TheChek News Flow

Macro :

- May: EU Leaders Told Her Florence Speech Changed Brexit Talks

- U.S. Is Communicating With North Korea, Tillerson Says

- EU Has No Legal Right to Interfere With Nord Stream 2: Spiegel

- UK Power Reserve Sale Attracts China State-Owned Grids: Reuters

Keep An Eye on :

- ABBN VX : ABB May Reach Upper End of 2020 Profit Target, CEO Tells DI

- AF FP : Air France A380 Makes Emergency Landing After Engine Blows Apart

- AIG US : AIG Freed From Systemic-Risk Label Assigned After 2008 Crisis -->+2.3% in after hours

- AZA IM : Alitalia administrator does not rule out possibility of receiving offer for entire airline

- ALO FP : Alstom Wins Tel Aviv Light Rail Signal System Tender: TheMarker

- ALPH SW : Alpiq Hires Goldman Sachs for Sale of Non-Core Units, SZ Reports

- POP SM : Banco Popular Bad Loans Ratio Soared to 21.3% in June

- BB FP : BIC Cuts FY Net Sales Organic Growth Goal to Slightly Below 2%

- BKW SW : BKW CEO Says Canton Bern Should Reduce Stake: Le Matin Dimanche

- ACA FP : Credit Agricole Italy Unit Buys Three Local Lenders: Statement

- DBK GY : Deutsche Bank to Pay $190 Million to Resolve Forex Claims

- DRI GY : United Internet’s Dommermuth to Become Drillisch CEO Jan. 1

- EDP PL : EDP Says It Sees CMEC Final Adjustment Amount at EU256m

- IAG LN : IAG Is Said to Show Interest in Monarch’s Assets: Sky News

- HLE GY : Hella Can Spend EU1b on Acquisitions, Automobilwoche Reports

- MUV2 GY : Munich Re’s Ergo Probes Possible Fraud Case at Russia Subsidiary

- NAS NO : Norwegian Air CEO Says His Tenure Is in ‘Overtime’: Nettavisen

- NuM LN : Numis takeover speculation mounts as Anders Holch Povlsen hikes stake

- PRS SM : Prisa Calls Extraordinary Shareholder Meeting

- RSA LN : RSA, he says, would not be a good asset to buy now, ZURN CEO in FT - http://on.ft.com/2x7uiVX

- RTL BB : RTL’s CFO Heggen Sees Stable 2017 Dividend: Boersen-Zeitung

- SGO FP : Saint-Gobain Canceled 5M of Its Own Shares After Buyback

- SOLB BB : Solvay Outlook to Positive From Stable by Fitch on Deleveraging

- TLX GY : Talanx Earnings Target Threatened by Catastrophes, Euro Reports

- UNA NA :ADM May Bid for Unilever Spreads Unit: Sunday Times

- VWS DC : Vestas Wins Wind Turbine Orders in Argentina, Italy, Mexico

- VIV FP : Italy to Discuss Telecom Italia-Vivendi in Oct.: Calenda in Sole

- VONN SW : Vontobel Has Up to CHF600m for Swiss Acquisitions, NZZ Reports

- VOW3 GY : Volkswagen Stops Sale of Ducati Unit, Fiom Union Leader Says

They are buying upside calls on the CBOE Volatility Index, or VIX, and using a sophisticated trading strategy to prepare for the Standard & Poor’s 500 index to advance over the next six months.

This approach might be called the “trust, but verify” trade.

Should stock indexes plummet from historical highs, and you can pick almost any reason you want, VIX should surge. VIX calls are thus a relatively inexpensive insurance policy to protect unrealized investment gains, or to profit from a sharp correction.

Meanwhile, certain pricing patterns that are invisible to most investors exist within the SPDR S&P 500 Trust (ticker: SPY) options market. So many investors have bought defensive puts, which increase in value should the fund decline, that the puts are priced with a fear premium. Investors are starting to take advantage of that skew—the difference between the implied volatility of certain puts and calls—by selling bearish put options and buying upside calls. In plain words, this basically means that puts are more expensive than calls.

