First Impressions

The Market Who Laughed at Danger
Doug Ashburn – JLN

Note: The views of Mr. Ashburn are his own, and do not necessarily reflect those of John J. Lothian & Co. In fact, I can guarantee the views do not reflect those who share this office.

There is an interesting assortment of news atop today’s newsletter. The top three stories, though unrelated at first blush, share a common thread – risk is an outmoded concept, and low rates are here to stay. Markets don’t dwell on bad news. The world still loves U.S. Treasury debt. Emerging market debt hit a record high.

Last week the financial press had a field day with CNBC commentator Rick Santelli’s latest on-air conniption. Santelli’s colleagues at CNBC called him out for being wrong about predictions of inflation that have proven unfounded, and Santelli could take no more.

To watch the segment in its entirety, click here =>

According to the wisdom of the day, the game is over and the alarmists, including Mr. Santelli, lost.

While I agree that the “coming wave of inflation” has not surfaced, nor will it surface any time soon, I still believe a bit of alarmism is in order. The real risk in this economy is not, nor has it ever been, the risk of a spike in U.S. Treasury rates. My biggest fear is in the pricing of all other assets relative to dollar rates. In 2008-09, the 10-year Treasury rate was not cause for alarm, but LIBOR was, as were junk bonds, emerging markets, real estate and equities.

We experienced a credit bubble. Credit bubbles end in credit liquidation, period. The liquidation period was cut short by intervention, and large amounts of debt have been transferred from the private and corporate sectors to the the public sector in the form of national debt and the Federal Reserve’s balance sheet. We will not move forward until the piper has been paid, and we as a nation can choose the quick and sharply painful path, or the path filled with slow, dull pain. In the meantime, we will have periods of relatively minor pain where we think the worst is over. Today’s headlines prove we are currently in a time of minor pain.

Santelli is wrong about inflation, but so are those poor souls piling into the riskiest debt in the search of a few extra basis points.

Quote of the Day

“We’re at that phase of the bull market where greed has overcome fear. There is the mind-set that, ‘I’m missing out a huge opportunity and I better jump in.'”

Joe Heider, managing principal at Rehmann Financial in the story, “Markets Don’t Dwell on Bad News”.

Lead Stories

Markets Don’t Dwell on Bad News
Dan Strumpf, Alexandra Scaggs and Chris Dieterich – WSJ
Investors have grappled with many obstacles this year, ranging from the withdrawal of the Federal Reserve’s postcrisis stimulus to patchy economic growth and military flare-ups in Ukraine and Israel.
Their response? Buy the dips.
The latest proof that fund managers are heeding this stock-market adage came on Friday, when the Dow Jones Industrial Average jumped 123.37 points, recovering almost all the ground it lost a day earlier after the downing of a Malaysia Airlines 3786.KU 0.00% jetliner over Ukraine and Israel’s incursion into Gaza.

***DA: What bad news?

Grand Central: Why the World Still Loves U.S. Treasury Debt
Jon Hilsenrath – WSJ
Last year’s taper tantrum is starting to look like a little footnote in bond market history.
Yields on 10-year Treasury notes dropped below 2.5% last week. This is remarkable given the fact that U.S. job growth is heating up, inflation readings firming and the Federal Reserve has said affirmatively that it plans to stop buying U.S. and mortgage bonds by October. Any of those developments normally drive bond prices down and yields up.

Emerging market debt issuance hits record high
Elaine Moore – Financial Times
Emerging and frontier market countries have borrowed a record amount of money in capital markets in the first half of this year, even as central bankers warn that “debt market euphoria” could be storing up trouble for the future.

***DA: Load up now while the rates are low and available. We will worry about paying it all back some other day.

Banks Aren’t Quite Ready to Let Go of Reserve Releases
Michael Rapoport – MoneyBeat – WSJ
Big banks’ releases of bad-loan reserves are supposed to be going away – but, apparently, not just yet.

