First Impressions

CME Eurodollar Bundle Futures and Options

CME Group announced today it will be launching futures and options on Eurodollar Bundles on September 22 of this year, pending regulatory approval. This should serve to simplify not only the trading of these popular spreads, but also margining and settlement as well.

Bundles, basically strips of eight or more consecutive quarterly futures contracts, began trading in 1994, and have grown steadily in popularity. The new contracts will be available in 2-year, 3-year and 5-year increments.

The only question I would ask is “What took you so long?”

Link to fact page =>

Quote of the Day

“The true sign of a top is when you have these new structures piling up. At the top of the market in 2007, there were these types of innovation and many investors didn’t realize about it at that time. These products are a clear risk indicator.”

Lawrence McDonald, a chief strategist at Newedge USA LLC in the story, “JPMorgan Joins Goldman in Designing Derivatives for a New Generation”.

Lead Stories

Exclusive: Private equity seeks assurances from U.S. regulators over loans
Greg Roumeliotis – Reuters
The private equity industry’s lobbying group met officials from the Office of the Comptroller of the Currency and the Federal Reserve last week to address concerns over a crackdown on junk-rated loans, people familiar with the matter said on Monday.

JPMorgan Joins Goldman in Designing Derivatives for a New Generation
Sridhar Natarajan and Alastair Marsh – Bloomberg
Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation.
JPMorgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as 10 billion euros ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt.

***DA: Big money in putting this stuff together.

S.E.C. Finds Bond Fraud in Kansas
Federal regulators said Monday that Kansas had defrauded investors by bringing $273 million of bonds to market in 2009 and 2010 without disclosing that its pension system was deeply underwater and that the investors ran a risk of not being fully repaid.

***DA: We got one first! (Illinois received similar charges from the SEC last fall.

Do ‘Living Wills’ for Banks Even Make Sense?
STEPHEN J. LUBBEN – Dealbook – NY Times
Last week, while some of us were trying to do our part to reduce the world’s oyster population, the Federal Reserve and the Federal Deposit Insurance Corporation decided that it was time to reject the “living wills” submitted by all of the major financial institutions.

***DA: The illusion of security.

Gross Reduced U.S. Government-Related Debt in July
Susanne Walker – Bloomberg
Bill Gross reduced his holdings of Treasuries and government-related debt in July as speculation increased that the Federal Reserve would accelerate the pace of interest-rate increases projected for next year.
The proportion of U.S. government-related debt in Pacific Investment Management Co.’s $223 billion Total Return Fund (PTTRX) was 45 percent, versus 47 percent in June, data posted yesterday on the company’s website showed. That compared with 50 percent in May, the highest level since 54 percent in July 2010.

Finance: The FICC and the dead
Tracy Alloway and Michael MacKenzie – Financial Times
The top brass at Citigroup gathered early this summer at their annual off-site meeting to discuss the fortunes of the US bank. The presentations covered a wide range of topics, not least Citi’s stubbornly low share price. But one, by credit strategist Matt King, stood out: “Who Stole the Market’s Mojo?”

Chinese trusts face slower growth as economy weakens
Gabriel Wildau in Shanghai – Financial Times
China’s trust sector, the largest segment in the country’s expanding shadow-banking system, grew at its slowest pace in more than two years in the second quarter as trusts grew cautious about lending into a weak economy.

Money-Market Investors Risk Losses on African Bank Debt
Robert Brand – Bloomberg
Investors in South African money-market funds holding African Bank Investments Ltd. (ABL) securities are facing capital losses even as money managers slash interest payments to offset writedowns of the debt.

Martin Feldstein and Robert Rubin: The Fed’s Systemic-Risk Balancing Act
Martin Feldstein And Robert Rubin – WSJ
The Federal Reserve Board of Governors recently warned of the possibility of excesses in asset markets but concluded that, at least for now, if there is a need to act it will not be done by raising interest rates but by relying on “macroprudential” policy tools to reduce systemic risk.

US to force swaps overhaul to improve wind-downs
Philip Scipio – Reuters
The way the world’s largest banks use derivatives is set for drastic change after the US Federal Reserve and Federal Deposit Insurance Corp moved to strip financial counterparties of early termination rights on new derivatives contacts in the event of some future bank failures.

Is the Australian model in trouble?
Matthew C Klein – Financial Times
Officially, Australia has avoided recession for more than two decades — an impressive achievement for a small open economy that has become increasingly dependent on exports of iron ore, copper, and coal as a source of growth.

As demand rises, tax-free bonds outperform equities
Economic Times
Tax-free bonds are outperforming even stocks among asset classes as demand surged after the government did away with fresh issues in the current financial year that started from April 1, capping supplies of such securities. Equity and debt products aren’t strictly comparable, but the belief that stocks are getting expensive makes taxfree bonds attractive bets.

When stocks go _____, bonds go _____
Joshua M Brown – The Reformed Broker
What is the relationship between stocks and bonds? The only real answer is context-dependent – What else is going on around us? Or, we can simply reply “it depends on the decade.”

