Referring to anyone as ‘being impaired’ is not a compliment. And, in the world of financial market punditry, where at least half of the experts are best at telling their audience what happened during the past 12 hours, while another 45% who position themselves as forecasters are right maybe 50% of the time, its no surprise that some industry experts would go as far as to suggest that most professional investors are impaired. MarketsMuse curators liken that phrase to the ‘professionals’ in Washington DC (as well as nearly all state capitals) who are playing at the game of politics. For those who keep a scorecard and track the performance of forward-looking views regarding financial markets and expressed by those appearing on the assortment of business news outlets, the following clip courtesy of CNBC might be looked back upon by viewers with the thought, “this guy really does has sight beyond sight!”
Fixed Income trading platform TradeWeb, best known for its dominant role administering OTC government securities trading between global banks and institutional customers is muscling into the world of ETFs. Tradeweb has just launched an electronic over-the-counter marketplace for trading exchange traded funds using a “request-for-quote” aka “RFQ”- based platform that is modeled after a platform Tradeweb successfully launched in Europe in 2012.
Tradeweb’s new U.S. platform is designed to be a fully-automated alternative to phone- and chat-based over-the-counter ETF trading of institutional-sized or less liquid orders. Tradeweb clients can use the platform to send RFQs to up to five dealers at a time, using either one- or two-way price quotes. The platform offers aggregated pre-trade price transparency from liquidity providers and National Best Bid and Offer exchange pricing. The platform can also seamlessly connect to third-party and proprietary order management systems, and risk management systems to enable market participants to fully automate workflows. There are now 11 leading liquidity providers on the platform, according to a company announcement.
In Europe, where ETF liquidity is relatively fragmented, Tradeweb’s platform has become one of the largest pools of ETF liquidity. The European platform supports more than 45 percent of OTC electronic trading and the platform’s daily volume exceeds €500 million (approximately $5.6 million) per day. In the U.S., ETF liquidity that trades on exchanges is more centralized, but Tradeweb’s platform is the first fully-electronic platform for trading institutional-sized or less liquid orders through dealers.
Chris Hempstead, KCG
“The Tradeweb ETF platform offers a new channel for liquidity and enhances our suite of execution capabilities,” said Chris Hempstead, head of ETF sales for KCG. “The platform represents a novel approach to improving price discovery as well as an innovative way to execute larger-size trades, while reducing the risk of materially impacting pricing.”
Institutions were early adopters of ETF and now hold about 34 percent of U.S. ETF assets, according to November data from State Street Global Advisors and Broadridge. As institutional OTC trading of ETFs continues to grow, market participants say pre-trade transparency into institutional-sized liquidity, and more streamlined, automated workflows are a next step.
“Leveraging electronic solutions to streamline over-the-counter trade workflows is an important step forward for the ETF industry. The combination of a robust exchange traded marketplace with an electronic, transparent OTC market delivers institutional investors choice in how they access liquidity,” said Leland Clemons, managing director at BlackRock iShares.
Tradeweb clients in the U.S. will be able to use the new platform to access all U.S.-listed ETFs, including fixed income ETFs, as well as European-listed ETFs.
MarketsMuse curators have canvassed assortment of guru-types who have attempted to decipher Friday’s stock rally, along with tuning in to the abundance of Monday morning quarterback views. For those who turn to the cartoon channel (i.e. CNBC), some pundits call it a dead cat bounce, more optimistic professional traders and pontificators would like to believe the spike on Friday is a sign of a “bottoming formation”–irrespective of many signals that suggest the “R-word” will become more frequently used when describing the state of the US economy. Smarter money, particularly those who have Sight Beyond Sight are focusing on following a private weekend comment summarizing last Thursday’s email newsletter from global macro think Rareview Macro…
Neil Azous, Rareview Macro
Factually the 14-day (Relative Strength Index) or “RSI” on the SPX Index is now 39; no one with a straight face can say the market is oversold technically. Last week, when the S&P futures bounced off the lows the professional community was open to the notion that the index could trade back up into the 1920-1960 range. That has not happened despite three key things:
President Draghi has backing of the Committee now to ease policy further;
The FOMC was dovish and the implied probability of a hike in March now is at 18% (it was ~28% yesterday); anything below 20% most likely means it’s going to zero; unconditional probability of June is exactly 20%; post-March FOMC that is most likely around 33% or 3 to 1 AGAINST;
Crude oil has taken out last week’s highs multiple times and broken the downtrend channel today on an intra-day basis. Additionally, the market has removed the majority of event risk related to Yen and Nikkei heading into the BoJ meeting tonight on the view that if the BoJ eases they go big (20 bonds, 1-3 ETF, and even cut IOER) because they can’t risk an incremental easing that the market rejects.
