First Impressions

Bits & Pieces, Snow Day Edition
Doug Ashburn, John Lothian News

Last week’s east coast “Snowmageddon” dominated the national news for three days despite the fact that, in most places, the totals came nowhere near the hype. Here in Chicago it began snowing Saturday evening and it has only just began to taper off as of Monday morning. The final tally looks to be in the 20-inch area, though Jim Kharouf will tell you there was every bit of two feet at his place even before the Sunday night finale. And though the story is dominating the local news today, on the national scene we are getting a mere fraction of the attention New York received last week.

Today is Groundhog Day, and Phil might see his shadow, but he must first dig up through two feet of snow.

Today’s newsletter is arriving a bit later than usual, due to weather delays. Yes; we realize that for the 4 years that Jon Matte put together JLN from above the Arctic Circle, we were never subjected to these kinds of delays. But he compiled the newsletter from his home, and he rarely got 20 inches of snow between his bedroom and his home office.

Speaking of Jon, he just completed the new web site for the tour company he now works for full time. If you plan to visit Alta, Norway for, say a Northern Lights tour, dogsled adventure, or one of the cruise ships that make their way northward in the summer, have a look at

FIA and SIFMA are coming together this week to host the Asset Management Derivatives conference this week in Dana Point, California. With all the new rules having come online this past year, it is time for the buyside to get together to network and compare notes. Click HERE for more information. Also, the countdown to FIA Boca sits at five weeks and one day. We will be there in full force; please contact us if you would like to schedule a meeting.

The bidding war between CME Group and BGC Partners for GFI Group has moved to the next level, as GFI shareholders Friday rejected CME’s bid (see stories in Lead and Exchanges sections below). CME Group, which was really after GFI’s technology bits, namely Trayport and FENICS, must move to Plan B. Options include trying to buy just the pieces they want, or, if the BGC deal does indeed go forward, bide their time then put in a bid for BGC Partners. That would be fun to watch.

Quote of the Day

“The Treasury Department is constantly monitoring liquidity across all financial markets. The Treasury market is the deepest and most-liquid market in the world and we are committed to ensuring that it remains that way.”

Adam Hodge, spokesman in the story, “The Treasury Market’s Legendary Liquidity Has Been Drying Up”.

Lead Stories

As Regulators Focus on Culture, Wall Street Struggles to Define It; Big Banks Try to Monitor Employee Attitudes to Avoid Future Problems
By Emily Glazer and Christina Rexrode
“Culture” is the buzzword of the moment at banks?and a puzzle that regulators and Wall Street firms are wrestling to solve. As they emerge from years of bruising fines, layoffs and losses, big banks are trying more than ever to monitor employee attitudes and values to avoid future problems.

CME Group and GFI Group Terminate Merger Agreement
CME Group
CME Group Inc. and GFI Group Inc. today announced that they have each determined to terminate their previously announced merger agreement following today’s special meeting of GFI shareholders.

1450% Income Growth Is What You Need to Join the 1%
Gail Degeorge – Bloomberg
New research shows that not only are rich Americans making more money than you, they’re also making money faster than you. A lot faster.
“Average earnings growth over the life cycle varies strongly with the level of lifetime earnings: the median individual by lifetime earnings experiences an earnings growth of 38 percent from ages 25 to 55, whereas for individuals in the 95th percentile, this figure is 230 percent,” according to a paper published in January by the National Bureau of Economic Research, by four authors including one at the Federal Reserve Bank of New York. “For those in the 99th percentile, this figure is almost 1,500 percent.”

Deflation alarms ring louder as EU, Chinese factories struggle; Central banks from Switzerland to Turkey via Canada and Singapore have already loosened monetary policy in the past few weeks
Business Standard
European and Chinese factories slashed prices in January as production flatlined, heightening global deflation risks that point to another wave of central bank stimulus in the coming year.

The Treasury Market’s Legendary Liquidity Has Been Drying Up
by Elizabeth McCormick, Daniel Kruger, Bloomberg
Trading Treasuries keeps getting tougher and tougher. For decades, the $12.5 trillion market for U.S. government debt was renowned for its “depth,” Wall Street’s way of talking about a market’s ability to handle large trades without big moves in prices. But lately, that resiliency has practically vanished — and that’s a big worry.

U.S. to Reduce Debt Next Quarter After Borrowing Needs Fall
Jeanna Smialek – Bloomberg
The U.S. Treasury Department said its borrowing needs this quarter will be the lowest since 2007 and it plans to pay down $7 billion of debt in the April-June period as a stronger economy helps improve government revenues.
The Treasury plans to issue $155 billion in net marketable debt in the first three months of this year, about $54 billion less than projected three months ago, the department said today in Washington. A paydown, or a net reduction in the Treasury’s marketable debt, often occurs during periods such as next quarter when personal and corporate tax receipts are due.

