First Impressions

Alun Green, SunGard – The Technology Roadmap, 2015 Edition

“We as human beings have not evolved to be very good at reading and writing.”

Alun Green asks, “is the written word dying?” Perhaps dying is too strong a word, but Green makes an excellent point in that humans have walked the planet for millions of years, and only began using the written word within the past few hundred years – much too short a time span to have “evolved” to cope with the written word. Meanwhile, as technology continues to disrupt any and all human processes, our species may well revert back to the forms of oral and visual communication to which we are better suited.

As a career technologist facilitating the automation of manual processes, Green asks what human beings will do when the computers and robots take over. His answer? Machine learning is not the same as artificial intelligence, and we sentient beings will be needed for decision making and communication, but not necessarily the written kind.

Watch the video »

Quote of the Day

“There’s no one deal that sticks out because everything was crazy. You had so much money coming into the market and if you have a high-yield corporate bond fund, your investors don’t pay you to sit in cash.”

Bonnie Baha, who helps oversee $80 billion at DoubleLine Capital, in the story, “Creditors Bawl: How Investors Ignored Risk of Junk-Bond Rout”

Lead Stories

How the US Federal Reserve intends to raise rates
Robin Wigglesworth – Financial Times
Buckle up. On Wednesday, the Federal Reserve is expected to raise interest rates for the first time since 2006, and reversing the past seven years of extraordinary monetary policy looms as being an experimental, possibly bumpy lift-off.

Junk bond market tests nervous investors
Eric Platt – Financial Times
Investors are discovering why high-yield bonds are also called “junk”.
After years of ignoring the low credit ratings and indebted balance sheets of companies within the junk bond sector, a wave of redemptions for three funds — forcing two to shutter in the past week — has triggered a frisson across the US fixed income market.

Banks Prep for Trading Influx, as Rate Rise Looms
Katy Burne – WSJ
Some large U.S. banks are revamping short-term trading desks that have languished in recent years, anticipating that a Federal Reserve rate increase this week will unleash a flood of activity.

Banks Would Have to Show Stress Survival Plans Under OCC Proposal
Ryan Tracy – WSJ
Many of the nation’s largest banks would have to show they have adequate plans for surviving severe financial stress under a proposal soon to be published by the Office of the Comptroller of the Currency.
The regulator’s proposal could create another compliance headache for large firms, which already must pass annual stress tests and plan for their death via “living will” bankruptcy plans.

The Guy Who Warned About Broken Libor Now Sees Fast-Money Financing as the New Risk
Tracy Alloway and Liz McCormick – Bloomberg
The cash that finances the U.S. economy is now coming from a spigot that is more prone to rapidly turning off in times of stress than the traditional banking system has been, according to the strategist who first brought attention to banks misstating key benchmark lending rates during the financial crisis in 2008.

Lehman Brothers dead, but trader keeps fight alive for $83 million bonus
Chicago Tribune
Before Lehman Brothers collapsed, pulling the trigger on the global financial crisis, a little-known bond trader was on a hot streak. Over two years, Jonathan Hoffman had brought the megabank more than $700 million in profits.
Just 35 years old, Hoffman was looking forward to an $83 million bonus. It was an eye-popping payday, even by Wall Street standards and a reflection of Hoffman’s reputation as a talented trader.

Why High-Yield Debt Selloff Isn’t 2007 All Over Again. Or Is It?
Michael J Moore – Bloomberg
Wall Street is having a 2007 flashback as a high-yield debt rout triggers nightmares of hard-to-trade assets plunging in value and funds halting redemptions.
Jim Reid, a strategist at Deutsche Bank AG, wrote Monday that this month’s turmoil, including Third Avenue Management’s suspension of cash redemptions from a mutual fund that invested in high-yield debt, may be a harbinger of things to come. Berwyn Income Fund’s George Cipolloni said the similarities between markets now and those before the financial crisis are too big to ignore.

Fed rate hike to put pressure on emerging market corporates in 2016
Tariro Mzezewa – Reuters
Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the U.S. Federal Reserve begins what is expected to be a series of interest rate increases after years of easy money policies.
The combination of weakening emerging market currencies, rising U.S. rates and a strengthening dollar could create a “perfect storm” of conditions to lead some emerging market companies to sell assets and others to default in 2016.

Creditors Bawl: How Investors Ignored Risk of Junk-Bond Rout
Cordell Eddings and Christine Idzelis – Bloomberg
You had to see this one coming.
Warnings of a high-yield bust were plentiful: The shale driller that missed its first payment. The clothing manufacturer and the software maker among the many companies that issued debt, payable in more debt, earmarked to reward managers who’d already loaded them up with debt.

