First Read

The Kharouf Family Says Thank You

By John J. Lothian

Jim Kharouf asked me to extend to the readership of JLN a sincere thank you on behalf of the entire Kharouf family for all the kindness shown to them during this last difficult week. Jim was very moved by all the kind emails, cards and even flowers sent by readers.

Thank you to all who continue to help Jim and his family as they mourn the loss of Jim’s father, George John Kharouf.

I was at the services on Friday and heard Jim give a moving eulogy about his father and what a humble giver he was. All fathers are special and Jim’s was no exception. I was glad I was there to hear Jim share his father’s story.

The Kharouf family and friends came out in force for the wake and funeral. And with your help, they were surrounded with even more love. They are appreciative and so am I. Thank you.


Three Investing Resolutions for 2015

Liam Pleven – WSJ
Here is a sobering reminder for the new year: One of these days, making money in the markets is going to get much harder.
No one knows if that time will come next year. Many investors worried 2014 would be a bad year—and it looked like they were right for a few bracing moments this month. But stocks now are poised to deliver gains for the sixth year in a row, and bonds often have paid off handsomely, as well.

**** The end of the year is full of lists and resolutions. My resolution is to make 2015 the best year ever.


The Best (and Worst) Investments They Ever Made
It’s the time of year for reflection. The Wall Street Journal asked successful people in the world of finance and beyond about the best or worst investments they ever made.
Responses came from a former chairman of the Federal Reserve, two Nobel laureates in economics, several prominent investors and business leaders, a nationally renowned poet and many others.

***** Let’s see, there was that firm “Short Term Capital Management” or was it “Short Time Capital Management” or something like that.


Disrupters bring destruction and opportunity
Financial Times
As buzz words go, it is an ugly one. But, in 2014, “disrupters” have been wreaking havoc on traditional business models everywhere, writes Sarah Gordon, Business editor.
As technology puts new tools into innovators’ hands, the old boundaries between sectors are breaking down. Amazon has transformed bookselling, branched out into general retail and is now experimenting with delivery by drones. Apple shook up both the music and telecoms industries, and now has designs on our wrists. Six years after it came into existence, Airbnb has more rooms available than IHG or Hilton, the world’s top hotel groups.

***** This is the year of the drone. Get ready for the disruption.


Hot Fund Takes Wrong Turn
Kirsten Grind – WSJ
The money-management industry’s push to bring hedge-fund-style trading to the masses has suffered a setback. Investors yanked more than $5 billion so far this year from the largest and most popular “liquid-alternative” mutual fund as losses mounted on bad bets tied to the global economy, according to fund-research firm Morningstar Inc. Assets in the MainStay Marketfield fund have fallen 45% from a February peak of $21.5 billion.

***** I love hot cross funds.


When Funds Insult Their Investors
Jason Zweig – WSJ
To the insult of chronic underperformance, mutual funds are adding the injury of unusually high taxes. The week of Dec. 15, dozens of mutual funds paid out taxable gains to their shareholders—even as the worst year of fund returns relative to market averages in modern history drew to a close.

***** Really? Blessed are those who pay high taxes for they have something to pay taxes on.


Fees Get Leaner on Private Equity
Mike Spector and Mark Maremont – WSJ
Facing pressure from investors and heightened scrutiny from federal regulators, some of the largest private-equity firms are giving up their claim to fees that generated hundreds of millions of dollars for them over the years.
The investment firms usually collect the fees from companies they buy for providing services such as consulting, serving as directors and helping them make their own acquisitions. Instead of keeping some of the money, the buyout firms, in new funds they are raising, will now pass the fees on in full to investors in the funds.

***** What’s in it for me?


The Fed Fights Half the Battle
The Editorial Board – NY Times
At its recent meeting, the last of the the year, the Federal Reserve said it was in no great hurry to lift interest rates — and that’s a good thing. Higher rates make sense when a strong job market pushes up wages and consumer prices. Currently, though, job growth is still too slow, unemployment too high, raises too measly and inflation too low to warrant a rate increase.

***** When higher interest rates are 1%, I am going to faint.


SEFCON Snapshot 2014, Part III: The New Market Structure

The WMBA Americas hosted SEFCON V on November 12, 2014, and John Lothian News was there. We interviewed 14 SEF operators, regulators and participants and put together this three part series on the state of SEFs one year into the mandate.

Part III looks at the new market structure brought about by the creation of SEFs and the regulations that guide them.

While many of the pieces are now in place, this structure is still taking shape, and in some cases, the rules have led to uncertainty and unintended consequences in the market structure.