The perils of a strong US dollar
Edward Luce, FT
The bad news is the US recovery is based on the familiar model of rising consumption
First things first. We are not about to replay the 1930s. The world’s big economies are not deliberately indulging in “beggar thy neighbour” devaluations and protectionism is not poised for an ugly revival. As they say in the US : situation normal, all fouled up ? or words to that effect.

Capitalism has broken free of the shackles of democracy
Slavoj Zizek, FT
Economic models have proved more portable than political ideas, writes Slavoj Zizek
People pose for photos in front of a billboard to Deng Xiaoping in Shenzhen, China July 4, 2010. The former Chinese leader’s economic reforms turned Shenzhen into the country’s first Special Economic Zone. Photo by Doug Kanter
To whom will monuments be built a century from now? Among them, perhaps, will be Lee Kuan Yew. He will be remembered not only as the first prime minister of Singapore, but also as the creator of authoritarian capitalism, an ideology set to shape the next century much as democracy shaped the last.

Greece Seeks Third Debt Restructuring: Who’s on the Hook?
Nikolaos Chrysoloras – Bloomberg
Greek Prime Minister Alexis Tsipras is asking the rest of the euro area to reduce his country’s debt burden. So who’s on the hook if he succeeds?
Tsipras has already pledged to repay in full Greece’s obligations to the International Monetary Fund and the European Central Bank. He’s also said private investors won’t be asked to shoulder additional losses after taking the hit for two restructurings since the start for the European crisis.
That leaves European taxpayers in the firing line.

Fed to propose margin rule aimed at shadow banking -Tarullo
The Federal Reserve plans to propose a rule that applies minimum margin requirements to certain forms of securities financing deals, in a move aimed at reining in the shadow banking industry, a top Fed official said on Friday.

A Banker Comes In From the Cold; Former Maryland Banker Reveals He Used to Work for the CIA
By Julie Steinberg
Edwin “Ed” Hale Sr., a retired bank executive known locally for his sharp-elbowed approach to business, installed video surveillance on his 186-acre farm and still sleeps with a sawed-off shotgun by his bed.

Gov’t Vow Lures Option Bulls to National Bank of Greece (NBG)
Andrea Kramer – Schaeffer’s Investment Research
The shares of National Bank of Greece (ADR) (NYSE:NBG) are up 10.9% at $1.22, after a spokesman for Greece’s new government said it “will not appoint party officials at the management of banks,” and vowed to “not do anything that would hurt the share value of banks.” Against this backdrop, NBG calls are trading at twice the average intraday clip, with speculators hoping for an extended short-term rebound.

Central Banks

Draghi Spurs Bulls to Ditch U.S. Equities for Europe: Options
Inyoung Hwang and Sofia Horta E Costa – Bloomberg
Equity investors are switching their allegiance to Mario Draghi from Janet Yellen.
Anticipation of more stimulus from the European Central Bank triggered a record amount of money into an exchange-traded fund that tracks the region’s stocks while hedging against currency moves. The Stoxx Europe 600 Index posted its best January since 1989, while the Standard & Poor’s 500 Index had its worst month in a year, with traders pulling more money than ever before from an ETF tracking it.

Campaign to audit the US Federal Reserve gathers pace
Sam Fleming and Barney Jopson – Financial Times
The US Federal Reserve is coming under the most political pressure it has faced since the financial crisis, as Republicans who say it lacks transparency attempt to subject its monetary policy deliberations to external audit.
Republicans who took control of both houses of Congress this year want to use their new power to push for laws that would expose the Fed’s rate-setting and quantitative easing policies to formal review.

Persistent Overoptimism about Economic Growth
Kevin J. Lansing and Benjamin Pyle – Federal Reserve Bank San Francisco
Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.

New York Fed Announces Changes to How It Calculates Fed Funds Benchmark – Real Time Economics
Michael S. Derby – WSJ
The Federal Reserve Bank of New York said Monday it’s changing the way it calculates and reports short-term borrowing costs.
In a press release Monday, the bank said the new formula for reporting what’s called the federal funds effective rate has no implications for monetary policy. Instead, the changes are designed to make the process of calculating the rate “more robust.” It said it will also make public a new “overnight bank funding rate” to more broadly describe the state of short-term funding costs.

Inflation Reading Furthest Away From Fed Target Since 2009 – Real Time Economics
Eric Morath – WSJ
A rapid deceleration in consumer inflation could complicate the Federal Reserve’s calculus for when to lift short-term interest rates from near zero.
The price index for personal consumption expenditures, the Fed’s preferred inflation measure, was up 0.7% in December from a year earlier, the Commerce Department said Monday. That was the smallest 12-month gain for consumer prices since October 2009, just after the economy started emerging from a deep recession.

