First Impressions

A Whirlwind Trip to SEFCON
by Douglas Ashburn, John Lothian News

This past Sunday, I flew to New York for Monday’s SEFCON IV, the fourth annual get-together of swap execution facility (SEF) participants and the regulators who oversee this market. It was a whirlwind trip, literally and figuratively. I fought through pounding storms and tornadoes in order to get to the conference and, once I settled into the venue, I was reminded that the SEF regulatory environment is still, three years after the passage of Dodd-Frank, subject to a few weather disruptions of its own.

In between panels on technology, regulation and market structure, John Lothian News interviewed about a dozen SEF operators, service providers and regulators, and what we found was that, while much progress has been made in the three years since SEFs were created by the Dodd-Frank Act, and while SEFs are officially “open for business” (the theme of this year’s conference), the atmosphere is still a bit unsettled – stormy, if you will.

To read the rest of the commentary, visit the John Lothian News site at

Quote of the Day

“In the non-financial part of the system [rational economic theory] works very well,” he says. But money is another matter: “Finance is wholly different from the rest the economy.”

Alan Greenspan in the story, “An interview with Alan Greenspan”.

Lead Stories

China PBOC Unveils Prime Interest Rate for Commercial Bank Loans
China’s central bank Friday said it has introduced a new prime lending rate, which it said would help push forward interest rate liberalization. The new bank lending rate, officially known as the “loan prime rate,” would be the rate on loans extended to the best customers of Chinese commercial banks.

Fed Proposes a Rule to Help Big Banks Stay Liquid in Times of Crisis
During the financial crisis of 2008, the big banks fell dangerously short of cash, forcing them to take out enormous government loans to survive the tumult. To help prevent another giant cash squeeze, federal regulators on Thursday proposed a rule that requires big banks to hold a set amount of assets that they can quickly turn into cash.
***DA: No matter what this collateral consists of, unless it is actual cash, there will be another mad dash to cash during a systemic crisis. And, once again, there will only be one entity on the planet large enough to stop the bleeding – the U.S. government.

Loeb’s Third Point Cautious About Abenomics’ ‘Third Arrow’
Kana Inagaki – MoneyBeat – WSJ
One of the big foreign hedge funds that have been bullish about Prime Minister Shinzo Abe’s visions of renewed Japanese economic growth is now raising a cautionary flag about the so-called “third arrow” of his economic program.
***DA: I thought this was a free lunch; why are you sending me a bill?

An interview with Alan Greenspan
Gillian Tett –
A couple of years ago I bumped into Alan Greenspan, the former chairman of the US Federal Reserve, in the lofty surroundings of the Aspen Institute Ideas Festival. As we chatted, the sprightly octogenarian declared that he was becoming interested in social anthropology – and wanted to know what books to read.
***DA: Greenspan started out as an avid pupil of Ayn Rand. Did he need to look further?
***JB: I would suggest –  Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.  Not really anthropology but something a monkey should have been able to understand so one wonders how Greenspan missed it.  Oh right…Ayn Rand disciple.

ETFguide: Are VIX Traders Riding the Wrong Roller Coaster?
Ron DeLegge, Editor – ETF Guide
Trading stock market volatility is not for the faint of heart. And if you’re a volatility trader, you’ve either personally experienced or are at least aware of the performance discrepancies between the CBOE S&P 500 Volatility Index and VIX exchange-traded products like the iPath S&P 500 VIX ST ETN.
***DA: Actually, the VIX has been more of a toboggan run for the last few years.

Markets Are Neither Efficient Nor Irrational (Part 1)
John Overstreet – Seeking Alpha
In a brief telephone interview shortly after the announcement that Lars Peter Hansen, Eugene Fama, and Robert Shiller were to be awarded the Nobel Prize “for their empirical analysis of asset prices,” Shiller said that our understanding of those prices is “very much a work in progress….(W)e’ve learned a lot about asset pricing, but there is a basic human element in it that is irreducible….(T)he field of finance will never completely understand asset pricing movements.”John Overstreet
***DA: Yet we will still try to develop models to predict the market and human behavior.

Central Banks

Why the Bank of England must gamble on growth
Martin Wolf –
For only the third time since the late 1800s – and the other two were just after the world wars – the UK’s private sector productivity has fallen over five years. This is why unemployment has remained low. It is also why the coalition government got away with three years of economic stagnation. With normal performance, unemployment would now be more than 15 per cent. But this experience raises questions. What are the UK’s economic prospects? What should policy do?