U.S. Corporations Increasingly Adjust to Mind the GAAP
Theo Francis and Kate Linebaugh – WSJ
A financial obfuscation of the dot-com era is making a comeback: Hundreds of U.S. companies are trumpeting adjusted net income, adjusted sales and “adjusted Ebitda.”
These adjusted measures paint a rosier picture of corporate earnings. Without them, third-quarter earnings per share fell 13% for the biggest U.S. companies, according to Deutsche Bank research, instead of falling 0.1% with them.

****SD: Valeant’s accounting was the focus of another WSJ piece from today.

How a Fed Hike Could Hurt Your Credit Card Debt
Suzanne Woolley – Bloomberg
It’s the anti-holiday gift: As consumers rack up credit card charges on presents, vacations, and dinners for the holidays, card issuers are poised to raise the annual percentage rate on their cards.
Card issuers are waiting to see if the Federal Reserve’s policy-setting committee bumps up the federal funds rate this week, as many expect. If it does, the hike will flow through to many credit card holders as soon as they receive their next bill.

Firms should pay off debt instead of rewarding shareholders, top investors warn
Tara Cunningham – The Telegraph
Investors are urging companies to focus on bolstering their balance sheets, instead of paying out surplus cash to shareholders, amid mounting concern that corporations are taking on too much debt, a closely followed monthly survey of investors around the world has revealed.

US inflation rate rises as Federal Reserve begins meeting
Underlying US inflation – excluding food and energy – rose in November, as the Federal Reserve meets to decide whether to raise interest rates.
The Labor Department said its core Consumer Price Index increased 2% last month. It was the third month that the core CPI increased by that much.

The Bizarre Theory That Says Fed Increases Will Fuel Inflation
Alexandra Scaggs – Bloomberg
Many economists are so perplexed by the lack of inflation in the U.S. after years of unprecedented monetary stimulus that a bizarre, century-old theory is suddenly gaining traction: Maybe higher interest rates are what’s needed to push up consumer prices.

Fannie and Freddie’s Government Rescue Has Come With Claws
Gretchen Morgenson – NY Times
On May 9, 2012, the executives of Fannie Mae, the beleaguered mortgage finance company, finally went public with good news: After three and a half years as a ward of the state, it was profitable again.
Since being bailed out by the government at the height of the financial crisis, Fannie had drawn $116 billion from the Treasury. But it had been clear for months inside the company that things were looking up. In fact, when Susan McFarland, chief financial officer of Fannie, announced the earnings, she said, “We expect our financial results for 2012 to be significantly better than 2011.”

Stiglitz’s Sticky Prices
Kaushik Basu – Project Syndicate
For a long time, the assumption underlying much of mainstream economics was that the invisible hand worked its magic seamlessly. Prices moved smoothly up as demand outpaced supply and rushed back down when the tables were turned, keeping markets in equilibrium.

Bankers’ bonus cap drives up salaries, says Bank of England
Tim Wallace – The Telegraph
Bankers’ salaries are rising because of the EU’s bonus cap, the Bank of England has suggested, as financial institutions refuse to cut payouts in response to tougher regulations.

Central Banks

Junk Bond Misery Backs Fed Case for Gradual Rate Rise, No Delay
Jeanna Smialek and Christopher Condon – Bloomberg
Junk bonds won’t stop Janet Yellen from raising interest rates this week, but they may provide an added incentive for the Federal Reserve chair to communicate clearly that future tightening will come gradually and will signal confidence in the economy.

A History of Fed Leaders and Interest Rates
Pradnya Joshi and Binyamin Appelbaum – NY Times
Janet L. Yellen, the chairwoman of the Federal Reserve, is about to take the central bank into a new era by beginning a process of raising short-term interest rates, which have rested near zero for seven years. How the economy responds to the Fed’s actions will go a long way toward defining Ms. Yellen’s tenure as the chief architect of the nation’s monetary policy.
Her three predecessors in recent decades all put their own distinctive stamp on the economy. Here is a brief look at their significant milestones and policy shifts in office

The Fed’s New Chapter Will Be Written in Dollar-Denominated Oil
Timothy A Duy – Bloomberg
The Federal Reserve is set to raise interest rates this week for the first time since 2006.
The final days of the zero interest-rate policy known as ZIRP are upon us; the end is here.
But the end of ZIRP is the beginning of a new chapter of monetary policy. This chapter will tell the story of the Federal Reserve’s efforts to normalize policy, and that particular tale has yet to be written. You can, however, expect Fed Chair Janet Yellen to emphasize “gradually” and “data dependent” as she pens the first few lines of the narrative at this week’s press conference.

