First Impressions

The Fed’s Bridgebuilder?
by Doug Ashburn

What would it mean to have Stanley Fischer as vice-chairman of the Federal Reserve? More hawkish or more dovish? Is it a bold move or a safe pick? Will he, to paraphrase Obi-Wan Kenobi, “bring balance to the force” by acting as a bridge between Janet Yellen and the hawkish wing, which becomes more prominent on the FOMC in 2014?

The man looks like a middle-of-the-road pragmatist, with plenty of experience at the central bank level as well as in the private sector. He has called QE “dangerous but necessary” and seems to be more willing to discuss the unintended consequences of zero interest rates and a bloating of the Fed’s balance sheet. That alone makes him OK in my book.


Quote of the Day

It’s not unusual for indexes to outperform the managers consistently over time. You’re not going to find from me an argument against indexing, by both professional or large investors, as well as small investors.

Hugh Johnson of Hugh Johnson Advisors in the story, “Fire Your Fund Manager: Stock Indices Trounce Portfolio Pros”

Lead Stories

Fire Your Fund Manager: Stock Indices Trounce Portfolio Pros
Matt Nesto – Yahoo Finance
By any measure, 2013 looks set to be another great year for stocks. In fact, if the final three weeks go well, it could the best 12-month jaunt for the large cap benchmark index (^GSPC, SPY) since a 31% gain in 1997.

***DA: You mean investors are wising up to the fact that paying extra fees to a manager so he can underperform the S&P 500 is a bad play?

For No. 2 at Fed, White House Favors Central Banker in the Bernanke Mold
Stanley Fischer, the former governor of the Bank of Israel and a mentor to the Federal Reserve’s chairman, Ben S. Bernanke, is the leading candidate to become vice chairman of the Fed, according to former and current administration officials.

***DA: Not my place to say but I would think having Citi’s vice chairman during the leverag-up days (2002-05) would be bad politics.

Relaxed Chinese Capital Controls Carries Potential for Reward and Risk
Jason Douglas – MoneyBeat – WSJ
Dismantling restrictions on the flow of capital across China’s borders would be a boon for the global economy, but could also pose risks to the stability of the financial system if not properly managed, according to a paper published Thursday by the Bank of England.

***DA: So capital flowing from an emerging market could create capital imbalances in the developed world? Sounds like turnabout is fair play.

Wall Street Reacts to Budget Deal: Tapering Odds Increase
Steven Russolillo – MoneyBeat – WSJ
The budget agreement reached by Congressional leaders brings a dose of stability to fiscal policy, but Wall Street is giving it a lukewarm reception as the deal did nothing to address the debt ceiling looming early next year.

***DA: Good news is bad again. I guess last Friday’s rally was a one-off event.

Japan cabinet approves $53 bln extra budget to fund stimulus
Japanese Prime Minister Shinzo Abe’s cabinet approved on Thursday a $53 billion extra budget for the current fiscal year to fund stimulus steps announced last week aimed at offsetting the blow from a planned increase in the national sales tax.

***JB: Let’s see…a regressive, anti-stimulative tax increase to pay for stuff. Diplo-speak at its finest.

Have you noticed? Equities are the new bonds
Paul Murphy | FT Alphaville
We’ve infiltrated Citi’s European Credit Conference, underway in Westminster on Thursday. Updates follow, until we’re thrown out.

It’s all been about QE
Paul Murphy | FT Alphaville
The key news, on the ground, is that several speakers have fallen foul of the fog. Lots of flights into Heathrow have been cancelled. But we’ve had an opening address from Citi’s head of credit strategy, Matt King. Message: ‘Be modestly long the riskiest assets; trash is good, but position yourself close to the exit.’

***DA: My concern is that everyone in this market is thinking the same thing – pile on until the market turns, then hit that big red button and get out.

Bondholder Hypo-thermia, in Austria
FT Alphaville
These are some mountains in Carinthia, Austria. Bucolic. That, meanwhile, is the logo of Hypo Alpe Adria, a regional lender rescued by the Austrian government in 2009, and which has now sprung another, €800m black hole… and it is just possible that the name is going to be as memorable as Amagerbanken or SNS Reaal for European banks’ bondholders. Potentially it may be a less than bucolic precedent for sovereign debt, too.

Japan’s GPIF Must Cut Bonds, Change Governance, Ito Says
Anna Kitanaka, Yoshiaki Nohara and Shigeki Nozawa – Bloomberg
The world’s largest manager of retirement savings should reduce holdings of domestic bonds and create a board of directors to replace the current governance structure, an expert panel told Japan’s ruling party.

