First Impressions

Sweet 16 Honorable Mention – Technology

The John Lothian News Sweet 16 Series featured the 16 best ideas and thoughts about exchanges, regulation, economics and technology. But there are still more great ideas for 2016 that made our honorable mention. Here are comments from more industry professionals on technology.

The Sweet 16 Series drew from 38 interviews conducted at the FIA Expo Conference in November 2015. Here are comments from David Snowdon, CTO of Metamako, Rob D’Arco, CEO of Rival Systems, Stephen Kuhn, CEO and Founder of Airex, and Jim Northey, principal consultant of CameronTec Group.

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Quote of the Day

“Inflation does not exist in real life. When a person goes to a shop and finds that prices have gone up, they are not in the presence of ‘inflation.”

Luis Salas, Venezuela’s new vice president for the economy, in the story, “For economy czar of crisis-hit Venezuela, inflation ‘does not exist'”

Lead Stories

Ratings Agencies Still Coming Up Short, Years After Crisis
Gretchen Morgenson – NY Times
The mistakes that led to the 2008 mortgage crisis can’t happen again, right?
Not so fast, particularly if you’re talking about credit ratings agencies like Moody’s Investors Service and Standard & Poor’s. Eight years after these companies were found to have put profits ahead of principle when they assigned high grades to low-quality debt securities, some of the same dubious practices continue to infect their operations. That’s the message in the most recent regulatory report on the companies from the Securities and Exchange Commission.
The credit ratings agencies played an enormous role in generating billions of dollars in losses during the debacle. Internal emails that emerged in congressional investigations were especially revealing of the problems at these companies. “We rate every deal,” one Standard & Poor’s employee famously wrote. “It could be structured by cows and we would rate it.”

Worst start to market year in two decades
Robin Wigglesworth and Eric Platt – Financial Times
More than $2.3tn was wiped off global stocks this week as China’s slowing economy and currency depreciations spooked investors around the world, leading to the worst start to a year for markets in at least two decades.
A robust US jobs report, which added a stronger-than-expected 292,000 extra jobs in December, allayed some concerns over US economic growth on Friday but failed to rescue the grim week for financial markets.

Goldman Sachs, Morgan Stanley Fall Below Tangible Book Value
Michael J. Moore – Bloomberg
Goldman Sachs Group Inc. and Morgan Stanley are trading below their tangible book value for the first time in more than two years.
The two largest equity-trading banks, which report fourth-quarter earnings this month, dropped more than 3 percent Thursday to fall below tangible book value, a measure of what the companies would be worth if liquidated. Goldman Sachs recouped some of its loss Friday, rising 0.3 percent to $165.03 at 11:40 a.m. in New York, while Morgan Stanley slid an additional 1.3 percent to $28.62.

Be Scared of China’s Debt, Not Its Stocks
Noah Smith – Bloomberg
China’s stock market is crashing again. After two days this week with big and rapid declines — the latest of which shut off trading only a few minutes after the open — Chinese stocks are back in the neighborhood of their mid-2015 lows. The raft of administrative measures that the Chinese government has used to prop up its markets since the big plunge last year seems to only have postponed further declines, rather than prevented them.

Shock, Laughter Greet Plan for Saudi Arabia’s Record Oil IPO
Dinesh Nair, Ruth David and Matthew Martin – Bloomberg
When one financial adviser heard about Saudi Arabia’s plans to list a company larger than the economies of most nations, he had to pull over his car because he was laughing so hard.
Saudi Arabian Oil Co., or Aramco, the world’s largest oil producer, said Friday it’s considering an initial public offering. It confirmed an interview with Deputy Crown Prince Mohammad bin Salman published in the Economist Thursday. The news was greeted with incredulity in the financial industry, according to interviews with a half dozen bankers who do business in the Middle East. They asked not to be identified to protect their business interests.

