First Impressions

Bits & Pieces
by John J. Lothian

Every year the CBOE holds a press lunch in Chicago in January. It is normally a very nice affair with a good turnout of Chicago-based industry journalists.

It was after last year’s press lunch that I wrote a column titled “The CME Should Buy the CBOE Soon.”

On January 24, 2014 the price of the CBOE stock was about $50. It closed that day at $50.03. The lowest it has traded since that day is $46.73. Yesterday the shares in CBOE Holdings, Inc. hit $65.00.

That is up 30% in about 12 months, after being up 76% in 2013 and still no deal. Oh well, I guess I was wrong.

Speaking of anniversaries, Doug Ashburn has been with John J. Lothian & Company, Inc. for four years. He has turned into quite a journalist, even if he will not admit it himself.

Next week is the Securities Traders Association of Chicago 89th Annual Mid-Winter Meeting at the Hilton on Michigan Avenue. See here for details

The 2015 Options Industry Conference is not next week, or in winter. It is May 6 to 8 at the Fontainbleau Hotel in Miami, FL. The BOX is the host exchange this year and they have asked me to reprise my role as moderator of the exchange leader panel. It should be fun.

In the coming days and weeks we will be sending out invoices to our readers for their 2015 subscriptions. We have returned to the policy of voluntary pay. If you find this newsletter valuable, you are asked to pay for it. We ask $150 for a 2015 individual subscription and $100 per reader for firms with five or more subscribers.

We did not make this change to maximize revenues, but rather to maximize the readership of this newsletter. In maximizing the readership, we maximize the viral nature of the of the information. More people will see the newsletter, more people will share it and a greater good will come from having this information to manage your non-price oriented risks. So if you know of people who would find value in JLN, please forward it along and encourage them to check us out.

We believe in market-based solutions. We believe in markets. We also believe music can save your mortal soul.

Quote of the Day

“The drop in oil increases expectations for disinflation, which will allow the Fed to move even more gradually From the global-investor perspective looking across markets, Treasuries are still relatively attractive.”

Margaret Kerins, the Chicago-based head of fixed-income strategy at Bank of Montreal in the story, “Treasury Bonds Defying Fed With Biggest Rally Since 1970s”.

Lead Stories

Treasuries Winning Streak Longest Since 2012 Amid Oil Collapse
Daniel Kruger and Susanne Walker – Bloomberg
Treasuries rallied, with benchmark 10-year yields dropping below 2 percent for the first time since October, as tumbling oil prices damped the global outlook for inflation.
U.S. 30-year bonds gained for an eighth day, sending the yield to the lowest level since July 2012, as a report showed service industries growth moderated as 2014 ended. Global sovereign bonds advanced, pushing yields to a record low, on speculation the European Central Bank may extend stimulus to boost regional economies. U.S. debt rallied even as the Federal Reserve plans to raise interest rates later this year.

Bloodbath at Dalal Street: Sensex crashes 855 points on Greece woes, oil gloom
The Pioneer
Dalal Street on Tuesday witnessed a bloodbath as BSE benchmark Sensex crashed by 855 points and investors lost nearly Rs 3 lakh crore of their wealth as shares of over 2,200 listed firms ended in the red. This is the worst ever crash in the last five and a half years as stock markets across the world went into a tailspin amid speculation about probable exit of Greece from the Euro region and oil prices cracking below $50 per barrel mark.

Treasury Bonds Defying Fed With Biggest Rally Since 1970s
Daniel Kruger – Bloomberg
Treasury (USGG30YR) 30-year bonds are posting their biggest-ever rally to start the year even as Federal Reserve policy makers plan to raise interest rates later this year.
The bond yield has dropped as much as 0.28 percentage point during the first three days of 2015 and is approaching its record low. Speculation the collapse in oil prices and the risk of deflation in Europe amid a surge in political turmoil will restrain inflation around the world added to the allure of U.S. debt.

An economist’s advice to astrologers
Martin Wolf Martin Wolf – FT
The world economy shows growth prospects for the year’
As the late John Kenneth Galbraith remarked: “The only function of economic forecasting is to make astrology look respectable.”

Beware of Nervous Fund Managers; A Study Shows That Gun-Shy Investment Pros Do Worse, and Risk Losing Job
By William Power – WSJ
When it comes to mutual-fund managers, the adage may be true: No guts, no glory. Investment professionals who are too scared about losses tend to perform more poorly overall, hurting both their investors and their own careers, contends a soon-to-be published study.

Goldman Says JPMorgan Should Break Itself Into Pieces
By Hugh Son – Bloomberg
JPMorgan Chase & Co. (JPM)’s parts are probably worth more to investors than the whole after regulators proposed tougher rules penalizing firms for size and complexity, according to Goldman Sachs Group Inc.