Janet Yellen: An orthodox economist for unorthodox times
Jason Lange – Reuters
Janet Yellen is guiding the Federal Reserve towards its first rate rise in a decade armed with traditional economic models that some economists worry could fail her in a world of massive money printing and near zero rates.
The 69-year-old economist argues the time is coming for a rate-lift-off even though inflation has yet to accelerate, trusting decades of studies that suggest a tight labor market eventually creates inflationary pressures.


Dollar Bulls’ Argument Undermined by Fed’s Trade-Weighted Index
Andrea Wong – Bloomberg
here’s a rift erupting between the dollar as measured by the Federal Reserve and the greenback that currency investors care about.
From the Fed’s perspective, the U.S. currency is soaring. The central bank’s trade-weighted gauge reached a 12-year high on Dec. 11 as a rout in emerging markets propelled the greenback against the currencies of a broad swath of U.S. trading partners, including China and Mexico. On the other hand, the dollar is tumbling against the euro and the yen, some of the world’s most-transacted foreign-exchange pairs.

China ready to moderate sharp offshore yuan falls: sources
China’s central bank is on guard against a sudden attack on the yuan in offshore markets, and is ready to intervene if the gap between offshore and onshore exchange rates becomes destabilizing, sources involved in policy discussions say.

The yuan as No. 1: China’s challenge to the dollar
Shingo Tamari – Nikkei Asian Review
As China expands its presence in the international currency and financial markets, observers are beginning to ask whether the country will shake up — or even break — the U.S.-led postwar international financial order.
Recent developments certainly point to a shift in the status quo: China led the creation of the Asian Infrastructure Investment Bank, and the International Monetary Fund recently decided to add the yuan to the basket of currencies that make up its Special Drawing Rights, a form of international reserve asset for use in currency and other crises.

Doing the Math on Rand Adds Politics as Reason to Be Pessimistic
Elena Popina, Lyubov Pronina and Paul Wallace – Bloomberg
Three finance ministers in five days: those two numbers just aren’t adding up for traders of South Africa’s rand.

Indonesia signs S$1b currency-swap deal with Australia to guard against market turbulence
Straits Times
Indonesia’s central bank has signed a 100 trillion rupiah (S$10 billion) bilateral local-currency swap agreement with its Australian counterpart to bolster its defenses against potential market turbulence.

The Currency of a Sun-Obsessed People Gets Fitting Name Change
John Quigley – Bloomberg
The Peruvians have a thing for the sun.
Their first currency, created back in the mid-1800s, was the sol (Spanish, of course, for sun), which was followed by the sol de oro (the sun of gold) and then in 1985 by the inti (an indigenous word for, you guessed it, the sun). When hyperinflation wiped out the value of the inti a few years later, it was time for another sun. The nuevo sol, it was called, as if to say “don’t confuse this new sun with all those old suns.”

Indexes & Index Products

China’s New Yuan Index: Here’s What the Market Needs to Know
Fion Li – Bloomberg
A new currency index in China is causing a stir as policy makers seek to refocus the market’s attention away from the yuan’s moves versus the dollar and instead compare performance against a wider selection of peers.

India Now Has a Keqiang Index — And It Paints a Bleaker Growth Picture
Sandrine Rasetello – Bloomberg
Chinese Premier Li Keqiang’s name has been attached to another economic gauge, covering another billion people: this time in India. And the picture the Indian Keqiang index is painting is more downbeat than glowing official data.
Indian stock brokerage Ambit Capital established the Keqiang index for the subcontinent as it tries to unravel the mysteries of new gross domestic product data introduced in January that has puzzled economists since.

Index investing is just one system – and not a very good one
Andreas Clenow – TradingFloor
Index investing is a cornerstone in most people’s portfolios. Whether you’re aware of it or not, you most likely have a stake in the large stock indices. This is a passive, stable and prudent way to invest your money for the long term, or at least that’s what we’ve always been told by schools, banks and governments.

Junk bond ETFs hit record trading levels
Joe Rennison and Stephen Foley – Financial Times
Trading in the biggest junk bond exchange traded funds soared to record levels during the recent market sell-off, intensifying a debate about whether high-yield ETFs contribute to financial stability or put it at risk.

