Alternative Thinking on Today's Market Events
The Daily Alpha - 09.16.15

Alternative Thinking on Today's Market Events
The Daily Alpha - 09.16.15

Garrett Baldwin

Here's today's alternative Thinking on Interest Rates, Fantasy Sports, Hackers, Real Estate, and Fine Wine.

1. "Global weakness, uncertainty around consumer sentiment, inflation still running below target are reasons the Fed will not move this week."

There’s a reason why Pacific Investment Management Co. CIO Dan Ivascyn told Reuters this week that the chance of a rate increase over the next two days sits at “below 50 percent.” 

The company is advised by former Federal Reserve chair Ben Bernanke. If anyone has foresight into what current Fed chair Janet Yellen might be thinking, it’s Bernanke.

With the FOMC meeting set to kick off today, the broader market expectations for a rate hike have increased from 28% to 32% over the last few trading sessions. However, a survey of economists by Bloomberg showed that 54 of 111 of respondents expected a hike, with the rise expected for 12.5 basis points. 

Though a rate hike seems more likely in December, the broader conversation and focus centers on the impact of a rate hike on indebted emerging markets and anyone who loaded up on cheap debt over the last decade. How much will a stronger dollar affect borrowers and Forex markets as expectations for a rate hike further accelerate? The sheer size of global debt markets should be concerning for everyone.

According to the International Bank of Settlements, dollar borrowing by non-U.S. entities has surged 50% since 2008. Today, it sits at a record $9.6 trillion. Developing economies were responsible for $3 trillion of this borrowing, which is 100% more than 2008 levels.

Some energy companies are already facing a crisis, as the combination of debt and cratering oil prices weigh on balance sheets. JPMorgan noted that Brazilian-energy giant Petrobras faces a very ugly future should borrowing costs rise. The investment bank estimates that each percentage point that borrowing costs rise, net income will fall by 15%.

Petrobas said it anticipates that its yearly debt costs will more than double by the end of the decade. That’s just one company…

2. "In July, FanDuel announced a $275 million financing round that valued the website at $1 billion."

There are many ways to make money off your sports addiction, but the financial potential of the daily fantasy sports industry is exploding in a way that has disrupted the global fantasy sports industry.

According to Fox Business, daily sites FanDuel and DraftKings shattered their first week prize pool records during Week One of the 2015 season. Over the weekend, DraftKings announced that its prize pool for NFL games topped $21 million. Meanwhile, FanDuel said that it topped a prize pool of $12 million.

Both firms remain private companies, and their valuations are likely poised to surge as momentum continues to build for the still-budding industry.

Or will there be a Congressional curveball?

Following news of both companies’ success over the weekend – and their constant advertising on ESPN and during NFL games – New Jersey Senator Frank Pallone (D) is prepared to look into the U.S. gambling code to question the legality of this industry. Sorry America... you like nice things? Well, this is why you can't have them.

“I am writing to request that the Energy and Commerce Committee hold a hearing examining the relationship between professional sports and fantasy sports to review the legal status of fantasy sports and sports betting,” the senator wrote in a letter to Commerce, Manufacturing and Trade Subcommittee Chair Michael C. Burgess (R-Texas).

Perhaps the most staggering thing about this weekend wasn't the Senator's opposition. It was these statistics: "Meanwhile, just 1.3% of all DFS players accounted for 40% of fees and won 91% of player profits. The bulk of this upper echelon spent an average of $9,100 on fees, on which they realized profits of $2,400, while accounting for 23% of all fees and 77% of the profits."

These are numbers provided by Ed Miller, an esteemed author on poker strategy, and Daniel Singer, senior adviser of the McKinsey & Company Global Sports and Gaming Practice. 

Increased use of algorithms and advanced strategies are providing some daily players "too much skill" and the numbers are raising eyebrows around the nation.

It’s a theme that Modern Trader explored in its September issue, as daily fantasy sites like FanDuel further blur the lines between gaming and gambling in today’s society.

Be sure to read the latest interview with former Cantor Fitzgerald co-CEO Lee Amaitis, who has taken his three-decade career as a dealer broker to the Las Vegas desert to redefine the future of live in-casino gambling.

And be sure to check back with Alpha Pages for more coverage on sports and exotic wagering. 

3. “Online, you are two milliseconds away from Ukraine or China..."

You might live in a nice neighborhood, far away from the dangerous alleys of a crime-ridden city

But online, criminals are closer than you think. And if you work in any business, you’re increasingly going to be the target of cybercrimes due to the rise of social engineering hacks around the world. You might think that you’re not as important as a CFO, but you’re actually the ideal target given your level of preparation.

In the October issue of Modern Trader, four ethical hackers sat down to discuss the cyber threats to the financial sector and to traders.

The complete interview can be read on newsstands at Barnes & Noble this week, with snippets online at Futuresmag.com and Alphapages.

So what is social engineering? It’s the process by which hackers infiltrate an organization by attacking a firm’s weakest link: The human element.

This is a fascinating story.

4. "If I was a smart Chinese investor I would be looking to accelerate my non-yuan purchases, buying U.S. real estate and high-end real estate in London" 

The iShares U.S. Real Estate ETF (IYR), a fund tracking publicly traded real-estate investment trusts, is down roughly 10% so far this year. Many have cited the Fed’s pending rate decision as a reason for this decline, but such rationale is misguided, according to Todd Briddell, CEO of CenterSquare Investment Management.

In a conversation with The Street last week, Briddell said that the alternative asset in real estate provides healthy returns, generates passive income, and offers diversification at a time that investors are concerned about the equity and bond markets.

"It's not just about the income," Briddell told The Street. "If you look back historically, an increase at the short end of the curve is less concerning for REITs than what might end up happening at the long end of the curve."

But the more interesting take away was the recommendation that Briddell offered in the wake of China’s recent currency devaluation. With additional devaluations possible, Briddell recommended that Chinese investors should look to the U.S. and London for investments. Be sure to check our previous issues for insight into whether these markets are poised for growth, and the Septemeber issue of Preqin's Private Real Estate Report, right here

5. “Because the Chinese stock market crash has effectively brought down prices in the fine wine market, the near future may be an excellent opportunity for interested investors to get into the fine wine market to reap rich rewards over the long run."

Speaking of China, an interesting take away from China’s recent stock market decline. The selloff didn’t just affect shares of Alibaba or Baidu, but the fine wine market has seen a decline in prices. 

Opportunities are starting to emerge, according to AuctionForecast’s Sisi Liang and Joseph L. Breeden.
In fact, take a look at the cost of Bordeaux as it tracks against the Shanghai Composite Index (also listed in the post.)

Editor’s Note: Remember, the Alpha Pages is currently boosting its contributor list, and we’re actively seeking content from individuals with original views on the alternative investment industry. Be sure to visit the Alpha Pages right here and scroll to the bottom for a list of topics that we are regularly covering and take part in the conversation.

Also, be sure to check out today’s top hedge fund and private equity news atFinAlternatives.com, and visit FuturesMag.com for daily updates on all things trading.

Finally, be sure to read the first issue of MODERN TRADER, which was recently nominated for the prestigious EDDIE award for the BEST ISSUE in the Business and Finance category.


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