Junk-Bond Baby Dumped With Bathwater in Oil Rout, Lillard Says
Zachary Tracer and Sonali Basak – Bloomberg
Prudential Financial Inc. (PRU), the life insurer with more than $1 trillion of assets under management, said investors concerned about possible defaults of oil and gas companies are overlooking opportunity elsewhere in junk bonds.
“The market has thrown the baby out with the bathwater,” Mike Lillard, chief investment officer of Prudential Fixed Income said today in New York as company executives discussed their outlook for 2015. “If the economy is fine, it’s strong, you’re going to see issues in the energy sector, but not overall.”

Swap Markets Debate Anonymous Trading in SEFs
Ivy Schmerken – WallStreet & Technology
Capital Markets Outlook: With more than a year of SEF trading up and running, swap participants are looking at standardized Market Agreed Upon or “MAC” swap products, to fuel anonymous order book trading next year.

Steven A. Cohen’s Point72 Earns Big 2014 Trading Profit; Investment Firm Recorded Roughly $3 Billion In Gross Profits
By Rob Copeland – WSJ
Steven A. Cohen’s investment firm earned a huge trading profit last year, a person familiar with the matter said Monday, despite a series of high-profile staff departures and the pressure of a continuing civil case against its founder for failure to supervise employees later found guilty of insider trading.

Love Him or Hate Him, Bill Ackman Now Runs the World’s Top Hedge Fund
By Katrina Brooker, Bloomberg
Lunch was a bit awkward. It was around 1 p.m. on a warm October day in New York. A group of Wall Street investors were tucking into chicken in a red-wine demi-glace and Brussels sprouts at the Plaza Hotel. They’d convened for Jim Grant’s fall conference, hosted by the influential editor of Grant’s Interest Rate Observer.

30 Under 30 Finance: The Top Young Traders, Bankers And Dealmakers
By Samantha Sharf and Nathan Vardi, Forbes
The rising stars of finance are making their mark on Wall Street, working at big banks like Goldman Sachs, hedge funds like Coatue Management, and private equity firms like KKR. The 30 men and women on Forbes’ 30 under 30 Finance list show yet again that some financial professionals are accumulating a tremendous amount of responsibility on Wall Street at the age of 29 or younger. Their accomplishments are impressive.

Central Banks

Obama to nominate former Bank of Hawaii CEO to Federal Reserve Board
Jim Puzzanghera – LA Times
President Obama said Tuesday that he would nominate the former head of one of Hawaii’s largest banks to serve on the Federal Reserve Board of Governors, following criticism from some lawmakers about the lack of community banking experience among the central bank’s leaders.
Obama tapped into his home state to select Allan R. Landon, who was chief executive of the Bank of Hawaii from 2004 to 2010.

Michael Heise: QE Is the Wrong Fix for Europe
Michael Heise – WSJ
Speculation is rife that the European Central Bank might announce bold new monetary easing measures at its policy meeting this month, in particular a program to purchase eurozone sovereign bonds, or quantitative easing. The goal would be to expand the ECB’s balance sheet by EUR1 trillion ($1.194 trillion).
Yet anyone who thinks QE would be the policy that at last jolts the eurozone out of its torpor is in for disappointment. QE is unwarranted. It also would most likely be ineffective.

Abenomics Enters Show-Me Phase As Japan Struggles With Growth
In an era of unprecedented, globally synchronized and at times controversial interventions by developed market central banks, the Bank of Japan (BOJ) is currently engaged in the most ambitious policy project seen yet. In October the BOJ surprised markets by announcing an expansion of their asset purchase program to an astounding 80 trillion yen (approximately $670 billion) per year.

Steve Forbes in Houston: The Federal Reserve is a bigger threat to the economy than oil prices, Jeb Bush has the chops to run for President
Houston Business Journal
In the run up to An Evening with Steve Forbes, a Jan. 6 event by AM 1070 The Answer and sponsored by the Houston Business Journal, I had a chance to sit down with Steve Forbes, the chairman and editor-in-chief of Forbes Media. Forbes explained his view on the real implications of oil prices, how his company’s unique content model is working out and who he thinks has the stuff to run for president in 2016.

With Democrats Out, Audit of Federal Reserve Gains Momentum
Alex Newman – The New American
Despite frantic opposition by the privately owned Federal Reserve and Democrat leadership in Congress, newly empowered Republican lawmakers, now in the majority in the Senate as well, plan to hold a vote on “Audit the Fed” legislation to scrutinize the secrecy-obsessed central bank. Federal Reserve bosses are already lashing out and lobbying lawmakers “forcefully” to reject efforts at congressional oversight and transparency. Senator Rand Paul (R-Ky.) and a coalition of his colleagues, though, are determined to see the bill become law this year, and congressional leadership has pledged to allow a vote.


