First Impressions

An article that hits the bull’s-eye
Doug Ashburn – John Lothian News

Jared Dillian is the author of Bull’s-Eye Investor and the 10th Man, two publications of Mauldin Economics. I have followed Mauldin Economics and its founder, John Mauldin, since he began publishing his free weekly newsletter over 15 years ago. Though the firm has branched out considerably since then, into (often steep) subscription-based newsletters, I still read a couple of the free weekly offerings, including those of Mr. Dillian.

I have been meaning to put one of his columns as the feature, and today is the day, as this one is quite relevant and timely.

The article begins with a basic overview of options theory and delta-neutral strategies, in order to help those unfamiliar with options to understand his main point, which is that there is a danger lurking in this market, a danger he has labeled “covert gamma.”

He begins with a history lesson from 1987 on portfolio insurance, that once-popular strategy of “hedging” a portfolio by pretending to have a short gamma position that needed to be hedged dynamically. It worked fine until that fateful day in October 1987 when everyone needed to hedge at once, and the hedges set off additional trigger points that needed to be dynamically hedged.

Dillian argues that today’s “buy-the-dip” strategy, combined with a modern market structure that allows all participants immediate access from any spot in the world, has created an environment ripe for disruption.

I won’t spoil the punch line. Click over and read it for yourself. Tell him Doug sent you.

Quote of the Day

“What we’ve been through the past four years has been ‘what is the fastest, easiest money to find?’ If one day that narrative changes and investors no longer believe in the omnipotence of central banks, then it will bring back what was old school — fundamental analysis and really caring about what’s going on.”

Magdy El Mihdawy, of Cantor Fitzgerald LP’s equity derivatives desk, in the story, “What Will Happen to a Generation of Wall Street Traders Who Have Never Seen a Rate Hike?”

Lead Stories

What Will Happen to a Generation of Wall Street Traders Who Have Never Seen a Rate Hike?
By Callie Bost and Jeanna Smialek – Bloomberg
Magdy El Mihdawy remembers exactly where he was when the stock market tanked in 2009.
He was on Spring Break in Florida — as a 22-year-old undergrad.
Today, El Mihdawy is part of a Wall Street demographic whose own trial by fire awaits: traders who’ve never known anything but a post-crisis world of rock-bottom interest rates and ever-rising markets.

What Happens When Everyone Is a Chinese Stock Market Genius – China’s biggest index just took a stomach-churning plunge. Is it a sign of things to come?
By David Wertime – Foreign Policy
A customer strolls into a bookstore, goes the popular Chinese joke, and tells the salesperson: “I’m looking for a book with no killers, but much bloodshed; with no love, but great regret; with no spies, but constant paranoia. Can you make a recommendation?” Just one, the salesperson replies: The State of the Chinese Stock Market.
Then there’s this one about a Chinese investor: “In the morning, he watches the K-line graph,” which tracks the perambulations of a share’s price. “In the afternoon, he goes to the hospital to watch his electrocardiogram.”

Why U.S. GDP Shrank – At A Glance
By Jeffrey Sparshott – WSJ
The U.S. economy faltered in the first quarter of 2015, according to Commerce Department data released on Friday. Here’s a quick look at the report.

Treasuries Rise as U.S. Economic Contraction Clouds Fed Outlook
By Daniel Kruger and Lucy Meakin – Bloomberg
Treasuries rose, pushing the 10-year note yield to a three-week low, as revised data showed that the U.S. economy shrank in the first quarter, signaling that the Federal Reserve’s path to higher interest rates is uneven.

A Six-Lane Freeway of $100 Bills Is Tormenting Credit Investors
By Lisa Abramowicz – Bloomberg
Think about all the ways the surging global debt market could implode, then argue yourself out of believing that any of those gloomy scenarios will come to pass.
Then do that mental exercise again. And again.
This is the agony of being a bond investor in 2015.

