First Impressions

OIC Conference Preview: BOX CEO Ed Boyle on how the options industry is working to address market challenges

At this year’s Options Industry Conference in Miami Beach, participants will discuss such crucial industry issues as market quality and deteriorating volumes, the implementation of Dodd-Frank and Reg SCI, technology and risk management. The conference is hosted by BOX Options Exchange, whose new CEO, Edward Boyle, spoke with John Lothian News about some of these issues and what’s being done to address them.
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Quote of the Day

“Credit-based oxygen is running out. I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang.”

Bill Gross in the story, ” Buffett and Gross Agree: Slump in 30-Year Bonds Makes Good Sense”.

Lead Stories

Pimco Total Return Loses Biggest Bond Mutual Fund Crown
Two years of client withdrawals at Pacific Investment Management Co.’s flagship have cost it the title of the world’s biggest bond mutual fund.
Investors pulled $5.6 billion from the Pimco Total Return Fund in April, after redemptions of $7.3 billion in March and $8.6 billion in February, according to estimates from the Newport Beach, California-based firm. With assets of $110.4 billion, the fund fell behind the index-tracking Vanguard Total Bond Market Index Fund, which had $117.3 billion as of April 30, according to preliminary data.

Buffett and Gross Agree: Slump in 30-Year Bonds Makes Good Sense
Warren Buffett and Bill Gross signaled the end is at hand for Treasury market bulls as 30-year bond yields rose to a four-month high.
Longer-maturity Treasuries led losses after Buffett, the billionaire chairman of Berkshire Hathaway Inc., said long-term bonds are overvalued. Touting bearish bets after yields climbed last week by the most in almost two months, Gross said the bull market “supercycle” for both bonds and stocks is ending.

The Owner of the Cleveland Cavaliers Gets a $1 Billion Payday from Cheap Bonds
Billionaire Dan Gilbert, whose Cleveland Cavaliers face declining odds of winning the 2015 National Basketball Association championship, is getting a consolation prize from the bond market: $1 billion of cheap debt.
Gilbert’s closely held Quicken Loans Inc. raised $1.25 billion on Friday in its first-ever bond issue, all but $250 million of which will flow to the parent company he controls, Rock Holdings. While junk-bond investors typically have extracted a premium from companies that borrow to pay their owners, buyers snapped up Quicken’s 5.75 percent, 10-year securities at a yield that’s in line with the average for the entire market, according to data compiled by Bloomberg.

The precarious prospects of London finance
Philip Augar, FT
UK’s next government needs a clear vision for the financial services industry, writes Philip Augar
It was 2006, and the City of London was enjoying an extraordinary surge, capturing market share and kudos from its global competitors. If you worked in financial services, London was the place to be. US investment banks, upset by the strict regulations imposed on their industry by the Sarbanes-Oxley Act, were moving senior staff to London and some briefed they might move their head offices, too.

Bogle vs. Grant in the Great Fund Debate
Jason Zweig, WSJ
Have index funds, the autopilot portfolios that dispense with stock-picking entirely, made fund managers obsolete? That question was the subject of a debate that I watched in New York last month between two respected investing experts: John Bogle, founder of Vanguard Group and father of the retail index fund, and James Grant, editor of Grant’s Interest Rate Observer, a twice-a-month publication widely read by professional portfolio managers.

Bull market ‘supercycle’ for stocks, bonds ending: Bill Gross
The bull market “supercycle” for stocks and bonds is approaching an end, as the unconventional monetary policies that have bolstered asset prices since the financial crisis are running out, widely followed investor Bill Gross said on Monday.
The attempt by global central banks to cure a debt crisis with more debt doesn’t have much further to run, which will end a rally that’s lasted three and a half decades, Gross said in an investment outlook for Janus Capital Group Inc..

Catastrophe bonds pioneer hits back at book
Alistair Gray in LondonA, FT
A pioneer of catastrophe bonds has hit back at claims that the instruments could jeopardise the stability of the global insurance industry, accusing the academics behind the highly critical research of “stoking unfounded fears”. John Seo — who co-founded Fermat Capital, among the most influential catastrophe bond fund managers — argues the business school analysis that warns of dangers in the market reaches “completely false” conclusions.

German Bonds Do About-Face as Yields Rise
Dealbook – NY Times
One of the world’s safest investments has been behaving strangely of late.
Only a couple of weeks ago, it looked as if the market interest rate on German government bonds maturing in 10 years was heading inexorably into negative territory, a once unthinkable reversal of the usual relationship between borrowers and lenders.