****SD: Also see “Too Big to Value: Why Saudi Aramco Is in a League of Its Own”

Payrolls Surge, U.S. Jobless Rate at 5% as Workforce Grows
Sho Chandra – Bloomberg
America’s labor-market juggernaut continued to roll unabated at the end of 2015.
Employers in December added 292,000 workers, exceeding the highest estimate in a Bloomberg survey, and payrolls for the previous two months were revised higher, a Labor Department report showed on Friday. The jobless rate held at 5 percent as people entering the labor force found work. At the same time, worker pay disappointed, rising less than forecast from a year earlier.

****SD: Quartz live-charted the jobs report

Credit Suisse’s ‘universal bank’ outperforms group
Laura Noonan and Ralph Atkins – Financial Times
New figures released by Credit Suisse have revealed better returns at its “Swiss universal bank” — which it wants to list next year — compared with the overall business.
The universal bank, including parts of Credit Suisse’s private bank and its old corporate and institutional banking division, had a return on capital of 14.2 per cent in the first nine months of 2015. This compares with 9.8 per cent for Credit Suisse overall.
The business’s flotation, expected by the end of 2017, was the wild card in the bank’s October strategy announcement, which also included investment banking job cuts and a SFr6bn capital raising.

Europe Set for Leveraged-Loan Deluge Even as Investors Shun Risk
Selcuk Gokoluk – Bloomberg
Global financial turmoil has failed to deter issuers in Europe’s leveraged-loan market.
About 12 European deals, totaling around 4.9 billion euros ($5.3 billion), are set to come to market in next few weeks, based on details from people familiar with the various plans. The loans all stem from acquisitions made last year by private equity firms, including KKR & Co. and TDR Capital.

Wells Fargo ends LSE membership
Tim Cave and Giles Turner – Financial News
Wells Fargo has withdrawn its membership of the London Stock Exchange – a rare sign of retrenchment by a US investment bank in Europe.
Wells Fargo Securities International Ltd, the bank’s London-based trading arm, resigned from the LSE on December 22, according to a notice issued by the exchange.
An LSE membership permits the holder to trade in a range of products, including UK cash equities and foreign depository receipts. However, a spokeswoman for Wells Fargo said its team of London equity traders were “primarily focused on US dollar stocks”, and that trading these did not require membership with the UK exchange. There have been no staff changes at the bank as a result of the decision, the spokeswoman added.

When Investors Call the Shots for Portfolio Managers
Ben Carlson – A Wealth of Common Sense
Investors often get exactly what they’re asking for, even if what they’re asking for will damage their performance.
One of the reasons there are so many closet index funds is because investors don’t like tracking error. Being different than the market can be uncomfortable.
One of the reasons hedge funds have performed so poorly in the past decade is because investors have been so risk averse following the financial crisis. They wanted lower volatility and downside protection and that generally comes with lower returns.

Finally! A banker who talks sense on Brexit
Allister Heath – The Telegraph
Kudos to Mark Astaire, a Barclays investment banker and one of London’s most senior financiers. His contribution to the European debate this week was perfectly pitched. The City will find it tricky if we leave the EU, and will incur extra costs, but will cope. It will remain one of the world’s leading financial centres. The City, one of our key industries, will in fact thrive, whether or not we are part of the EU.

Ukraine: dismal economic prospects, great sovereign bond
John Dizard – Financial Times
For all Ukraine’s troubles, its external bonds had the highest returns of any sovereign debt last year. The optimists who actually held on to the paper through continued civil war, depression, devaluation, restructuring, and, finally, at the end of December, selective default, would have made a 41 per cent profit on their position.

For economy czar of crisis-hit Venezuela, inflation ‘does not exist’
Brian Ellsworth – Reuters
Venezuela’s new economy czar Luis Salas is tasked with controlling what is believed to be the world’s highest rate of inflation, but comes to the job with an unusual perspective: that inflation does not really exist.

U.S. Consumer Credit Grew Slowly in November
Anna Louie Sussman and Josh Mitchell – WSJ
Americans’ outstanding debt tab grew at the second-slowest pace of the year in November as they appeared to rein in borrowing for higher education, masking a pickup in credit-card debt.

