Fed Testimony Begins With VIX-ETPs Under Fire

It all begins today with Federal Reserve Chairman Jerome Powell’s first day of testimony in front of lawmakers. His prepared remarks to the House Financial Services panel will be released at 8:30 a.m. Eastern Time, followed by his testimony that will begin at 10 a.m. Eastern. It’s a foregone conclusion that the testimony on Capital Hill will be televised. Investors will likely focus on any verbiage from the Chair with regards to inflation.

“I think he’s going to avoid getting boxed in, and there’s no need or urgency to communicate,” said George Goncalves, head of fixed-income strategy at Nomura. “He has not had his first official meeting on his watch, so how can he really deviate from the prior agenda without having run it by the committee?”

Economic reports Tuesday include durable goods and advanced economic indicators at 8:30 a.m. ET. S&P/Case-Shiller home prices are expected at 9 a.m., and consumer confidence is due at 10 a.m. The markets will also shed light on earnings results from Macy’s, AutoZone, Discovery Communications, Toll Brothers, Camping World, SeaWorld, Steve Madden and American Tower this morning. But before we get to some of the earnings expectations and already delivered results, Jim Cramer is calling on an investigation into some of the VIX related products.

“I’m calling on Congress to investigate these instruments,” the host of CNBC’s “Mad Money” said on Monday. “I’m calling for the SEC’s enforcement arm to look into whether there’s culpability and manipulation, while the corporate finance department of the SEC should re-examine the reasoning behind allowing exactly these kinds of products … to be in the first place. What would really be lost? OK, some fees. Maybe a few strategies that failed,” he said. “What will be gained? How about this. How about a restoration of the integrity of the system, a system that’s been challenged, yet again, by instruments that should never have been created.”

Ahead of Cramer’s rant, however, Proshares is taking action to curb the risk in its VIX related products/funds. The following changes are sought after by the fund according to a press release yesterday:

• ProShares Ultra VIX Short-Term Futures ETF (NYSE Arca: UVXY) will change its investment objective to seek results (before fees and expenses) that correspond to one and one-half times (1.5x) the performance of the S&P 500 VIX Short-Term Futures Index (“Index”) for a single day. The Fund’s investment objective currently is to seek results (before fees and expenses) that correspond to two times (2x) the performance of the Index for a single day.
• ProShares Short VIX Short-Term Futures ETF (NYSE Arca: SVXY) will change its investment objective to seek results (before fees and expenses) that correspond to one-half the inverse (-0.5x) of the Index for a single day. The Fund’s investment objective currently is to seek results (before fees and expenses) that correspond to the inverse (-1x) of the Index for a single day.

Even as the VIX has done what it was constructed to do over the years, these products will continue to come under fire for the proposed contribution to the recent market correction. The VIX spike to 50 during this period but has since dropped significantly and to where it presently resides around 16. Based on weekly straddles the VIX may hover around current levels until the next catalyst up or down presents itself. Such a catalyst may come from the Fed or in preparation for the next rate hike, which is highly anticipated to come in March.

Square will be reporting this afternoon and with great anticipation. Shares have soared 167% over the past 12 months, compared to a 17% gain for the S&P 500 and they’re up more than 400% from the company’s IPO price of $9. Of the 35 analysts who cover the company, 17 have buy ratings, 16 have hold ratings, and two have sell ratings. The average price target is $42.28, 8.8% below current levels.

Analysts tracked by FactSet estimate that Square generated $601 million in revenue during the quarter, while the Estimize consensus calls for revenue of $608 million. Square reported revenue of $452 million in the prior December quarter. Payment volume from sellers who do more than $500,000 in annual business grew 64% year-over-year in the third quarter. Analysts also estimate that Square earned 7 cents per share on an adjusted basis, whereas it reported a 4-cent net loss a year earlier.

Fitbit reported results after the bell yesterday and found its share price under great pressure as the company missed it’s profit goals and underwhelmed investors with its 2018 forecast. Chief Executive James Park told MarketWatch prior to the company’s earnings call Monday that Fitbit had aggressive sales goals for its new Ionic smartwatch during the holiday season, but ultimately sales of the device “didn’t turn out the way that we expected it.” That was due to a promotional atmosphere, limited app selection at launch time and a “prudent” approach to inventory after fumbling that a year earlier, he said.

Fitbit delivered revenue of $571 million for the December quarter and an adjusted net loss of 2 cents per share, both of which fell short of analysts’ estimates. The company reported a fourth-quarter loss of $45.5 million, or 19 cents a share, compared with a loss of $146.3 million, or 65 cents a share, in the year-ago period.

Shares sank 12% in after-hours trading following the release. Fitbit estimates an adjusted loss of 21 cents to 18 cents a share on revenue of $240 million to $255 million for the first quarter, and sees full-year revenue of about $1.5 billion. Analysts expect a loss of 9 cents a share on revenue of $340.3 million for the first quarter, and revenue of $1.73 billion for the year.  Fitbit is also focused on cutting costs by roughly 7% in 2018. Zerella said the company will be “very selective” in terms of hiring and will work down its non-workforce discretionary spending. “There will be a lot of optimization as we look to get through another year of transition while making sure we still invest in the things we need to come out the other side,” he said.

Apple, who competes with Fitbit in the smartwatch space is taking on another initiative related to clinical healthcare. The iPhone maker has rolled out a website, acwellness.com to accompany a pair of health care clinics under the name AC Wellness, which it describes as an “independent medical practice dedicated to delivering compassionate, effective health care to the Apple employee population.” The site listed the launch date for the plan as Spring 2018. Apple wants to recruit a Health Partner, who would work with primary-care physicians to help patients improve health; and a Clinical Exercise Coach, who would help employees improve their overall well-being by getting fit.

U.S. equity futures are pointing to a flat to slightly lower open presently as European are lower in the early morning hours. The U.S. 10yr. Treasury is still holding steady below 2.88%, but will likely take its cues from the Fed Chair’s testimony on Capital Hill this morning. All eyes on the Fed as markets anticipate a continued regime of higher volatility in the markets.