Everyone Loving the Dollar Raises Correction Alarm to Kit Juckes
Rachel Evans – Bloomberg
The biggest rally in the dollar in more than four years is raising a red flag that the best-performing major currency of 2014 risks reversing course.
“I am alarmed by consensus and positioning, both of which are extreme,” Kit Juckes, a London-based global strategist at Societe Generale SA, wrote in a note today. “A correction seems likely very soon, if it isn’t already starting.”

Russia Credit Risk Soars to Six-Year High as Ruble Slides on Oil
Vladimir Kuznetsov and Natasha Doff – Bloomberg
The cost of insuring Russian bonds against default rose to the highest level in almost six years on speculation a cut in the nation’s credit rating to junk is imminent. The ruble tumbled for a second day.
Five-year credit default swaps jumped 56 basis points to 594 by 6:54 p.m. in Moscow, the most since March 2009 on a closing basis and the fifth-highest sovereign globally. The contracts rose 118 basis points in the past three days. The ruble lost 1.9 percent to 62.0265 a dollar as Brent crude slid toward $50 a barrel for the first time in almost six years.

Best And Worst Performing Currency ETFs Of 2014
Seeking Alpha
Currency markets had an eventful 2014 with the U.S. dollar touching multi-year highs against a basket of major currencies. Improving U.S. economic data, escalating geopolitical tensions, diverging central bank policies around the world and chances of a sooner-than-expected rate tightening cycle in the U.S. were some of the factors contributing to a stronger greenback.

It’s Getting Ugly for Sterling Out There
Chiara Albanese – WSJ
All eyes are on the sliding euro, but sterling is beating it hands-down in the ugly stakes.
The euro has lost 1.7% against the dollar since the first moments of 2015, sinking to its lowest point in nine years. That’s no mean feat. But sterling has shed nearly 2.5% against the buck.

Indexes & Index Products

Nasdaq to Be Top Smart Beta Index Provider
In an attempt to expand its global index business and exchange traded funds (ETFs) portfolio, Nasdaq OMX Group Inc. (NDAQ) inked a strategic deal to buy Virginia-based leading private investment advisory firm – Dorsey, Wright & Associates (DWA). The acquisition is valued at $225 million and is expected to culminate by Mar 2015.
The transaction is expected to be accretive to earnings immediately upon closing. Although Nasdaq aims to fund the deal with its prevailing cash and debt, management does not expect any significant burden on financial leverage and capital return.

Revisiting the ‘problem’ with leveraged ETFs « TSI Blog
The Speculative Investor
My 3rd November blog post explained why leveraged ETFs should only ever be used for short-term trades. To set the scene, here is an excerpt from this earlier post:
“The crux of the matter is that leveraged ETFs are designed to move by 2 or 3 times the DAILY percentage changes of the target indexes. They are NOT designed to move by 2 or 3 times the percentage change of the target indexes over periods of longer than one day. Due to the effects of compounding, their percentage changes over periods of much longer than one day will usually be less — and sometimes substantially less — than 2-times (in the case of a 2X ETF) or 3-times (in the case of a 3X ETF) the percentage changes in the target indexes.”


CME Group Announces the Launch of Physically Delivered Gold Kilo Futures
Press Release – MarketWatch
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the launch of physically delivered Gold Kilo Futures contracts (contract code GCK) to begin trading on January 26, 2015, pending all regulatory review periods.

Gold-Oil Ratio Shows Crude Drop Tied to Supply: Chart of the Day
David Wilson – Bloomberg
The highest gold prices relative to oil since the 1990s show crude’s plunge stems from excess supply rather than potential deflation, according to Michael Shaoul, chief executive officer of Marketfield Asset Management LLC.
The CHART OF THE DAY shows the ratio between the two commodities since 1971, when the precious metal’s price was allowed to fluctuate rather than being fixed in dollars. Spot gold, available for immediate delivery, and historical crude prices compiled by Bloomberg were used in the comparison.

Gold shines amid the uncertainty of global markets
Swaha Pattanaik – The Globe and Mail
One excellent reason not to buy gold used to be that other alternative safe investments offered much higher yields. How times have changed.
Gold still comes with costs and no cash return. But at today’s prices, so do a substantial portion of government bonds, including all German debt with maturities of five years or less. Half of all outstanding government debt yields less than 1 per cent, Bank of America Merrill Lynch economists calculate. Many yield-hungry investors might think gold’s zero is not significantly inferior, after adjusting for the risk of bond-devaluing inflation.

Pin It on Pinterest

Share This Story