A key aim of Dodd-Frank and other regulations was increased competition, but is a true “all-to-all” market possible? Is there a cost in terms of liquidity from these and other regulations? Is aggregation of separate liquidity pools a viable option?

Watch the video »


Correlations to Break Down in 2015
Michael J. Casey – WSJ
In 2014, global markets started breaking a multiyear pattern in which different asset classes and geographic markets mostly moved in unison. Correlations are set to break down further in 2015. Accelerating this breakdown is fact that central banks are going their separate ways – the Federal Reserve is preparing for a rate increase, the European Central Bank for more monetary easing – while energy producers and consumers are experiencing starkly different effects from falling oil prices.

***** This is going to be a great movie in 2015, “When Central Banks Diverge.”


High-cost oil production not worthwhile
Anjli Raval – Financial Times
When the oil world’s most important man says anything, people pay attention. But the usually aloof Ali al-Naimi, Saudi Arabia’s oil minister, took market observers by surprise last week when he did something he would never normally do — talk the market down. Rather than instil calm as the price of oil fell to a five and a half year low of around $60 a barrel, Mr Naimi’s forceful and at times bellicose comments only gave those betting on lower prices encouragement to keep selling.

***** We will see $20 oil again.


Sony’s ‘The Interview’ makes $18 million in opening weekend
Sony Pictures (6758.T) said “The Interview” has earned more than $15 million in online sales and another $2.8 million in theaters, an impressive return made possible by the publicity surrounding the cyberattack blamed on North Korea.

***JB: So it took Glorious Leader to get Hollywood to embrace modern online distribution methods? Go figure…



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Lead Stories

Wall Street’s Watchdog Doesn’t Disclose All Regulatory Red Flags
Jean Eaglesham and Rob Barry – WSJ
Wall Street’s own national watchdog doesn’t make public all the regulatory red flags it has about brokers, prompting calls from state regulators for more expansive disclosure.
Investors checking disciplinary records from the Financial Industry Regulatory Authority, or Finra, can see that in Bennett Broad ‘s 35-year career as a stockbroker, he has faced 25 customer complaints involving alleged trading abuses, and that 15 ended in payouts to clients.

U.S.-based stock funds attract record $36.5 bln inflows in week
Sam Forgione – Reuters
Investors in U.S.-based funds poured $36.5 billion into stock funds in the latest weekly period, marking the biggest inflows on record as U.S. stocks surged to record highs, data from Thomson Reuters Lipper service showed on Friday. The massive cash commitments for the week ended Dec. 24 were the biggest since Lipper’s records began in 1992. Investors pledged entirely to funds that specialize in U.S. stocks, which attracted $39 billion, while funds that invest in non-U.S. shares posted $2.5 billion in outflows.

HK-Shanghai stock link hurdles spark derivatives boom
Hong Kong’s off-exchange derivatives market is thriving as foreign funds prevented from using a landmark Hong Kong-Shanghai trading link by technical and regulatory hurdles look for a back door to gain exposure to China’s record-breaking stocks rally.

U.S. Muni-Bond Market Is on a Tear
Municipal bonds are on a winning streak that many investors bet will run into the new year.
The debt issued by U.S. cities, states and local entities such as sewer systems has posted its longest string of monthly gains in more than two decades in 2014, outpacing gains in corporate bonds and U.S. government debt, according to data from Barclays PLC.

U.S. Bond Sentiment Is Worst Since Disastrous ’09 as Fed Shifts
Liz Capo McCormick and Susanne Walker – Bloomberg
Get ready for a disastrous year for U.S. government bonds. That’s the message forecasters on Wall Street are sending.
With Federal Reserve Chair Janet Yellen poised to raise interest rates in 2015 for the first time in almost a decade, prognosticators are convinced Treasury yields have nowhere to go except up. Their calls for higher yields next year are the most aggressive since 2009, when U.S. debt securities suffered record losses, according to data compiled by Bloomberg.

Russian Regulators Triple Size of Retail Bank Bailout
Alexander Kolyandr – WSJ
Russian regulators more than tripled the size of its bailout of a leading retail bank Friday, as authorities continued efforts to shore up the banking system that has been hit by the plunging ruble.

Access to Gmail Is Blocked in China After Months of Disruption
Edward Wong and Kiki Zhao – NY Times
The Chinese government appears to have blocked the ability of people in China to gain access to Google’s email service through third-party email clients, which many Chinese and foreigners had been relying on to use their Gmail accounts after an earlier blocking effort by officials, according to Internet analysts and users in China.
The blocking began last Friday and has ignited anger and frustration among many Internet users in China. Data from Google shows traffic to Gmail dropping to zero from Chinese servers.