Chris Jacobson, a Susquehanna Financial Group strategist, recently advised his clients that an investor sold 25,000 March $233 puts and bought 37,500 December $257 calls, pocketing about $2.20 for every contract. An investor also sold 25,000 of the same March $233 puts to buy 25,000 of the December $256 calls, collecting $2.80 per contract.

Why would anyone get so bullish when so many other investors are fretting—wrongly, we think—that the end is nigh?

Three-month SPY skew is near the highest levels of the past five years. This means the SPY puts are unusually expensive to buy, a fact that many investors like to exploit by selling. But really all the put sale suggests is that some sophisticated investors think they can get a good price for them and that they will likely expire worthless if stock keep rallying. If stocks decline, they don’t mind covering those puts or buying stock. The call position lets them participate in rallies.

SHARES OF CBOE HOLDINGS (CBOE) have been consolidating around $106 to $107 after we recommended taking profits on our last CBOE trade that returned 940% in about a month. However, a recent milestone in VIX options trading should prompt investors to keep a close eye on their positions. Last week, CBOE announced that VIX set a new daily trading record of 2.6 million contracts, surpassing the previous record of 2.5 million from early August. The stock didn’t move much on the news, but there always seems to be a lag in investor understanding of what could affect the shares’ price. Remain vigilant in watching for a potentially strong stock move that could come when CBOE reports earnings on Nov. 7. Until then, be ready to lock in profits should our short December $105 put and long December $110 call, executed at a $1.05 credit when the stock was at $106, become profitable.

IN 1992, when the options industry was struggling to win investor acceptance, the exchanges and Options Clearing Corp. had an idea. They would fund and form an investor education group, and the Options Industry Council was born. The OIC, which just celebrated its 25th anniversary, has taught thousands of investors how puts and calls can help them better navigate the stock market. The group’s website, optionseducation.com, is a rich resource. Many people and organizations have played roles making options one of the world’s most important markets—an incredible feat—but OIC deserves special recognition for pioneering efforts to address financial literacy and teach legions of investors how to better manage the risk and reward of the markets.

UK accounting watchdog doubles total fines

Financial Reporting Council under pressure to be tougher on misconduct

The UK accounting watchdog has nearly doubled the level of fines it has issued in the latest financial year, as politicians and investors push for a tougher approach to misconduct.

Fines issued by the Financial Reporting Council rose from £6.8m in the 12 months to the end of October 2016 to £12.8m this year after the watchdog issued two record-breaking penalties.

This included a £5m penalty for PwC in May — then the largest ever given by the watchdog — for “misconduct” in relation to the audit of Connaught, a FTSE 250 social housing maintenance group that was put into administration in 2010.

PwC subsequently received another record-breaking fine in August of £5.1m for “extensive misconduct” relating to the audit of RSM Tenon, a professional services group put into administration in 2013.

In contrast, the average annual fines imposed by the regulator between 2011 and 2014 were just £1.1m.

However, the FRC’s fines remain a fraction of those issued by other regulators such as the UK’s Financial Conduct Authority.

The FCA fined German lender Deutsche Bank £163m in January, and its largest ever fine was £284m against Barclays in 2015.

Erik Gordon, assistant professor at the University of Michigan’s Ross School of Business, said: “It is surprising [accountancy firms] are not more severely penalised than they currently are. The damage to investors, including retirees, [of misconduct] is far larger than the fines imposed.

“Regulators could encourage auditors to put more emphasis on compliance by imposing more bans from the profession. The personal career threat of being banned from the profession for five years or even for life would cause the individuals who do the work to think twice about compliance.”

The fines have also been far smaller than the annual fees accountancy firms can earn from blue-chip clients, which often reach tens of millions of pounds.

“You cannot expect fines to have much effect when auditors face the choice of losing £20m in fees by displeasing a client or paying a far smaller fine. Fines that would be large enough to eliminate partner bonuses for five years would be more effective,” Prof Gordon said.

