First Read

Holiday Bits
By John J. Lothian

The John Lothian News team is scattered to the four winds post-holidays as we work from home or take this slow time before New Year’s to get some quality family time away. Construction on our offices continues and we hope to be back in the offices on January 9.

We will be publishing JLN this week, but JLN Options will remain on the sidelines for the rest of the year.

MarketsWiki will end the 2016 year with about 91.5 million page views since it was launched. Sometime in early 2017 we expect to pass the 100 million page view mark, surely something deserving of a celebration.

MarketsReformWiki has 14.2 million page views since it was launched. We are looking for someone to help us edit this site for 2017.

Lastly, these are my last two weeks as CEO of John J. Lothian & Company, Inc. Jim Kharouf takes the reins on January 9th, when we return to our offices. For practical purposes, he has taken the reins and is running with them.

The response to the news of Jim’s promotion has been heartwarming, making me even more confident it is the right move.

As I move to Executive Chairman, my focus will be on helping Jim become the best CEO he can be. I will also be leading our MarketsWiki Education initiative and helping with sales, marketing and who knows what.

The year of 2017 looks to be an exciting one in the markets, for the industry and for JLN.

Enjoy the rest of 2016 and get ready to strap your seatbelt extra tight for 2017.


Who Benefits From Market Speed Bumps? The Exchanges
Holly A. Bell – NY Times
Since the election, stock prices have risen sharply on hopes that a wave of pro-growth policies under Donald J. Trump will drive up equity prices even further. But Mr. Trump’s administration will soon face a trend that threatens to move the long-term benefits found in stock markets away from investors and toward exchanges.

***** If Holly Bell is not on your radar, she should be.


Facebook for Stockpickers; Divya Narendra’s social network for investors, SumZero, has 13,000 members, many paying $10,000 a year or more.
Leslie P. Norton – Barron’s
Great investment ideas are hard to come by, but SumZero, a eight-year-old social network, is a good place to look. The Website counts nearly 13,000 fund managers and professional investors among its members and currently features some 9,000 long and short ideas.

***** Follow the heard and herd for a princely sum.


Wielding Claims of ‘Fake News,’ Conservatives Take Aim at Mainstream Media
Jeremy W. Peters – NY Times
The C.I.A., the F.B.I. and the White House may all agree that Russia was behind the hacking that interfered with the election. But that was of no import to the website Breitbart News, which dismissed reports on the intelligence assessment as “left-wing fake news.”

***** Fake news is like shark bite stories. It has always been there, it is just getting a lot more press these days.


Friday’s Top Three
It’s heartening to see that despite the looming holiday that last Friday’s newsletter was well read. Out in front was the Bloomberg story, If You’re So Smart, Why Aren’t You Rich?. Didn’t Ross Perot once quip to a reporter trying to tell him some economist’s position that he has never met a rich economist? In a very close second was the Chicago Tribune story, Emanuel’s email highlights: Ken Griffin’s speed bump, a bid for Bezos and Uber oops. As someone who bikes along the lake frequently, I must say I agree with Ken Griffin on that one. And in a very close third was John Lothian’s article, Markets Aren’t the Only Thing That Make Lows. A timely reminder that the holidays can also be a difficult time for some.


Lead Stories

Chinese billionaire with ambitions to reshape investment models; Shanda founder Chen Tianqiao sets sights on pioneering role in finance
Jeevan Vasagar in Singapore – FT
Chinese retail investors may be able to dream of Picasso while hanging share certificates on their walls. A Singapore-based Chinese billionaire investor, who this year acquired stakes in peer-to-peer group Lending Club, the fund manager Legg Mason and Sotheby’s, has proposed “securitising” the artist’s work to create fractional ownership and tap a wider market in Asia.

Law Firms’ Accounts Pose Money-Laundering Risk; Hundreds of millions of dollars allegedly siphoned from Malaysian state fund 1MDB passed through firms’ pooled accounts in U.S., prosecutors say
Rachel Louise Ensign and Serena Ng – WSJ
Tens of billions of dollars every year move through opaque law-firm bank accounts that create a gap in U.S. money-laundering defenses, according to a Wall Street Journal analysis.

