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Quote of the Day

“It has a contrite, bereft peatiness. The remit to the master blender was to taste the ups and downs of the economic devastation of 2008.”

James Green, a 34-year-old London entrepreneur who has created a new liquor line, in the story, “Lehman Brothers Still With Us in Spirits, via Scotch Whisky”

Lead Stories

Hedge Funds Bet on Risks in U.S. Blue-Chip Debt
Wall Street Journal
Hedge funds are betting the next bond sector to crack will be the $4.5 trillion market for the safest U.S. corporate debt. New York’s Perry Capital has placed a $1 billion wager against investment-grade bonds issued by 10 companies it thinks are especially susceptible to an economic downdraft, rising interest rates or are on the wrong side of change in their industries, people familiar with the matter said. The bet and others like it reflect a belief that this year’s economic uncertainty and market turbulence are evidence of deeper problems that won’t be confined to vulnerable areas such as energy and junk bonds.

Bloodied, Not Broken – U.S. Bond Market’s Biggest Bears Die Hard
The biggest bears in the U.S. bond market are standing their ground. Despite the best start to a year for Treasuries since the credit crisis, Western Asset Management, Loomis Sayles and Franklin Templeton Investments say U.S. government bonds are a losing bet. The firms, which oversee more than $800 billion, contend investors are being driven by irrational fears about China, the commodities collapse and a weakening U.S. economy — and making the mistake of pouring into Treasuries that yield less than 2 percent.

Deutsche Bank is at a record low and investors are once again scared of European banks
Business Insider
Deutsche Bank’s share price is at a record low. On Friday, shares of Germany’s largest bank trading in New York closed at $16.88, a new low for the stock. Deutsche Bank shares trading in Frankfurt were down more than 4% on Monday, and credit-default swaps on the bank spiked to their highest level since 2012, when the entire efficacy of the eurozone was in doubt.

When Bank Ceiling Drops, So Does Floor
Bloomberg Gadfly
In some ways, this should be a great time for the biggest banks. Debt-trading volumes are picking up. Corporate clients are paying bigger fees to borrow and acquire one another. Markets are becoming more volatile, which traditionally means more lucrative arbitrage opportunities. And yet bank stocks and bonds are plummeting, with investors showing growing concern that financial firms will suffer so badly that they’ll be unable to repay their debt. What gives? It doesn’t seem as if the industry is heading toward a repeat of the banking crisis of 2008, which led to Lehman Brothers’ demise. Aren’t these banks safer than they used to be in the face of new, risk-curbing regulations?

Allianz Global Investors to Buy Rogge Global Partners
NY Times
The investment manager Allianz Global Investors said on Monday that it had agreed to acquire Rogge Global Partners, a fixed-income firm in London, for an undisclosed amount. The transaction would strengthen the fixed-income business of Allianz Global Investors, while giving Rogge Global Partners larger distribution of its products. Allianz Global Investors is owned by the Allianz Group, the German insurance giant. In the United States, Allianz owns a majority stake in the Pacific Investment Management Company, or Pimco.

Private equity groups under pressure to buy own stock
Financial Times
The world’s largest private equity companies are coming under increasing pressure to buy back their own listed shares after the downturn in both the credit and stock markets hit the value of their portfolios. A sharp drop in profits, including the unrealised value of investments, at Blackstone and Apollo in the fourth quarter has cast buyout groups in an unforgiving light, with Carlyle, KKR and Oaktree still to announce earnings this week.

Fining Bankers, Not Shareholders, for Banks’ Misconduct
NY Times
Ho-hum, another week, another multimillion-dollar settlement between regulators and a behemoth bank acting badly. The most recent version involves two such financial institutions, Barclays and Credit Suisse. They agreed last Sunday to pay $154.3 million after regulators contended that their stock trading platforms, advertised as places where investors would not be preyed on by high-frequency traders, were actually precisely the opposite. On both banks’ systems, investors trying to execute their transactions fairly were harmed. As has become all too common in these cases, not one individual was identified as being responsible for the activities. Once again, shareholders are shouldering the costs of unethical behavior they had nothing to do with.

