First Impressions

Ed Tilly, CEO of CBOE – Embrace Change

“We were challenging people’s livelihoods…”

Reaching our goals in life does not always involve a linear path. Ed Tilly, CEO of the Chicago Board Options Exchange, discusses the long and winding road he followed in his career and key experiences that helped him get where he is today. He stresses that examining your own strengths and weaknesses and knowing the limits of your abilities is one of the keys to success. Making mistakes and taking chances are two other important areas that help us learn and grow in our careers. “You will fail,” he tells his audience, “and that’s okay.” For Tilly, not receiving a nomination to the CBOE’s Board of Directors motivated him to try again and come back the next year with fresh ideas to help improve the exchange.

Watch the video »

Quote of the Day

“September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” Of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”

Ben Bernanke in the story, “2008 Meltdown Was Worse Than Great Depression, Bernanke Says”

Lead Stories

Argentina revokes Bank of New York Mellon’s authorization to operate
Argentina said on Tuesday it had stripped Bank of New York Mellon’s authorization to operate in the South American country, its latest move against the financial institution which obeyed a U.S. court ruling that tipped it into default.

***DA: Rock and a hard place – BNY is being canned by Argentina for refusing to be in contempt of court in the U.S.

Abenomics’ arrows fail to hit their mark
Henny Sender – Financial Times
Mid-August is Obon season in Japan, the time when people return to their ancestral homes and pay homage to the spirits of their ancestors. It is a time for reflection on the past, as New Year is a time to look forward. This year, Obon comes as a reminder of just how hard it is to move on.

***DA: Three arrows? I only count one.

Europe Bond Gains Push Yields From Spain to Germany to Records
David Goodman and Lukanyo Mnyanda – Bloomberg
Euro-area bonds advanced, pushing 10-year yields from Spain to Germany to record lows, amid speculation the European Central Bank is prepared to expand its stimulus plan as the region’s economic outlook dims.
Rates on similar-maturity Austrian, Belgian, Dutch, Finnish, Irish and Italian debt also fell to all-time lows. The euro region’s bonds have extended gains into an eighth month. ECB President Mario Draghi said on Aug. 22 that bets on price increases in the currency bloc “exhibited significant declines.” Policy makers are scheduled to hold their next rate-setting meeting on Sept. 4.

2008 Meltdown Was Worse Than Great Depression, Bernanke Says
Pedro Nicolaci da Costa – WSJ
Former Federal Reserve Chairman Ben Bernanke, a prominent student of the Great Depression, contends that the 2008 financial crisis was actually worse than its 1930s counterpart.
Mr. Bernanke is quoted making the statement in a document filed on Aug. 22 with the U.S. Court of Federal Claims as part of a lawsuit linked to the 2008 government bailout of insurance giant American International Group Inc.

BitBeat: For Bitcoin’s Miners and Spenders, a Supply and Demand Imbalance
Paul Vigna and Michael J. Casey – MoneyBeat – WSJ
The amount of hardware being thrown at bitcoin mining continues to rise, but if those mined bitcoins aren’t being used, an imbalance between supply and demand will develop that may increase volatility in the price, CitiFX’s Steven Englander wrote in a note.

***DA: If today’s newsletter arrives late to your inbox, it is because Jeff and Doug got into another argument about bitcoin. Sorry for the delay.

S&P Revises Loan Rating Methodology to Boost CLO Business
Kristen Haunss, Julie Miecamp and Matt Robinson – Bloomberg
Standard & Poor’s is altering its approach to grading corporate loans after lagging behind the competition in one of the fastest growing parts of the debt market.
Changes by the world’s biggest credit-rating firm would, in effect, increase the estimates for how much lenders in some loans will get back in the event of a default, allowing investment firms to bundle riskier, higher-yielding debt into collateralized loan obligations. S&P’s share of the grades assigned to the biggest portion of CLOs declined over the last six quarters, to 57 percent from 100 percent, according to Wells Fargo & Co.

Ex-banker replaces rebel minister in French cabinet shake-up
Mark John and Julien Ponthus – Reuters
President Francois Hollande replaced his maverick leftist economy minister with a former Rothschild partner on Tuesday, in a reshuffle intended to reconcile his efforts to revive the stagnant French economy with deficit-cutting orthodoxy.

