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Opening Bell: 2.7.17

Silicon Valley hedge fund has big red button; Seth Klarman fears Trump; Barack Obama kitesurfs with Richard Branson; and more.
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Silicon Valley Hedge Fund Takes On Wall Street With AI Trader (BBG)

silicon valley ping pong fire

The walls of Sentient's San Francisco office are dotted with posters for robots-come-alive movies such as "Terminator." Inside a small windowless trading room, the only light emanates from computer screens and a virtual fire on a big-screen TV. Two guys are quietly monitoring the machine's trades—just in case the system needs to be shut down. “If all hell breaks loose," Hodjat says, "there is a red button."

A Quiet Giant of Investing Weighs In on Trump (NYT)

“The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty,” he wrote. “Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.” While Mr. Klarman clearly is hoping for the best, he warned, “If things go wrong, we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation, and global angst.”

A Morality Tale of Stocks, Vice and President Trump (WSJ)

The Catholic Values Fund has made 9.6% since the election, including dividends, with its November and December performance accounting for the bulk of those gains. The Vice Fund, which specializes in alcohol, tobacco, guns and gambling, is up only 1.7%, far behind the wider market. “You would never have thought it,” says Gerry Sullivan, the Vice Fund’s manager, who is Catholic himself.

White House memo confuses Wall Street on fate of fiduciary rule (Reuters)

President Donald Trump's Friday memorandum ordered the Labor Department to review the so-called "fiduciary" rule. But that call for a review was significantly weaker than an earlier draft, seen by Reuters, that requested a 180-day delay in the scheduled April 10 effective date of the rule, which is already on the books. Trump's memo did not go as far as White House early guidance to reporters that the memo would ask the department to "defer implementation" of the rule.

“Sexy” companies like Snap tend to be bad investments (FT)

You aren’t supposed to be able to systematically earn more money for taking less risk, yet this is what seems to be happening in the period (1978-2013) studied by Lee and Li. According to any commonsense definition, the companies most likely to raise equity under their framework seem a lot riskier than the ones least likely to raise equity. [...]Lee and Li argue that companies with “sexy” products can lure people into repeatedly overpaying for stakes.

What everyone gets wrong about the 'fear index' (Yahoo)

“The misrepresentation of the VIX as a fear gauge signaling future market weakness is just plain wrong,” Citi’s Tobias Levkovich said in a note to clients on Friday. “Widely available indicators provide little investment ‘edge’ even if the consensus narrative is overly focused on this volatility metric despite its poor predictive power. Indeed, the S&P 500 has been higher 84%-88% of the time 12 months later when VIX readings were between 10 and 20 or between 30 and 40; hence, low or high VIX levels are not nearly as useful as advertised.”

French political turmoil hits bond spreads (FT)

“Markets underpriced the political risks in 2016 and they are determined not to do the same again,” said James Athey, investment manager at Aberdeen Asset Management. “Investors want greater rewards for the risks they see in French, Dutch, German and possibly Italian elections this year to destabilise the region.”

Richard vs Barack - kiteboard and foilboard challenge (Virgin)

One of the first stories Barack told me when he and Michelle arrived on Moskito Island was how, just before he became President, he had been surfing on a dangerous break in Hawaii. When he came in from an exhilarating session, the new head of his security team turned to him and said: “This will be the last time you surf for eight years.” For the next eight years he didn’t have the chance to surf, enjoy watersports or do many of the things he loved. So it was tremendous to offer him the chance to learn to kitesurf.

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UBS Unit Said to Be Close to Guilty Plea in Rate-Rigging Scandal (NYT) Federal prosecutors are close to securing a guilty plea from a UBS subsidiary at the center of a global investigation into interest rate manipulation, the first big bank to agree to criminal charges in more than a decade. UBS is in final negotiations with American, British and Swiss authorities to settle accusations that its employees reported false rates, a deal in which the bank's Japanese unit is expected to plead guilty to a criminal charge, according to people briefed on the matter who spoke of private discussions on the condition of anonymity. Along with the rare admission of criminal wrongdoing at the subsidiary, UBS could face about $1 billion in fines and regulatory sanctions, the people said. 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Counter-Terrorism Tools Used to Spot Staff Fraud (FT) JPMorgan Chase has turned to technology used for countering terrorism to spot fraud risk among its own employees and to tackle problems such as deciding how much to charge when selling property behind troubled mortgages. The technology involves crunching vast amounts of data to identify hard-to-detect patterns in markets or individual behavior that could reveal risks or openings to make money. Other banks are also turning to "big data", the name given to using large bodies of information, to identify potential rogue traders who might land them with massive losses, according to experts in the field...Guy Chiarello, JPMorgan's chief information officer, said the bank was mining massive bodies of data in "a couple of dozen projects" that promised to have a significant affect on its business, although he refused to give further details. 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In January, more than $600 billion in spending cuts and tax increases, the so-called fiscal cliff, are scheduled to begin. “The president and speaker had a frank meeting in the Oval Office,” Boehner spokesman Brendan Buck said in an e-mailed statement, adding that the “lines of communication remain open.” Britain's Queen Quizzes Central Bank on Financial Crisis (CNBC) During a visit to the Bank of England on Thursday, the Queen was overheard asking whether a "lax" attitude to financial regulation had contributed to the financial crisis. After touring the vast vaults of gold bullion that lie beneath the central bank in London, Queen Elizabeth reportedly asked the central bank officials whether the Financial Services Authority (FSA) that was meant to regulate the banking system had not been aggressive enough - "did not have the teeth" - in its response to the crisis...The Queen was then told that officials in the room were charged with ensuring the crisis did not happen again. 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Buffett (NYP) The “Oracle of Omaha” sent a terse e-mail to editors at CNBC yesterday after a reporter for the cable news network railed against his recent repurchase of Berkshire Hathaway shares. Gary Kaminsky, CNBC’s capital markets editor, took Buffett to task for the $1.2 billion stock buyback, calling it “hypocritical to the maximum level.” Kaminsky claimed that Buffett’s purchase allowed the seller — described by Berkshire as the “estate of a long-time shareholder” — to avoid potentially higher capital gains taxes next year...In his rebuttal e-mail, Buffett said capital gains taxes don’t apply to estates. “Mr. Kaminsky also made the statement that the estate that was a seller was better off by selling in 2012 than 2013,” he wrote. “This, too, was incorrect.” He said capital gains are wiped out by stepped-up basis rules, with assets marked at their current fair-market value at the time of death. 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Two residents said when they answered a knock at their door, a man was standing in the doorway holding a machete. The man, a neighbor, reportedly said he was tired of vandalism to his home and blamed it on a family member of his neighbors, police said. The neighbors attempted to slam the door on the man, but he reportedly put his foot into the door holding it open, police said. The neighbors were ultimately able to close it, though the suspect denies he put his foot in the door. Police interviewed the man, 38, who admitted he'd retrieved the machete out of anger after another incident of vandalism.