Observations and Insight

NFA 2015: Have you Noticed Anything Different?
By Doug Ashburn – JLN

We just wrapped up a two-part video interview with Dan Roth, CEO of the National Futures Association. He offered up an honest assessment, in my opinion, of the state of the agency in the wake of the MF Global and Peregrine Financial Group bankruptcies that rocked the industry in 2011 and 2012.

In Part 1, Roth summarizes the internal changes made at the NFA, from its audit and hiring practices to the delivery of information to NFA members and market participants.

Watch Part 1 — http://jlne.ws/1LPTIIg

Part 2 is a summary of changes made to the agency’s rules to restore customer confidence, namely on audit confirmations, residual interest (which differs from the CFTC’s residual interest rule), and the treatment of customer segregated funds (the “Corzine Rule”).

Watch Part 2 — http://jlne.ws/1AAs54g

The role of a self-regulatory organization consists of threading the needle between overall effectiveness and over-burdening members and member firms. While there is always room for improvement, I see today’s NFA as a much different organization than it was five years ago.

Lead Stories

Major Firms Are Saying the Stage Is Set for Another Crisis in the Bond Market
Lisa Abramowicz – Bloomberg
The stage is set for another financial crisis to unravel years of relative calm in debt markets.
At least that’s how firms from UBS Group AG to Invesco Ltd. see it. Here’s why: Prices in the world’s biggest bond market are swinging and the plunge in oil is sinking the economies of nations from Venezuela to Nigeria.
***DA: I remember reading a while back that over the last five years, over $1 trillion was loaned to oil services projects that are dependent on oil above $80 a barrel.

Short Sellers Walk Away From U.S. Small-Caps After Drop: Options
Joseph Ciolli – Bloomberg
The biggest drop in small-cap equity valuations since 2011 is luring investors back to shares that led the bull market over its first five years.
Price-earnings ratios for the Russell 2000 index have contracted from above 60 to about 43, the largest drop in four years, amid earnings that are poised to climb 10 times faster than the Standard & Poor’s 500 Index over the next 12 months.

U.S. Economic Growth at Year’s End Revised Downward
Nelson D. Schwartz – NY Times
The American economy expanded at a slower pace than initially thought in the fourth quarter of 2014, as a weaker trade balance and less stockpiling by businesses weighed on growth.

As Hedge Fund Returns Falter, Money Continues to Flow In
James B. Stewart – NY Times
Another year, and another mediocre performance by hedge funds, to put it kindly. The Barclay Hedge Fund Index gained a meager 2.89 percent in 2014, while the Standard & Poor’s 500-stock index gained over 13 percent and the Barclays United States Aggregate Bond Index rose over 5 percent.
Even as their high fees have minted scores of new billionaires, hedge funds have now substantially underperformed a simple blend of index funds — 60 percent stocks and 40 percent bonds — for three-, five- and 10-year periods. And the 10-year numbers cover the period of the financial crisis and the sharp decline in stocks — the very calamity that hedge funds are supposed to protect against.
***DA: I never understood the logic behind these types of stories. Hedge funds are a diversification tool that, really, should underperform the S&P 500 in monster years like 2014. It is akin to saying “I continued to buy life insurance this year despite not having died once in the past 47 years.”

Stocks are setting up for a more volatile move. Here’s why.
Lawrence Lewitinn – Yahoo Finance
The “fear index” has fallen once more as stocks make new highs.
The CBOE Volatility Index (the “VIX”), which started the month off at 20, is now trading below 14. The VIX, which is a measure of the market’s expectations of future volatility in the S&P 500, is often called the fear index because it tends to rally when stocks sell off.
But with the VIX declining for much of this month, does it mean the market has become too complacent?

February’s Big Rally, VIX’s Big Drop, and More Things You Shouldn’t Overanalyze
Adam Warner – Schaeffer’s Investment Research
The market is up about 6% in February. Beware of any analyst pointing out that it’s an unsustainable pace. That’s because it’s a fairly obvious point, about as insightful as saying “volatility will rise.” If we rallied 6% every month, the market would double in a calendar year (remember the old Rule of 72?). Of course, it’s not happening. But hey, it makes for an impressive month, especially since it’s only 28 days.

Volatility Returns On Mixed Economic Data
Minyanville’s Wall Street
The Consumer Price Index fell 0.7% in January, the largest decline since December 2008 as gasoline prices dropped.
The Core CPI, which excludes volatile food and energy prices, rose 0.2%, ahead of the 0.1% expected.
James Bullard, President of the St. Louis Fed, said in a CNBC interview that the data was supportive of a Federal Reserve interest rate hike.

We’ve Just Received a Bunch of Disappointing News on U.S. Manufacturing
Lorcan Roche Kelly – Bloomberg
Here’s some data you should be watching.
Various regional surveys of manufacturers that have been released over the past couple of weeks have all missed expectations.


Survey of Hundreds of Directors Highlights Key Challenges Facing Boards Today
Press Release – ICE
NYSE Governance Services, a leading provider of corporate governance, risk, ethics and compliance services for public and privately held companies along with Spencer Stuart, a global, senior executive search firm, today released the 12th Annual What Directors Think Survey. This nationwide survey of nearly 500 directors highlighted that daily risk oversight continues to be one of the central challenges facing boards, as well as an increased focus on shareholder engagement and board composition.

Ex-Goldman Sachs Executive Launches Bitcoin Brokerage
Zach Alighieri – Coin Buzz
Launching this week is Crypto Facilities Ltd., a London-based bitcoin derivatives broker started by former Goldman Sachs Executive Director in Credit Quantitative Modelling Timo Schlaefer.
The derivative market is basically a contract system that gets its value from the price if the asset it is linked to, in this case that asset is bitcoin. Crypto Facilities trades bitcoin options and futures which, allows users to take a long and or short perspectives of the price of bitcoin.

Regulation and Enforcement

Insider Traders and Whistle-Blowers
Matt Levine – Bloomberg
In 2010, the Federal Bureau of Investigation raided Level Global Investors, Diamondback Capital and Loch Capital looking for insider trading. All of those funds ended up shutting down, and while several Level Global and Diamondback employees were convicted of insider trading, the convictions of the two who went to trial, Todd Newman and Anthony Chiasson, were recently and notably reversed. The New York Times got the FBI’s 2010 Level Global search warrant unsealed yesterday, and it is a fascinating read.

Options Education

How Real Estate Options Work (PEI,CME)
Elvin Mirzayev – Investopedia
Real estate options are contracts that allow one side to purchase the right to buy the underlying real estate at maturity for a certain price on a future date, both determined in advance. Some of the benefits of entering into a real estate option contract are as follows:

The Most Important Technical Indicators For Binary Options
Shobhit Seth – Investopedia
Welcome to binary options. All or nothing, one or zero, these securities are available on Nadex and the Chicago Board Options Exchange (CBOE). Binary options allow traders to make time-bound conditional bets on predefined values of stock indices, forex, commodities, events, and even bitcoin values.

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