First Impressions

Survey Says – Give the readers what they want!
John Lothian News
Today we are kicking off our 2016 survey campaign. Help us help you by giving us three minutes of your time and sharing your thoughts. You should have already received a special survey request email, but if not, you can take it by clicking below

Sweet 16 Honorable Mention – Technology

The John Lothian News Sweet 16 Series featured the 16 best ideas and thoughts about exchanges, regulation, economics and technology. But there are still more great ideas for 2016 that made our honorable mention. Here are comments from more industry professionals on technology.

The Sweet 16 Series drew from 38 interviews conducted at the FIA Expo Conference in November 2015. Here are comments from David Snowdon, CTO of Metamako, Rob D’Arco, CEO of Rival Systems, Stephen Kuhn, CEO and Founder of Airex, and Jim Northey, principal consultant of CameronTec Group.
Watch the video »
Sponsored by Cinnober
***DA: With today’s installment, we wrap up our “Sweet 16” series. To see the entire series, click HERE. Thanks again to Cinnober for sponsoring the series and allowing us to squat at their Expo booth.

Quote of the Day

China poured more cement and concrete between 2011 and 2013 than the US did in the whole of the 20th century.

Former Treasury Secretary Lawrence Summers, in his FT column “Heed the fears of the financial markets”

Lead Stories

How David Bowie Changed Wall Street
Dealbook – NY Times
David Bowie was known for his ability to reinvent himself. But he also helped inspire a pocket of Wall Street that tries to create money out of weird things like billboard rental income, cellphone tower lease payments and literary or film libraries.

Heed the fears of the financial markets
Larry Summers – FT
Often markets are volatile at the end of a year and then settle down as a new year begins. Not this year. US and European markets closed lower on Friday after a very rough week despite a strong US jobs report. The week saw dramatic declines in China’s stock market and currency. Oil prices fell even in the face of major tension between Iran and Saudi Arabia.

Could this be the new model for central banks?
The Bank of England (BoE) should scrap its rate-setting committee and use quantitative easing as its main monetary tool — before losing its monetary powers altogether, according to a new study. The bank should also cease targeting inflation and instead focus on nominal (non-inflation adjusted) gross domestic product, “dissident” economist, Anthony Evans, added in the report. This was published on Monday by the Adam Smith Institute (ASI), a U.K. free-market think tank.

Is the Fed ignoring this market signal?
The debate is on: Are we headed toward a recession or not?
At least one well-known, and well-respected, economic guru, Raoul Pal, has claimed the world, including the United States, is already in a recession. Former Treasury Secretary Larry Summers says the Federal Reserve must prepare for the worst. Still others say a recession is nowhere in sight — certainly not here at home.

‘Star Wars,’ and How a Force Helps the Federal Reserve
Binyamin Appelbaum – The New York Times
This is a story about “Star Wars: The Force Awakens”… and the Federal Reserve. Wait! Keep reading. Some cheap tricks are entertaining. The movie, as of Sunday, had collected more money from American audiences than any other film in American history. In less than a month, its domestic box office receipts have totaled $812 million. This is a record. It is also a great example of “money illusion,” the human tendency to take nominal prices more seriously than actual value.

***DA: Now you see it; now you don’t.

Central Banks

Fed Sent Record $97.7 Billion in Profits to U.S. Treasury in 2015
The Federal Reserve handed over a record $97.7 billion in profits to the Treasury Department in 2015, according to preliminary figures released Monday. The Fed uses revenue from various sources, including interest from its big portfolio of bonds and other assets, to cover its operating and other expenses. The rest of the money is sent to the Treasury to help pay the federal government’s bills. In 2014, the Fed sent a then-record $96.9 billion to the Treasury.

***DA: Too bad Yellen is not on a 2-and-20 deal.

ECB’s Rueffer asks Athens to fulfill pledges
A representative of Greece’s international lenders said in an interview over the weekend that the review could be wrapped up within a reasonable time frame as long as Greece stuck to its reform program.

Banks’ Worst Fears Eased as Basel Soft-Pedals Capital Overhaul
Bloomberg Business
Global banking regulators pledged to refrain from further tightening capital requirements with new rules to be finalized in 2016, dispelling industry fears that triggered intense lobbying efforts over the past year. The Basel Committee on Banking Supervision doesn’t plan to raise capital requirements across the board in the remaining projects of its post-crisis bank rule overhaul, it said Jan. 11 after a meeting of its oversight body, chaired by European Central Bank President Mario Draghi. The group, which includes the Bank of England and U.S. Federal Reserve, said it will assess the potential costs of any additional action.

China’s Central Bank Extends $754.4 Million in Loans to Financial Institutions
China’s central bank said Monday that it has extended a total of 4.973 billion yuan ($754.4 million) credit to banks via its relending program as of the end of 2015, in a bid to encourage banks to provide cheaper funds to boost the struggling economy. The People’s Bank of China said in a statement on its website that it had extended loans to 31 local financial institutions, which are expected to use the funds to help the country’s small businesses and agricultural sector.

***DA: And at least a few of these are like the “loan” I gave my cousin back in 1994 – non-performing.

Poland Needs an Independent Central Bank
Bloomberg View
Poland’s problems are structural, not of a monetary nature, so the government should not lean on the central bank to solve them. But its aggressive moves to dominate the constitutional court and the media have made investors worry that it might.


