First Impressions

New Year, New Newsletter?
Being the start of a New Year it is only natural to look at the state of things and see where improvements can be made. It is no different here at John Lothian News. We are taking a look at our newsletter offerings and considering what we can do better with them.

While we certainly have ideas of our own it is helpful to hear from our readers and listen to their likes and dislikes and wishlists. So, if you’re of a mind to, drop me an email (link in the banner) and tell me what you do or do not like and what you’d like to see in future newsletters.

Thanks in advance for your time!

Quote of the Day

“If you look back at the public speeches that have been made by the Federal Reserve officials from the chair, Janet Yellen, on down to some of the governors, there is an indication about some concern about some of the emerging excesses in the financial markets.”

Henry “Dr. Doom” Kaufman in the story, “‘Dr. Doom’ to investors: Preserve liquidity and watch for bubbles”.

Lead Stories

Bats Says Exchange Fee Cuts Would Save $850 Million for Traders
By Sam Mamudi – Bloomberg
Another leading stock exchange operator has a plan to improve the $24 trillion U.S. equity market. Bats Global Markets Inc. suggested a reduction in fees for buying and selling some stocks that could produce industry savings exceeding $850 million for the most-active shares, according to a statement today. The Lenexa, Kansas-based company also said there should be a review of how brokers report where they send stock orders and what standards they use in making those decisions.
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Bill Gross Calls It: 2015 Is Going to Be Terrible
By Ben Steverman, Bloomberg
Bill Gross, bond king, ousted executive, self-styled poet of the markets, has a bold, depressing prediction for 2015, and he’s not couching it in any of his usual metaphor: “The good times are over,” he wrote in his January investment outlook note. By the end of 2015, he goes on, “there will be minus signs in front of returns for many asset classes.”
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‘Dr. Doom’ to investors: Preserve liquidity and watch for bubbles
Jonnelle Marte – The Washington Post
Henry “Dr. Doom” Kaufman has lifted some of the gloom from his outlook. But he still has a word of caution — or two — for investors.
The economist who earned the nickname for making dark calls on inflation and interest rates during the 1970s and 1980s says the U.S. economy may have finally turned a corner after the Great Recession. But Kaufman, 87, formerly a managing director at Salomon Brothers and an economist with the Federal Reserve Bank of New York, says that the Federal Reserve now has to watch out for bubbles.
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Bonds Look ‘Dangerous’ at 300-Year High, Charteris Says
Anchalee Worrachate – Bloomberg
The 40-year bull market in fixed income will end soon, with interest rates set to rise and lower oil prices boosting growth, according to Ian Williams, Chief Executive Officer at Charteris Treasury Portfolio Managers.
“Bonds are a highly-dangerous asset class which carry heavy asymmetric risk versus any likely reward,” Williams said in an e-mailed statement. “Buying any asset at 300-year highs carries huge risk,” he said, referring to U.K. government bond yields that he said are the lowest since at least 1703. Charteris manages about 100 million pounds ($151 million).
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Soaring Bond Prices May Sound an Economic Warning
By Peter Eavis, NY Times
The United States economy is accelerating, unemployment is falling and wages are even beginning to creep higher. Yet a huge bond market with a strong track record for predicting economic problems is flashing a warning sign right now.
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Pimco Cuts Access to Some Quarterly Investment Reports
By Landon Thomas Jr., FT
The bond giant Pimco has removed from its website the quarterly investment reports of two large mutual funds that were managed by William H. Gross before he was forced to leave the firm last year.
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The Quants on the Left Bank: How Paris-Based Physicists Used Algorithms to Get Big Returns
By Jeremy Kahn and Lindsay Fortadom, Bloomberg
Paris is famous as the home of philosophers, scientists and mathematicians. Today, thousands of students traipse through the city’s Left Bank on their way to classes at the Universite Pierre et Marie Curie and the Ecole Normale Superieure.
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Group of Financial Institutions Settles MF Global Suit; Goldman, J.P. Morgan, Citigroup Among Firms in Settlement
By Joseph Checkler, Wall Street Journal
A group of well-known financial institutions settled a lawsuit brought by former MF Global Holdings Ltd. investors for $74 million.
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Finra to investigate US bond trading
Tracy Alloway – FT
A top regulator for the US brokerage industry said it would begin examining the bond market, including the operations of electronic debt trading platforms that were proliferating as investors seek new ways of trading fixed-income securities.
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Finra to Probe Broker Conflicts When Exchanges Offer Rebates
By Dave Michaels, Bloomberg
The brokerage industry’s self-regulator will spend 2015 looking into whether deals between brokers and exchanges are taking money out of investors’ pockets, regulators said in a letter outlining the year’s oversight priorities.
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Derivatives markets brace for Basel III margin crunch in 2015
by Elliott Holley, Banking Technology
Derivatives market participants are concerned about the impact of new margin requirements for non-cleared derivatives under Basel III, with a large number unsure whether they will even have to comply with the rules, according to new survey by the International Swaps and Derivatives Association.
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The Rise and Fall of Merrill Lynch, and the Lessons Learned
By Paul Vigna, WSJ
On this day in 1914, a young securities broker named Charlie Merrill opened up shop in a subletted room at 71 Broadway in lower Manhattan, naming the one-man firm Charles E. Merrill & Co. It was an inauspicious start for a company that would come to change the face of Wall Street – only to be swallowed whole by Wall Street at its worst nearly a century later.
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Central Banks