U.S. mutual fund trustees feel the heat of investor lawsuits
Ross Kerber – Reuters
Before New York’s famed 21 Club steakhouse drew attention in November for hosting Donald Trump, the wealthy U.S. president-elect, it quietly fed other public representatives: trustees of Paris-based AXA SA (AXAF.PA) investment funds.

Unloved stockpickers hoping 2017 will be their year; Active managers argue 2017 should be easier if central banks end their stimulus
Miles Johnson and Lindsay Fortado – FT
Each year at the Ira Sohn conference a group of the world’s best known hedge fund managers present their top ideas for what to buy in the stock market. The event is so closely followed by investors that it is not unknown for shares in companies that are picked to start rising before presenters have even left the stage.

HSBC should show way forward with a female chairman; Big banks have a poor record of elevating women to top jobs
Patrick Jenkins – FT
HSBC is apparently getting close to identifying the chairman it wants as a replacement for Douglas Flint, who plans to retire in 2017. Is it possible that the lender will become a rarity among big global banks and choose a woman for the role?

Monte dei Paschi shortfall hits EUR8bn, says ECB; Significant rise in cost to government of rescuing Italy’s third-largest bank
James Politi in Rome – FT
The European Central Bank has said that Monte dei Paschi di Siena’s capital shortfall has risen to EUR8.8bn from EUR5bn, significantly increasing the price tag of the rescue of Italy’s third-largest lender by the government.

The New Cold Currency War
Joachim Fels – PIMCO
Earlier this year, we saw a transition from an old-style currency war (openly fought with negative interest rates and quantitative easing) to the “Shanghai co-op” – an implicit agreement, or truce, among major central banks that excessive dollar strength was bad for the global economy. As a consequence, the Federal Reserve became more dovish, the European Central Bank (ECB) and the Bank of Japan (BOJ) de-emphasized negative interest rates, and the stabilization of the U.S. dollar helped emerging markets and commodity prices recover. Also, China’s depreciation of the yuan was orderly rather than disruptive.

China to speed up drafting overseas investment regulations: state media
China will speed up drafting regulations on overseas investment, as investment in sectors such as property has shown irregularities, a senior commerce ministry official was quoted as saying on Tuesday.


‘Clean Brexit’ could save UK £450m a week, claims pro-leave group; Change Britain says UK could save £24bn a year by leaving single market, customs union and ‘burdensome regulations’
Rowena Mason – The Guardian
A pressure group backed by a string of former Vote Leave campaigners from Michael Gove to Gisela Stuart has claimed that exiting the EU with a “clean Brexit” could save the country £450m a week.

Exchanges, OTC and Clearing

DGCX ESMA Equivalence Update
On December 16, 2016, the European Commission determined that the United Arab Emirates has an equivalent regulatory regime for central counterparties (CCPs) to the European Union (EU). The decision confirms that non-EU CCPs in the UAE meets the EU’s regulatory standards. This decision will contribute to market certainty and cross border activity, thereby avoiding fragmentation of markets.

Osaka Exchange: Concerning Night Session Trading For Index Futures And Options
Concerning today’s trading of Index Futures and Options in the night session, trading will be available as normally.

Global Advisors Bitcoin Fund listed on Channel Islands Securities Exchange
Brave New Coin
Global Advisors (Jersey) Limited (GAJL) recently announced that the Channel Islands Securities Exchange (CISE) has approved the Global Advisors Bitcoin Investment Fund plc (GABI). The open-ended fund has become the first digital asset-related listing on the Exchange and is, “the first regulated bitcoin fund to be listed on any exchange globally,” according to both company announcements.

BSE to introduce six-year govt bond futures from 30 December; BSE’s interest rate futures contract is based on 6.84% central government security maturing on 19 December 2022, and will be available for trading from 30 December
Live Mint
New Delhi: Leading stock exchange Bombay Stock Exchange (BSE) will introduce new interest rate futures (IRF) contracts from 30 December on six-year government bonds maturing in 2022.