Rand Has Flash Crash as China’s Woes Trigger Drop of Up to 9%
Bloomberg Business
The South African rand plummeted by the most in more than seven years on Monday and bonds tumbled as market turmoil in China and a drop in U.S. stocks deterred risk-taking. The rand plunged as much as 9 percent, the most since October 2008, to 17.9169 per dollar, before paring losses.

The Franc Problem with Switzerland
BY HOLGER ALICH – Handelsblatt
A year after ending the fixed-exchange rate with the euro, Switzerland’s economy is feeling the pain from a more expensive Franc. The unemployment rate and bankruptcies are on the rise.

Euro Exchange Rate Still Forecast to Decline Below Parity
Pound Sterling Live
Divergence between ECB and Fed policy outlook could be a source of further weakness in EUR/USD, according to ABN Amro: “Going forward we expect sentiment in currency markets to calm down and investors to refocus on monetary policy divergence. Therefore, we expect EUR/USD to decline to below parity this year.”

Strong dollar could send oil to $20 a barrel
CNN Money
That’s the view of analysts at Morgan Stanley. In a report published Monday, they say a 5% increase in the value of the dollar against a basket of currencies could push oil down by between 10% and 25% — which would mean prices falling by as much as $8 per barrel.

China’s Unclear Yuan Policy Puts Traders in a Fix
Sharp swings in the value of China’s currency this year suggest the country’s central bank has changed the way it sets the yuan’s rate each day. The problem for investors is working out just how Beijing is now going about it. That is more than an issue for finance geeks. Beijing has altered its yuan-setting method twice in the last six months, following its surprise devaluation of the currency last August.

Mexico’s peso weakens to historic low of 18 pesos per dollar
Mexico’s peso weakened to a historic low of 18.01 pesos per dollar in international trading on Sunday, amid concerns over the economy in China and persistent declines in the price of oil. The Mexican peso slid 16.8 percent in 2015 and has slumped more than 4 percent so far this year.

Indexes & Index Products

VIX Weekly Futures Prices Rose 42% in First Week of 2016
Matthew Moran, CBOE Options Blog
Jan. 10, 2016 – The first week of 2016 was a challenging one for many financial markets worldwide, as (1) It was the worst opening week of the year in history for both the S&P 500® Index (SPX) and the Dow Jones Industrial Average, (2) The Shenzhen Composite Index of Chinese stocks fell 14.2%, (3) Crude oil futures (Feb. WTI) fell 10.5%, and (4) The U.S. dollar posted its biggest weekly loss vs. the yen since August 2013.

***DA: For a graphical representation, have a look at the chart below, and click it to read the full story.

VIX Chart Jan 11, 2016
Examining The Predictive Power Of Small-Cap ETFs
Followers of the January Effect believe that so goes January, so goes the year for stocks. Add to that, it is widely believed that small-cap stocks are supposed to do the leading in the first month of the year to validate the January Effect.

Chinese woes! MSCI Asia Pacific index tumbles to 4 year low
Mounting concern over the financial stability in China has dragged the Asian stock markets once again. The MSCI Asia Pacific excluding Japan Index nosedived over 2% to 374 points today in Hong Kong, going southward to its lowest level since October 2011.

Target-date retirement funds may miss the mark for investors
Target-date funds have become extremely popular, especially in 401(k) retirement plans — but these offerings aren’t as simple as they seem and could disappoint investors. The basic idea of these funds is cooler than sliced bread: you pick a fund with a year in its name (2025 or 2040, for example) that is closest to when you need the money (usually at retirement).

Using Indexing Tools for Risk Management — Sophisticated Strategies from Basic Building Blocks
Indexology – S&P Dow Jones Indices
Advisors today share a problem new to the careers of all but the eldest of us. As I discussed in a recent webinar, at Giralda Advisors, we call it the Portfolio Problem — unique in the last 30 years and arguably the most significant issue facing financial planning professionals over the next several years, if not decades.


Measuring up: An ounce of gold buys 33 barrels of oil, most since 1988
With oil prices reeling from an oversupply and gold getting a boost from demand for a haven, Brent crude is the cheapest relative to the precious metal in a generation.

***DA: I had to blow the dust off my point-and-figure charts from 1988 and, sure enough, they’re right. Personally, I would rather have the oil. Anyone got a tanker I can borrow?

How Gold Got Its Groove Back
Who says gold lost its appeal as a safe haven asset? After five straight positive trading sessions last week, the yellow metal climbed above $1,100, its highest level in nine weeks, thanks in part to a weaker U.S. dollar. The rally proves that gold still retains its status as a safe haven among investors, who were motivated by a rocky Chinese stock market, North Korea’s announcement that it detonated a hydrogen bomb last Wednesday and rising tensions between Saudi Arabia and Iran.

The Golden Constant Hypothesis And Its Implications For Future Real Gold Returns
Seeking Alpha
There are several theories attempting to explain either value or movements in the price of gold, with differing views on fundamental economic and political forces behind them (it is a very popular topic for conspiracy theorists too). The recent paper on “golden constant” hypothesis by Erb and Harvey considers inflation as a fundamental driver of the price of gold, and therefore suggests that the primary motive for investing in gold is to hedge against inflation.

Jackpot! Gold Discovered Under Airplane Seat
On airplanes, your seat may be used as a flotation device.
It can also be used to smuggle gold.

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