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JLN Financials, JLN Options and JLN Environmental/Energy will not be published again until Monday, January 4. We will be publishing the JLN newsletter tomorrow, but not on Friday. We will return on Monday and publish through Thursday of next week. We wish you a safe and joyous holiday season!


Ed Boyle, BOX Options Exchange – The Crystal Ball

“The successful firms in this industry looked at the history, saw the change coming, and reacted by getting ahead of it.”

Ed Boyle believes that everyone has access to a crystal ball. The trick, however, is to make sure it is tuned to the right frequency. He says the past creates the future, and one must look through the trees to see properly. Then, proceed with passion. Sure; it sounds easy on paper, and yes, the devil is in the details, but that’s where the passion comes in.

The financial markets are in the midst of a full regulatory overhaul, and with this change comes opportunity, but only for those firms capable of embracing the change and riding the wave.

Watch the video »

Quote of the Day

“It’s like a cancer. It’s spreading throughout the body. If you look at all the segments in high-yield — chemicals, metals and mining, utilities, retail, health care — they’re all impacted.”

Michael Carley, the former co-head of distressed debt at UBS Group AG who is a co-founder of hedge-fund firm Lutetium Capital LLC, in the story, “The Distressed-Debt Trades That Obliterated Bonus Checks in 2015”

Lead Stories

The Cannibalized Company – How the cult of shareholder value has reshaped corporate America
Karen Brettell and Timothy Aeppel – Reuters
Buybacks fueled by cheap credit leave workers out of the equation

Wall Street Cop Uses Algos to See Billions in Errant Bond Trades
Matt Robinson – Bloomberg
Jesse Litvak kicked off a widespread investigation into the opaque world of bond trading by accidentally sending a client a spreadsheet detailing how he was allegedly ripping them off. Wall Street’s main regulator is trying to make sure future probes aren’t relying on similar stumbles.

Default danger for US high yield in 2016
Jenny Cosgrave – CNBC
After the bruising decline seen in high-yield bonds so far this year, dominated by the trouble for oil and commodity issuers, investors and analysts warn that the worst is still to come for the sector.
High-yield bonds are down around 5 percent so far this year, with estimates for junk bond returns in 2016 ranging from a loss of 3 percent to a gain of 6 percent, according to an annual, informal survey from S&P Capital IQ Leverage Commentary and Data (LCD).

US banks hit by cheap oil as Opec warns of long-term low
Laura Noonan and Ben McLannahan – Financial Times
US banks face the prospect of tougher stress tests next year because of their exposure to oil in a sign of how the falling price of crude is transforming the outlook not just for energy companies but the financial sector.

The Distressed-Debt Trades That Obliterated Bonus Checks in 2015
Jodi Xu Klein – Bloomberg
Distressed debt investors could describe 2015 in a single word: pain.
With oil and coal prices simultaneously falling to unforeseen lows, the bonds and loans of energy companies lost much of their value. The agony quickly spread to other industries, from materials to retail to industrials, and traders struggled to find safe havens and preserve their paychecks amid the rout.

Hidden in plain sight: Big risks at failed Third Avenue fund were clear to some
Tim McLaughlin, Ross Kerber and Svea Herbst-Bayliss – Reuters
In the months before the blowup of Third Avenue’s junk bond fund in early December, investors and financial advisors called the New York-based investment company to voice their concerns about the growing percentage of hard-to-trade, illiquid assets in the fund’s portfolio.

Deutsche Bank Leads a Retreat From Markets
Mark Gilbert – Bloomberg
For five consecutive years, the end of December has seen Deutsche Bank atop the annual league tables as the bank that handled the most European bond sales. Not this year.

For Chinese companies handling bad loans of banks, 2016 may become best year yet
Liz Mak – South China Morning Post
KPMG predicts 2016 may be the best year for China distressed bank assets yet, with the number of asset management companies that specialise in digesting banks’ bad debt portfolio likely to surge up to 31, up from the present number of 18.
But the window for investment may not remain open for long. The year 2016 will likely represent a peak for China NPLs, said Barclays China financials analyst Alex Zhou, with the figure likely to moderate from 2017.

CFTC moves on swap reporting standards
Cian Burke – Futures & Options World
The Commodity Futures Trading Commission (CFTC) launched on Tuesday a consultation on the standardisation of data fields under its swap reporting rules, marking the US regulator’s latest effort to improve the quality of reported data.
The CFTC is seeking input on 120 data fields covering reporting topics including counterparty-related elements, price, clearing, product, periodic reporting, orders, package transactions, options, additional fixed payments, notional amount, events, rates and foreign exchange.