Stock exchange sale
AT long last the process of making Pakistan’s stock exchange independent of the powers of the broker community is reaching fruition. With the sale of a strategic stake in the newly created Pakistan Stock Exchange to a Chinese consortium, the country’s capital markets could well receive the boost that the fundamentals merit. A lot depends on how well the new investor can manage the peculiarities of the PSX. There are grounds to be confident though, since the consortium brings plenty of experience to the position, and the stock market here is not particularly complex or diversified. That gives the new investor much room to introduce and prioritise new products and deepen trading. A futures market would be one related development.

TOCOM Launches Oil Physical Market And Begins Publication Of Oil Physical Index Prices
The Tokyo Commodity Exchange, Inc. (TOCOM) announced today that they received regulatory approvals from the Minister of Agriculture, Forestry and Fisheries as well as the Minister of Economy, Trade and Industry to “launch an oil physical market as a concurrent business of a commodity exchange”. The Exchange plans to start operations on January 11, 2017.


Trump’s Financial Deregulation Might Be Bad News for Banks After All; Some influential people in the president-elect’s sphere say big lenders should maintain higher capital in return for scaling back some regulations
Adam Creighton and Ryan Tracy- WSJ
Bank stocks have surged since the election on hopes that President-elect Donald Trump will roll back financial rules. But deregulation, for the biggest institutions at least, might come with a catch: tougher limits on borrowing.

Memo For PM Modi – India Should Tax People Not Financial Markets
Tim Worstall – Forbes
Narendra Modi, the Prime Minister of India, has made comments suggesting that he wants to see a higher tax take from financial markets. This is somewhere between entirely reasonable and completely disastrous, it depends upon exactly what he means by taxing markets. If he means taxing the incomes of those who work in or speculate in said markets then that is just fine and to the extent that it isn’t done already might be very sensible. If he means the taxation of the actual markets themselves, or the activity or transactions in them, then that’s a truly terrible idea. For we know very well that all taxes have deadweight costs and different ones have different deadweights. The trick is to gain the needed revenue with some modicum of equity and with the least inefficiency, inefficiency here being a synonym for with the fewest deadweights.

Investing and Trading

Good Evening, Mr. Bond
Daily Reckoning
Not long ago I had dinner in my hometown of Darien, Connecticut, with one of the best sources on the inner workings of the U.S. Treasury bond market. Our dinner took place at the Ten Twenty Post bistro, the same restaurant I wrote about in my first book, Currency Wars.

One of 2016’s Worst-Performing Assets: Frontier Markets; Investors pulled $840 million in 2016 from frontier-market funds through Dec. 21
Carolyn Cui – WSJ
A stock index tracking some of the world’s riskiest, potentially fastest-growing investments has missed out on this year’s global rally, the latest sign of the upheaval reordering financial markets.

Bond investors must accept low-for-longer era is over; Much worse to come in the new year following central bank action and populism
Alberto Gallo – FT
The low for long era is over. Central banks, fiscal activism and populism pricked the bond bubble in 2016. Next year will be a lot worse for bond investors, and the aftershocks of the burst will spread across many other assets.

Oil Producers Turn To Wind Power
Neanda Salvaterra – WSJ
Royal Dutch Shell PLC is one of several oil firms attempting to develop wind power amid pressure from shareholders to tap into renewable energy sources as global efforts to limit climate change gain momentum, write Zeke Turner and Sarah Kent.

Everybody wants to buy the euro; Why the dollar is the real question mark heading into 2017
Paul Donovan – Nikkei Asian Review
With the U.S. Federal Reserve raising interest rates, and European Central Bank President Mario Draghi seemingly unable to break his addiction to quantitative easing, many investors are questioning who would want to buy the euro. The answer is simple. The whole world is eager to buy the euro. The problem in 2017 is more likely to be finding anyone who wants to buy the dollar.


How JPMorgan could not save Italy’s problem bank
Silvia Aloisi, Paola Arosio and Pamela Barbaglia – Reuters
On the morning of July 29, former Italian Industry Minister Corrado Passera was traveling in a high-speed train toward the medieval city of Siena, racing to meet the directors of the world’s oldest bank to present them with a rescue plan.