The FRC is in the process of reviewing its rules, including whether its penalties are enough of a deterrent to misconduct. Its conclusions are due to be published before the end of the year.

The sharp increase in the size of the penalties issued by the FRC comes at a time of growing pressure for the watchdog to toughen its policing of misconduct in the accounting profession.

Accounting scandals at large UK companies including Tesco, BT and Rolls-Royce have also turned attention to the role of auditors and the regulator that oversees them.

Guy Jubb, an honorary professor at the University of Edinburgh and corporate governance expert, urged the FRC to adopt more “innovative” penalties for accounting firms. This could include banning a firm from accepting new clients for several months if it commits a significant misdemeanour, or introducing stricter monitoring for the firm involved

Hedge Funds Ain’t Dead Yet

With an improved environment for stock picking, the average hedge fund is up an average 5.4% through August

Written off less than a year ago as overpriced and underperforming, hedge funds are pulling off an unexpected two-step this year: Making money and taking in new cash.

The average hedge fund is up 5.4% through the end of August, while stock-focused hedge funds have gained 8.31%, according to researcher HFR. Over the same period, the Standard & Poor’s 500 rose 11.9% including dividends, while the traditional 60-40 split of stocks and bonds would have earned 8.9%.

That makes this year the industry’s best relative performance in a rising market since 2010. Investors, particularly in Asia and the Middle East, have begun sending new money hedge funds’ way, attracted by the better returns and a broad lowering of the industry’s famously hefty fees.

For now, at least, the gloom that had beset hedge funds is lifting and even giving way to outright optimism.

“It just feels better,” said Alper Ince, partner at hedge-fund investor Pacific Alternative Asset Management Co. Mr. Ince credited an improved environment for stock picking that has fallen in hedge funds’ favor, with popular stocks like Amazon.com Inc. outperforming, and bets against retailers also paying off.

A year ago, things looked ugly for the industry.

Longtime managers like Richard Perry were shutting down, and many who remained were forced to negotiate their fees to sate disappointed backers. The pressure was compounded by a decade of nearly uninterrupted gains for the S&P 500, contributing to dramatic outperformance for low-cost, passive investment products.

Sticking around seemed even less attractive as managers had to dip into their pockets to pay out ever rising salaries to dissuade staff from leaving for flush technological companies dangling seven-figure packages.

Earlier this year, for instance, billionaire Kenneth Griffin was so frustrated with investment performance at his $27 billion hedge fund, Citadel LLC, that he sent the staff a stinging mass letter that read in part, “I am disappointed that after years of leading our industry we failed to deliver,” people familiar with the matter said. Citadel separately announced that compensation for some staff would be slashed.

This year, Citadel’s flagship fund is up more than 9% through mid-September, already eclipsing last year’s total 5% gain. Last year was the fund’s weakest mark in nearly a decade, the people familiar with the matter said.

Hedge funds at large pulled in $39 billion of new money this year, a reversal of $112 billion in outflows last year, researcher eVestment says. Industry executives expect the inflows to continue with several banner fund launches in the months ahead, including the return of fallen star Steven A. Cohen and a multibillion-dollar China-focused fund from Ray Dalio’s Bridgewater Associates, the world’s largest hedge-fund firm.

Few managers expect a return to the heyday of a decade ago, when every young trader with a pulse dreamed of a hedge fund of their own. Privately, many industry executives fret that the industry, which bets on and against markets world-wide, has been tagged with a permanently undesirable patina.

Fall is typically the season of hedge-fund shutdowns and this year is no exception. The well-known so-called value investor Whitney Tilson said last week he would shut his hedge-fund firm, Kase Capital Management LLC, which had dwindled to $50 million under management and lost 8% so far this year.

Among hedge funds girding for a continued bumpy road ahead is GoldenTree Asset Management, a $25 billion firm.

This month, GoldenTree warned investors in a private note reviewed by The Wall Street Journal that credit markets were “providing mid cycle pricing for late cycle risk.” GoldenTree’s main fund is up 5% this year, the note indicates.