Three wise men: Ageing reformists diagnose the economy’s ills
The Economist
Whatever image you may have of the reformists hoping to shake up China’s creaking economic system, it is probably not one of octogenarians who fiddle with their hearing aids and take afternoon naps. But that is a fair description of three of the country’s loudest voices for change: Mr Market, Mr Shareholding and the most radical of all, the liberal. With growth slowing, the stockmarket once again in trouble and financial risks looking more ominous, their diagnoses of the economy, born of decades of experience, are sobering.
Wu Jinglian, Li Yining and Mao Yushi—their real names—were born within two years of each other in 1929 and 1930 in Nanjing, then China’s capital. Whether it was that or pure coincidence, all three grew up to demand an end to Soviet-style central planning and to propose, to varying degrees, capitalism in its place. Their influence has waned with age, but their powers of analysis remain sharp. And they do not much like what they see.

Central Banks

US Fed will need six years to normalise balance sheet, says John Williams
Vivien Lou Chen and Jeanna Smialek – Australian Financial Review
It will take the US central bank at least six years to reduce its bloated balance sheet back to more a normal size, San Francisco Federal Reserve Bank president John Williams said, as officials take a gradual approach to withdrawing crisis-level stimulus.

The End of the Monetary Illusion Magnifies Shocks for Markets
Simon Kennedy – Bloomberg
Central bankers are no longer the circuit breakers for financial markets.
Monetary-policy makers, market saviors the past decade through the promise of interest-rate reductions or asset purchases, now lack the space to cut further — if at all — or buy more. Even those willing to intensify their efforts increasingly doubt the potency of such policies.

Australia’s Reserve Bank beats incompetent Fed in understanding monetary policy: Marc Faber
Michael Janda – Australian Broadcasting Corporation
In a case of the little battler that could, global investment analyst Marc Faber believes Australia’s Reserve Bank has a much better grasp of monetary policy than its much bigger cousin the US Federal Reserve.
Dr Faber – famous for The Gloom, Boom and Doom Report that he authors – told the ABC’s PM program that his discussions with Reserve Bank of Australia (RBA) officials fill him with more confidence than his experience with the Fed.

Monetary policy in Japan: Markets monkey with BOJ chief Kuroda in new year
Shotaro Tani – Nikkei Asian Review
Bloodbath. Carnage. These are just a sample of the sanguinary words used to describe the market turmoil in early 2016. Although the markets seemed to have calmed down somewhat, investors are still wary.
Rising tensions in the Middle East, a sudden fall in Chinese stocks and the yuan and a North Korean nuclear test are each capable of spooking financial markets on their own. In the space of a week, investors have endured them all — and reacted by pulling money out of risky assets like stocks and pouring them into safer ones such as the yen. That spells bad news for the Bank of Japan’s governor, Haruhiko Kuroda.

China central bank intervening to support yuan via state-owned banks: traders
China’s central bank was suspected of intervening in trading to support the yuan via state-owned banks, traders said on Friday.

ECB’s Lane Says Bond Buying Can Be Increased
Paul Hannon – WSJ
The European Central Bank will expand its program of government bond purchases if that is needed to raise the inflation rate to its target, a member of its governing council said in an interview published Friday.

China FX reserves fall $512.66 billion in 2015, biggest annual drop on record
China’s foreign exchange reserves, the world’s largest, fell $107.9 billion in December to $3.33 trillion, the biggest monthly drop on record, central bank data showed on Thursday.
The December figure missed market expectations of $3.40 trillion, according to a Reuters poll.
China’s foreign exchange reserves fell $512.66 billion in 2015, the biggest annual drop on record.
The value of its gold reserves stood at $60.19 billion at the end of December, up from $59.52 billion at the end of November, the People’s Bank of China said on its website.