Deutsche Bank tells staff no bailout needed for U.S. settlement: source
Deutsche Bank (DBKGn.DE) sought to reassure staff about its financial strength on Friday, in the wake of a $7.2 billion settlement with the U.S. Department of Justice (DoJ) over its sale and pooling of toxic mortgage securities.

Barclays gambles as it stands its ground against US regulators
Martin Arnold – Financial Times
There are several theories why Barclays has chosen to break ranks with rivals and fight the US Department of Justice rather than fold to prosecutors’ demands to settle allegations of mis-selling mortgage securities before the 2008 financial crisis. Most analysts had estimated that Barclays would be able to settle the case for a civil penalty of about $1bn, based on the amounts already paid by many of its US rivals to resolve similar allegations.


5 Fintech Startups To Watch In 2017
Ainsley O’Connell – Fast Company
For fintech, 2016 was a year of reckoning. Scandals and layoffs killed industry buzz, and deal activity took a mid-year nosedive. Regulatory uncertainty in the U.S. loomed large, as did Brexit. For some companies, the environment led to a greater reliance on partnerships with big banks, with potential implications for the types of exits that investors could realize. For others, 2016 became a time to retrench and refocus.

Fintech: no more the new kid on the block; Funding in the lending segment doubled from 2015; government focus on digital transactions and companies’ focus on on-boarding new customers to continue
Vivina Vishwanathan – Live Mint
Year 2016 was not as glamourous as 2015 was for fintech in terms of interest from investors. According to start-up data analytics provider Tracxn, investments in 2016 were $484.79 million, compared with $1.18 billion in 2015. One of the reasons is that the 2015 numbers include money raised by Paytm in 2015.

Blockchain-backed Platform Offers OTC Securities On The Cloud
Toronto-based Equibit Development Corporation (EDC) is looking to change the way over-the-counter (OTC) markets operate, and decentralized technology has a key role to play.

Who owns blockchain? Goldman, BofA amass patents for coming wars; Some of the biggest names in business have quietly patented some of the most promising blockchain technologies
Bloomberg via Live Mint
In the headlong rush to revolutionize modern finance, blockchain enthusiasts are overlooking one potentially costly problem: their applications, built on open-source code, may actually belong to someone else.

5 Fintech Startups To Watch In 2017; After a glum 2016, look for startups tackling massive opportunities like insurance and real estate to reenergize the fintech sector.
For fintech, 2016 was a year of reckoning. Scandals and layoffs killed industry buzz, and deal activity took a mid-year nosedive. Regulatory uncertainty in the U.S. loomed large, as did Brexit. For some companies, the environment led to a greater reliance on partnerships with big banks, with potential implications for the types of exits that investors could realize. For others, 2016 became a time to retrench and refocus.


Where Does the Mortgage Settlement Money Go?
NY Times
Since the 2008 housing crisis, federal regulators have touted billion-dollar settlements, which, by giving certainty to investors, are often accompanied by a jump in the bank’s stock price. Financial companies have paid at least $164 billion in more than 100 mortgage-related settlements since 2009, according to an analysis by Keefe, Bruyette & Woods. Below, we examine the eight banks that have paid the most and explain how the largest payments were divided up.

The SEC Files: Tales Of Advisors Behaving Badly
Cyril Tuohy – InsuranceNewsNet
From Ponzi schemes to wacky real estate deals and movie ventures to managerial inertia, 2016 was another year filled with rogue advisors and brokers, at least in the eyes of the Securities and Exchange Commission. In a review of financial advisors behaving badly, we highlight brokers and advisors who preferred — either by design or by oversight — helping themselves before helping others. In nearly every instance, their actions ended up costing them a pretty penny.

The SEC accused a software developer of fraud for behaving like a software developer
Oliver Staley – Quartz
One of the great workplace revolutions of the last few decades has been the realization that an employee’s productivity shouldn’t be measured by the amount of time spent at their desk. But government agencies have been a bit slower to recognize this sea change. So much so that the inspector general of the Securities and Exchange Commission accused a software developer in the world of finance of “attendance fraud”—because he can’t account for the 1,200 hours he worked, and for which he was paid $125,000, The Wall Street Journal is reporting.