Deutsche Bank Breaks Down Greece’s Possible Futures
In a report published Thursday, Deutsche Bank Strategist George Saravelos said that Greece’s “endgame is here.”
The cash-strapped country is trying to come to an agreement with European officials to unlock much-needed bailout aid and avoid financial insolvency. Any such agreement would need to be ratified by the Greek parliament. Greece will owe the IMF 1.6bn EUR over the course of next month, with the first of four installments being due on June 5.

Greece Vows to Hold Out Another Week as EU Aims to Wind Up Talks
By Ben Sills – Bloomberg
The Greek government said it can survive another week without defaulting on the International Monetary Fund as European officials warned the window for accessing aid is closing.

When Fed Policy Hits Emerging Economies, Some Do Better Than Others. A New Paper Suggests Why
By Ben Leubsdorf – WSJ
What happens in the U.S. doesn’t always stay in the U.S. when it comes to monetary policy. But emerging economies may be better positioned to weather spillovers from the Federal Reserve’s actions if they start out on a strong foundation, according to a recent analysis by central bank economists.

Failure resolution not breakup
By Martin Neil Baily – Brookings Institution
The Dodd-Frank law is now five years old, but the struggle over how to implement financial reform continues unabated – and there is a danger that sensible policymaking is losing out. Ben Bernanke recently wrote about the dangers of the proposed Vitter-Warren bill, which would restrict the Federal Reserve’s emergency lending authority, going beyond the restrictions already in the law. In addition, there is another very important struggle taking place: How should large banks be regulated to avoid “too big to fail”?

Watchdog suggests EU take less rigid view of foreign derivatives rules
By Huw Jones – Reuters
The European Union may need to be less rigid in its approach to dealing with financial rules from outside the bloc to avoid disputes with other countries, the EU’s top markets regulator said on Friday.

Central Banks

ECB fears ‘abrupt reversal’ for global assets on Fed tightening
By Ambrose Evans-Pritchard – The Telegraph
The global asset boom is an accident waiting to happen as the US prepares tighten monetary policy and the Greek crisis escalates, the European Central Bank has warned.

Fed Faces Lower Economic Growth Hurdle to September Rate Rise
By Rich Miller – Bloomberg
The economy may not need to bounce back all that much from its first-quarter swoon for the Federal Reserve to raise interest rates in September.

Adjusting the Fed’s View of Growth
By Justin Lahart – WSJ
If there ever was a contraction in the economy the Federal Reserve could look beyond, the drop in first-quarter gross domestic product was it.

Byron Wien: The Fed basically put $3 trillion into the stock market
By Akin Oyedele – Business Insider
Stocks have catapulted through the recovery.
Among the things that have driven the expansion, a key factor has been the role of the Federal Reserve.
In market commentary Wednesday, Blackstone’s Byron Wien pegs a number on this: $3 trillion.

Fear Bond Buys Would Spark Inflation Misplaced, Cleveland Fed Says
By Pedro Nicolaci da Costa – WSJ
Worries that the Federal Reserve’s bond buys would lead to runaway inflation were misguided and have proven incorrect, according to new research from the Cleveland Fed.

Why the Fed is wrong. Again — Commentary
By Michael K. Farr – CNBC
The Federal Reserve has fueled financial bubbles and exacerbated economic problems before, and it is doing it now. In the past 15 years, we have seen what can happen when the Fed underestimates the risks of rising asset prices and maintains “accommodative” monetary conditions for too long. Investors should proceed with caution.

China Money Network – China Will Not Reverse Monetary Easing Policies
China Money Network
The reported liquidity drain of over RMB100 billion by China’s central bank does not indicate the start of the country’s monetary policy reversal. China will continue deploying further loosening policies via interest rate cut and bank reserve requirement ratio (RRR) cut, says a BofA Merrill Lynch Global Research report.

Minneapolis Fed leader maintains call for low rates
By Adam Belz – Star Tribune
The head of the Minneapolis Fed is still standing with those who think the Fed should hold off on raising interest rates.
The U.S. job market still has ground to recover, and the Federal Reserve should be “extraordinarily patient” about raising rates, Minneapolis Fed President Narayana Kocherlakota said Thursday in Helena, Mont.