Yellen Tells Bond Bulls Not to Pay Too Much Attention to Oil
Lisa Abramowicz – Bloomberg
Federal Reserve Chair Janet Yellen is telling U.S. bond bulls they shouldn’t be so complacent just because oil is plummeting.
That’s bad news for traders who’ve been piling into debt.
Her message: Any drag on inflation may be only temporary and not enough to derail the central bank’s plans to raise interest rates from near zero this year.
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Fed looks past a world in turmoil, confident in U.S. recovery
Howard Schneider – Reuters
U.S. central bankers have looked beyond a global deflation threat, fear of energy-sector bond defaults, and a surge of oil patch layoffs to reach what appears to be a firm conclusion: the U.S. recovery is here to stay.
New trade data released on Wednesday and signs of ever-stronger consumer spending confirmed the United States remains the bright spot in a global economy plagued by uncertainty.
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Obama’s Choice for Fed Is a Nod to Smaller Banks
Binyamin Applebaum – NY Times
President Obama said on Tuesday that he would nominate Allan R. Landon, the former chief executive of one of the largest banks in Hawaii, to a seat on the Federal Reserve’s Board of Governors.
Mr. Landon’s selection comes after months of pressure by the community banking industry, which is regulated by the Fed and which has argued that the Fed’s seven-member board should include at least one person with relevant experience of that sector.
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Derivatives Show Traders Are Undeterred on Rates by FOMC Minutes
Liz Capo McCormick – Bloomberg
Derivatives show minutes from the Federal Reserve’s last meeting did little to alter traders’ expectations that policy makers will begin raising interest rates this year. That’s where the similarities on the outlook for rates between the bond market and the central bank ends.
Federal funds futures show a 59 percent chance of the Fed raising its near-zero policy rate in September, little changed from before the release of the Dec. 16-17 meeting minutes. For the years ahead, traders see the Fed increasing rates to only about half the 3.75 percent peak level policy makers predict.
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Fed Minutes Show Rate Rise Unlikely Before April
Christopher Condon and Jeff Kearns – Bloomberg
The Federal Reserve confirmed that being “patient” on interest rates means no increase before late April, while expressing concern that inflation might continue to linger below its goal.
Most members of the Federal Open Market Committee thought a patient stance “indicated that the committee was unlikely to begin the normalization process for at least the next couple of meetings,” according to minutes of the Dec. 16-17 gathering released today in Washington.
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Fed Will Continue Reverse Repo Tests Through January 2016
Michael S. Derby – WSJ
The Federal Reserve in December authorized another year of tests for a program designed to set a floor under short-term interest rates, while shelving another idea it had considered to help it raise rates when the time comes.
The Fed decided at its policy meeting last month to continue experimenting with its so-called overnight reverse repurchase facility through Jan. 29, 2016, according to minutes of the meeting released Wednesday.
The program had been set to end this month.
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Currencies