The key question is with largely every asset now discounting these central bank events and the high degree of correlation of risk assets to crude oil, especially the S&P 500, why has the S&P not responded and traded up to the expected range of 1920-1960?
The answer is that tomorrow the BEA releases their quarterly update for corporate profits (Bloomberg Ticker: CPFTYOY Index). Last quarter it was down -5.74%. The key point being is that tomorrow brings a likely confirmation of two-quarters in a row of declining profits – or a “profit recession”. Remember, this is a clean look at profitability and there are no footnotes like a company specific earnings release that can attempt to paint any Picasso they want.
Additionally, ISM Manufacturing data is released on Monday and in order for the cyclical call bounce to begin to materialize it can’t show another print to the downside. Right now the market has shifted to a 40-50% probability of a forthcoming recession up from 10-20% to start the year. Confirmation of further ISM Manufacturing weakness will only accentuate the view that 11 of the last 13 recessions included ISM Manufacturing printing below the 50 level.
So while you may have to wait for two-quarters in a row of negative GDP at some point in the future to get formal confirmation of a recession, the risk is that corporate profits and manufacturing will govern risk assets for the time being and outweigh the heavy emphasis the Ph.D. community places on the consumer and a services-driven economy for now.
When you marry all of this with corporate earnings season that is now half-way complete, with the exception of Facebook (NYSE:FB), not one icon company has had a good print or said something truly positive in the outlook. In fact, AAPL is very close to touching its 200-week moving average like Russell 2000 and Transports. The last time that happened was during the GFC.
Finally, Friday was month-end and the bulls will lose the call for further pension re-balancing that showed equities were very large to buy. The risk now, with all of the oversold conditions worked off, is that the S&P 500 resumes its downtrend and like every other risk asset the 200-week moving average of 1704 is a magnet.
Interest Rate Probability Dispersion Post-FOMC:
Hike Twice March AND June: 6%
Hike Once March OR June: 36%
NO Hike At All by June: 58%
Rareview Macro is the publisher of “Sight Beyond Sight“, a subscription-based advisory service for professional investors, hedge funds and self-directed investors and offers actionable trade ideas using futures, options, and ETFs within the framework of a disciplined analysis process. Author Neil Azous publishes intra-day updates re model portfolio and trade posts via Twitter @rareviewmacro
(Traders Magazine)- According to the ETF curators at MarketsMuse, “..If you’re going to dominate the ETF space, you should own your own exchange..” and with that, Canada’s upstart Aequitas Neo Exchange has landed its first listed exchange traded fund in Canada – from mega money manager Invesco, whose Canada counterpart Invesco Canada is also an investor in Neo.
The new exchange, which launched in March 2015, announced it has received its first listing application from PowerShares Canada. The Invesco-sponsored fund has filed a preliminary prospectus with Canadian securities regulators for PowerShares DWA Global Momentum Index ETF, and applied to have the ETF listed on NEO.
According to NEO, this listing will be the first in a series of new listings expected on NEO in the coming months, demonstrating the
Jos Schmitt, CEO
importance of competition to drive innovation and efficiency in the Canadian capital markets.
“With a shared vision of bringing competitive and innovative solutions to the Canadian capital markets, Invesco Canada is the perfect partner to kick off the listing business on NEO,” stated Jos Schmitt, President and Chief Executive Officer of NEO. “We have designed our listings offering to ensure we optimize the investor experience. We look forward to meeting the needs of companies and investment products who choose to list on NEO.”
“We have completed our due diligence on NEO’s operations, including its trading and market data business, and we are impressed with what we found,” added Peter Intraligi, President, Invesco Canada. “Through innovative and competitive investment products, we strive to give investors new opportunities to achieve their long-term financial goals. Invesco is a strong advocate of free market competition, as we believe it spurs innovation, which ultimately benefits investors.”