Oil Rises Amid Reports of Clashes in Libya
Georgi Kantchev – WSJ
Oil rose on Monday after falling for five consecutive weeks, amid reports of escalating clashes in Libya, a key crude producer.
Oil prices have slumped since the summer on fears of a global oversupply coupled with tepid demand for the commodity. Libya’s oil production recovery after the country’s civil war, along with booming U.S. shale production, has been one of the main reasons for the oil glut.

Nikkei surrenders early gains on suspected Ebola case; health-related stocks soar
Japanese stocks turned negative on Monday after the health ministry announced a suspected case of the deadly Ebola virus, spooking investors but boosting health-related shares.

Jobs Data Are an Imperfect Market Indicator
Spencer Jakab – WSJ
It’s fortunate that state employees have such strong job security. Otherwise, some of those manning unemployment offices might risk finding themselves on the other side of the counter.

Icahn Discloses Stake in Manitowoc, Seeks Breakup
Chelsey Dulaney – WSJ
Activist investor Carl Icahn disclosed a 7.77% stake in Manitowoc Co. on Monday and said he plans to push the company to split itself in two, mirroring an activist campaign launched in June by Relational Investors LLC.

Allianz lead reinsurer to missing AirAsia plane
Lawrence White – Reuters via Yahoo Finance
German insurer Allianz said on Monday it was the lead re-insurer to the AirAsia jet missing off the Indonesian coast with 162 people on board, making it the third major airline accident it has been involved in this year.
The German company, which has Malaysia Airlines as a client, was the main reinsurer to flight MH370 that disappeared over the Indian Ocean in March, as well as to flight MH17 which was shot down in July while flying over Ukraine.


Regulators Tackle Insurance License Loophole
Regulators around the country are taking steps to patch a loophole that allows brokers who have been barred from the securities industry to sell insurance and other financial products.
The Financial Industry Regulatory Authority said it would next month begin providing to state insurance regulators a monthly report of its disciplinary actions against securities brokers. Wall Street’s self-regulator currently sends the report, which details whenever a broker is barred or suspended, only to state securities regulators.

South Korea’s banks to get a boost from promised lighter regulation
Joyce Lee – Reuters
South Korea’s banks, whose average returns on equity are the worst among lenders in Asia and are less than half of their Chinese peers, are poised to benefit from a promised move by the country to ease heavy-handed regulation.
Stifling regulation has crimped banks’ freedom in Asia’s fourth-largest economy to charge rates and offer products based on market demand, tying their hands in the struggle against a slowing economy and low interest rates.

Coming soon, easier norms for currency derivatives trading
Business Line
Market regulator Securities & Exchange Board of India (SEBI), in consultation with the Reserve Bank of India, is set to relax norms in the currency derivative market. The two regulators are working together to relax the open position limit and extend the time for the market. Circulars in this regard are expected to be out very soon,” a highly-placed source told BusinessLine.

Interim Order in the matter of Vaibhav Pariwar India Projects Limited

Interim Order in the matter of Suraksha Agrotech Industries Limited

Interim Order against Sai Prakash Properties Development Ltd. and its promoters/ directors

Exchanges & Trading Facilities

Dalian Commodity Exchange To Conduct Cooperative Test For Simulation Trading Of Options Market Making
Press Release – Dalian Commodity Exchange
To promote the preparations for the businesses of market institutions related to options market making and speed up the cultivation of the potential options market makers, on December 24, Dalian Commodity Exchange (DCE) issued the “Notice of DCE on Registration for Cooperative Test for Simulation Trading of Options Market Making”, seeking institutions to conduct the cooperative test for the options market making in the simulation trading environment.

Hedge Funds & Managed Futures

China’s Xiaomi raises $1.1 bln from investors at $45 bln valuation
China’s Xiaomi Inc, one of the world’s fastest-growing smartphone makers, has raised $1.1 billion in a round of funding that cements its status as one of the world’s most valuable private technology companies at a valuation of $45 billion.
Investors include private equity funds All-Stars Investment, DST Global, Hopu Investment Management, and Yunfeng Capital, as well as Singapore sovereign wealth fund GIC, Chief Executive Lei Jun said Monday on Weibo, confirming earlier media reports.

