First Impressions

Gareth Parker, FTSE Russell – The Boring Bit of the Investment Management World, And Why It’s Not

“Smart Beta is essentially the indexing of interesting ideas. These index guys are turning expensive good techniques into cheap good techniques.”

Picture if you will a time and place where there is no such thing as an index – no Dow Jones Industrial Average, Russell 2000, no FTSE 100. How would you measure relative performance? The answer is, you wouldn’t, and it was not so long ago that we didn’t.

Gareth Parker takes through a brief history of indexing, what he calls the “boring bit” of the investment world. As the talk progresses, we see that, not only is the the always evolving world of indexing not boring, it can be lucrative, for both job seekers and investors.

Watch the video »

Quote of the Day

“I’ve been to so many Davoses, and when it’s quiet, that’s when you should panic.”

Ray Dalio, the billionaire founder of hedge fund Bridgewater Associates, commenting on the expected “vigorous discussion” at the World Economic Forum’s Annual Meeting, in the story, “Davos Gets Jittery as Trump Rises, Oil Falls and China Slows”

Lead Stories

The Deeper Causes of the Global Stocks Rout
Mohamed A. El-Erian – Bloomberg
To shed light on one of the worst starts to a new year for global stock markets, some analysts are turning to macroeconomic explanations, such as China’s economic slowdown and its uncharacteristic policy slips. Others prefer to focus on the cascading influence of unhinged markets, such as oil. Yet neither explanation is sufficiently comprehensive; and each fails to account for major changes in liquidity and volatility.

China’s great economic shift needs to begin
Martin Wolf – Financial Times
Chinese policymakers have a stellar reputation for the quality of economic management?but the same was true of the Japanese three decades ago. For the Japanese, the difficulty of shifting from their high-savings, high-investment, “catch-up” economic model proved very large. Indeed, this has still not been completed. While the Chinese economy has far more room to grow than Japan a quarter of a century ago, its disequilibria are even bigger. Moreover, contrary to conventional wisdom, the transition to a new pattern of growth has not really begun.

****SD: Chinese economic growth at its slowest pace in 25 years according to today’s data (6.9 percent GDP growth in 2015). Here is the FT’s take on the far-reaching effects of China’s doldrums.

U.S. Takes Step Toward Increasing Oversight of Treasury Market
Ian Katz and Alexandra Scaggs – Bloomberg
The U.S. is taking a step toward increasing oversight of Treasuries in response to complaints from both traders and government officials that the market is too opaque.
The Treasury Department on Tuesday asked for input on how the market has changed and what should be done so that it can operate more smoothly. Regulators want to prevent the kind of sudden price swings that occurred on Oct. 15, 2014, when yields fluctuated in a way that had only happened three other times since 1998.

Goldman Sachs Wants to Make More Giant Loans
Justin Baer – WSJ
Goldman Sachs Group Inc., beset by a steady decline in a fixed-income trading operation that was once its most-reliable source of profits, is turning for help to a business it once eschewed for help: debt financing.
With its top-ranked mergers-and-acquisitions operation facing more-limited growth prospects and debt trading under pressure from new regulations, Goldman has identified loans and bond underwriting as key sources of additional profit, according to officials at the firm.

Basel rules to cost banks EUR40m-EUR120m each, says study
Laura Noonan – Financial Times
Global banks will have to spend between EUR40m and EUR120m each to implement global regulators’ latest rules on trading book capital, a new study from consultants Oliver Wyman claims.
The analysis also says regulators have “drastically understated” the impact the new rules will have on the capital requirements for banks’ trading operations. These divisions already have seen their returns cut by higher capital requirements imposed in the aftermath of the financial crisis.

Morgan Stanley and Bank of America profit as legal bills fade
Tim Wallace – The Telegraph
Bank of America’s profits more than tripled in 2015 to the highest level in nearly a decade as legal bills fell.
The US-based lender made a $15.9bn (£11.2bn) profit in 2015, up from $4.8bn in the previous year, despite a 2pc fall in revenue to $82.5bn, thanks largely to lower lawyers fees and fewer fines.
2014 was a tough year for American banks, as misconduct costs – such as the £2.7bn foreign exchange manipulation fine levied on seven banks in the UK and America – hit profits.

