First Impressions

Bits & Pieces
By John J. Lothian

It was good to see Harlan Ten Pas of McGladrey, LLP at yesterday’s Chicago Cubs game corporate outing for the accounting firm. As was shared in this newsletter in March, Harlan suffered a stroke last fall and has been working hard to rehabilitate himself.

Yesterday was the second time in July I have seen Harlan. He also attended a McGladrey event at the Ravinia, North America’s oldest music festival.

McGladrey had a good turnout for yesterday’s event, which has grown over the years from 30 to 460 people .

Oh, and by the way, McGladrey is rebranding under the name RSM. which they announced in June.

On the way to the Cubs game we took the CTA Brown Line elevated train from the Van Buren stop. Doug shared with me the window that Wikipedia founder Jimmy Wales used to sit in front of and trade Fed Funds 18 years ago as fellow traders at Chicago Options Associates, right next to the Brown Line platform.
When Jimmy Wales offered his MediaWiki software for free, the same stuff that powers Wikipedia, I said “sold,” and used it to build MarketsWiki, MarketsReformWiki and

In Japan, the opening ceremonies of the World Scout Jamboree were held and this picture was shared by my daughter’s Scoutmaster. It was taken from a drone above the crowd.
We are expecting a smaller crowd than at the jamboree, but don’t forget to sign up your interns and newer employees for our Chicago Summer Intern Education series.

Today is the last day of work for our intern Erik Donelson, who has contributed to MarketsReformWiki for the last 3 months. Erik has been boning up on the European regulations coming into effect as he built up MarketsReformWiki. We wish Erik well in his next endeavor and thank him for his contributions to John Lothian News.

Quote of the Day

“The ECB sleeps better at night. The nightmares have dispersed and inflation is rising.”

Brian Tomlinson, fixed income portfolio manager at Allianz Global Investors, in the story, “ECB’s money-printing working though deflation, growth threats persist”

Lead Stories

How Tsipras Plans to Make Party Rebels Put Up or Shut Up
Nikos Chrysoloras and Eleni Chrepa – Bloomberg
It seems that one surprise referendum wasn’t enough for Greek Prime Minister Alexis Tsipras.
The leader of Europe’s most indebted country is taking on dissenters within his own party, Syriza, who claim that the bailout deal he accepted violates his mandate.
After more than 30 of his own lawmakers refused to support bills implementing creditor demands in two votes this month, Tsipras is drawing a line: Support me or vote against me this weekend and risk bringing the government crashing down.

Banks Pitch Swaps as Alternative to Buying Stock
Juliet Chung and Katy Burne – WSJ
Banks are nudging certain hedge-fund clients to use derivatives instead of actual stocks when placing some bets, an effort aimed at lessening the impact of new capital rules on the banks’ businesses.

September? December? Fed’s Not Saying and Traders Don’t Care
Daniel Kruger – Bloomberg
The Federal Reserve needs a little longer to decide when to raise interest rates for the first time in nine years. The bond market is more interested in when the second increase will be.

Jack Lew sends a letter to Congress asking them to pay debts
Mark Melin – ValueWalk
Looking at Greece it is easy for those in the most prosperous nations in the world to assume such misadventures in government debt could never traverse to domestic shores. But perhaps an alien visiting the planet and just looking at a recent government letter and the history of U.S. discourse over government debt might disagree.

Europe’s Bonds Widen Yield Gap to Treasuries on Slower Inflation
Anchalee Worrachate – Bloomberg
European government bonds rose from Germany to Portugal, outperforming U.S. peers, as inflation data buoyed the case for the European Central Bank to keep monetary stimulus while the Federal Reserve prepares to raise interest rates.
Spanish bonds advanced as consumer prices in that country resumed their drop this month, after being stagnant in June. The extra yield, or spread, that investors get for holding Treasury 10-year notes instead of similar-maturity bunds widened to the most in almost two months. The Fed signaled on Wednesday that hurdles to higher borrowing costs in the U.S. have diminished.

Deutsche Bank Profit Beats Forecasts, Driven by Investment Bank
Eyk Henning – WSJ
Deutsche Bank AG ‘s new co-chief John Cryan on Thursday presented a sharp rise in the bank’s second-quarter profit, driven by unexpectedly strong investment banking revenue and lower overall taxes, but warned of challenges and underscored his focus on cutting costs.