Why China Shifted Its Strategy for the Yuan, and How It Backfired
Lingling Wei and Anjani Trivedi – WSJ
When the International Monetary Fund added the Chinese yuan to its elite basket of global reserve currencies in late November, officials at China’s central bank patted themselves on the back.
“There was a sense of mission accomplished,” says one of the officials.
The IMF stamp of approval put the yuan in the same league as the dollar, yen and sterling, a status befitting the world’s second-largest economy and one long sought by Beijing.

Chinese firms step up dollar debt redemptions as yuan weakens
Michelle Chen and Fang Yan – Reuters
Chinese companies that have borrowed heavily in global dollar debt markets are increasingly planning early repayments of their dollar-denominated loans and bonds as the Chinese yuan’s weakness extends into the new year.

China’s Currency Communication Breakdown
Alex Frangos – WSJ
China hasn’t lost control of its currency so much as it has lost control of the narrative about its currency. A dose of certainty could help investors adjust to China’s perilous predicament.

Currency Devaluations by Asian Tigers Could Hinder Global Growth
Landon Thomas Jr. – NY Times
China’s decision to push the value of its currency lower has opened a new front of worry for global investors: a potential wave of currency devaluations among the so-called Asian tigers — South Korea, Singapore and Taiwan.

Greece’s Two Currencies
Yanis Varoufakis – Project Syndicate
Imagine a depositor in the US state of Arizona being permitted to withdraw only small amounts of cash weekly and facing restrictions on how much money he or she could wire to a bank account in California. Such capital controls, if they ever came about, would spell the end of the dollar as a single currency, because such constraints are utterly incompatible with a monetary union.
Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges.

This thing looks like that thing, SEF rulebook edition
Joe Rennison – Financial Times
A brand spanking new trading platform has just received temporary registration from a US regulator to trade derivatives. But on paper, it looks suspiciously like an existing derivatives trading platform that would also be a key competitor.
FTSef, owned by Flextrade, intends to trade FX non-deliverable forwards, where a currency exchange rate is agreed at the time of the trade for a future date and the settlement value is the difference between the agreed rate and the spot price. To do so, FTSef submitted an application to the Commodity Futures Trading Commission to become a registered swap execution facility. On Tuesday, it received temporary registration.

Venezuela’s Strange System Of Exchange Rates
Emiliana Disilvestro and David Howden – ValueWalk
Venezuela is currently going through its worst crisis in history, replete with an endless list of interesting problems. Foremost among these are severe shortages in even the most basic of necessities. Economists have used these shortages as textbook examples to illustrate the pernicious effects of price controls.
Few people, however, are aware that many of the country’s problems are caused by a complex monetary arrangement that makes use of four different exchange rates simultaneously. The result is that Venezuela can either be extremely cheap, or unbearably expensive, depending on the rate used.

SNB Suffers Record 23 Billion-Franc Loss on Strong Currency
Catherine Bosley – Bloomberg
Federal government, cantons to receive their customary payout
Franc rose vs. euro after SNB gave up cap on franc in January
The Swiss National Bank estimates that it incurred a record loss of 23 billion francs ($23 billion) last year after it abandoned its currency cap.

Indexes & Index Products

That Giant Sucking Sound You Hear Is the ETF Options Market
Eric Balchunas and Tracy Alloway – Bloomberg
As investors rush to protect their portfolios in a tumultuous start to the year, odds are they will be using options on exchange-traded funds to do it.
While much of the recent focus on the ETF phenomenon has centered squarely on their inflows and trading growth, they are quietly becoming the epicenter of the equity option market.
ETFs now account for about 70 percent of all equity option volume, or $770 billion of the approximate $1.1 trillion traded per day, using a sample of the past 20 trading days. That’s double what the average volume was five years ago, at a time when more people than ever are buying and selling puts and calls on ETFs than they are on individual stocks.

Asia Fixed Income: 2015 Pan Asia Report Card
Michele Leung – S&P Dow Jones Indices: Indexology
Despite the weakness in local currencies, the S&P Pan Asia Bond Index, which is designed to track local currency bonds in 10 countries and is calculated in USD, delivered a total return of 1.45% for 2015. The S&P Pan Asia Corporate Bond Index rose 2.54% in the same period, outperforming the S&P Pan Asia Government Bond Index.