***DA: Solvency (or the appearance thereof) has been of tantamount importance since 2009. So don’t mess with anything that boosts today’s earnings numbers.

Allianz Backs ‘Legend’ Gross as Pimco Fund Lags Behind
Oliver Suess – Bloomberg
Allianz SE (ALV), Europe’s biggest insurer and owner of Pacific Investment Management Co., is standing by Chief Investment Officer Bill Gross as his main fund trails peers and struggles with a record streak of investor redemptions, calling him an industry “legend”.
Gross, who runs Newport Beach, California-based Pimco, has given no indication that he will step down and is “even more invigorated” as Pimco begins to improve performance from its biggest fund, Jay Ralph, the German insurer’s management board member responsible for asset management, said in an interview.

Swiss National Bank, China Agree on a Currency-Swap Deal
Neil MacLucas – WSJ
The Swiss National Bank and the People’s Bank of China have reached a currency-swap agreement, allowing the two central banks to buy and sell their currencies up to a limit of 150 billion renminbi, or 21 billion Swiss francs ($23.4 billion). The deal will also allow the Swiss central bank to invest some of its huge accumulation of foreign exchange reserves in the Chinese bond market, the SNB said in a statement Monday.

Fed’s Junk Loan Bubble Busting Seen Failing as Sales Jump
Craig Torres and Kristen Haunss – Bloomberg
One of the Federal Reserve’s first post-crisis tests of its ability to quash excessive risk-taking using regulatory tools is so far looking like a failure.

Huatong Drives Biggest Jump in Chinese Debt Costs Since November
Borrowing costs for Chinese companies leapt by the most in eight months amid concern Huatong Road & Bridge Group Co. may become the second onshore corporate to default on its bonds.
One-year top-rated commercial paper yields jumped 26 basis points last week, the steepest such period increase since mid November, to 4.957 percent, the highest since April 16, according to Chinabond.

Argentina nears cliff in risky debt game
Benedict Mander in Buenos Aires – Financial Times
In “Rebel Without a Cause”, the anti-hero played by James Dean is challenged to a lethal game of chicken in which two cars must race towards a cliff. The loser is the driver who jumps out first. Investors in Argentine bonds must feel as if they are in a re-run of the 1955 film.

A dose of rate reality to hit markets
Henny Sender – Financial Times
The markets were clearly not spooked by what Federal Reserve chairwoman Janet Yellen meant to be a nuanced tone in her semi-annual monetary report to Congress last week. While some detected a “mildly hawkish message” most risk markets yawned and carried on.

***DA: She was a fast learner in the art of Fedspeak.

Takeover deals highlight bets on equities outperforming bonds
James Mackintosh, Investment Editor – Financial Times
Hedge funds betting on the £32bn AbbVie bid for London-listed pharmaceutical company Shire, which wrapped up on Friday, tracked the US drugmaker’s private jet to and fro across the Atlantic to measure the progress of the talks.

U.K. SFO Said Close to Opening FX-Rigging Investigation
Suzi Ring – Bloomberg
U.K. prosecutors are preparing to open a criminal investigation into alleged manipulation of foreign-exchange benchmarks, a person with knowledge of the matter said.
The Serious Fraud Office could announce the investigation as soon as this week, the person said, asking not to be named because the move isn’t public.

China treasury operations face location conundrum
Paul Golden – Euromoney Magazine
Treasurers and banks are divided on the extent to which financial-system liberalization in China has made it possible, or desirable, for multinationals to manage China treasury functions from elsewhere in Asia.

Central Banks

Learn to Stop Fretting Over Higher Rates and Love the Fed
Cordell Eddings and Akin Oyedele – Bloomberg
If you’re concerned that the Federal Reserve will derail the bond market when it finally starts raising interest rates, the last two tightening cycles suggest those worries may be overblown.
Instead of tumbling, U.S. debt securities from Treasuries to junk bonds gained. They returned an average 5.7 percent between June 2004 and June 2006, when the Fed lifted rates to 5.25 percent from 1 percent. In the seven months ended January 2000, bonds retained their value even as benchmark borrowing costs increased 1.75 percentage points.