DelphX: A More Liquid Bond Market In The Works
Press Release – Mondovisione
DelphX LLC, the first provider of continuously-updating benchmark pricing for fixed income securities, today unveiled QuotePx, a secure OTC network being developed for confidential communication among fixed income dealers and investors. Within QuotePx, investors will gain access to customized quotes from competing dealers, a suite of comprehensive TCA and best execution tools and alpha for providing market making resources to dealers. Dealers, in turn, will gain access to vast reserves of inventory supply and demand for deployment in intermediating market liquidity, without adversely impacting their capital position.

BlackRock Adds Junk-Bond ETF With Hedge as Dollar Stalks Returns
Rachel Evans – Bloomberg
BlackRock Inc., the world’s largest money manager, is starting the first exchange-traded fund to invest in global junk bonds while hedging out currency risk.
Investors have directed more than $43 billion into ETFs that protect against foreign-exchange risk this year, almost five times flows into the products in all of 2014, as a surging dollar imperils overseas returns when translated back to the U.S. currency. Fund providers have taken note, almost doubling the number of hedged ETFs available, data compiled by Bloomberg show.

Bailout Money Goes to Greece, Only to Flow Out Again
Jack Ewing and Liz Alderman – NY Times
The Greek businessman was nervous as he carried a suitcase stuffed with cash through passport control at the Athens airport a few months ago. But the distracted and overworked customs officials waved him through.
A few hours later the man touched down in Frankfurt, where he quickly deposited the money in a German bank.
The stash was part of 40 billion euros, or about $44 billion, that businesses and individuals have withdrawn from Greek banks since December, exacerbating the country’s financial woes.

Standout Earnings Can’t Overcome Bearish View on Brazil’s Stocks
Denyse Godoy – Bloomberg
Vale SA to Banco Bradesco SA’s earnings surprises weren’t able to lift the Ibovespa as traders expect Latin America’s largest economy to slow further.
The benchmark equity gauge extended this month’s slide after the central bank lifted interest rates for a seventh straight time even with the nation set for the worst recession in 25 years. While Brazil’s earnings season got off to a good start, with most companies beating analysts’ estimates, traders say the economic malaise is hindering stock gains.

Puerto Rico bonds: Great upside, but buyer beware
Jacob Pramuk – CNBC
High-yield Puerto Rican bonds hold upside, but big risks remain as the commonwealth could fail to meet its next payment deadline, one municipal bond investor said Thursday.
The cash-strapped island’s Public Finance Corp. faces an Aug. 1 deadline to pay $58 million to bondholders. At low prices, Puerto Rican municipal bonds make a strong play for yield seekers if the government can make its payments, said Daniel Solender, lead portfolio manager for municipal bonds at Lord Abbett.

Deep Value Investing When Interest Rates Are Zero
Victor Wendl – ValueWalk
While sitting next to the chief executive officer (CEO) of BlackRock, Inc. on a panel at the recent Delivering Alpha Conference, billionaire Carl Icahn commented on the risk associated with investing in a high-yield bond exchange traded fund (ETF). Making a negative comment on a financial product when its CEO is sitting right next to you might make some people feel a little uncomfortable, but billionaires are not average people. Icahn’s concern was regarding the lack of liquidity in high-yield bonds. If redemptions cannot be met in an ETF that holds junk bonds, investors could be forced into taking severe losses. However, blaming an institution for losing money in an oversized ETF product that holds a large number of junk bonds is sort of like blaming Dr. Joseph-Ignace Guillotin for a capital punishment contraption bearing his name. Guillotin was neither the inventor of the decapitation device nor a fan of the death penalty. The French physician only recommended its use as a more humane way to deliver a death penalty sentence. Likewise, Blackrock did not invent the high-yield bond ETF and offers a number of other investment products that vary in terms of risk level. If you do not like junk bonds, you might consider investing in a more conservative financial product, which would result in a shaving cut rather than a beheading if illiquid junk bonds were to head south.