Big banks tight lipped as ASIC rate rigging probe intensifies
Sydney Morning Herald
Australia’s biggest banks are tight lipped as the corporate watchdog prepares to take action against banks alleged to have manipulated the bond market’s key benchmark interest rate. On Monday, The Australian Financial Review reported that the Australian Securities and Investments Commission was preparing to take court action against ANZ Banking Group and 10 traders, the culmination of a multi-year investigation into misconduct in setting the bank-bill swap rate or BBSW.

Fears over new financial crisis come back to haunt global markets as trading turmoil hits
The Telegraph
Global stocks were gripped by a fresh bout of panic selling on Monday, raising fears over the health of the world’s banking system for the first time since the financial crisis. European markets slumped to their lowest level in more than two years amid an unremittingly bleak outlook for the global economy and concerns over the resilience of the world’s biggest lenders. The Euro Stoxx 600 index of leading bank shares fell as much as 6pc in Monday’s trading, closing down 5.6pc, plumbing depths not seen since August 2012. The continent’s lenders have now lost 17.3pc of their value of the last 30 days. Volatility forced shares in Barclays to be briefly suspended in late afternoon trading. Barclays, along with BNP Paribas and ING Santander all closed down more than 5pc.

Central Banks

The Probability of Negative U.S. Rates Is on the Rise
Global central banks have opened the door to negative U.S. interest rates, in Wall Street’s view.
After the Bank of Japan cut some rates below zero last month to spur growth and inflation, strategists are weighing the Federal Reserve’s options in case of a crisis. If the world’s biggest economy weakens enough that traditional policy measures don’t help, the Fed may consider pushing rates below zero, according to Bank of America Corp. and JPMorgan Chase & Co.

****SD: Also see Fed May Lack Legal Authority for Negative Rates: 2010 Fed Memo

Franco-German central bankers call for creation of eurozone treasury
The Telegraph
Two of Europe’s most powerful central bankers have called on the eurozone to form its own treasury and push forward with a quantum leap in integration to secure the single currency’s future. ADVERTISING Germany’s Jens Weidmann and France’s newly appointed François Villeroy de Galhau urged member states to move towards a “comprehensive sharing of sovereignty” which would include a common 19-member treasury and an “independent fiscal council” with a eurozone parliament.

Bank of Japan policymakers feared negative rates war, hit to bank profits
Policymakers at the Bank of Japan tussled over the decision to adopt negative interest rates, raising a slew of concerns ahead of a close vote, according to the official summary released Monday.
Blindsiding global financial markets on January 29, the BOJ adopted negative interest rates for the first time ever, buckling under pressure to revive growth in the world’s third-largest economy. It was a close call, with five members voting for negative interest rates and four against the surprise move.

Here Are Central Banks That Have Been Getting It Right — and Wrong
The Federal Reserve is the most optimistic. The Bank of Japan made the biggest mistake. The Bank of Canada is the most accurate, but it’s got the easiest job. These are just a few of the findings of Bloomberg’s first-ever ranking of Group of Seven central banks according to their ability to forecast their own economies. Turns out the financial crisis really did ruin everyone’s estimates, just like the Greek crisis might this year, and complicated economies are harder to deal with.

Bank of Canada Says Fiscal Stimulus Can Ease Financial Risks
Financial stability risks may be one more reason for the federal government to consider ramping up fiscal stimulus. In a speech today in Montreal, Bank of Canada Deputy Governor Tim Lane laid out the main challenge central banks face today: how to worry about the financial stability risks associated with record low borrowing costs when the primary objective is to ensure the economy is growing at an appropriate pace. The answer is that monetary policy needs help,
Lane says.

The Bizarro World of Negative Interest Rates
By Marc Chandler – RealClear Markets
In many ways, the world has turned upside down. It is not just central banks that have set policy rates below zero, but the entire German curve out through eight years have negative yields. Japan, which has the largest debt burden relative to GDP, has negative yields out through nine years. The Swiss curve is negative through 15 years.
It is not just core countries either. Ireland, which holds national elections in a couple of weeks, has negative yields out four years. Spain, which is struggling to put together a government following the election at the end of last year, has negative rates through two-years.

What’s holding back the world economy?
Joseph Stiglitz – The Guardian
QE and low interest rates have disproportionately created wealth in the financial sector and inflated asset bubbles. It has done little for the real economy. The rules of the market need to be rewritten.