****SD: Also in Morgan Stanley news, “Morgan Stanley Backs Billionaire Steven Cohen With Loan Secured by Art”

CBO: Federal deficit to rise to $544 billion
The federal budget deficit is expected to increase this year for the first time since 2009, according to estimates released Tuesday.
This year’s budget shortfall is expected to rise to $544 billion, about $105 billion more than last year, according to a decade-long economic outlook released by the nonpartisan Congressional Budget Office (CBO).

****SD: Full summary from the CBO can be found here

Central Banks

The lunatics are running monetary policy
David Oakley – Financial Times
Have central bankers lost control as the animal spirits in the markets create instability, damage investor sentiment and weaken consumer confidence?
To put it bluntly, have the lunatics taken over the asylum, with monetary policy decisions now in the hands of the whimsical and capricious market rather than those sober people that run central banks?

****SD: I’m picturing lesser known Looney Tunes characters (Yoyo Dodo anyone?) looking through charts and whispering in Yellen’s ear.

China Worries Weigh Ahead of European Central Bank Policy Decision
Todd Buell and Paul Hannon – WSJ
European Central Bank policy makers here are accustomed to looking south for economic trouble spots. In the past, weakness in Greece and southern Europe has hindered growth in the 19-country currency bloc.
But when rate-setters meet for a policy decision Thursday, they are expected to be looking far to the east, because Chinese market turmoil is weighing on stock markets and investor sentiment world-wide.
That volatility combined with low energy prices globally threaten to put more pressure on the ECB’s inflation target. That could prompt ECB chief Mario Draghi, a central banker with proven dovish tendencies, to loosen monetary policy even further this year.

IMF cuts global growth forecasts
Larry Elliott – The Guardian
The International Monetary Fund has added to concerns about the health of the global economy by cutting its growth forecasts for the next two years and warning that recovery from the financial crisis could be derailed altogether if key challenges are mishandled.
The Washington-based body said world output would be 0.2 points lower in 2016 and 2017 compared with forecasts made just three months ago – and that the risks to its predictions were to the downside.

Mark Carney rules out imminent interest rate rise
Peter Spence – The Telegraph
Mark Carney, the Governor of the Bank of England, has admitted that interest rates are likely to remain at their historic lows for longer than expected, as the central bank’s forecasts for rising inflation have unravelled.

****SD: Also from The Telegraph, “We should all try to ignore what Mark Carney says about interest rates”

Davos Gets Jittery as Trump Rises, Oil Falls and China Slows
Simon Kennedy and Matthew Campbell – Bloomberg
As the chattering chieftains of the global economy gather this week in Davos, Switzerland, they’re facing the darkest outlook since the financial crisis tipped the world into recession seven years ago.

****SD: Before “Game of Thrones,” when I heard Davos, I thought Switzerland. Now, not so much.

Fed Policy is Hawkish (No Foolin’)
Bob Lang – CBOE Options Hub
We have come to the point where Fed policy is really in a corner, and the only real way out is to distribute some pain to the markets. That has certainly been the message so far in 2016, but was certainly telegraphed over the past year or so, too. The Fed seems quite confident about the prospects for economic growth and the potential for rising inflation, enough they felt comfortable raising interest rates last month a 1/4 point – the first such move in nearly a decade. The minutes came out last week and expressed their confidence in the employment outlook, and indeed the December report on January 8 did not persuade them to believe otherwise.

Against the tide: The Fed versus the ECB
David Roche – Euromoney Magazine
The US Federal Reserve has finally bitten the bullet and hiked its policy rate by 25 basis points to 0.5%, with the aim of raising it further by another 1% this year. The six years of cheap money, near-zero rates and quantitative easing are over in the US, while Europe and Japan continue to ease. Stock markets are relieved that the uncertainty is over and they have a better handle on Fed plans, so stock prices rose on the rate move.

Bernanke says PBOC needs to be more transparent on yuan policy
Benjamin Robertson – South China Morning Post
Former US Federal Reserve Chairman Ben Bernanke on Tuesday criticised the People’s Bank of China for not being transparent when explaining its currency strategy to the markets and at the same time said there was no chance the International Monetary Fund’s currency reserves, to which the yuan recently won admittance, would actually become a global reserve currency.

****SD: And the world nods.


Deutsche Bank to Face British Lawsuit Over High-Speed Trading
Jack Ewing – NY Times
Deutsche Bank, already troubled by lawsuits and official investigations, faces another challenge. A group of lawyers said on Monday that they planned to sue the company in British court, accusing the bank of using high-speed trading software to profit in foreign currency markets at the expense of customers.