Sarao Said to Seek Bail Again 3 Months After Flash-Crash Arrest
Suzi Ring – Bloomberg
The British trader accused of contributing to the 2010 flash crash is making another attempt to reduce his 5 million-pound bail ($7.8 million) after spending the last three months in jail.
Navinder Singh Sarao’s appeal is set to go before a London court in August, according to a person with knowledge of the situation, who didn’t want to be identified because the hearing hasn’t been scheduled. His lawyers must prove Sarao doesn’t have access to any unknown assets that would make him a flight risk.

Central Banks

ECB’s money-printing working though deflation, growth threats persist
Francesco Canepa – Reuters
Four months since its start, the European Central Bank’s money-printing program is showing promise, having so far warded off deflation in the face of tumbling oil prices and a financial crisis in Greece.

IMF Reiterates Unwillingness to Fund Greece Without Debt Relief
Andrew Mayeda – Bloomberg
The International Monetary Fund reiterated its unwillingness to provide more financing to Greece without debt relief by euro-member states and further reforms from the Greek government.

Monetary policy: Will Britain or America raise interest rates first?
The Economist
American and British central bankers face a similar tough choice. On both sides of the Atlantic, the economy is growing moderately, and unemployment is closing in on 5%­­. As a result, wage growth is picking up. But inflation remains low: 0.2% in America and zero in Britain, according to the central banks’ respective preferred measures. And nobody is certain how much slack remains in labour markets­­—a key determinant of inflationary pressure. In this mixed environment, when is the right time to raise rates? And which rate-setters will go first?

Bill Gross on Dangers of Fed’s Easy Money
Bill Gross – Barron’s
I’m not what you would call a “prayerful” type of guy. Even at 30,000 feet, when the air gets rough, I never invoke the “God” word, settling instead for promising myself that if I ever get back to terra firma, I will never fly again, which I promptly forget days or even hours later. It’s not that I’m a nonbeliever in prayer’s ultimate destination, but more of a cynical take on why the Lord would hand out party favors to everyone that asked, or to those that asked most intently.

Is Brazil Done Hiking Rates?
Kenneth Rapoza – Forbes
It’s hard to make predictions on Brazil these days. Anything goes, and so much of it depends on the direction of the dollar and the Chinese economy. China is Brazil’s No. 1 trading partner.

Is India’s central bank doomed to be powerless?
Madhura Karnik – Quartz
The power struggle between India’s central bank and the Narendra Modi government is intensifying.
At the heart of the conflict is a new proposal by the Financial Sector Legislative Reforms Commission—first set up by the previous United Progressive Alliance government in 2011—that seeks to dilute the Reserve Bank of India’s (RBI) control over the country’s monetary policy.

China watchdog says graft risk controls tightened at central bank
Ben Blanchard – Reuters
The People’s Bank of China is strengthening internal risk controls to weed out potential corrupt practices, a unit of the Communist Party’s graft watchdog within the central bank said on Thursday.


Bets Rise That China’s Yuan Will Fall
Anjani Trivedi and Mia Lamar – WSJ
Bets are rising that China’s currency is headed lower with its stock market, a signal of waning investor confidence in the country’s ability to manage its economic slowdown and market turmoil.

Dollar Enigma: Why Are Bulls Losing Confidence With Fed Looming?
Lananh Nguyen, Rachel Evans and Andrea Wong – Bloomberg
Even as the Federal Reserve may be weeks away from raising interest rates for the first time in almost a decade, currency forecasters are ratcheting back expectations for gains in the dollar.

Bank Of England: A New Sterling Money Market Data Collection And The Reform Of SONIA
Press Release – Mondovisione
The Bank of England has today published a consultation document setting out in detail plans first announced in March 2015 for a new sterling money market data collection. The consultation also sets out, at a high level, how the Bank plans to use these data to reform the Sterling Overnight Index Average (SONIA) benchmark interest rate.
The Bank is undertaking the new data collection to secure and improve the information available to it on conditions in sterling money markets, which is an important input to the decisions of the Monetary Policy Committee and Financial Policy Committee. The Bank intends to collect transaction-level data from banks, building societies and major investment firms on their secured and unsecured sterling money market borrowing activity. This will provide the Bank with a better understanding of developments in short-term interest rates, benefiting the Bank’s analysis of both monetary and financial conditions. It will also provide a richer picture of activity in the sterling money market, enabling the Bank to better assess overall market effectiveness.