Invesco Canada has filed its preliminary prospectus containing important information relating to PowerShares DWA Global Momentum Index ETF with the securities regulatory authorities in each of the provinces and territories of Canada. The preliminary prospectus is still subject to completion or amendment. Copies of the preliminary prospectus may be obtained from Invesco Canada and are also available on www.sedar.com. There will not be any sale or acceptance of an offer to buy the securities until a receipt for the final prospectus has been issued.
Invesco Canada is a shareholder of Aequitas Innovations Inc., the parent company of NEO. Peter Intraligi, President and Chief Operating Officer of Invesco Canada is a Director of Aequitas Innovations.
(SubstantiveResearch.com). Trading oil or simply just talking about where, when and why this commodity will assert a more predictable pricing direction has proven to be a slippery slope for professionals and pundits alike. Expressing views via the actual barrel (WTI) or via an ETF (e.g. USO, BNO etc) has been challenging for the best of traders who have spent the last number of months trying to catch a falling knife, or at least pinpoint a trend that doesn’t slip through their fingers. Neil Azous, from global macro think tank Rareview Macro has spent some time this week discussing switching out of his bearish views on oil and its correlated asset classes should the right signals appear.
The idea being that should oil take out last week’s highs (i.e. step 1), and that move is then confirmed by breaking the upside of the downward channel (i.e. step 2), he would start buying the correlated exposure (MSCI EM, high-yield, RUB, TIPS etc). Well, step 2 was breached yesterday, but only on an intraday basis, not on a closing basis. So technically it’s not confirmed, but it is moving in the right direction.
Neil Azous, Rareview Macro
While Rareview still holds the view that oil may go back and retest, or take out recent low prices before bottoming, Azous has some interesting observations about oil positioning that makes going long enticing. He reckons there is a very clear agenda from the professional community to label the reversal in prices as the long awaited bottom in crude oil and that there is now a genuine exercise underway to engineer higher prices by joining the long crude oil position. Of course the idea that OPEC and non-OPEC may co-opt in production cuts takes this a step further, but it’s just wishful thinking at this stage. Azous goes on to discuss CTA positioning, expectations for IMMs later today, oil’s correlation with the MSCI, which will be of interest to those looking to put on an actionable proxy trade/hedge related to the above narrative.
Click the below link to access Rareview’s archive, or to receive this report.
(Bloomberg LP)-NYSE Group Inc. may still be the king of exchange-traded funds among U.S. stock markets, but their hold on the ETF business might be slipping as Issuers, including BlackRock seek other listing venues and challengers to the throne are gaining ground.
Last year, a record 23 ETFs left the company’s NYSE Arca exchange, shifting their listing to rival markets, according to data compiled by Bloomberg. BlackRock Inc., the world’s largest asset manager, this month said it was diversifying by moving 11 iShares ETFs away from NYSE Arca, the first time it’s yanked funds from the exchange.
While the vast majority of ETFs still list at NYSE Arca — its funds amount to about 94 percent of the total market value of all U.S. ETFs — other exchanges are making inroads as investors increasingly use the products. Bats Global Markets Inc. handles about a quarter of U.S. ETF trading, more than any other exchange operator, and Bats has listed 10 new funds this year, versus one at NYSE Arca and one at Nasdaq Inc.
“The growth in ETFs in terms of assets and trading volume has obviously caught the attention of exchanges looking to build their listing businesses,” said Eric Balchunas, a Bloomberg Intelligence analyst.
Among the ETFs BlackRock will relocate are the $13.9 billion iShares MSCI Eurozone ETF and the $8.1 billion iShares 20+ Year Treasury Bond ETF. “A big issuer and a big ticker moving over, that’s really helpful for these exchanges to build their credibility and make other issuers feel comfortable,” Balchunas added. “Having a few of those studs can go a long way.”
