First Impressions

For today’s top spot in the newsletter, we would like to feature a piece written a couple days ago by Henry Schwartz, CEO of Trade Alert, who this week is acting as “guest editor” of the JLN Options newsletter. Schwartz, who founded the option flow analytics company in 2005, reminisces on his early days on LaSalle Street, and how he used the experience to shape the philosophy of Trade Alert. According to Schwartz, the transition to electronic, anonymous execution did not quell the desire for “market color” to pass on to clients. It just made it more difficult.

Says Schwartz, “it’s important to remember that most of the flow originates with people who do their homework and ‘pull the trigger’ on trades” and that the human part of the equation is perhaps more important today than ever.

Read Schwartz’s commentary, “Give the People What they Want” >>>

If you like what you see in the options newsletter, I encourage you to subscribe for free here >>>

Quote of the Day

“The new guidance will keep the market guessing. It will create more uncertainty in the market than when it’s linked to unemployment. The problem with forward guidance is that some in the market take it as a promise.”

Salman Ahmed, global strategist at Lombard Odier Investment Managers in the story, “Carney Fuels Record U.K. Interest-Rate Bets With Policy Guidance”.

Lead Stories

ECB Considering Negative Deposit Rate
The European Central Bank is “seriously” considering taking its rate on overnight bank deposits into negative territory, a top member of its executive board said Wednesday, adding to mounting speculation that the central bank will act at its next policy meeting to keep the tepid euro-zone economy on track.

***DA: I am setting up a company that sells safes that fit comfortably inside your mattress.

Exclusive: EU executive sees personal savings used to plug long-term financing gap
The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis, an EU document says.

***DA: What a dandy of an idea. Why didn’t we think of that sooner?

The Dangers of Central Bank Flip Flops on Forward Guidance
MoneyBeat – WSJ
Last year, central bankers enthusiastically embraced a new communications strategy: they would set guideposts for when they expected to change future policy so that markets could better price in the likely timing and pace of changes in monetary conditions. Now, little more than a month into 2014, the whole forward guidance thing is out the window. That isn’t good for central bank credibility.

***DA: It can’t be called guidance if it has no power to guide.

The End of Erdogan-omics
Piotr Zalewski | Foreign Affairs
Turkish Prime Minister Recep Tayyip Erdogan is no fan of high interest rates. He has repeatedly argued that his country’s central bank should keep real lending rates at or near zero.

Cruz Demand on Debt Limit Puts McConnell in Tough Spot
Kathleen Hunter – Bloomberg
Senate Republican Leader Mitch McConnell’s vote yesterday to clear the way for Congress to lift the federal debt ceiling made the U.S. Chamber of Commerce’s task of helping him win re-election a lot harder.
And, according to McConnell’s allies, one of their own is to blame: Senator Ted Cruz of Texas.

***JB: This is what happens when you let the lunatics run the asylum.

The Long and Short of It: The Impact of Unemployment Duration on Compensation Growth
M. Henry Linder, Richard Peach, and Robert Rich – Liberty Street Economics
How tight is the labor market? The unemployment rate is down substantially from its October 2009 peak, but two-thirds of the decline is due to people dropping out of the labor force. In addition, an unusually large share of the unemployed has been out of work for twenty-seven weeks or more—the long-duration unemployed. These statistics suggest that there remains a great deal of slack in U.S. labor markets, which should be putting downward pressure on labor compensation. Instead, compensation growth has moved modestly higher since 2009.

***DA: Which is why the Fed needed to move the goal posts and add an inflation metric.

Bund yields drop on disinflation fears
Jamie Chisholm –
Will there be Eurolove on Saint Valentine’s Day? Friday, February 14, will see a continent-wide batch of fourth-quarter GDP reports hitting traders’ screens.

Municipal bond investors return after mini-break following Detroit
Vivianne Rodrigues in New York –
Just seven months after the biggest municipal bankruptcy in US history, investors are back for more. The $4tn US municipal bond market has become one of the best performing asset classes this year, reversing a wave of redemptions after Detroit’s $18.5bn bankruptcy last July.

***DA: No fear.

Behold the new, new economy?
Izabella Kaminska | FT Alphaville
Or as the FT’s Martin Wolf says on Wednesday, regarding the increasing automation of the economy … [W]e must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?

***DA: In my neighborhood we have middle-aged professionals who have been out of work for several years, and others of equal aptitude and experience who work 70-hour weeks.

Ratings bias slap-back smackdown watch
Dan McCrum | FT Alphaville
So, after we wrote about a paper by two economists at the University of Heidelberg that attempted to discern an empirical basis for accusations of bias in rating agency opinions, Standard & Poor’s fought back.