Dollar Pegs Seen Bending While Reserves Keep Them From Breaking
Ye Xie and Maria Levitov – Bloomberg
Countries with currencies pegged to the dollar are coming under increasing attacks by traders who bet it’s become too expensive for policy makers to continue defending exchange rates amid a soaring greenback and a collapse in commodities prices. It may be the speculators who end up losing.

Breaking the Hong Kong dollar peg
Jennifer Hughes – Financial Times
Over time the idea of a black tulip — a quest for perfection introduced by Alexandre Dumas in the novel of that name — has become conflated with the tulipmania bubble that burst shortly before he set his story. Use the notion in today’s markets and you could be describing the search for an unbreakable currency system or, conversely, that rare trade that bets at just the right moment that such a system does not exist.

****SD: Bloomberg’s take here

China’s Currency Isn’t Dominant Yet
Mark Whitehouse – Bloomberg
Despite growing concerns that China’s economy is in trouble, the country’s currency is widely seen as a contender to oust the U.S. dollar from its dominant position in international trade. Judging from data on money transfers, it has a very long way to go.

Jawboning the Won: Decoding Comments by Korean Policy Makers
Cynthia Kim and Jiyeun Lee – Bloomberg
As the South Korean won trades near a five-year low against the dollar amid increased uncertainty in China and the slump in global financial markets, policy makers have stepped up their commentary on foreign exchange.

Bitcoin: Is the crypto-currency doomed?
A high-profile Bitcoin developer has said the crypto-currency has failed and he will no longer take part in its development.
Mike Hearn, a Zurich-based developer and long-time proponent of Bitcoin, surprised many this weekend when he published a blog calling Bitcoin a “failed” project.
Mr Hearn, who had until recently been working on new software for the currency, says he has now sold all of his own bitcoins and will no longer take part in the crypto-currency’s development.
So, is Bitcoin doomed?

Through the Looking Glass: The Fragility of EM Currencies
Idan Levitov – Finance Magnates
We are at a critical juncture in the global economy. Most every economic headline that gets splashed across our screens details China weakness, commodity price meltdowns and excessive volatility in equities markets.
These are but a few of the many concerns plaguing investors, traders and speculators the world over. The Chinese yuan is under tremendous pressure. The authorities in Beijing, along with the People’s Bank of China have moved swiftly to devalue the CNY to make Chinese exports more competitive on global markets.

Exclusive: Q4 2015 US Retail Forex Profitability Report Shows Improved Trading
Finance Magnates
US retail forex traders were more profitable to end 2015. During the final quarter, 37.4% of traders were profitable on a Weighted Average basis compared to 34.9% in Q3 2015. Non-weighted calculations showed average broker profitability of 35% which was a 3.6% improvement from the poor 31.4% figure in Q3.

Indexes & Index Products

Zombie ships send maritime freight into worst crisis in living memory
The Telegraph
The shipping industry is facing its worst crisis in living memory as years of rapid expansion fuelled by cheap debt have coincided with an economic slowdown in China.
“We are now at the stage where people are struggling to remember an era when it was this difficult, we’ve gone through what it was like in the 90s, the 80s and the 70s, so expressions like ‘living memory’ start to apply,” said Jeremy Penn, the chief executive of the Baltic Exchange in London.
The Baltic Exchange has set shipping rates for more than two-and-a-half centuries and the situation its members now face is grim.

****SD: “How Maersk Is Coping With the Trade Slump” from the WSJ today

Tokyo Financial Exchange And S&P Dow Jones Indices Sign A License Agreement For DJIA Index
Tokyo Financial Exchange Inc. (TFX) and S&P Dow Jones Indices LLC have signed an agreement which allows TFX to list DJIA Margin contracts based on Dow Jones Industrial Average (DJIA) on TFX.

These Are the World’s Most Innovative Economies
Michelle Jamrisko and Wei Lu – Bloomberg
In the world of ideas, South Korea is king.
Germany, Sweden, Japan and Switzerland rounded out the top five in the 2016 Bloomberg Innovation Index, which scored economies using factors including research and development spending and concentration of high-tech public companies.