The wild trading session in the U.S. stock market on Aug. 24 has drawn attention to ETFs, and may factor into listing decisions. The U.S. Securities and Exchange Commission said trading rules on NYSE Arca exacerbated volatility that day. In its 88-page analysis of Aug. 24, the SEC pointed out that NYSE Arca’s allowable price bands limited how quickly ETF prices could recover after trading halts. The bands, which NYSE Arca later proposed to widen, may have caused additional delays by limiting faster price adjustments, the regulator said. BlackRock expressed its support for NYSE Arca’s rule change in a letter to the SEC.
Bats Global Markets has been edging into ETF listings by paying issuers to choose its platform. The company launched the Bats ETF Marketplace last year, charging no listing fees to issuers and offering to pay them up to $400,000 per year for their listings, based on average daily volume. The exchange also poached Laura Morrison, an executive from NYSE’s ETF division, in April.
For the full story from Bloomberg reporter Annie Massa, click here
MarketsMuse fintech and fixed income curators are both noticing increasing upticks in stories relating to the use of blockchain technology specifically for use within the corporate bond issuance process. We might have been one of the first to focus on this application despite the early stage push back from IT blockheads within the securities industry who “didn’t get the joke”–but for those who missed the first memos, below is a good primer. The real meat is at the bottom.
(AllCoinNews)–This month, a paper examining how blockchain technology might be used to issue and trade bonds more effectively was published by the 2015 Freshfield Steven Lawrence Scholars. Aimed at first year law students in the UK, the Freshfields Stephen Lawrence Scholarship Scheme is designed to address under-representation of black men from low-income households in large commercial law firms.
In the paper, the scholars propose and analyse two different blockchain-leveraged bond trading systems, one that utilizes a closed pool of banks to verify transactions – Bond Blockchain 1.0, and another that relies on a open pool of individuals to verify transactions – Bond Blockchain 2.0.
According their paper, these two bond systems would have the same core characteristics. All bond issuers will have a user profile with two types of wallets, one for transferring bonds and the other for transferring money. Both wallets would contain the same unit types so they can be transferred on the same blockchain. To add units to the wallets, money needs be deposited or bonds need to be created through the the user interface. Metadata embedded in the units will distinguish whether units are currency or bonds. As a bond is purchased, two transactions take place in the system. Currency units are transferred from the investor’s money wallet to the issuer’s money wallet, while bond units are transferred to the issuer’s bond wallet to the investor’s bond wallet.
The major distinction between the closed and open pool systems is in who they serve. InBond Blockchain 1.0, the system using a closed pool of banks to verify transactions through blockchain technology, the bonds would only be available to institutional investors. This system’s innovation is the disintermediation of the clearing and settlement functions of the legacy bond trading system. The legacy system will no longer be needed as as the transfer and proof of bond ownership will be recorded in the blockchain and the digital account of the new owner. The benefits of Bond Blockchain 1.0 would be a reductions in costs resulting from removing intermediaries and a much quicker settlement time resulting from instant account transfers and blockchain verification in around 10 minutes.
MarketsMuse Editor Note: Towards understanding how/where/why blockchain technology is actually being implemented for use in corporate bond issuance, our curators encourage you to go directly to the source: fintech firmSymbiont–which is backed by among others, SenaHill Partners.
(SubstantiveResearch.com) Neil Azous from Rareview Macro writes that many in the market still don’t get the joke of what’s going on – that is, a true exercise in risk reduction led by real money or that the bears are in charge. Indeed, he observes much of communications he and his team have been receiving is focused on looking for a bounce in risk assets or a counter-trend trade in most assets. They are fooling themselves, seems to be the message.
Neil Azous, Rareview Macro
Azous has called this move more than pretty well, which was featured in a12 Jan note from SubstantiveResearch.com (our note on Jan 12,) and many of these calls are now playing out. In yesterday’s note he touches on the capitulation of Yen shorts from Japanese retail, the complete collapse of the long end of the crude oil yield curve and what that means for long-term modelling (10-year) of prices in the energy sector. There’s also a great section that looks at the equity performance of banks, and what appears to be a re-rating of these stocks on account of their exposure to emerging markets, crude oil and energy. Rareview’s note can be found via this link.
Announced after the close of trading on Thursday, Goldman Sachs $5.1 billion settlement with the U.S. Department of Justice, AGs from NY and IL and two other federal agencies in connection with the big bank’s underwriting and sale of mortgage-backed securities (MBS) sounds whopping, but seemed to have little impact on the Squid’s stock price in after-hours trading ..Below extract courtesy of CNBC..