Emerging-Market Distressed Debt Loss Worst Since 2008
Bank of America Merrill Lynch’s Distressed Emerging Markets Corporate Plus Index fell 13.4 percent through Dec. 26, set for its worst performance since October 2008, as a tumble in the price of oil sparked a currency crisis in Russia. That brought this year’s decline to 19.7 percent, the most in six years. High-yield distressed securities in the U.S. lost 8 percent, the indexes show. Emerging markets accounted for 14 of the 56 global defaults this year in Standard & Poor’s coverage.

Rush for exposure to US economic recovery drives ETF inflows
Ralph Atkins – Financial Times
A scramble for exposure to the US’s economic recovery dominated flows into fast-growing exchange traded funds in 2014, and contrasted with fading investor enthusiasm for Europe.
International flows into all ETFs with exposure to the US this year were equivalent to almost 50 per cent of starting assets under management — the strongest since 2008, according to an analysis for the Financial Times by Markit, the financial data provider.

Banks & Brokers

Japan’s M&A Rankings Topped by a Morgan Stanley-MUFG Hybrid
Atsuko Fukase – WSJ
The top adviser on mergers and acquisitions in Japan is neither Japanese nor American but an unusual blend of the two that has overcome expectations of a culture clash.
Mitsubishi UFJ Morgan Stanley Securities landed the No. 1 spot in the 2014 rankings for Japan-related M&A for the second consecutive year, according to data-tracking firm Dealogic. It advised on deals with a value of $41 billion, beating out Goldman Sachs Group Inc. at $21.9 billion and Nomura Holdings Inc. at $21.5 billion.

Goldman Sachs, Clients, Face $835 Million Loss Over Banco Espírito Santo Loan
Margot Patrick and Patricia KowsmannWSJ
Goldman Sachs Group Inc. and several of its clients stand to lose hundred of millions of dollars from a loan made to Banco Espírito Santo SA just weeks before the Portuguese lender collapsed in August, after the Bank of Portugal said the claim won’t be honored by Novo Banco, the “good bank” carved out of BES.

Clearing & Settlement

Derivatives exchanges prove resistant to regulatory change
Daily Times
In December 2013, Hanmag Securities Corp, a small South Korean brokerage firm, lost 46 billion won (26.77 million pounds) in a day after a stock option trading algorithm went bad. It was a fatal blow for a company that had just 15 billion won of capital — Hanmag went bust.
What happened next rattled regulators around the world: Hanmag defaulted on its obligations, forcing the Korea Exchange’s clearinghouse to tap its emergency funds.

Working group recommends common clearing for commodity futures with Rs 100 cr net worth [India]
Business Standard News
The working group set up by the finance ministry in last June has recommended common Clearing Corporation (CC) for clearing trades on commodity futures exchanges. The CC shall be set up with initial networth of Rs.100 crore, to be owned upto 51 per cent by commodity exchanges with equal shareholding and will be a “for profit” entiry with profit not being the sole objective.

Singapore Exchange to upgrade derivatives trading, clearing platforms
Singapore Exchange Ltd (SGX) said on Monday it would upgrade its derivatives trading and clearing platforms to improve risk controls and lower costs for market participants.

Indexes & Products

European Stocks Drop as Greece’s ASE Tumbles After Vote Results
Jonathan Morgan – BloombergBusinessweek
European stocks fell, led by a slump in Greece’s ASE Index as the nation faces early elections after Prime Minister Antonis Samaras failed a third time to get enough backing for his presidential candidate.
The Stoxx Europe 600 Index lost 0.4 percent to 342.48 at 12:37 p.m. in London, after sliding as much as 0.8 percent. The Greek benchmark gauge plunged 6.6 percent and as much as 11 percent, the most among 18 western-European markets. National equity indexes from the region’s peripheral nations also sank.

Stock futures edge lower with indexes near records
Ryan Vlastelica – Reuters
U.S. stock index futures were slightly lower on Monday, as investors found few reasons to keep pushing shares higher following a sharp rally that has taken major indexes to repeated records.

Cheil Industries soars on hopes of joining global indices
Yonhap News Agency


Xiaomi Becomes World’s Most Valuable Tech Startup
Juro Osawa,
Gillian Wong and Rick Carew – WSJ
It’s official: Xiaomi Corp. is the world’s most valuable technology startup.
Now that the Chinese smartphone maker has raised $1.1 billion, giving it a valuation of more than $46 billion including the fresh capital, the real test for the company will be living up to investors’ high expectations.