China widens foreign access to domestic bond market
Gabriel Wildau in Shanghai, FT
China has approved HSBC, Morgan Stanley and 30 other foreign institutions to invest in its $5.9tn domestic bond market, a big step towards opening its capital markets to foreign investment.

Greece aims for deal with lenders, IMF hard on reforms: minister
Greece intends to meet debt payments this month and reach a deal with its international lenders to unlock remaining bailout aid, but the International Monetary Fund insists on tough labor reforms, the country’s labor minister said on Monday.
Struggling amid a cash crunch, Athens faces debt repayments to the IMF totaling nearly 1 billion euros this month. It has been borrowing from municipalities and government entities to meet obligations.

Morning Agenda: Britain’s Conservatives Get Hedge Funds’ Vote
NY Times
The British elections are on Thursday, and members of one constituency, the financiers, have already made their preference extremely clear, Danny Hakim writes in DealBook. Britain’s Conservative-led government has been a staunch supporter of hedge funds and banks, battling at home and in the European Union on their behalf, and some hedge fund managers have written “eye-popping checks” to the party.

Supreme Court hands win to Barclays over $4 billion in Lehman assets
The U.S. Supreme Court on Monday allowed Barclays Plc(BARC.L) to claim about $4 billion of disputed assets as part of its hurried purchase of much of Lehman Brothers Holdings Inc’s[LEHRG.UL] brokerage unit at the height of the 2008 financial crisis.
The U.S. top court declined to hear an appeal filed by Lehman’s creditors, leaving intact an August 2014 ruling by the 2nd U.S. Circuit Court of Appeals in New York that went in favor of Barclays.
Barclays already had control of $3.5 billion of the disputed $4 billion.

GFI Launches Electronic Trading Platform for Odd Lot Corporate Bonds in the U.S.
GFI’s new offering, available via CreditMatch, serves the dealer-to-dealer market for corporate bonds with a notional value of less than $1 million
GFI Group, a leading intermediary and provider of trading technologies and support services to the global OTC and listed markets, announced today the launch of an electronic trading platform for Odd Lot Corporate Bonds in the U.S.

Exchanges need to balance policing and profitability
Brooke Masters, FT
Ordinarily, market abuse and manipulation cases take forever.
More than five years after UK watchdogs dramatically raided Moore Capital, Deutsche Bank and a series of other London companies, most of the people who were charged following the insider dealing probe have yet to stand trial. Similarly, global investigations of the Libor scandal are still ticking on more than six years after the first information requests were sent out.

Schwab Opts Not to Adopt Liquidity Fees, Redemption Gates for Government Funds; SEC has expanded regulation in response to 2008 crisis
Charles Schwab Corp. on Friday said it doesn’t plan to charge liquidity fees or adopt redemption gates for its government funds, following expanded regulation that allows fund managers to do so during times of market turmoil.

Three Citadel Hong Kong Employees Leave Amid Macro Desk Cuts
by Bei Hu, Bloomberg
Three Hong Kong employees recently left Citadel as the hedge-fund firm run by billionaire Ken Griffin cut jobs on its macro trading desk.

Central Banks

Goldman: Expansion in Stock Valuations Will End When the Fed Raises Rates
The second-longest expansion in U.S. stock-market valuations in more than three decades is coming to an end, according to Goldman Sachs Group Inc.
Stock valuations have surged 62 percent since September 2011, the longest period of multiple expansion since the height of the Internet bubble in December 1999, when the S&P 500’s forward price-to-earnings ratio had climbed for 61 straight months, according to Goldman. The current run is 42 months old and Goldman predicts it will end when the Federal Reserve lifts interest rates, which the strategists believe will happen in September.

Warren Buffett: I was wrong about interest rates and Federal Reserve
Warren Buffett, the world’s most admired billionaire, faced a lot of criticism on his home turf at this year’s annual meeting of Berkshire Hathaway. Some of it was self-inflicted.
Buffett said that he wouldn’t have predicted that interest rates could have stayed this low for this long without a problem. “So far, I have been wrong on interest rates,” said Buffett. “It is so hard for me to believe that you can drop money from a helicopter and not have inflation, but we haven’t.”

Fed’s Evans: rate hikes could start sooner, if kept slow
With U.S. inflation uncomfortably low and the unemployment rate still too high, the Federal Reserve should hold off on raising short-term interest rates until early next year, a top Fed policymaker said on Monday.
Still, Chicago Fed President Charles Evans said, rate hikes could begin this year without harming the recovery.