***DA: Meaning diversification is somewhere between very important and irrelevant.

Investors wonder: How do we get out of here?
Matt Turner, Tim Cave, Joe McGrath and Sarah Krouse – Financial News
Imagine tourists piling on to a holiday island in droves, only to want out again fast on rumours of an approaching typhoon. They rush to the airport to find only a few small propeller-driven aircraft on hand. The result would be a huge and anxious queue in departures.

***DA: Some of us would stockpile food and water and head for the high spot on the island.

The link between capital and inequality
John Bakie – The Trade
What is Capital in the Twenty-First Century about?
The book is written by French economist Thomas Piketty and focuses on wealth inequality in Western Europe and the US since the 18th century. It argues that concentration of wealth among a select few is a core feature of capitalism that needs to be tempered by intervention from states, otherwise it threatens the democratic order.

***DA: Which works in theory, but not in reality since the state is less trustworthy than market forces.

Central Banks

Fed gives preview of future non-bank scrutiny
Gina Chon – Financial Times
The scrutiny of AIG and GE Capital, which are overseen by the Federal Reserve, is a preview of what other non-banks may face if they are also designated as systemic risks to the financial system.

***DA: Haven’t we already established that AIG is a systemic risk?

Factbox: South Korea’s central bank and the government
The Bank of Korea is expected to cut interest rates this week, a Reuters survey shows, in what would mark a sharp turnaround from its recent hawkish policy stance and raise questions about the bank’s ability to forge its independence in the face of government pressure. Here is information on the Bank of Korea’s structure and its relationship with the government

BoE statement to set the pace for sterling
Jamie Chisholm – Financial Times
UK jobs data are set for release at 0930 BST. An hour later the Bank of England is due to publish and hold a press conference on its third quarter Inflation Report.


Euro Falls to Almost Nine-Month Low as Confidence Sags
The euro fell toward the weakest since November after investor confidence in Germany slumped to the lowest level since 2012, adding to concern Europe may be entering a Japanese-style deflationary spiral.

Aussie Rate-Cut Bets Derail World-Beating Gain: Australia Credit
Candice Zachariahs and Kevin Buckland – Bloomberg
This year’s best-performing major currency is losing steam as the Reserve Bank of Australia reinforces prospects it will consider cutting interest rates unless the economy regains momentum.

U.S. watchdog calls bitcoin ‘Wild West’ of finance
Douwe Miedema – Reuters
Virtual currencies such as bitcoin are the “Wild West” of financial products because of risks including huge swings in exchange rates, the U.S. Consumer Financial Protection Bureau said on Monday.

***DA: The CFPB also said to watch out for bitcoin scammers.

Indexes & Index Products

The Innovation Behind the Index
Amy Kover
In 1896, Charles Dow created the Dow Jones Industrial Average to answer a single question: “What did the markets do today?” By boiling down 12 complex stocks into one simple number, he opened the doors to stock market investing for everyday people.
Decades later, Standard & Poor’s expanded this concept by introducing the S&P 500. Its developers believed they had created a more representative measure of the U.S. stock market by tracking a broader group of companies based on market capitalization. A revolution in investing ensued.

U.S. Indexes Restrict Russia Stocks – Emerging Markets Daily
Dimitra DeFotis – Barron’s
The keepers of U.S. stock indexes are capping Russian stocks in light of expanded U.S. sanctions against Russia for its incursion into Ukraine.
But indexes aren’t eliminating affected Russian stocks unless further sanctions require it. On Monday, Russian shares rose after MSCI kept Russia’s two largest banks, Sberbank and VTB, in its MSCI Russia index, Reuters reported. Russell Indexes noted today that it would curtail affected members of the Russell Global Index that were named in U.S. or EU sanctions against select Russian energy, financial services and defense enterprises.


Flat Gold Prices Are Enough To Lure Investors To Gold Mining Stocks
Tatyana Shumsky – MoneyBeat – WSJ
Investors betting on gold miners don’t need gold prices to post an eye-popping performance from here on out. Even “meh” will do.

Why is the gold price immune to global strife?
Jenny Cosgrave – CNBC
Gold has been trapped in a narrow range over $1,300 per ounce, struggling to extend its rally, even as a whole raft of geopolitical tensions remain unresolved.
The yellow metal has failed to “find the vigor usually associated with rising fear,” according to analysts, even as U.S. forces carried out air strikes in Iraq, and NATO warned of the “high probability” of a Russian invasion of Ukraine Monday. Indeed, known holdings of gold by exchange-traded funds remaining close to its lowest point this year.

Buy gold miners, not gold
After years of lagging way behind, the charts now suggest investors should buy shares of gold miners, rather than the precious metal they dig up.
Oppenheimer technical analyst Ari Wald believes the Market Vectors Gold Miners exchange traded fund GDX +1.67% , or GDX, can soar more than 40% from current levels to his price objective of $38, which corresponds roughly to the March 2013 highs.

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