***DA: The “learn to stop worrying and love…” headline has gone cliche since I used it last year. Now, when I read one, I must take a deep breath, keep calm and carry on.

***JB: Pretty sure it has been cliche since about ten minutes after Stanley Kubrick used it in Dr. Strangelove in 1964.

The Federal Reserve Overreaches
Iain Murray – National Review Online
Is the Federal Reserve after your debit and credit cards? In a move little noticed except by those in the payments industry, the Federal Reserve last fall issued a consultation document about “payment system improvement.”
This suggests a desire by the Fed to introduce a new payments system, ostensibly to allow faster payments and reduce transaction costs. The Fed worries that other countries have moved ahead of the U.S. in payments efficiency, but their suggestion might mean that the central bank will compete with the entities it regulates.

***DA: Today’s First Impressions column featured a bit of alarmism. After reading this story, I am reminded that there are many levels of alarmism, and mine is mild in comparison.

Publication of ECB minutes will end a decade of silence
Claire Jones –
A quiet revolution is under way to make the European Central Bank’s voice a little louder. Since last summer, the central bank’s governing council has debated whether to drop its long-held resistance to revealing what happens when members gather on the 36th floor of Frankfurt’s Eurotower to set monetary policy.

Carney’s Time in Canada Points to Caution on BOE Rates
Mark Carney may have been recalling his time at the Canadian central bank when he cooled talk last month of an early Bank of England interest-rate increase.
The Bank of Canada raised its key interest rate by 75 basis points from a record-low 0.25 percent in three moves between June and September 2010. Futures data compiled by RBC Capital Markets show investors were betting on more increases.

Biotech Analyst to Janet Yellen: ‘Tell Me What I’m Missing’
Steven Russolillo – MoneyBeat – WSJ
The Fed caused quite a stir earlier this week when it said valuations of small caps, biotech and social-media stocks appeared to be “substantially stretched.” Mark Schoenebaum, a biotech and pharmaceuticals analyst at ISI Group, disagrees with that assessment.


Japan’s retail investors pile into US dollar funds
Ben McLannahan in Tokyo – Financial Times
Since former Federal Reserve chairman Ben Bernanke began to gesture towards an exit from ultra-easy monetary policy last May, Japan’s retail investors have taken every opportunity to pile into the US dollar.

Rupee futures open to foreign investors, but find few takers
Garima Chitkara – Euromoney Magazine
In the short-term, foreign-market players have little incentive to access the exchange-traded currency futures market, despite liberalization efforts from regulators, given the liquidity provided by the OTC market, say market players. However, in the medium- to long-term, India’s bid to develop an onshore currency futures market looks promising.

U.K.’s Serious Fraud Office Investigates Possible Forex Rigging
Chiara Albanese – WSJ
The U.K.’s Serious Fraud Office is gathering information about possible rigging of the foreign-exchange market, the latest sign of the seriousness of the global probe into currencies trading. “We are receiving and examining complex data on this topic,” a spokeswoman at the SFO told The Wall Street Journal Sunday.

How To Stop Bitcoin Banking; Give It A BitLicense In New York
Tim Worstall, Contributor – Forbes
New York State has decided to issue a regulatory structure for Bitcoin, meaning that businesses in that State can be sure of what they can and cannot do. This is excellent news of course, the regulatory uncertainty is most certainly holding back development of all cryptocurrencies. However, there is one tiny problem with the regulations as they’ve proposed them. They actually make running a Bitcoin bank illegal. Which, if you’re trying to encourage people to develop new banks is probably something of a bad idea.

New Bitcoin Lobbying, Trade Association Announced
Paul Vigna – MoneyBeat – WSJ
The release this past week of the so-called “bitlicense” proposal from the New York State Department of Financial Services underscores that regulators are taking bitcoin and cryptocurrencies seriously. Now a group of bitcoin backers announced they’ve formed a trade association to represent the industry’s interests in Washington, D.C.