Goldman Sachs (NYSE:GS) said Thursday that its fourth-quarter earnings will take a roughly $1.5 billion hit as it has reached a nearly $5.1 billion settlement agreement in principle related to its “securitization, underwriting and sale of residential mortgage-backed securities (MBS) from 2005 to 2007.”
The bank said in a Thursday release that its agreement in principle will resolve actual and potential claims from the Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration and the Federal Home Loan Banks of Chicago and Seattle.
The terms of the agreement say that Goldman will pay a $2.385 billion penalty, make $875 million in cash payments and provide $1.8 billion in consumer relief. The bank said that the relief will be partly composed of principal forgiveness for underwater homeowners and distressed borrowers.
Goldman will also contribute to construction financing, affordable housing, and debt restructuring support.
Shares of the Squid traded slightly negative in after-hours action.
The agreement in principle is still subject to final negotiation of the documentation, the bank said.
(MarketsMedia : not to be confused with Madmen Media, owner of MarketsMuse.com)– In order to keep up with the demands of today’s high-volume electronic markets and leverage their fintech muscles, the Chicago Board Options Exchange, the top options mart player plans to migrate its CBOE and C2 options markets as well as its CBOE Futures Exchange to an internally developed matching engine beginning in August, according to CBOE senior management.
The new system, dubbed Vector, will replace the current internally developed CBOE Direct platform, which the exchange launched in November 2001 and runs all three markets.
“Trading volumes on the exchanges have grown and the growing demands of the higher-frequency trader require us to keep up,” said Ed Tilly, CEO of the CBOE. “It’s difficult to keep up a system that was designed with your customers’ needs from 14 to 15 years ago, and meet their needs for today and tomorrow.”
The current trading engine served the CBOE community very well, but the CBOE leadership decided it was time for an overhaul. “We developed Vector starting from a blank piece of paper beginning in 2014,” Tilly said.
The buy-or-build decision was a close call, as at least one unspecified third-party technology provider delivered a very impressive pitch to handle the job. Ultimately, the call to stay in-house was made in deference to the customization of the CBOE product suite, Tilly said.
Besides improved transaction speeds and scalability, the new matching engine will also incorporate new risk management tool for trading firms.
For the entire coverage from MarketsMedia (not to be confused with Madmen Media, owner of MarketsMuse.com, please click here
(MarketsMuse courtesy of Chicago Tribune)-The notion of a secondary trading market for crowdfund investments is not new–a topic that MarketsMuse has profiled more than once during past several months, but those efforts have been more noticeable outside the US. That’s now changing. Chicago-based CFX Markets launched a platform Tuesday allowing crowdfunding investors to sell their shares online. The new platform gives users a way to resell their shares on a secondary market if they want to get out of the investment in a pinch.The new site will initially focus on real estate crowdfunding platforms.
“Our goal in creating a secondary market for crowdfunding investments is basically to make it as easy to buy somebody’s private investments as it is to buy and sell shares of Microsoft,” said Juan Hernandez, CFX Markets managing director. Hernandez is a former algo trader specializing in FX and Equity markets. The company has gained increasing notoriety since its April 2015 soft launch, when it introduced its open source application known as CFX,Crowdfunding Crossmarkets.
“There’s this tremendous number of new platforms out there that have high-quality investment opportunities that people can now participate in, but what happens after you’ve invested in one of these properties and it’s one to two years later and you need to cash out on your position for whatever reason?”
Juan Hernandez, CFX Markets
CFX Markets is an affiliate of Chicago-based real estate crowdfunding platform PeerRealty, which lets investors buy stakes of real estate offerings.
The new market will allow members of PeerRealty and Chicago-based platforms American Homeowner Preservation, CrowdFranchise and PropertyStake to resell their shares. It will announce other partners this year, Hernandez said.
Investors on member platforms can log into CFX and sync accounts so their shares show up on the secondary market. Investors can list the assets they want to sell and pick a price for them; then buyers can review the assets and performance, match a bid or make an offer. Buyers don’t need to be existing members of affiliated platforms.