Credit Raters to Face New Conflict Curbs Under SEC Rules
Dave Michaels – Bloomberg
Credit-rating firms, whose lapses played a central role in the 2008 financial crisis, will face new restrictions on conflicts of interest under rules set to be adopted by the U.S. Securities and Exchange Commission.
Firms including Moody’s Investors Service and McGraw Hill Financial Inc. (MHFI)’s Standard & Poor’s would have to ensure they follow internal methodologies when grading debt and revising ratings under rules commissioners will vote on at a meeting in Washington today. They will also have to disclose more about the accuracy of ratings, including a common way of presenting rates of defaults and downgrades for bonds backed by loans for homes and commercial buildings.

Central Banks

Central bankers face ‘confidence bubble’
Ralph Atkins – Financial Times
Frothy financial markets, asset prices at perilous highs, cautious investors pushed to take ever bigger risks – the side effects of central bank actions since the collapse of Lehman Brothers investment bank in late 2008 have been considerable. Little wonder there has been enough talk of asset “bubbles” for a Financial Times series.

ECB and Fed Face Policy Divergence, For Now
Todd Buell – MoneyBeat – WSJ
The European Central Bank and the Federal Reserve may soon see policies going in vastly different directions.
Many market participants took ECB President Mario Draghi’s recent speech in Jackson Hole—in which he warned about declining inflation expectations – as a signal that the ECB will embark on a broad-based asset purchase program, known as quantitative easing, in coming months. And most observers expect the Federal Reserve to start raising rates by the middle of next year.

***DA: It looks like different trajectories, but it is really just different timelines.

Draghi Soothes Bond Market After Summer of Strife
Alastair Marsh and Katie Linsell – Bloomberg
Mario Draghi’s words have lost none of their potency. Just look at the bond market where the European Central Bank president’s hints about further stimulus soothed investors unsettled by turmoil from Ukraine to Iraq.
After Draghi indicated in Jackson Hole, Wyoming, that he’s moving closer to quantitative easing, the average yield investors demand to hold investment-grade bonds in euros fell to a record 1.32 percent, according to Bank of America Merrill Lynch indexes. Junk-bond yields also dropped to 3.79 percent, 34 basis points shy of an all-time low.

Who will raise rates first: Yellen or Carney?
MatthewLynn – MarketWatch
There have been some epic transatlantic yacht races over the decades. It is always a contest of navigation, strength and skill, which pits each sailor against both the elements and the competition.
But right now there is another transatlantic race underway, and this one is being fought among central bankers. Which country will raise interest rates first, Britain or the United States? Both Bank of England Gov. Mark Carney and Federal Reserve Chairman Janet Yellen have been making increasingly aggressive noises about bringing to an end five years of super-cheap money.

Biggest Danish Fund Readies for Rate Shock as Exit Narrows
Peter Levring – Bloomberg
Denmark’s biggest pension fund, ATP, says it’s willing to sustain losses in the short term as part of a bet that central banks will need to reverse an unprecedented period of monetary easing.

BlackRock Appointed by ECB as ABS-Program Consultant
Paul Gordon – Bloomberg
The European Central Bank appointed BlackRock Inc. (BLK), the world’s biggest money manager, to advise on developing a program to buy asset-backed securities.
BlackRock Solutions, a unit of the New York-based company, will provide advice on the design and implementation of a potential ABS-purchase plan, an ECB spokesman said in response to e-mailed questions. Safeguards against any conflict of interest are included in the agreement, the spokesman said.

Federal Reserve Board Proposes to Repeal Its Regulation AA (Unfair Credit Practices)
Foley & Lardner LLP – JDSupra
The Board of Governors of the Federal Reserve System is requesting comment on its proposal to repeal its Regulation AA, which for nearly 30 years has prohibited banks from engaging in specified unfair and deceptive credit practices.
In the Federal Trade Commission Act (the FTC Act), Congress directed the Federal Trade Commission (FTC) and the Federal Reserve Board to promulgate rules to define and prevent unfair and deceptive acts and practices. The Federal Reserve Board’s rulemaking authority under the FTC Act was limited to banks. Pursuant to this authority, the Federal Reserve Board adopted Regulation AA in 1985, closely following the FTC’s rule adopted a year earlier.