SGX’s next-generation derivatives trading and clearing platform to use Nasdaq technology
Press Release – SGX
Singapore Exchange will upgrade its derivatives trading and clearing platforms to further strengthen Singapore’s market infrastructure and to support the strong volume growth in SGX’s derivatives business.
The upgraded platforms, SGX TITAN, will ensure continued agility and innovation in terms of new products and services offered by SGX. It is designed to increase efficiency and lower trading and clearing costs for market participants. Industry standard access protocols, extensive self-help functionality and improved straight-through-processing will be the significant benefits from the upgraded infrastructure. SGX already offers the longest trading hours of any Asian exchange, and SGX TITAN will strengthen its risk controls and system safeguards to help market participants manage their trading and clearing positions on a 24-hour basis. The core trading and clearing systems are based on Nasdaq’s Genium INET solution, with rollout scheduled towards the end of calendar year 2016.

The year in review from Cinnober
Press Release – Cinnober
As 2014 comes to an end, we sense an even more exciting year is about to begin. What can we see, and what do we foresee?
First, this has been a year dominated by forward progress. Our customers have carried out numerous significant launches, including the world’s two largest clearing projects. They have also broken volume records and won prestigious awards. Our customer list has expanded on both the trading and clearing side, and we’ve embarked on an exciting voyage by acquiring BOAT.


Credit Suisse vows to fight New York mortgage securities case
Katharina Bart – Reuters
Credit Suisse Group AG (CSGN.VX) said on Monday it would fight a U.S. lawsuit which accuses the Swiss bank of deceiving investors in mortgage-backed securities it had issued.

Bank settlements hit $56bn in most expensive year on record
Martin Arnold – Financial Times
This has been a record year for the world’s banks. But not in the way they would have liked. The total amount they have paid in fines and legal settlements surpassed $56bn in 2014, according to research by the Financial Times, making it the most expensive year on record.
Bankers often put this vast expense — equivalent to the gross domestic product of Croatia — down to the cost of clearing up “legacy issues” stemming from the financial crisis, as well as the impact of “fine inflation” among regulators.


Big Asian Debt Issuers Feel Pinch
Fiona Law – WSJ
Asian companies issued record amounts of bonds this year, but some of that debt is turning sour as falling oil prices and a shakeout in China’s housing market hit energy companies and real-estate developers.
Oil and gas companies as well as property developers were the biggest issuers in the year through mid-December, raising a combined $50 billion, equivalent to 44% of the region’s corporate bonds issued in U.S. dollars, euros and yen, Dealogic data show.

Yen’s Slump Seen Longest Since Gold Standard Ended: Currencies
Kevin Buckland and Hiroko Komiya – Bloomberg
If your New Year’s wish is for more yen weakness, get ready to celebrate.
After sliding more than 36 percent since the end of 2011, the median estimate of economists and strategists surveyed by Bloomberg is for an additional drop of almost 4 percent through the end of 2015 from 120.33 per dollar today in Tokyo. A fourth straight annual decline would be the yen’s longest losing streak on record, or at least since the global monetary system broke from the gold standard in 1971.

The 94% Plunge That Shows Abenomics Losing Global Investors
Yuji Nakamura and Yuko Takeo – Bloomberg
Foreign investors have had just about enough of Abenomics.
After pumping record amounts of cash into Japanese shares last year, they’ve hardly added to holdings in 2014. Inflows are down 94 percent this year to 898 billion yen ($7.5 billion), on pace for the smallest annual amount since the 2008 global financial crisis. The month of April 2013 alone registered almost three times as much foreign investment in the stock market as all of 2014.

Frontier Markets

Greek Assets Sell Off Sharply After Parliament Failed to Elect President
Josie Cox – WSJ
Greek assets sold off aggressively Monday after a parliamentary vote failed to elect a new president, paving the way for a snap election which could yield power to antiausterity independence parties and deal a sharp blow to the country’s international bailout program.

Rouble slumps 7% versus dollar in early trade
Economic Times
The Russian currency has extended its losses, declining by 7 percent as the economy shows the first signs of recession.

DGCX Launches Three New Emerging Market Currency Futures
Press Release – DGCX
Expanding its suite of Emerging Market (EM) products, the Dubai Gold and Commodities Exchange (DGCX), today announced the launch of three new currency contracts – Russian Ruble Futures, Korean Won Futures and South African Rand Futures. The new contracts went live on Friday, December 26.
The new EM currency contracts will provide DGCX market participants with additional tools to manage their price risk and exposure to foreign currencies as well as provide new arbitrage opportunities.

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