BoJ: rifts over negative rates laid bare
Financial Times
Some board members at the Bank of Japan were clearly not impressed with the decision to introduce negative interest rates, as the “summary of opinions” on the January meeting released today by the bank shows a clear schism. The BoJ releases a summary of policy discussions around a week after each meeting, something it brought in from the start of this year in a bid to smooth communications with the market. Governor Haruhiko Kuroda has the final say on what is released to the public.

Jefferies Strategist: The ECB and the BoJ Need to Go Way Bigger for Their Easing to Work
The Bank of Japan and European Central Bank are pumping roughly $70 billion into the financial system each month, yet global markets are sputtering, inflation is low, and economic momentum remains underwhelming. That’s because European and Japanese quantitative easing just doesn’t pack the same punch as the Fed’s bond purchasing program, according to Jefferies Chief Market Strategist David Zervos.

Emerging-Market Central Banks Battle Capital Flight
Anjani Trivedi –
Central banks in some emerging markets are stepping up efforts to flood their financial systems with cash, highlighting the pressure that they face from rapid capital flight.
The moves amount to a collective turnabout from months of interest-rate cuts in 2015 that helped send emerging-market currencies down by as much as 20% to 30% over the past year against the U.S. dollar.


A Dying Breed: Currency Traders Are Left Out of New Wall Street
Charlie Stenger, a currency-broker-turned-recruiter, has seen it all. One fired trader wept in his office. Another admitted he hadn’t told his wife he was unemployed, and left the house every day in a suit to sneak off to a coffee shop. Then there are the delusional guys, who carefully explain how they’re not interested in jobs that don’t pay as well as those they just lost.
Stenger, who was laid off from ICAP Plc in 2013 and now works for Sheffield Haworth Ltd., tells the men and women he counsels: Take the pay cut. Oh, and don’t wait for the phone to ring.

Russian Hackers Moved Ruble Rate With Malware, Group-IB Says
Hackers used malware to penetrate the defenses of a Russian regional bank and move the ruble-dollar rate more than 15 percent in minutes, according to a Moscow-based cyber-security firm hired to investigate the attack. Russian-language hackers deployed a virus known as the Corkow Trojan to infect Kazan-based Energobank and place more than $500 million in orders at non-market rates in February 2015, Group-IB told Bloomberg, without identifying individuals behind the attack. The resulting rate swing prompted a Russian central bank investigation into potential market manipulation.

China foreign-exchange reserves drop as PBOC supports yuan
South China Morning Post
China’s foreign-exchange reserves shrank to the smallest since 2012, indicating that the central bank sold dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure. The world’s largest currency hoard decreased by $99.5 billion in January to $3.23 trillion, according to a People’s Bank of China statement released on Sunday. The contraction was less than a Bloomberg survey’s median estimate of a $120 billion drop. The stockpile slumped by more than half a trillion dollars in 2015, the first-ever annual decline.

Greenback Correction Now Over or Still Got Further to Go?
Finance Magnates
Last week the market unwound some of the long US$ positions that have been built up over the last year and a half, so is this more than an overdue correction or has the mighty greenback lost its attraction? Well yes and no! In the FX market it is difficult to see another currency worth buying against the USD. We have a number of major currencies with negative interest rates on excess funds set by central banks and it looks distinctly possible this trend could continue with further moves below zero.

Global currency collapse: Winners and losers
CNN Money
Russia’s ruble and Mexico’s peso recently hit all-time lows against the dollar. The currencies of Colombia, Argentina and Brazil are all down 28% or more in the past 12 months. Turkey and South Africa have also fallen by double digits over that time.

Ban high-denomination notes to cut crime, says ex-bank chief
Financial Times
The EUR500 note, $100 bill and £50 note are rarely found in the average consumer’s wallet in today’s world of easy digital payments and “contactless” bank cards. But with cash still very much king in the underworld of terrorists, drug lords and tax cheats, a new paper has called for the abolition of “the currency of corrupt elites”. By taking such high-denomination banknotes out of circulation, governments could make life harder for criminals, argues Peter Sands, former chief executive of UK-based Standard Chartered bank, in a paper published on Sunday.

Indexes & Index Products

London top flight index plummets more than 9% since start of year
Belfast Telegraph
The London top flight index has plummeted nearly 9% since the start of the year as it dropped 2.7% in afternoon trading.