Venezuela currency blues hit U.S. blue-chip companies
Tim McLaughlin and Dena Aubin – Reuters
Venezuela’s currency woes cut nearly $3 billion in profit at U.S. blue-chip companies during the second quarter and prompted Procter & Gamble Co to remove its operations in the South American country from its consolidated financial reports.

Emerging Currencies Sink as U.S. Growth Stokes Fed Rate Concern
Maria Levitov and Harry Suhartono – Bloomberg
Emerging-market currencies slumped the most in 11 weeks and stocks retreated as accelerating U.S. economic growth rekindled concern that the Federal Reserve will raise interest rates sooner rather than later.

Indexes & Index Products

The Amount of ETF Shares Being Traded Has Eclipsed U.S. GDP
Eric Balchunas – Bloomberg
Everyone is talking about how exchange-traded funds have now overtaken hedge funds in terms of total assets.
That’s small change compared with how much ETFs trade nowadays.

The ‘Worst Mutual Fund in the World’ Tracks The S&P 500 – Focus on Funds
Chris Dieterich – Barron’s
Forget the active versus passive investment debate. The surest way to trail your benchmark is to pay too much for passive indexing.
Micheal Johnston at Fund Reference singles out plain-vanilla index funds that charge above-market fees as the most pernicious on the market. Why do these fund companies charge so much? Because they can.

ETFs to Access Stronger Overseas Developed Markets
Tom Lydon – ETF Trends
Developed international stocks and exchange traded funds are pulling ahead with the Eurozone strengthening on improved earnings and Japan finding support from domestic institutional investors.
In Europe, with the Greek debt woes dissipating, investors have been focused on the improved earnings season, according to Russ Koesterich, managing director and BlackRock’s global chief investment strategist.

S&P Dow Jones Indices Broadens Family of Global Infrastructure Indices Into Bonds
PR Newswire
S&P Dow Jones Indices (S&P DJI), one of the world’s leading index providers, today announced the launch of a robust suite of global infrastructure bond indices to effectively measure corporate, municipal and preferred debt issued by infrastructure companies throughout the world.

Greater Stock ETF Usage Influences Underlying Components
Tom Lydon – ETF Trends
Exchange traded funds track the performance of their underlying components. However, as the popularity of the investment vehicle grows, some ETFs are beginning to affect the performance of individual stocks. According to S&P Capital IQ, ETFs may pose systemic risks, especially as investors pour more money into the investment vehicle than the individual stocks that the ETFs hold.

New Appeal for BXM Index and Buy-write Strategies in 2015
Matt Moran – CBOE Options Hub
In a recent news article in Bloomberg, Callie Bost noted this year’s relatively strong performance for the CBOE S&P 500 BuyWrite Index (BXM), and she wrote —
“Traders Score With Buy-Write Options Strategy Tuned to U.S. Calm. Traders selling calls on stock holdings are beating the S&P 500 for the first time since 2011. The torpor in U.S. equities is proving a bonanza for traders employing an options tactic designed to capitalize on dead markets. … ‘A churning market is the buy-write index’s best friend,’ said Mark Sebastian … ‘The fundamental drivers of buy-write’s underperformance – – Federal Reserve bond-buying and zero interest rate policies – – is coming to an end,’ Nicholas Colas, chief market strategist at Convergex Group LLC, wrote in a note Tuesday. … “
Ms. Bost also noted that the shares outstanding in an ETF designed to track the CBOE BXM Index rose to a record high in May.


As gold price falls, miners pick derivatives to protect income
Jan Harvey – Reuters
Gold mining companies are turning increasingly to derivatives to lock in future revenues, as an industry still smarting from losing out on a 12-year bull run gets creative over protecting its income during the metal’s current downturn.

Gold Bets Weigh on Paulson, Einhorn – Focus on Funds
Chris Dieterich – Barron’s
Will John Paulson and David Einhorn give up the ghost when it comes to gold?


UBS Deal Shows Clinton’s Complicated Ties
James V. Grimaldi and Rebecca Ballhaus – WSJ
A few weeks after Hillary Clinton was sworn in as secretary of state in early 2009, she was summoned to Geneva by her Swiss counterpart to discuss an urgent matter. The Internal Revenue Service was suing UBS AG to get the identities of Americans with secret accounts.

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