Pope attacks mega-salaries and wealth gap in peace message
Philip Pullella – Reuters
Pope Francis said in the first peace message of his pontificate that huge salaries and bonuses are symptoms of an economy based on greed and inequality and called again for nations to narrow the wealth gap.

Central Banks

Fischer Seen Bringing Crisis-Fighting Skills to No. 2 Fed Post
Joshua Zumbrun and Rich Miller – Bloomberg
Stanley Fischer, said to be the leading candidate for the No. 2 job at the Federal Reserve, offers crisis-fighting experience and a dose of skepticism about efforts to shape expectations on the outlook for interest rates.

Fans of ECB Quantitative Easing Gain a Strong Friend
Brian Blackstone – MoneyBeat – WSJ
Advocates of large-scale asset purchases by the European Central Bank, known as quantitative easing, have picked up a strong ally: the chief economist of Germany’s largest bank.

More ECB action not ruled out but not needed for now: Coeure
The European Central Bank has not ruled out further moves to help the euro zone but they are not needed for the moment, one of the bank’s top policymakers, Benoit Coeure, said on Wednesday.

RBI to introduce steps to bolster bond market: Rajan
Business Standard
Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday cautioned that tapering of the US’ bond-buying programme by the Federal Reserve might have unexpected results, but added India was prepared for it. He said the central bank would bring measures to augment liquidity in the debt market in coming weeks.


New Zealand Central Bank Joins Others in Warning on Bitcoins
Rebecca Howard – MoneyBeat – WSJ
New Zealand’s central bank is wading into the debate about bitcoin, urging the country’s banks and businesses to exercise caution with the virtual currency.

Bitcoin Believers See a Role for Wall Street
A venture capitalist, a former regulator, a lawyer and a pair of entrepreneurs — Bitcoin evangelists all — gathered on Tuesday in the private dining room of an upscale Manhattan restaurant to discuss their vision of a world in which the currency plays a role in mainstream finance.

Bitcoin Startup Gets $25 Million in Andreessen-Led Funding Round
Carter Dougherty and Max Raskin – Bloomberg
Coinbase Inc., a provider of online Bitcoin accounts and transaction services, raised $25 million in funding led by Andreessen Horowitz.

Indexes & Index Products

Taking the leap onto fund platforms
Peter Davy – Financial News
The UK’s Retail Distribution Review, which bans the payment of commission to financial advisers, is changing the way exchange-traded funds are sold, with fund platforms benefiting the most. But there is still a long way to go, as many European fund supermarkets are not ready to trade in ETFs, unlike their US counterparts.

S&P Dow Jones Indices launches indices on Chinese equity market
Investment Europe
S&P Dow Jones Indices has announced the launch of the S&P Total China BMI Indices, an extension to the S&P Global BMI family. The five indices are designed to allow global investors to analyse the Chinese equity market in a robust and efficient manner by including both A-shares and off-shore listings in one set of indices, S&P Dow Jones Indices said.


Gold Drop Is Blow to Prominent Hedge-Fund Manager Sprott
Rob Copeland –
One of the world’s biggest gold bugs is getting crushed by the metal’s steep fall. The flagship fund of prominent Canadian hedge-fund manager Eric Sprott has dropped more than 50% this year in what will likely be the third consecutive year of double-digit percentage losses, according to documents sent to investors.

***DA: Sprott is not having a good day today. As of midday, gold is down over $30.


Lawrence McCarthy, Who Saw Swaps Danger at Lehman, Dies at 49
Laurence Arnold and Mary Childs – Bloomberg
Lawrence McCarthy, a senior managing director at Cantor Fitzgerald LP who, as an executive at Lehman Brothers Holdings Inc., was said to have predicted that credit-default-swap traders were “working on bringing down the whole world,” has died. He was 49.

Misconceptions about hedge fund replication, Part 1
Benedicte Gravrand – Opalesque
Hedge fund replication is the collective name given to a number of different methods that attempt to replicate hedge fund returns. With the belief that alpha is a zero-sum gain, more investors are now said to be looking to simply add “hedge fund beta” to their portfolio through replication products.

Misconceptions about hedge fund replication, Part 2
Benedicte Gravrand – Opalesque
Known variously as hedge fund replication, alternative beta, liquid alternatives, these assets attempt to resolve many of the problems institutional investors experienced in 2008, that is, transparency, liquidity and fidelity, writes Marc Freed in the Journal of Indexes. According to him, the three main analytical approaches to hedge fund replication today are mechanical (which copies actual positions held by hedge funds), distributional (winch infers the exposures of hedge fund portfolios from the statistical properties of time series of their returns), and factor-based (which identifies correlations between hedge fund indexes and conventional investment indexes).

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