U.K. Competition Watchdog Joins Currency Probe
Chiara Albanese – WSJ
The U.K.’s antitrust watchdog has joined a raft of global regulators investigating possible wrongdoing in the currency market, underscoring how the sprawling probe may have expanded in scope in recent months, according to two people familiar with the matter.

Central Banks Playing Own Version of FX Monopoly
Simon Kennedy – Bloomberg
When the Plaza Hotel started selling its own version of Monopoly, the game board lacked a square to mark the 1985 currency accord named for the New York landmark.
“Plaza-opoly,” introduced this year, recognizes the hotel’s role as a location for the movies Home Alone 2 and North By Northwest, yet there’s no acknowledgement of the historic pact struck there by the largest economies to devalue the dollar.

Turkey Leaves Benchmark Repo Rate Unchanged, Cuts Lending Rate
Onur Ant – Bloomberg
Turkey’s central bank left its benchmark repurchase rate unchanged, saying it will maintain a “tight monetary stance” to curb inflation even after unexpectedly cutting the overnight lending rate.
The lira gained to the highest level in two weeks after the Monetary Policy Committee, led by Governor Erdem Basci, kept the repurchase rate steady at 8.25 percent, as forecast by nine out of 16 economists in a separate Bloomberg survey. The panel lowered the upper end of the so-called interest rate corridor by 75 basis points to 11.25 percent and the overnight borrowing rate was unchanged at 7.5 percent.

Indexes & Index Products

For First Time, S.&P. 500 Closes Above 2,000
Nathaniel Popper – NY Times
The Standard & Poor’s 500-stock index reached a milestone on Tuesday, closing above 2,000 for the first time ever, if just barely. It was a lazy day of trading that picked up on some encouraging signs in the United States economy, but not enough for sustained optimism in the market.

Risk remains in place for indexes
Thomas H. Kee Jr. – MarketWatch
There is considerable risk of a gap down in the market, and investors should implement profit stops to protect their positions.
The market has recently moved in one direction and one direction only, but it has done so on very light volume, and markets that move up without backing and filling, when coupled with low-volume environments, are set up for reversals.

5 Fastest Growing ETFs Of 2014 By Flows Here at, we monitor ETF flows religiously on a daily basis. Our daily flows report is based on total dollars; we often see the same tickers on the list. Those usually include tickers like the SPDR S&P 500 ETF (SPY | A-98), the iShares MSCI Emerging Markets ETF (EEM | B-99) and the SPDR Gold Shares (GLD | A-100) because they’re some of the largest ETFs in the world. So, naturally, big money is constantly moving in and out of these funds.

***DA: Number one on the list is our neighbors at First Trust and their Global Tactical Commodity Strategy.

How a Novice Quant Developed an Index for Changing Japan
Tom Redmond, Anna Kitanaka and Toshiro Hasegawa – BloombergBusinessweek
Two years after being plucked from the ranks of exchange product developers to design the JPX-Nikkei Index 400 (JPNK400), Daisuke Tanaka finds himself at the center of a corporate revolution.
Bespectacled and lean at 40, the lifelong employee of Japan Exchange Group Inc. (8697) is executing a plan backed by the government to shame corporate executives into boosting profits rather than hoarding cash. Tanaka’s index, which aims to stoke the economy, is changing company behavior and winning fans such as Goldman Sachs Group Inc. even as detractors deride its makeup and say it will cause investors to buy when valuations peak.

The Demise Of Active Management Is Greatly Exaggerated
Seeking Alpha
The media has been bombarding investors with articles explaining how indexes like the S&P 500 have outperformed the majority of active mutual fund managers.


How gold is defying the haters
Alex Rosenberg – CNBC
The headwinds for gold appear to be mounting.
Stocks are rising to new highs, potentially drawing fresh money into the equity market. Meanwhile, the U.S. dollar index is nearly at a one-year high, which hurts the classic gold-bug argument that the dollar will weaken and only gold can truly store value.

The interest rate trap… and what it means to the gold market
Michael J. Kosares – GoldSeek
“Interest rates on Treasury securities, which have been exceptionally low since the recession are projected to increase in the next few years as the economy strengthens and to end up at levels that are close to their historical averages (adjusted for inflation).” – Budget Outlook for 2014, Congressional Budget Office

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