First Impressions

Steve Crutchfield, EVP at IntercontinentalExchange – How to Build an Options Trading System (In Ten Minutes)

“You’ve got to come up with some numbers that describe the universe based on data that fit that model.”

Steve Crutchfield, Executive Vice President at IntercontinentalExchange, explains the three key components of building a trading system. Beginning with a brief history of the New York Stock Exchange, Crutchfield gives a glimpse of trading activity in its early stages and its evolution into today’s intricate electronic systems. Crutchfield emphasizes that looking at historical data and determining which numbers to pull out from it is a difficult problem to solve, among many other challenges in the trading world today.

Watch the video »

Quote of the Day

There’s reason to be worried about high yield but there are those that believe that there is still more returns left in this asset class before the Fed changes policy and you need to flee.

Cabot Money Management’s William Larkin, as quoted in the Bloomberg article “Love Affair With Junk Resumes With Biggest Inflows of ’14”

Lead Stories

Upstarts prepare to ambush the lords of finance
Gillian Tett – Financial Times
When central bankers and economists gather on Friday for their annual convention in Jackson Hole, there will be plenty of solemn debate about the state of the world’s banks. But as policy makers and economists ponder where the industry is headed, a certain irony hangs in the air.

***DA: This article focuses on the various alternative payment systems and schemes. The problem is deciding on one reliable standard.

U.S. judge calls Argentina debt swap plan ‘illegal’
Nate Raymond and Joseph Ax – Reuters
U.S. District Judge Thomas Griesa on Thursday called Argentina’s proposed debt restructuring plan “illegal” but stopped short of holding the country in contempt, saying that would not help resolve the dispute that led to the nation’s second default in a dozen years.

***DA: A last great act of defiance or a Hail Mary play?

Love Affair With Junk Resumes With Biggest Inflows of ’14
Sridhar Natarajan and Christine Idzelis – Bloomberg
U.S. high-yield bond funds recorded the biggest weekly inflow of 2014 as investors returned to the riskiest corporate debt following an unprecedented withdrawal at the start of August.
Mutual funds and exchange-traded funds that buy junk bonds attracted $2.2 billion in the week ended Aug. 20, according to data provider Lipper. That’s the second straight week of inflows after investors pulled $7.1 billion in the five days ended Aug. 6, extending redemptions to as much as $12.6 billion over a four-week period.

Blackstone Said to Be in Talks to Back New Distressed Fund
Bei Hu – Bloomberg
Blackstone Group LP is in talks to back a Hong Kong-based distressed fund started by Jason Brown, a former global head of Goldman Sachs Group Inc. (GS)’s Special Situations Group, said two people with knowledge of the matter.
Brown’s Arkkan Capital Management Ltd. will focus on Asian opportunities with the flexibility to invest globally, said the people, who asked not to be identified as the information is private. It would be the second time Blackstone backs an Asia-based hedge fund since the 2008 global financial crisis.

U.S. Bond Issuance Nears $1 Trillion
Mike Cherney – WSJ
U.S. corporate-bond issuance is hurtling toward a record for the third consecutive year, as companies take advantage of a surprising interest-rate decline to stock up on cash. Companies around the globe have sold about $994.9 billion of bonds in the U.S. this year as of Thursday morning, according to data provider Dealogic, which has figures dating back to 1995.

***DA: Stock buybacks also set a new record. No doubt in my mind what is fueling the rally.

Company Bonds in Europe to Return Up to 8%, Says Aberdeen’s Webb
High-yield corporate bonds in Europe will hand investors returns of as much as 8 percent this year as the region’s stuttering economy boosts the likelihood of policy makers suppressing borrowing costs, according to Roger Webb, an investment director at Aberdeen Asset Management Plc.
The prediction is an increase from his forecast for gains of as much as 7 percent made in January. Webb, who is based in London, also revised the outlook for returns on investment-grade debt to as much 7 percent from 5 percent.

Five Questions for Participants at Fed’s Jackson Hole Conference
Pedro Nicolaci da Costa – MoneyBeat – WSJ
Top central bankers from around the world gather in Jackson Hole, Wyo., this week for the Federal Reserve Bank of Kansas City’s annual policy conference. This year’s focus is labor markets. The slow recovery of the U.S. job market has been a key reason for aggressive Federal Reserve efforts to stimulate growth, including bond buys and near-zero interest rates.

Buiter on helicopter drops
David Keohane – Financial Times
Some further, further reading on Friday — a new paper from Citi’s Willem Buiter, on why helicopter drops of money always work.

***DA: Helicopter drops work great if one is standing directly under the helicopter, as is Citi, but get worse the further away one is from the drop. Those who didn’t catch any of the flying money – savers and the non-investor class – must live with the resultant price rise but cannot compete with those holding fistfulls of dropped money.

Argentina and Elliott – was it really a bond play?
Financial Times
Pablo Triana, Professor at the ESADE Business School and all round derivatives expert, thinks that the role of CDS deserves consideration in the fight between Argentina and a hedge fund. In this post he explores possible motives for litigation. Elliott Management declined to comment.