Is Transition to Inflation Targeting Good for Growth?
Federal Reserve Bank San Francisco
Inflation targeting is often considered the most appropriate monetary policy framework for central banks seeking price stability. While a target can help stabilize inflation, the implications for a country’s growth are less clear. Advanced economies experienced higher economic growth immediately following the transition to inflation targeting. However, developing economies experienced only modest gains that were close to their trend growth. One explanation is that transitioning to a low-inflation regime can be more costly for less stable countries that have higher inflation expectations and less credible policies.

Has the Bank of England taken savers for granted?
After a full parliament of near zero interest rates and quantitative easing, some are beginning to wonder whether the nation’s savers have been forgotten.
The Bank of England has taken the brunt of the protests, accused of forgetting the interests of the thrifty at best, and at worst of stealing from them by generating inflation.


As the Euro Slides, a Coin Meets Its Waterloo
Dealbook – NY Times
Here at the Belgian Royal Mint, machines called giraffes spit out as many as 850 euros a minute.
At times during the summer of 2008, that many shiny coins would have been worth $1,360. Now it’s just under $950, a symptom of Europe’s inability to navigate through crisis. Even as the region’s outlook improves ever so slightly, the currency just can’t shake the specter of moribund growth and the troubles of Greece.

Why Global Currency Investing Still Makes Sense – Even Amid A Strong Dollar
Seeking Alpha
In recent months, financial headlines have highlighted a strong rise in the U.S. dollar (USD). Drivers of this gain have included widespread anticipation that the U.S. Federal Reserve (Fed) will raise short-term interest rates in 2015, along with an improving U.S. economy and weaker economic growth in Europe, Japan, China and other major emerging markets.

Digital Currencies’ Field of Dreams Is Prepped for Game Time
What a difference a year makes. Twelve months ago the Bitcoin market was absorbing the impact of the seemingly overnight collapse of Mt. Gox, its largest exchange. The cryptocurrency’s value was in freefall from a peak of around US$1,200 in November 2013. And news headlines questioned the digital currency’s viability as concerns over security grew.

Hedging Currency With ETFs to Dampen Volatility
Innovation has undoubtedly played a key role in the ETF marketplace, and in the last couple of years there has been a proliferation of funds that hedge as part of their investment strategy. Among the most popular ETF strategies have been foreign equity funds that hedge out currency exposure, but there also have been ETFs issued that hedge interest rate risk as well.

Indexes & Index Products

5 things about ETFs that scare investors
By Victor Reklaitis, MarketWatch
Liquidity worries have bubbled up lately in the world of exchange-traded funds, meaning heebie-jeebies about the tradability of certain ETFs.

MSCI sees flexibility in adding A shares to benchmark indexes
EJ Insight
The openness of China’s stock markets is the most important factor that will determine the inclusion of A shares in the MSCI indexes, according to a senior official of the equity index provider. Chia Chin-ping, Hong Kong-based managing director and head of research for Asia Pacific at MSCI Inc., said even if mainland-listed A shares are not included in the company’s emerging markets index soon, they still could be added later on condition that there is material progress in the opening of China’s stock markets, the Hong Kong Economic Journal reported.

The Russell Is Vital to the Big Picture
The Street
Perhaps we should forget that it was the Russell 2000 that I thought would enjoy an oversold rally on Friday, since clearly the rally was all about the big-caps and not the small-caps. Did you see that pathetic little rally the Russell had?

Tools for Managing Home Price Risk Are Emerging
S&P Dow Jones Indices – Indexology Blog
S&P Dow Jones Indices offers information for hundreds of indices on our website, but two in particular drive a large portion of our traffic: the S&P 500 and the S&P/Case-Shiller Home Price Indices.


Barrick names BlackRock exec as head of business performance
Barrick Gold Corp on Friday named Catherine Raw, a BlackRock executive and co-manager of one of its flagship mining funds, as head of business performance.

Whipsawed Gold Is Now ‘Data Dependent’
Seeking Alpha
Cycle theorists often say that time is the most important factor for determining whether price will rise or fall, and they certainly must be having a little chuckle to themselves at the moment. Despite all the promising price patterns and bullish supporting fundamental data, the gold price has failed to break out to new highs and the bugs remain frustrated.

Russia Gold Investing
While the IMF still reports the United States as the largest holder of gold reserves by far, these are essentially self-reported numbers. They are not reliable because countries could have incentives to under report or over report their gold reserves.
It is thought by many that China, at least up until this point, has under reported its gold reserves. It seems the Chinese have been accumulating more and more gold over the last several years.

Will gold get back its sheen?
Kavita Jajoo was once bullish on gold. “I used to invest in gold ETFs but stopped two years ago because the returns were not attractive,” says the Mumbai-based accounts professional. She still holds the gold ETFs bought before gold’s dramatic decline in 2013, but has no plans to increase her exposure to the yellow metal.

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