***DA: So journalists are attempting to discern whether a paper that was written to discern whether ratings agencies, whose job is to discern creditworthiness, is being discerned by a ratings agency.

Central Banks

Carney Fuels Record U.K. Interest-Rate Bets With Policy Guidance
Anchalee Worrachate – Bloomberg
Mark Carney’s guidance on the path of U.K. monetary policy, designed to provide investors and consumers with greater certainty, is instead stoking record speculation on future interest rates.

China issues rules to limit bond investment by shadow bank products
China’s central bank published rules on Thursday governing investment by wealth management products (WMPs) in the country’s bond market, in a move aimed at containing risks posed by banks’ off-balance-sheet business.

Pimco’s Gross: BOE to Hike Rates Before Fed
Min Zeng – MoneyBeat – WSJ
Bill Gross is among a growing chorus of investors and analysts betting on the Bank of England to be the first of the major developed nations to raise short-term interest rates.

How Mark Carney is ‘Canadianizing’ the BOE
Jason Douglas – MoneyBeat – WSJ
Scotiabank’s Derek Holt and Dov Zigler have an interesting take on Wednesday’s Bank of England inflation report. To recap, Gov. Mark Carney ditched the explicit link between interest rates and unemployment that officials established in August and said that in future the Monetary Policy Committee will look at a whole range of labor market and other indicators (18 to be exact—see table 2 and 3 here) to assess whether their policy stance is appropriate.

Unfazed by market rout, BOJ to signal confidence on inflation goal
The Bank of Japan, unfazed by the latest emerging market rout, is set to stand pat on monetary policy next week and stick to its rosy economic assessment, signaling that any additional monetary stimulus may be some time away.

***DA: Everything is fine and dandy.


Seven banks face new forex market-rigging claims in lawsuit
Daniel Schäfer and Madison Marriage in London –
Seven global banks including Barclays and UBS face new claims of alleged foreign exchange market manipulation in the first US class-action lawsuit to include original research that highlights unusual price spikes in euro, sterling and other major currencies.

***DA: The lawyers win again, as usual.

Britain warns Scotland: Forget the pound if you break away
Britain will warn Scotland on Thursday it can’t keep the pound if it votes for independence, its boldest attempt yet to scuttle a nationalist bid to break the 307-year-old union with England.

***DA: Can’t have your pound cake and eat it, too.

RBI to come out with considered view on bitcoin, says Rajan
Business Standard
Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday said the central bank was trying to understand virtual currencies in a better manner, adding RBI would “come out with a more considered view on it”.

Aussie’s Gain to Yen Seen Illusory in Momentum: Market Reversal
Kristine Aquino and Hiroko Komiya – Bloomberg
The Australian dollar is poised to reverse its advance to a one-month high against the yen, trading patterns suggest, after the currency pair tracked a recovery in investor appetite for riskier assets.

BitBeat: Alt.Coins Bitten by Same Bitcoin Bug
MoneyBeat – WSJ
We’re not seeing especially large fresh demand for the alt.coins — at least not yet. Why not? Well, besides the fact that many don’t trade on the biggest exchanges and that the two that do — Litecoin and Namecoin — are also trapped by a withdrawal freeze at BTC-e, a more fundamental problem is that most are built right off the same protocol on which bitcoin is based.

Indexes & Index Products

BlackRock expands retirement business with new bond funds
BlackRock Inc, the world’s largest money manager, is expanding its push into the retirement market with a new set of bond funds tied to indexes that track an individual’s expected annual retirement income once he or she reaches age 65.

MSCI reclassifies stocks in Asian and emerging market indexes
Index provider MSCI reclassified equities across a broad spectrum of Asian and emerging markets as part of its February semi-annual index review.

Low-Vol Indexes A Smoother Ride
David Koenig –
As investors continue to seek ways to help manage volatility within their portfolios, indexes focused on low-volatility stocks have gained increasing interest in recent years. It makes sense to the extent that investing in funds that use such indexes make for a smoother ride.


Gold starts to glitter for Berenberg’s Stefan Keitel
Mike Foster – Financial News
Stefan Keitel, chief investment officer at Berenberg and one of Europe’s best-known strategists, has cash to play with following a bearish call on equities in November, and is keeping a close eye on gold.

The real reason the Chinese are mad for gold
Izabella Kaminska | FT Alphaville
It’s not an easy concept for some gold lovers to grasp, but… a nation importing huge amounts of gold into its economy doesn’t necessarily reflect prosperity on its part. In fact, it can imply economic weakness around the corner.

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