Platinum Partners arrests are scant consolation for alleged victims
Lawrence Delevingne – Reuters
When six executives of Platinum Partners, including founder Mark Nordlicht, were arrested on Monday on federal charges of running a more than $1 billion hedge fund fraud, people who had long alleged they were harmed by the New York-based firm felt some vindication. But the possibility that each defendant might face prison terms has done little to soothe their continued anger over losses that may never be recouped.

Sebi to finalise norms for options in commodities soon; However, regulator is treating issue with caution; experts suggest letting banks act as aggregators
Rajesh Bhayani – Business Standard
Market regulator Securities and Exchange Board of India (Sebi) is finalising norms for allowing options in commodities, albeit cautiously.

Giving Asia its due in global financial regulation
Nicolas Veron – Nikkei Asian Review
Global cooperation on financial regulation has become increasingly important and valuable over the last decade, but its effectiveness cannot be taken for granted. Following November’s U.S. presidential election, Asia, and particularly China, needs to take a more central role to ensure the viability of the global system.

214 institutional investors have signed up to the Principles for Responsible Institutional Investors as of December 27, 2016
FSA – Japan
The Council of Experts Concerning the Japanese Version of the Stewardship Code (Chairman: Professor Hiroyuki Kansaku, The University of Tokyo) published the Principles for Institutional Investors (Japan’s Stewardship Code) in February 27, 2014. The Council requested the FSA to publish and periodically update the list of institutional investors who announced their acceptance of the Code.


Equatorial Guinea accuses SocGen bankers of being “spies”
Michael Stothard in Paris – Financial Times
Three Société Générale executives have been arrested in Equatorial Guinea for allegedly breaking its banking secrecy laws, accused of leaking financial documents to be used against the country’s vice president during his upcoming corruption trial in Paris. The move is the latest in a tit-for-tat battle between the two countries after French prosecutors this year formally charged the vice president, Teodoro Nguema Obiang, of acquiring real estate, luxury cars, art and other goods in France with public funds.

Yuan Turnover Soars in Sign of December Outflow Pressures
Bloomberg News
Daily average volume surges this month as currency drops; Increase suggests capital exodus is accelerating: RBS
The onshore yuan’s surging trading volume is another piece of evidence that capital is fleeing China at a faster pace.

A Bruised Investor Seeks Justice for China’s Market Turmoil
Edward Wong – NY Times
With the nausea came a sense of frustration. Earlier this year, Xu Caiyuan watched helplessly as the numbers flashed across a computer screen in his office in Shanghai’s glittering financial district.

Kuroda defends BOJ’s yield curve control, upbeat on global outlook
Leika Kihara – Reuters
Bank of Japan Governor Haruhiko Kuroda defended his yield curve control policy on Monday, saying it had kept Japan’s long-term interest rates from joining the uptrend in global yields and was helping the economy overcome stagnation.

Three foreign banks eyeing Turkish market -bank regulator to state media
Three foreign banks, including one from the United States, are considering entering the Turkish market, possibly as soon as next year, the head of the country’s banking watchdog was quoted as saying.

Global diamond business roiled as cash crunch hits Indian stone cutting
Rajendra Jadhav and Susan Taylor – Reuters
The global diamond industry is facing disruption that could stretch through the first few months of next year, including Valentine’s Day in February, as a result of Indian Prime Minister Narendra Modi’s radical move to abolish most of the nation’s cash overnight.


A Portrait of the Investing Columnist as a (Very) Young Man
By Jason Zweig
When an inmate in federal prison reminisces about what you were like as a child, you pay attention.

It’s a-me! How Super Mario became a global cultural icon
The Economist
The izakaya has a name, but it cannot be published. Its location is a closely guarded secret. Entry is restricted to members—celebrities, media types and otaku, a particularly devoted kind of pop-culture geek. They do not come for the food, though it is excellent, nor for the drinks, which are well mixed. They come for Toru “Chokan” Hashimoto, the Nintendo alumnus who runs the place, and for his friends and their memories. On one wall is a sketch of Pikachu, a popular character in Pokémon games, drawn by its creators when they dropped by. On another is the original sheet music from a classic Nintendo game, a gift from the composer. Front and centre is a drawing of Mario signed by Shigeru Miyamoto.

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