Dell Begins Accepting Bitcoin on Its Website
Paul Vigna – MoneyBeat – WSJ
Michael Dell, founder and CEO of the big PC maker Dell, announced via Twitter TWTR +0.49% on Friday that his eponymous company will start accepting bitcoin as a payment option for anything purchased on the company’s website.

Indexes & Index Products

VIX Rose 32% on Thursday, as VIX Futures Now Offered Round-the-Clock
Matt Moran – VIX Views
On Thursday the world experienced unsettling news as a plane was shot down in Ukraine, and there was violence in the Gaza Strip. There continues to be strong futures and options trading activity related to the recent rise in volatility indexes at CBOE. Long futures and long call options positions in volatility indexes are used as catastrophe hedges by some investors.

ETFs to Avoid If You Don’t Want to Fight Janet Yellen
Eric Balchunas – Bloomberg
‘Don’t fight the Fed’ is usually a broad bit of advice, meaning that it’s smart to invest in line with the Federal Reserve’s monetary policy. For example, invest in stocks when interest rates are low and look to take profits when policy tightens. But on July 15, Federal Reserve Chair Janet Yellen got unusually specific in talking about the market. In Senate testimony, she dissed stock sectors such as social media and biotechnology, calling them “substantially stretched” and overvalued.

European providers should study the evolution of US exchange-traded funds
Shawn McNinch – Financial News
Assets in US exchange-traded funds have grown by 230% since 2008, creating an industry worth more than $1.8 trillion.

First Trust’s smart beta attracts the money for ETFs
Mike Foster – Financial News
The Big Three exchange-traded fund providers – BlackRock, Vanguard and State Street Global Advisors – have dominated the ETF market for years by consistently attracting the lion’s share of inflows to their funds. But a new kid on the block has been knocking on the leaders’ door and in the first half of the year it managed to attract the third-largest inflow of new money.


Geopolitics Keeps Safe-Haven Bid in Gold Market
Kitco news (via Forbes)
Gold prices are moderately higher in early U.S. trading Monday as heightened geopolitical tensions keep a safe-haven bid in the market. August Comex gold was last up $8.70 at $1,318.00 an ounce. Spot gold was last quoted up $5.60 at $1,317.00. December Comex silver last traded up $0.261 at $21.205 an ounce.
Geopolitics remains on the front burner of the market place early this week. Last week’s downing of a Malaysian airliner on the Russia-Ukraine border and Israel’s ground offensive against Hamas on the Gaza strip are the dominant fundamentals in the markets Monday morning.

***DA: Gold has had a hard time staying below $1300 for any sustained period.

Gold Diggers Revive French Exploration as Prices Drive Hunt
Although France hasn’t historically been a large producer of gold, soaring prices of the metal are bringing companies to its door. By granting the first exploration licenses in mainland France in more than two decades to Variscan, Economy Minister Arnaud Montebourg is trying to revamp the country’s mining industry and cut reliance on imports of metals such as rare earths critical for military equipment and renewable energy.

Autilla Outlines Data Plans Ahead of MiFID 2
Faye Kilburn – WatersTechnology
London-based precious metals market Autilla, which announced last week that it has migrated to a new electronic trading platform from Swedish exchange trading and market technology provider Cinnober, is leveraging the platform to create a repository of historical quote and trade data to increase transparency in the over-the-counter precious metals markets.

Chinese Bitcoiner Makes Physical Bitcoins In Pure Gold
Eric Mu – Forbes
Back in early December last year, we heard that people in the Channel Island of Alderney had been working on the idea of producing physical Bitcoins, as part of their grander plan to reinvent the British crown dependency as a global hub of digital currency. Since then, things have been rather quiet with no follow-up since the initial report.
Obviously, Alderney’s residents weren’t the only ones working on the idea, and now it appears they may have lost the race to some Chinese guy who had just put the idea into execution.

***JB: Seems to defeat the point of a bitcoin.

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