China Woes Send Traders Running From Germany’s Once-Mighty DAX
Roxana Zega – Bloomberg
You know things are bad for German stocks when even Greece is beating them.
The DAX Index has tumbled 7.1 percent this week through Thursday, posting one of the worst drops among developed markets and its biggest slump since the China-led rout in August. The German measure closed below 10,000 for the first time since October, just after completing a fourth straight year of advances.

As goes the first week, so goes …
Tim Edwards – S&P Dow Jones Indices: Indexology
The world’s equity markets have a encountered a rocky introduction to 2016; including the worst ever start for the Dow Jones Industrial Average (against a record that stretches back to 1897) and steep falls across developed and emerging markets. Equity markets are down more or less everywhere, and in many cases materially so.


Haven Assets Lose Luster as Refuge From Market Turmoil
Christopher Whittall and Ese Erheriene – WSJ
Investors looking to weather the turmoil ripping through global markets are facing up to a hard truth: Havens don’t offer the protection they once did.
A handful of assets such as government bonds, gold and oil previously acted as shock absorbers in investor portfolios, rising in value when others fell through the floor. Now, investors find these hedges are no longer dependable.

China’s largest bank buys huge 1,500-tonne gold vault in London
The Telegraph
China’s largest bank is buying the lease on Deutsche Bank’s huge London gold and silver vault, enlarging its footprint in the city’s bullion market, according to reports.
ICBC Standard Bank, which took a controlling stake in London-based Global Markets business last year, has also applied to become a clearing member of the London gold and silver over-the-counter business.

New gold rush flattens Johannesburg’s famous mining dumps
Fox News
A new gold rush is hitting Johannesburg, literally flattening the South African city whose Zulu name “Egoli” means City of Gold.
Hundreds of massive dumps of “tailings,” the waste product left from more than a century of gold mining, dot the area in and around South Africa’s largest city. Experts believe they have long posed a serious health and environmental risk to the estimated 1.5 million people who live near them. But the dumps are yielding a new round of precious metal thanks to new technology, and, this time, companies sifting through the giant dumps are carting away the waste and transforming the city’s skyline.

Digging into Suriname’s Massive and Corrupt Gold Industry (VIDEO)
Gold is everywhere in Suriname, and the effects of its mining seep into all aspects of society, from the political powers to what the locals wear on their fingers. The industry is a necessary source of income for many Surinamese, but it’s also destroying the environment, bad for public health, and filled with corruption.


Here is Donald Trump’s tremendous advice for investing in the stock market right now
Colin Campbell – Business Insider
Real-estate tycoon Donald Trump gave his supporters some free investing advice at a Thursday-night campaign rally: Be cautious.
“Be very conservative, because it could be very rough out there,” Trump said. “And who can fix things better than me?”

How skyscrapers reveal the rise and fall of American fortunes
Emily Badger – The Washington Post
Jason Barr is an economist who studies skyscrapers. Or, as he jokes, skynomics: how construction costs and condo prices shape the skyline, how building booms chase business cycles, why new record-breaking towers reach the heights they do.
“Fundamentally,” he says, “the skyline is a rational result of underlying economic forces.” Look at the city that way, and architecture reflects the booms and busts of the American economy over the last century. A timeline of skyscraper construction in New York City in particular mirrors the exuberance of the Roaring ’20s, the spending standstill of World War II, the rowdy years on Wall Street and the hiccups of crises from oil spikes to the recession.

Bernie Sanders has a problem: sometimes greed is good
The Guardian
Bernie Sanders has a problem. Sometimes greed is good.
Imagine, for a minute, that your employer tells you that he’s going to pay you 25% more a year and give you an extra week of vacation. In exchange, all you have to do is agree to come in an hour earlier every day, leave an hour later every day, and make you responsible for finding a way to cut your division’s annual budget by 5%. Do you take the offer?

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