Yen Splits Top Forecasters as Japanese Officials Express Unease
By Eshe Nelson and Chikako Mogi – Bloomberg
The yen’s slide to a 12-year low against the dollar has the top forecasters and dealers of the Japanese currency divided on how much weaker it will get.

FXCM’s Swiss Franc Losses Prompt Call for Tougher Currency Rules
By Silla Brush – Bloomberg
The U.S. derivatives industry’s front-line regulator wants retail currency dealers to face higher capital and risk-management standards after Swiss franc losses this year left a leading brokerage needing a $300 million rescue.

Franklin Templeton Sees Value After Emerging Currencies Rout
By Rachel Evans – Bloomberg
A selloff in emerging-market currencies has created a buying opportunity for Franklin Templeton Investments.
Eric Takaha, a money manager at the investment company, which oversees more than $894 billion in assets, said he sees value in Mexican and South Korean bonds after a gauge of developing-market currencies tenders fell to a 12-year low in March.

Dominic is wrong – the time is ripe for digital gold
By James Turk – MoneyWeek
James Turk, founder of GoldMoney (recently acquired by BitGold), responds to Dominic Frisby’s take on BitGold from Thursday’s Money Morning.
Dear Dominic,
I am writing in response to your latest article about BitGold’s purchase of GoldMoney. I would like to clear up some points, so that your readers understand this transaction. BitGold is not a “bitcoin company” – if you need a comparison, it is much more “PayPal” than “bitcoin”, but BitGold can be better understood as a “digital gold” company, which of course is what GoldMoney invented and patented.
The digital gold currency being offered by BitGold is a technological advancement upon the service GoldMoney provided until January 2012. The profitability of a high velocity payments business like PayPal dwarfs that of gold ETFs and custody businesses. When GoldMoney launched 15 years ago, its payment service was ahead of its time. Today the market is ripe for innovation.

Indexes & Index Products

Russell index adjustments could produce $40 bln trade flurry
By Chuck Mikolajczak and Noel Randewich – Reuters
Investors trying to capitalize on the annual tweaks to the makeup of Russell stock indexes may produce a rush of transactions worth over $40 billion in the final moments of trading on Friday, June 26, when those changes are formalized.

Why the major indexes are making investors play defense
By Thomas H. Kee Jr. – MarketWatch
For traders, opportunities are surfacing as the market flirts with longer-term support levels, and for longer-term investors, red flags are popping up because those same support levels started to break on Monday, which is why a more defensive posture may be necessary.

Why Sovereign Wealth Funds Love Smart Beta
By Jess Delaney – Institutional Investor
Sovereign wealth funds are increasingly adopting smart beta strategies to diversify, enhance returns and reduce risk.

New Efficiente PLUS Improving CD Options
By Chris Sandys – Seeking Alpha
JPMorgan (NYSE:JPM) recently introduced a new iteration of their ubiquitous Efficiente family, which is used monthly as a reference index for numerous Market Linked Certificates of Deposit (MLCDs). This newest member of the family is called the Efficiente PLUS DS 5 (hereafter referred to as “Efficiente PLUS.”)


Jobs take the helm at gold talks
By Allan Seccombe and Karl Gernetzky – BDlive
Just over a week before the start of formal wage talks, SA’s five major gold producers are gearing for negotiations that could last up to five months, to thrash out a wage agreement that the parties hope will not result in wholesale shaft closures and job cuts.
The companies’ CEOs have been holding mass meetings with employees at their operations ahead of what could be the toughest wage talks in decades.


A Tactical Tool For Dialing Down Fixed-Income Risk
By John Gabriel – Morningstar
Market participants have been bracing for an eventual hike for a few years now. According to interest-rate futures, the market is assigning a 56% probability that the Federal Reserve will hike its target rate to 0.25% from 0% at its next meeting on June 17. So, it is far from a foregone conclusion that Yellen and company will start raising rates this summer.

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