The bear is back: Experts warn the FTSE 100 is on the brink as global market volatility continues
City A.M.
Fears that the FTSE 100 could be dragged into bear market territory deepened yesterday as global equities were gripped by volatility in another day of torrid trading. The FTSE 100 has so far managed to fend off falling into the bear trap, trading around 19 per cent off its all time high of 7,103 in April last year. However, experts have warned that London’s premier index is now on the brink.

For E.T.F. Traders, Lessons From the Panic
Conrad De Aenlle – NY Times
A selling point of exchange-traded funds over traditional mutual funds is that they can be traded at any time during a market session, but when stocks plunged as soon as trading began on Aug. 24 — that feature of E.T.F.s became a bug.

The Rieger Report: Munis Rich or Cheap? It’s all relative
J.R. Rieger – Indexology: S&P Dow Jones Indices
Are U.S. municipal bonds rich or cheap relative to other fixed income asset classes? It is all relative. As of January 15th 2016, the yield to worst of investment grade bonds tracked in the S&P National AMT-Free Municipal Bond Index was a 1.8% (tax-free yield). The Taxable Equivalent Yield (TEY) of those bonds using a 35% tax-rate assumption would be 2.77% (the required yield of a taxable bond to keep the same interest income after taxes).

S&P 500 Correction Appears Small in Context of History: Chart
The recent 10 percent drop in U.S. stocks looks very small when considered in the context of the 220 percent rally from the 2009 nadir to the 2015 peak.


Price of Gold in 2016: Will It Break Out or Melt Down?
Dan Caplinger – The Motley Fool
Gold suffered another bad year in 2015, falling another 12% to close the year at about $1,060 per ounce. That put the price of the yellow metal at its worst year-end level since 2008 and extended a three-year streak of falling prices for gold. Looking forward, investors want to know if tough times will continue for gold or whether it will finally post a substantial rebound. Let’s look at some of the things the gold market has gone through lately and what impact it will have on prices in 2016 and beyond.

India’s gold bonds seen luring investors in search of safe haven
Rajendra Jadhav and Suvashree Choudhury – Reuters
The second tranche of India’s sovereign gold bonds, whose sale began on Monday, is likely to draw good response from investors, as they are priced below market rates for the metal and sharemarket turmoil spurs investors to diversify holdings.


‘No layoffs … this week’: Marissa Mayer’s twisted joke kills morale
James Covert and Claire Atkinson – New York Post
You’re not getting fired this week — feel better now?
That was the creepy message Yahoo! boss Marissa Mayer had for employees at a companywide meeting earlier this month, drawing nervous chuckles from workers who fear for their jobs, sources told The Post.

****SD: Wow. I never quite know how to interpret assessments of Mayer’s abilities, but this is terrible leadership.

“We’ve hit peak curtains:” Even IKEA thinks everyone’s bought enough useless stuff
Aamna Mohdin – Quartz
Western consumers have reached their limits for “buying stuff.” That verdict comes from an unlikely place: IKEA, the Swedish furniture goliath. Speaking at The Guardian’s Sustainable Business debate, Steve Howard, IKEA’s head of sustainability, said:
“In the West, we have probably hit peak stuff. We talk about peak oil. I’d say we’ve hit peak red meat, peak sugar, peak stuff … peak home furnishings.”
IKEA may have a point: sales for furniture and lighting are at their highest since the financial crisis. With oil now cheaper than an actual barrel, is home furniture the next tipping point?

****SD: If this is true, we’re talking about a YUGE hit to consumer discretionary spending.

Trump’s bad bet: How too much debt drove his biggest casino aground
The Washington Post
For months in 1987, Donald Trump maneuvered to take control of the hulking, unfinished Taj Mahal casino in Atlantic City. He snapped up stock in the parent company after its owner died and then made a surprise bid to take the company private.
With the Taj, along with two casinos he already owned in the city, Trump could dominate gambling on the East Coast. But first he needed to convince state gambling regulators that he was financially stable and could raise enough cash to complete the $1 billion project.

Why are there so few Dalit entrepreneurs?
Kathryn Lum – Quartz
In July last year, I was in Gandhinagar, the capital of the Indian state of Gujarat, at the monthly meeting of a credit cooperative. It has 1,300 members, all drawn from Dalit families at the bottom of India’s caste hierarchy. It’s the kind of organisation where you might expect to see a host of entrepreneurs and business people in charge, but of the nine board members sitting around the table, just one was a businessperson.
****SD: This could be called, “The unfortunate intersection of caste and capitalism.”

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