Reserve Bank of India faces a difficult choice
Business Standard
Ahead of the Reserve Bank of India (RBI) policy, both the domestic and global backdrops remain considerably uncertain. Growth momentum is weak and is likely to remain so in the coming quarters.

The UK At The Heart Of A Renewed Globalisation – Speech Given By Mark Carney, Governor Of The Bank Of England At An Event To Celebrate The 125th Anniversary Of The Financial Times, London, 24 October 2013


EM currency notes finding buyers even after rout
Yakob Peterseil –
Structured notes linked to emerging market (EM) currencies are finding buyers, even as the currencies remain volatile following the rout during the second and third quarters of this year. The temptation is coming largely from attractive prices in the forwards market, sources say, as well as clients’ long-term bullishness on EM economies compared to developed markets such as Europe.

Currency Talk: Dollar Weakness Here to Stay Amid U.S. Uncertainty
Erin McCarthy – MoneyBeat – WSJ
The reign of king dollar is over for now, says Komal Sri-Kumar, president of Sri-Kumar Global Strategies, Inc. and chairman of the asset allocation committee at TCW Group Inc.

This is your euro on AQR
David Keohane | FT Alphaville
Consider this from Morgan Stanley’s FX team: EMU-based banks are preparing for the Asset Quality Review, which will reference year-end balance sheets. Ahead of the event, equity weak banks have a high incentive to reduce the asset side of the balance sheet, using proceeds to add to equity positions. Foreign funds stand ready to snap up these assets at discounted prices.

S Korean won tumbles after Seoul warns of intervention
Delphine Strauss –
South Korea warned on Thursday that it would intervene to stop its currency strengthening too far, as the weak dollar fuelled a rally in emerging markets.

Bitcoin endorsed by top hedge fund manager
Stephen Foley in New York –
Financial advisers who gathered in New York to hear leaders of the asset management industry impart their best investment ideas for the year ahead were given a surprising tip by one prominent hedge fund manager: Bitcoin.

Indexes and Index Products

Performance of VIX ETPs During The Recent Debt Ceiling Crisis
Since the first big wave of VIX ETPs hit in 2010, I have periodically plotted all these products on a grid that used the y-axis for leverage and the x-axis for target maturity. While the initial intent was to highlight roll yield risk and leverage/compounding risk, over time I was unable to resist the urge to indicate which ETPs were optionable, which had both long and short legs, which had legs that were dynamically allocated, which had non-VIX components, etc.

Firing Line: Liz Wright
Daniel Liberto –
Since starting her new job at ETF Securities at the end of last month, Liz Wright has already announced ambitious plans to make exchange-traded products as popular to retail investors in the UK as they are in the US.

Are Emerging-Market ETFs Safe?
Joseph P. Porter – Seeking Alpha
Several years ago my portfolio included an emerging market ETF, Vanguard’s (VWO), but with the onset of the recession I consolidated my holdings into a few ETFs that seemed safe, and an emerging markets ETF no longer struck me as a viable candidate. With the general air of uncertainty that has clouded over many foreign markets I thought it best to avoid re-introducing them to my holdings – at least for the time being. The question now is: is an ETF that focuses on emerging markets a good investment?

Foreign Bond ETFs: Strategist See A Role For Them In Portfolio
With interest rates in an uptrend in the U.S. and lots of volatility and uncertainty in the U.S. markets, adding international fixed-income ETFs to one’s portfolio can be a useful diversification strategy. International bonds are something for investors to consider, especially buying bonds in developed countries of Europe and Japan, said G. David MacEwen, chief investment officer and senior portfolio manager for American Century Investments.


A Piece of the Gold Puzzle Falls into Place
David Franklin – Market Strategist, Sprott Asset Management
2013 has been the year that China has lit the physical gold market on fire; however you would never know from the metal’s price performance. While the price of gold has fallen more than 20%, bullion flow to the East has been nothing short of spectacular. Recently published data supports our presumption that physical gold was indeed flowing from ETF liquidations with a significant amount heading East.

Indian Buyers Paying a Premium Price for Gold
Biman Mukherji and Debiprasad Nayak –
Choked-up supplies and festival-season demand are leading Indian gold buyers to pay big margins over its international price to ensure immediate delivery.


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