Within hedge funds, macroeconomic-focused managers, who try to get ahead of political and other broader trends, have mostly whiffed in predicting this year’s major moves, particularly the weakening in the U.S. dollar, investors say. The average macro fund is roughly flat this year, according to HFR.

For now, the industry’s gains are shared by managers large and small, including many who came into the year with something to prove.

One of the biggest rebounds is under way at Brahman Capital Corp., a New York hedge-fund firm that flew under the radar for more than three decades.

At its apex around two years ago, Brahman managed more than $5 billion, as principals Mitchell Kuflik and Robert Sobel bet big on hedge-fund favorite Valeant Pharmaceuticals International Inc. When Valeant’s stock plummeted from $257 to $14 a share, Brahman fell in turn, as the firm reported losses and investors pulled their money.

Brahman sold Valeant stock last year and with what is now $3.8 billion of remaining cash pivoted to new ideas like a stake in travel company Expedia , people close to the firm said. This year, Brahman’s main fund is up 17%, the people said.

Under fire prime minister launches Tory conference with plans to lure younger voters

Theresa May has announced plans to freeze university tuition fees and an additional £10bn of help for homebuyers, as she launched this week’s annual Conservative party conference with policies aimed at younger voters.

Mrs May, who has been buffeted by cabinet tensions over Brexit and manoeuvring for the party leadership by foreign secretary Boris Johnson, wants her party’s convention in Manchester to focus on a domestic agenda.

The prime minister has announced her intention to fight the next election in 2022, but the next four days will prove a tough test of her authority over a party still recovering from the shock of the bungled general election.

Speaking on the BBC’s Andrew Marr programme on Sunday morning, Mrs May declined to directly apologise for her handling of the general election, but said: “I’m sorry some of our good members of parliament lost their seats and some very good candidates did not gain their seats.”

Mrs May also demurred when asked whether she would fire Mr Johnson, saying only: “I have a cabinet which is united on the mission of this government to build a country that works for everyone.”

Mrs May’s first announcement was a freeze of student tuition fees at £9,250 from next year, accompanied by a rise of the repayment threshold so that graduates will only start paying back their loans once they are earning £25,000, up from £21,000.

The prime minister’s proposals are modest compared with Labour’s promise to abolish tuition fees altogether, but Mrs May believes such a move would undermine university funding and mainly help higher-earning graduates.

Speaking to the Sun on Sunday, the prime minister said: “Too many young people fear they are going to be worse off than their parents. We have listened to those concerns and we are going to act to offer a fairer deal for students and young people.”

Mrs May told the BBC on Sunday that the tuition fee freeze and higher repayment threshold marked the first stage of a wider review of student financing.

The Conservatives will also put a further £10bn into the Help to Buy loan scheme, intended to help another 135,000 buyers purchase homes. The funding will allow recipients to get a mortgage with a deposit of 5 per cent and can only be used for the purchase of new-build homes.

Meanwhile Sajid Javid, communities secretary, will on Sunday announce reforms to improve the security of tenants, ensuring that all letting agents are registered and requiring landlords to join a dispute resolution scheme for tenants who say they have been wronged.

He plans to overhaul the insurer,returns to his plan for rebuilding fixing problems and redefining its customer service

Zurich Insurance’s lakeside headquarters is just a façade. Behind the original frontage completed in 1901, nothing exists. The company is rebuilding it from the ground up.

Mario Greco, who took over as the Swiss group’s chief executive last year, believes the global insurance business is about to go through a similar refit.

“The industry is on the verge of a profound change,” says the 58-year-old Italian. “I pretty much bet on the fact that it won’t look the same at all, definitely in 10 years, but most likely in five.”

In the past, he says, insurance was the ultimate “push” product — people only bought it if someone sold it to them. In the future, he believes insurers will have to build a closer relationship with their customers to survive.