Global Dealmaking Hits All-Time Peak in 2015 at $4.2 Trillion
Ed Hammond – Bloomberg
There have been 37,212 deals in 2015 — roughly one for every employee of Goldman Sachs Group Inc., the Wall Street bank that has been one of the big winners of the current merger boom.

China approves strategic emerging industries board, bolster capital market
Daniel Ren – South China Morning Post
Beijing has given the green light to the Shanghai Stock Exchange to create a new board for strategic emerging industries, part of efforts to expand the financing channel for technology firms amid a slowing economy.

The Trouble With Sovereign-Wealth Funds
Simon Clark, Mia Lamar and Bradley Hope -WSJ
Kazakhstan’s $55 billion sovereign-wealth fund helped pull the country through the global financial crisis and offered funding for the country’s bid to host the 2022 Winter Olympics.
But the collapse in oil prices has hit Kazakhstan and its fund, Samruk-Kazyna JSC, hard. In October, the fund borrowed $1.5 billion in its first syndicated loan to help a cash-strapped subsidiary saddled with a troubled oil-field investment.

Banks Reject New York City IDs, Leaving ‘Unbanked’ on Sidelines
Michael Corkery and Jessica Silver-Greenberg – NY Times
Nearly a year ago, Mayor Bill de Blasio proclaimed that a new municipal identification card would help thousands of New Yorkers “lead fuller lives, better lives, lives full of respect and recognition.”
More than 670,000 people have obtained the identification cards since the program began in January. One of the program’s goals is to help many of those people obtain bank accounts.
But some of the biggest banks in the city — including JPMorgan Chase, Bank of America and Citigroup — will not accept the cards as a primary source of identification, even though their federal regulators and some smaller banks have approved their use.

Pentagon eyes proposal for M&A changes in ‘weeks’
The Pentagon and other U.S. government agencies should complete a legislative proposal in coming weeks to let regulators block proposed mergers for national security reasons, instead of just antitrust concerns, a top official said on Tuesday.

What were the best trades of 2015?
John Authers – Financial Times
What were the best trades of 2015?

****SD: Also, here is a video where Authers comments on total returns being with one percentage point of zero for US stocks, bonds and cash.

10 Fintech Megatrends to Watch in 2016
David Gyori – Finance Magnates
Among the trends discussed for 2016: is PayPal an acquisition target? Are robots working with advisors or replacing them? Is Bitcoin destined for gloom?

End of year report card: Investment Banking 2015
Tim Burke – Financial News
The past 12 months have seen our American exchange students do better than the local pupils. Although Deutsche Bank remains Europe’s leading homegrown firm, its standing has been diminished, underscoring the possibility that the industry might end up as a two-tier system.

Medieval Champagne fairs: Lessons for development
Sheilagh Ogilvie – VOX, CEPR’s Policy Portal
A vocal set of economists argue that economies can succeed in the absence of strong state and public institutions. This column looks to the ‘Champagne fairs’ of medieval Europe for lessons in how important public institutions can be. Public authorities are crucial – for good or for ill. When rulers provided these as generalised institutional services to everyone, the Champagne fairs flourished. When they granted them to privileged groups only, trade declined and business moved elsewhere.

Central Banks

Bernie Sanders: To Rein In Wall Street, Fix the Fed
Bernie Sanders – NY Times
Wall Street is still out of control. Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail. But almost every one is bigger today than it was before the bailout. If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

Gravity Is Back for 2016 Markets as Central Bank Support Ebbs
Simon Kennedy – Bloomberg
Central bankers risk turning more foe than friend to investors in 2016.
After propping up financial markets with zero interest rates and debt purchases for seven years, top monetary-policy makers are becoming a less calming presence as the new year approaches.

Fed: What to expect for monetary policy beyond the next hike? – SocGen
Aneta Markowska, Research Analyst at Societe Generale, expects three hikes next year on the assumption that the inherent volatility in the data and the markets will cause the Fed to take a pass at one of the ‘live’ meetings.

Hungarian Rate Setters to Play Unorthodox Game
Margit Feher – WSJ
Hungarian rate setters unanimously voted in mid December in favor of keeping the benchmark rate unchanged at its record low and agreed to use unconventional tools to loosen monetary conditions further, according to minutes of the rate meeting published Wednesday.
All members of the nine-strong panel argued that “the inflation target could be achieved in a sustainable way by holding the base rate unchanged for an extended period and by using unconventional, targeted monetary policy instruments.”