HSBC to Start Trading European Bond ETFs for First Time in 2016
Katie Linsell – Bloomberg
HSBC Holdings Plc is planning to start trading fixed-income exchange-traded funds in Europe next quarter as demand for the product grows.
The firm hired Ruban Shan from Goldenberg Hehmeyer LLP, an ETF broker, in July to help prepare for the initiative, said Mehmet Mazi, the London-based head of traded credit. HSBC may hire two more traders for the business, according to Mazi. The bank’s equity ETF traders may also be called upon to provide backup, he said.

Stocks: The Worst December Since 2002?
Ben Levisohn – Barron’s
MKM’s Jonathan Krinsky observes that the S&P 500 is heading for its worst December since 2002 – and the Russell 2000 to its worst since its creation in 1979:

The Rieger Report: Munis lead the pack in the final lap
J.R. Rieger – S&P Dow Jones Indices
As 2015 inches closer to the final bell U.S. municipal bonds are leading the returns as we near the halfway point of the final lap.

ETFs Had A Good 2015, And 2016 Will Add Even More Choice For Investors: S&PTeresa Rivas – Barron’s
With 2015 beginning to wind down, S&P Capital IQ looks back at what has been a pretty good year for ETFs, with some $200 billion in inflows—and sees more good times to come in 2016.


Gold to Breach $1,000 as Fed Lifts Rates in ’16, SocGen Says
Ranjeetha Pakiam – Bloomberg
Prices to decline to $955 an ounce next year, Bokobza says
Three further hikes in U.S. interest rates seen in 2016
Gold is going to be a casualty of the Federal Reserve, according to Societe Generale SA.

Gold investors sold the rumor of higher U.S. rates – will they buy the fact?
Jan Harvey – Reuters
Gold bulls hoping an anticipated rise in U.S. interest rates will paradoxically boost the metal’s price might just be disappointed, as the wider environment offers little to justify a rebound.

India targets gold hoards and temple treasures in trade deficit battle
Raja Murthy – Asia Times
India aims to recycle 20,000 tons of privately-owned gold in a monetization scheme to reduce record bullion imports and trade deficit. India overtook China this year as the world’s biggest consumer of gold.

Out of Rand Crisis, Opportunity for World’s Costliest Gold Mines
Kevin Crowley – Bloomberg
South African President Jacob Zuma is causing turmoil in financial markets and accidentally throwing a lifeline to his country’s struggling gold industry.
Zuma’s decision to fire respected Finance Minister Nhlanhla Nene drove the rand to a record low, instantly reducing labor and other costs in the local currency for mining companies relative to the U.S. dollars they earn by selling gold.

There is no Nazi gold train, Polish scientists say
Alex Duval Smith – The Guardian
Scientists have quashed a claim by two amateur treasure hunters that they had discovered a legendary gold train hidden by the Nazis in a southern Polish railway embankment.
“There is no train,” Prof Janusz Madej of the Polish mining academy told a press conference in the city of Walbrzych. The conference was attended by dozens of journalists and television crews who began following the gold train story after the treasure hunters made their claim in August. “The geo-magnetic model anomalies would be far greater if there was a train,” he said.

****SD: All I wanted for the holidays was a buried treasure train, but I guess I’ll have to wait another year.


A Mansion, a Shell Company and Resentment in Bel Air
Louise Story – NY Times
The most notorious new house in Los Angeles hangs from a Bel Air hillside, high above the sprawl and smog, unfinished and unloved.
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Outraged neighbors call it “the Starship Enterprise,” and in truth it looks like nothing so much as an earthbound space station of curved glass and steel, draped in scaffolding and tarpaulin, roughly 30,000 square feet and nearly 70 feet high.

Abe Deflation Fight Has Foes on Nearly Every Street Corner
Kevin Buckland and Kyoko Shimodoi – Bloomberg
They stand resolutely on street corners around Japan, proclaiming that deflation has not been vanquished, much as the Abe administration and the central bank have tried.
They are the country’s 5 million vending machines, and as anyone who has visited can attest, they are seemingly everywhere: from the capital’s vast network of train and subway stations, to Kyoto’s historic shrines and temples, to Okinawa’s remotest islands, and even on Mount Fuji. At about one for every 25 people, Japan has the most vending machines per capita in the world — double the rate of the U.S.

Americans go searching for the Fed
Alex Rosenberg – CNBC
With the Fed expected to raise interest rates on Wednesday, interest in the Fed itself is rising.
According to Google trends, U.S. Google searches for “The Federal Reserve” have been rising sharply since August. In fact, partial data for December show that more people are searching for the term this month than they ever have before, going back to at least 2004.

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