

“We’re on pace to exceed 5 billion dirhams ($1.36 billion) in sales this year, driven by new launches that we’re going to be bringing in the third and fourth quarters.”

The latest comments signal a further improvement in the UAE’s economy and its often crisis fraught real estate sector. Pandemic related job losses forced nearly 10% of the UAE’s expat population to leave, hitting property prices and increasing vacancies last year.

But low lending rates and improving business conditions in the UAE have helped to stoke demand for Aldar’s major community and housing development projects in Abu Dhabi, where it is the developer of choice for the Abu Dhabi government.

Total sales topped 3.4 billion dirhams in the first half of the year, and the recovery has helped to push its shares up more than 100% in the past 12 months. Aldar Properties is now the largest listed developer in the United Arab Emirates with a market value of nearly $9 billion.

Residential sales prices in Abu Dhabi had fallen on average by 2% in 2020, while prices in Dubai, where a supply glut has weighed on prices for more than half a decade, fell by 7.1%, according to Knight Frank. Price falls were largely concentrated in the apartments segment of the market, but demand for larger villas in both cities held up.

But Dubai’s largest developer, Emaar Properties, saw its sales surge to a record $2.65 billion in the second quarter of this year, while Damac Properties saw losses narrow. Shares of both have risen 42% and 33%, respectively, in the past 12 months.

“Our customer bases are expanding,” Fewer said. “70% of our recent launches have gone to new customers and a lot of them are tenants who are converting the ownership,” he added, suggesting people were upgrading to bigger homes and villas to accommodate the rise in remote work and learning.

Expatriate homeowners and foreign investors made up more than 40% of Aldar’s buyers in the second quarter.

A high national vaccination rate, improving mobility trends and government reforms to company ownership rules, paired with more flexible residency visas have also helped to improve sentiment within the sector broadly.

 

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