Argentina Credit Swaps Auction to Include Disputed Yen Bonds
Sridhar Natarajan – Bloomberg
An auction to settle outstanding credit-default swaps triggered by Argentina’s default will include two yen-denominated bonds that may increase payouts, according to the International Swaps & Derivatives Association.

Central Banks

In Jackson Hole, Central Bankers and Easy Money Collide
Jon Hilsenrath – WSJ
Central bankers gathering here this week confront a global economy that has once again disappointed, leaving them reluctant in some places and unable in others to turn off spigots of easy money employed since 2008 to boost growth.

Janet Yellen to see Jackson Hole return to wonky roots
Robin Harding in Jackson, Wyoming and Tom Braithwaite in New York – Financial Times
There will be no Wall Street economists in the audience when Janet Yellen addresses the Kansas City Fed’s annual Jackson Hole conference for the first time as chairwoman of the Federal Reserve.

Bullard Sees ’Several Hundred Billion’ of Reverse Repos
Matthew Boesler – Bloomberg
The Federal Reserve will probably borrow “several hundred billion” dollars from money-market mutual funds and others to anchor the federal funds rate when it begins tightening policy, according to St. Louis Fed President James Bullard.
“I don’t think it would have to be that large of a program. Possibly several hundred billion would be enough,” Bullard said, referring to the Fed’s overnight reverse repurchase facility, which it has been testing since September.

John H. Cochrane: A Few Things the Fed Has Done Right
John H. Cochrane – WSJ
As Federal Reserve officials lay the groundwork for raising interest rates, they are doing a few things right. They need a little cheering, and a bit more courage of their convictions. The Fed now has a huge balance sheet. It owns about $4 trillion of Treasury bonds and mortgage-backed securities. It owes about $2.7 trillion of reserves (accounts banks have at the Fed), and $1.3 trillion of currency. When it is time to raise interest rates, the Fed will simply raise the interest it pays on reserves.

***DA: I am looking forward to that day.

South Korean Bonds Post Weekly Decline as BOK Seen Holding Rates
Jiyeun Lee – Bloomberg
South Korea’s 10-year government bonds posted the steepest weekly slide in three weeks after central bank Governor Lee Ju Yeol refrained from signaling further monetary easing.


Argentina’s Peso Weakening at Fastest Pace Since January
Camila Russo and Charlie Devereux – Bloomberg
First came the default, then a proposed debt swap aimed at circumventing a U.S. court ruling that could normalize Argentina’s relations with foreign investors. Now traders foresee a devaluation for the second time this year.

***DA: There is still an 8-handle on the official USD/ARS rate, but on the black market, it is more like 14 to the dollar.

BitBeat: BitLicense Gets Extension; Lawsky: ‘We Don’t Have a Monopoly on the Truth’
MoneyBeat – WSJ
Your hard work paid off, bitcoiners: you got an extension. The New York Department of Financial Services on Thursday announced that it will grant a 45-day extension to the open-comment period for its “BitLicense” proposal, in effect doubling the timeframe. The new deadline is Oct. 21. The move represents a minor victory for the bitcoin community, which has made getting an extension one of its top goals.

***DA: No, but there is a tightly held oligopoly on the truth.

Indexes & Index Products

‘Fear gauge’ loses its punching power
Michael Mackenzie – Financial Times
The CBOE’s Vix, an index of implied volatility from one-month options written on the S&P 500 has made a nice round trip over the past month. After rising to peak at 17 in early August, the Vix now slumbers below 12, unchanged from late July. In turn the S&P 500 has rallied smartly from this month’s low and is pushing into record territory with a test of the 2,000 point threshold looming.

ETF Providers Grapple With Index Choices
Investor’s Business Daily (via NASDAQ)
It’s something of a cliche these days to talk about the slicing and dicing of the ETF market, but who wields the knife?
That would be the index providers creating and maintaining the benchmarks the industry relies on.
While traditional stock indexes weigh companies by market capitalization (S&P 500) or price (Dow Jones), newer offerings continue to capitalize on the alternative weighting trend.

Commodity ETFs: Know Your Indices
Kenneth Lamont – Morningstar
In May, BNP Paribas changed the benchmark of its broad-basket commodity ETF, namely the S&P GSCI Capped Component 35/20 THEAM Easy ETF, for the sole purpose of complying with ESMA diversification guidelines.
The replacement index applies caps on a ‘component’ rather than a ‘commodity’ level, effectively reducing the index’s exposure to the energy sector.


Gold Refiner Predicts Curbs by India May Be Permanent
Prabhudatta Mishra – Bloomberg
Controls on gold imports by India will probably be permanent as the world’s largest consumer after China seeks to sustain a reduction in the current account deficit, according to the country’s biggest refiner.

***DA: When that flows down to the retail market, there could be serious repercussions.

Interest-Rate Fears Trample Gold
Tatyana Shumsky And Ira Iosebashvili – WSJ
Gold is losing its allure as investors brace for higher interest rates. Prices of the precious metal have fallen 4.9% from their recent high on July 10, as a string of upbeat U.S. economic reports has bolstered the case for tighter U.S. monetary policy.

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