Fund managers ready for ‘smart beta’ wars
Financial Times
The swelling popularity of cheap, index-tracking funds has been a mounting concern for traditional asset managers. But many have decided to launch a fightback, betting that they can capture business in the more innovative edges of the passive investment world. The exchange-traded fund (ETF) industry is utterly dominated by three big players — State Street, BlackRock and Vanguard. Together they control about 80 per cent of the nearly $4tn passive investment world, a virtually unassailable perch in an industry where scale is the biggest advantage.

****SD: Also from the FT Smart beta products risk misleading investors

Baltic index touches new record low on muted vessel demand
The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying industrial commodities, registered a new all-time low on Monday on muted vessel demand.

Guggenheim’s $240 Billion Man Says Nasdaq to Tumble Below 3,800
Technology stocks will tumble further this year as investors flee to safety and buyers stay on the sidelines, according to Scott Minerd, chief investment officer for Guggenheim Partners LLC. The Nasdaq Composite Index will probably drop below 3,800, sliding another 13 percent, he said. The tech-heavy index already has fallen that much this year, closing at 4,363 on Friday, its lowest since October 2014. That’s more than 16 percent below the all-time high it reached in July.

Small Caps Still Outperforming
Larry Swedroe –
As the director of research for The BAM Alliance—a community of about 140 like-minded RIA firms who believe in providing a fiduciary standard of care using an evidence-based investment strategy—I often get requests from other advisors for my help in answering questions from clients about articles they’ve read in the financial media. As such, I thought I’d share my thoughts on a January article from Pension Partners LLC, an investment advisor and manager of the ATAC Rotation mutual funds, titled: “Do Small Caps Really Outperform Over Time?” The article makes the case that while small-caps have outperformed over the full history for which we have data (beginning in 1926), they have underperformed since 1979. The article supports this contention by comparing the return of the Russell 2000 Index (R2K) to that of the S&P 500 Index over the 37-year period from 1979 (when the R2K was introduced) through the end of 2015.


Gold: The Metal That Central Banks Love To Hate
Andrew Hecht – Seeking Alpha
Gold is the one means of exchange that has outlived all others. Each and every paper currency that exists today, backed by the full faith and credit of the governments that print the bills and mint the coins, is relatively new compared to gold. Gold has been around for thousands of years.

Options Market Hints at Further Gains for Gold
Saumya Vaishampayan – Bloomberg News
Investors are rushing to buy bullish call options on a gold exchange-traded fund, reflecting a bet that the haven asset could continue to rally as stocks tumble around the world.

China Continues To Buy More Gold As it Sells Other Foreign Reserves
China’s central bank continues to see the value of diversifying into gold as it continues to purchase the precious metal on a monthly basis in the midst of falling total reserves.


Sanders’s Wall Street Attacks Strike Home in New Hampshire Town
Five-dollar bills in the cash register at Tri-City Bicycles in Rochester, New Hampshire, send customers a message stamped in red ink: “Not 2 B used 2 bribe politicians.” Owner Mark Traeger’s frustration with what he calls a rigged economy has become a central theme in the Democratic presidential primary. Tri-City can’t park profits overseas to dodge taxes. It can’t pony up the big campaign contributions or the rich speaking fees over which insurgent candidate Bernie Sanders has been attacking Hillary Clinton.

Burritos, cheese and Bowie: curious bonds and unusual investments
The Guardian
‘Our ingredients: love, passion and great milk!” declares the website of the esteemed parmesan cheesemaker 4 Madonne Caseificio dell’Emilia. They’ll need to update that shortly, with a pinch of “tradable financial instruments”. Like so many small businesses, 4 Madonne struggles to borrow from the bank right now. Unlike most, however, it has found their solution in the bond markets.

Lehman Brothers Still With Us in Spirits, via Scotch Whisky
Wall Street Journal
Lehman Brothers is gone, but anyone wanting to savor the distinct taste of financial ruin that its name evokes has ways to do so. With a dram of Lehman Brothers Scotch, say.
“It has a contrite, bereft peatiness,” says James Green, a 34-year-old London entrepreneur who has created a new liquor line with the doomed bank’s logo. He is describing his flagship Scotch whisky, labeled Ashes of Disaster. “The remit to the master blender was to taste the ups and downs of the economic devastation of 2008.”

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