Record highs predicted for bitcoin in 2016 as new supply halves
Jemima Kelly – Reuters
2016 could prove to be the year that the price of bitcoin surges again. Not because of any dark-web drug-dealing or Russian ponzi scheme, but for an altogether less sensational reason – slower growth in the money supply.

Buy Side Concerned Over FX Market Liquidity
Profit & Loss
In a survey, released last week by State Street, 43% of the survey respondents said that they were concerned about declining liquidity in the FX market, while 70% said that they were concerned about declining liquidity in fixed income. This should come as no surprise to anyone that has been working in or around these two asset classes over the past year. Sixty-eight cent of the respondents – which comprised 110 portfolio and risk managers working at asset management companies, banks/insurance, alternative managers, pension funds and sovereign institutions – blame the regulatory environment for diminishing liquidity.

China to Double Onshore Yuan’s Trading Hours From January
China will double the yuan’s onshore trading hours from January as it prepares for the currency’s addition to the IMF’s reserves basket in October next year.

Zimbabwe’s curious plan to adopt China’s currency
Adam Taylor – Washington Post
Want evidence that China is still making inroads in sub-Saharan Africa? Look no further than Zimbabwe, where the finance minister just announced a plan to begin using the Chinese yuan as an official currency within the southern African nation — part of a deal in which Beijing will also cancel about $40 million in debt.

India has to brace for more volatility, currency war
Business Standard News
The financial stability report, released on Wednesday, warned of a currency war amid competing central bank policies, and harped on the need for India to carry out crucial reforms amid the uncertainties.
Benign oil prices are not an occasion for complacency for a country like India that runs twin deficits and the government should take the opportunity to improve its finances and push for investment spending that would encourage private sector to come forward with their own investment plans, the report said.

Indexes & Index Products

On pace for a record-breaking year of ETF inflows
The Reformed Broker
My pal Nick Colas at Convergex, chief market strategist at Convergex, a global brokerage company based in New York, put out some interesting info on this year’s ETF flows.

Yield Opportunity with a Covered Call ETF Strategy
Tom Lydon – ETF Trends
With the equities market slowing down after a multi-year rally, investors may find opportunities in exchange traded funds that track buy-write or covered-call strategies.

Amazon spurs US mutual fund winners in 2015
Stephen Foley – Financial Times
The most successful US mutual fund managers of the past year have Jeff Bezos, chief executive of Amazon, to thank for their top-ranked returns.

WisdomTree Launches Two Dynamic ‘Alt’ ETFs
Chris Dieterich – Barron’s
WisdomTree (WETF), best known for its homemade indexes of global stocks and as a pioneer of currency-hedged ETFs, added to its “alternative” exchange-traded fund offerings on Wednesday. The WisdomTree Dynamic Long/Short U.S. Equity Fund (DYLS) and Dynamic Bearish U.S. Equity Fund (DYB) made their trading debuts in this holiday-shortened week.


Traders Pricing In Unusually Choppy Trading For Big-Cap Gold Miners ETF
Chris Dieterich – Barron’s
Some derivatives-related market oddness for this holiday-shortened week:
Traders are pricing in bigger future prices swings for the Market Vectors Gold Miners exchange-traded fund (GDX) than for the usually more volatile Market Vectors Junior Gold Miners ETF (GDXJ) for the first time in five years.

Archaeologists believe Thames gold hoard may have come from Tudor hat
Patrick Foster – The Telegraph
A gust of wind blowing up the Thames half a millennium ago may have been responsible for the creation of a small hoard of gold that has been dug out of the muddy banks of the river.


Why It’s So Hard to Put a Price on the World’s Biggest Diamonds
Thomas Biesheuvel – Bloomberg
Stones so rare only small group of super-rich can afford them
To gauge value, miner Gem Diamonds cuts some of its own rocks
When miners unearth the world’s biggest and rarest of diamonds — like the golf-ball-sized, 357-carat rock found this year in the southern African kingdom of Lesotho — figuring out what they are worth can prove almost as difficult.

Money in the movies (VIDEO)
The Economist
Finding the bad guy in Hollywood films is easy: he either has a British accent or he works in finance. Philip Coggan and Oliver Morton analyse cinema’s famous financiers

A Fitting End for the Hottest Year on Record
Jonah Bromwich – NY Times
With some help from El Niño, 2015 will almost certainly finish out its run as the hottest year on record with temperatures on Christmas Eve and Christmas Day predicted to be well above average across much of the United States.

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