The U.S. Economy Will Soon See Its Best Years in a Decade, Forecasters Say – Real Time Economics
Josh Zumbrun – WSJ
The White House, Congressional Budget Office and Federal Reserve unanimously see the nation on the cusp of the best years for the economy in a decade or more.
In its latest round of economic forecasts, released Monday with the president’s budget, the White House sees the unemployment rate falling below 5% by the end of 2016, the lowest since before the recession. The White House sees growth of 3% this year and in 2016–the best back-to-back years since 2004 and 2005.


Citigroup Removed Its Swiss Franc Hedge at the Worst Possible Time
by Julia VerlaineDakin Campbell, Bloomberg
Citigroup Inc.’s loss on a surge in the Swiss franc this month was exacerbated by the bank’s decision to let protections against currency swings lapse a week earlier, according to people with knowledge of the situation.

NSE extends fee discount for currency futures, equity options
The Economic Times
Leading bourse National Stock Exchange (NSE) has extended discount of up to 50 per cent in transaction charges for trading on its currency derivatives platform and in equity options segment for two more months.
The NSE in November had announced concession in transaction charges for currency futures trade and equity options segments. These were applicable from December 1 and continued till January 31, 2015.

Currency War Claims Another Casualty: Denmark
Mark Gilbert – Bloomberg
After half a decade of growing ever sleepier, the currency market has started the year with its most volatile period since 2011. As the victims of the Swiss franc detonation lick their wounds, Denmark is battling to avoid its krone becoming the next victim of the global currency wars, wielding a combination of negative interest rates plus market interventions to sell its own currency plus scrapping government bond sales as it defends its peg to the euro. I’ve seen this movie before; it never ends well.

Barclays Expects Euro Parity with Dollar by Year-End
MoneyBeat – WSJ
The euro is likely to reach parity with the dollar by the end of this year, Barclays says.
A stronger-than-expected reaction to the European Central Bank’s asset-purchase program and increased risks of a crisis to the euro bloc have added to the pace of the common currency’s downward trajectory, says Barclays’ currency research group in a note to clients.

Indexes & Index Products

When It Comes to VIX, What is ‘Normal’?
Adam Warner – Schaeffer’s Investment Research
Another week, another CBOE Volatility Index (VIX) PANIC ATTACK! But yet it’s not really a panic. The market is so prone to bigger ranges and reversals and plus-1% drops nowadays, it’s tough to call it unwarranted. In fact, it’s downright sane.
VIX closed at about 21 last week, but yet did not register an “official” overbought signal yet. It closed Friday 13% above its 10-day simple moving average (SMA). Let’s call it “elevated but orderly.”

Spain and Italy weigh on European indexes amid nerves over Greece
Francesco Canepa – Reuters
Spanish and Italian shares weighed on European equity indexes on Monday as investors grew more worried about the possible ramifications of Greece’s debt negotiations for the rest of the euro zone periphery.
In its first week in office, Greece’s new government has made clear it wants to end its existing funding arrangement with the European Union, European Central Bank and International Monetary Fund “troika” when it expires on Feb. 28.

The Danger of Indices
We’re surrounded by investment products that track indices. S&P 500 index funds seek to replicate the performance of the S&P 500 index – easily accomplished by simply buying the constituent stocks in designated weights. Other indices are more difficult to track – for example when the product invests in futures to approximate spot market returns (GSCI) or acquires only a subsample of index constituents (Barclays Ag).


Chinese banks to join new gold fix from March
By Henry Sanderson, FT
The replacement for the near-century-old London gold fix will start in March, with the hope of attracting at least 11 members, including Chinese banks for the first time.

ICE Benchmark Administration to Administer the LBMA Gold Price from March 2015; LBMA Gold Price to replace the London Gold Fix
Press Release – ICE
Intercontinental Exchange (NYSE:ICE), the leading global network of exchanges and clearing houses, and the London Bullion Market Association (LBMA), have today announced that the new LBMA Gold Price, which replaces the long established London Gold Fix, is expected to be launched in March 2015. As announced by the LBMA in November 2014, ICE Benchmark Administration (IBA) will officially become the administrator of the new pricing mechanism.
As the administrator for the LBMA Gold Price, IBA will transition to a physically settled, electronic and tradeable auction, with the ability to participate in three currencies: USD, EUR and GBP. Within the process, aggregated gold bids and offers will be updated in real-time with the imbalance calculated and the price updated every 30 seconds. IBA will use ICE’s widely distributed front-end, WebICE, as the technology platform which will allow direct participants, as well as sponsored clients, to manage their orders in the auction in real time via their desktops.

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