Interviewed at the company’s temporary headquarters in a back office across town, Mr Greco says he wants to turn Zurich into a company that can build that sort of connection with his customers. In short, he wants to give the company “a new identity”.

Mr Greco studied economics in Rome and started his career at McKinsey in Milan. But he is a Zurich veteran. He spent five years at the company before 2012, leading both its life insurance and general insurance businesses. He left to lead a turnround at Italian insurer Assicurazioni Generali by selling unwanted businesses and cutting debt, but he returned to Zurich last year after his contract in Italy was not renewed. Mr Greco is reluctant to go into the reasons why, saying only that he respects the shareholders’ right to make decisions about management.

While he was away, Zurich, Europe’s fourth-largest insurer by market capitalisation, went through a rough patch. Underwriting problems in its US division in 2015 and general insurance losses elsewhere forced it to drop a putative £5.6bn bid for UK insurer RSA, and the share price fell sharply. Zurich’s then chief executive, Martin Senn, departed in December, and took his own life six months later. The company said he was “not only a highly valued former CEO and colleague but also a close friend”.

Mr Greco returned to Zurich in March 2016, finding a company where the business problems faced in 2015 had dented morale. “People think highly of the company,” he says. “2015 was a bad year but people wanted to strike back and show they are strong.”

Mr Greco says the company made a “very relevant mistake” in 2013, when it committed to a growth strategy that undermined its reputation for strong underwriting, and caused costs to balloon.

But Mr Greco insists — several times — that he does not see Zurich as a turnround. Wearing a tie on a swelteringly hot day, he affects modesty. “I’m just bringing back the consistency between the strategy of the company, the priorities of the company and the skills and the way we act. We’re not going for growth now, we’re going for profits, which is what a company such as Zurich should always do.”

It might not be a turnround, but Mr Greco has had to take remedial action, for example getting rid of the complex “triple matrix” structure under which the company was organised along geographic, product and functional lines, leaving staff uncertain as to who exactly was in charge.

“We’re simple people, all of us. Geographies are the things that we all understand . . . They have different languages, they have different regulations . . . You can’t abolish that.” Zurich is now organised only by geography, he says.

He has also overhauled the management and is planning to cut $1.5bn, or 15 per cent, off the company’s cost base between 2017 and 2019, under a strategy unveiled last November. The company has not said how many more jobs will go as part of the process.

More fundamentally, though, he wants to rebuild the way that Zurich deals with its customers. “The identity I’m trying to give the company is to be the first insurance company which is known to the customers for services,” he says. “Not every customer will go after us. Zurich . . . will never be a trading company that wants you for one year and then you can go. We want to develop long-term relationships.”

In practical terms, that means fixing problems as they arise, rather than simply collecting premiums once a year and writing out cheques when necessary.

“We would rather be the company that will try to fix your bumper, to give you a courtesy car, and to give a guarantee for the work done on your car,” he says. “If you just want somebody to pay you cash, you might find some other companies doing better than us.”

Cover-More, a more than $500m acquisition this year, is a move in this direction. The Australia-based travel insurer offers extra services — for example, customers who fall ill while away can consult a doctor in their home country before seeking local treatment. “Cover-More is not an insurance company,” says Mr Greco. “It is a services company.”

There could be similar acquisitions as Mr Greco seeks to add more fee-earning services to Zurich’s portfolio. But he is cautious about M&A: “You often don’t need anything in another insurance company because what you get is another set of undifferentiated services and a bunch of clients who don’t know exactly why they purchased the services of that company.”

RSA, he says, would not be a good asset to buy now, although diplomatically he adds that his predecessors might have had a different logic.

It is clear that Mr Greco is happy to be back in Switzerland. Last year, Zurich’s operating profits rose 55 per cent to $4.5bn. He wants to move fast: “This is a gigantic time of change for the industry and there will be winners and losers. This is not going to be neutral.”

Zurich’s new office (an “interplay of old and new”, according to the company’s blurb) is expected to be finished by 2020. When it is completed, Mr Greco says, “I don’t think that building will find the same industry.”