Even Dairy Farmers Get Squeezed by Rigging in the $5.3 Trillion Currency Market
Gavin Finch and Julia Verlaine – Bloomberg
Ed Gribble gets up at 5 every morning regardless of the weather to feed the 180 cows on his farm in Sussex, a rural idyll on the south coast of England, adjacent to where economist John Maynard Keynes once lived.
Gribble, whose family has toiled on this land for three generations, works more than 13 hours a day and uses the highest-yielding breed and most up-to-date farming techniques. Still, he barely scrapes a profit as a glut in supply and slackening demand push the price of milk below his production cost. If it weren’t for the subsidy he gets from the European Union, he’d have to sell his Holstein Friesian cows.
jlne.ws/14ndUT1

Rouble’s woes spread to other ex-Soviet currencies
Marc Jones – Reuters
Falling energy prices and the plunge in the Russian rouble are hitting currencies across the former Soviet states, with Belarus and Turkmenistan having already devalued this week and markets betting that Kazakhstan will follow soon. Countries of the former Soviet Union have had their own currencies for two decades but many still depend on Russia, both for trade and for money sent home from workers living there.
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Merkel Backs Greece Staying in Euro If It Pursues Reforms
Patrick Donahue – Bloomberg
German Chancellor Angela Merkel backed keeping Greece in the euro area, saying she has consistently sought to avoid the most-indebted nation’s exit from the currency bloc.
“We need to tell people, and to some extent market participants, that the chancellor and the German government have always acted in such a way that Greece remains in the euro area,” Merkel said in London today. It was her first public comment on Greece since Der Spiegel magazine reported this week that her government was ready to let the country leave the euro.
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Euro Drop a Turning Point for Central Bank Reserves
Lananh Nguyen – Bloomberg
Central banks and reserve managers are breaking from past practice by showing little appetite to add euros as the currency tumbles.
The total amount of reserves held in euros fell 8.1 percent in the third quarter, more than the currency’s 7.8 percent decline in that period against the dollar, according to the most recent figures from the International Monetary Fund. The last two times the euro depreciated 7 percent or more in a quarter — in 2011 and 2010 — holdings declined far less.
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Emerging currencies face bumpy year but much already priced in: Reuters poll
Silvio Cascione – Reuters
Emerging market currencies will stay under pressure in 2015, a Reuters poll found, though they may not fall as much as last year as lower commodity prices and tighter monetary policy in the United States could be largely priced in already.
All major emerging market currencies except the Mexican peso MXN= are set to drop further this year, according to the median views of more than 80 strategists and economists polled.
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Indexes & Index Products

NASDAQ OMX Adds To Indexing Business With $225 Million Acquisition
Forbes
NASDAQ OMX Group, one of the most well-diversified global stock market operators, recently announced the acquisition of American index and analytics provider Dorsey Wright & Associates for $225 million with an intent to expand its exchange-traded fund trading and indexing business. According to NASDAQ management, the acquisition will contribute to the upcoming earnings in late January, and should not impact capital return plans.
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Alternative Funds and Indexes Make Finra’s Short List of Concerns
Chris Dieterich – Barron’s
The Financial Industry Regulatory Authority, a top regulator for brokers, outlined concerns with some of the fund industry’s hottest products in its annual examination priorities framework for 2015.
Alternative funds and indexes both made the list, a heads-up to the industry that Finra is watching specific products and/or sales and distribution practices. The Wall Street Journal’s Karen Damato reported on the list Monday.
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How to Trade the VIX; Profit From Volatility
Steven M. Sears – Barron’s
A view is emerging across Wall Street that sudden spikes in options volatility should be sold in anticipation of sharp moves lower.
These “volnado” trades, as we have called them, are based on the view that investors are overreacting to tremors in global markets and are too worried about what could happen in America.
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