Jorge Newbery, founder and CEO of American Homeowner Preservation, said he expects the option of selling shares on the secondary market will draw more individuals to invest on his platform and encourage existing investors to put in more money.
Kendall Almerico, a Washington D.C.-based lawyer focused on crowdfunding, said buyers aren’t likely to immediately flock to what is still new territory for many investors.“We’re maybe a year, a couple years away before this becomes more commonplace,” he said.
But Almerico believes secondary markets will become an integral part of the new crowdfunding economy. “This is kind of that missing piece of the puzzle,” for equity crowdfunding, he said. “That liquidity is what makes this potentially such a great, attractive offer to get into: They can actually sell it if they need to.”
(Bloomberg LP reporting via TradersMagazine) — Dan Mathisson, aka “Mr. Algo”, the executive who helped build Credit Suisse Group AG into an electronic-trading powerhouse over the past decade, plans to leave the bank at the end of next month, according to people familiar with the matter.
Mathisson, who most recently served as head of U.S. equity trading for the brokerdealer, made the decision to go, according to the people, who asked not to be identified discussing personnel matters. The bank plans to separate electronic trading from block trading, said one of the people, after those businesses had been pushed together during his ascent. The separation is part of broader changes within the Zurich-based company’s markets business.
The 45-year-old is leaving at the same time the private stock-trading platform that he oversaw is under investigation. Bloomberg News reported in September that the bank will pay more than $80 million to settle federal and New York authorities’ allegations that it didn’t adequately inform customers of how the Crossfinder dark pool operated.
Mathisson plans to open his own asset-management business next year, according to a person familiar with the matter. A company spokeswoman said he wasn’t available to comment. The Wall Street Journal reported earlier Tuesday that Mathisson is leaving.
Dan “Mr.Algo” Mathisson
Mr. Algo
Once dubbed “Mr. Algo,” Mathisson was one of the most prominent faces in modern, electronic markets. He help build Crossfinder into one of the largest U.S. dark pools. When lawmakers started to ask whether Wall Street’s private trading clubs had made stock markets less transparent and less fair, Mathisson trekked to Washington to defend them in a way that was unparalleled by his peers at other banks. He testified several times before Congress in recent years, vowing that dark pools weren’t as mysterious as their cryptic-sounding name implied.
He joined Credit Suisse in 2000 after eight years at quantitative hedge fund D.E. Shaw & Co., where he was the firm’s head stock trader and built his own trading models. Credit Suisse executive Bob Jain, who ran the bank’s quantitative trading desk, introduced Mathisson to colleagues as “Mr. Algo,” a reference to his status as an innovator in a field that was just starting to sweep through Wall Street: Using computer algorithms to automate big transactions.
Mathisson is known for being as much a translator as a trader. A fixture at industry conferences, he’s well regarded for his skills at explaining the complex architecture of the modern stock market in ways that a layman can understand, according to peers.
Under his leadership, Credit Suisse grabbed market share by selling algorithms directly to money managers. The programs resulted in better executions for institutional investors, who want to have their large orders filled without stock prices moving against them.
Before dark pools ran afoul of regulators, one of their biggest threats in Washington was lobbying by stock exchanges. New York Stock Exchange and Nasdaq Inc. executives were aggressively complaining to lawmakers that too much volume had moved off public venues, which had made trading less transparent and could affect the prices all investors pay to buy and sell shares. When the Senate and House held hearings, Mathisson became the go-to witness for banks that operated dark pools.
“Much of the debate over dark pools is misguided and is fueled by a desire by exchanges to avoid healthy competition,” he told a subpanel of the Senate Banking Committee in 2009.
To kick off the 2016 debt market outlook, MarketsMuse fixed income curators are looking forward to the next Caribbean boondoggle, and in that spirit, we extend a shout out to Ron Quigley, one of the primary debt capital market’s top pulse-takers who also goes by the title Head of Fixed Income Syndicate for boutique investment bank, Mischler Financial Group, the financial industry’s oldest certified minority brokerdealer owned and operated by service-disabled veterans. Mischler was the 2014 and 2015 winner of the Wall Street Letter Award for Best Broker-Dealer Research, Quigley’s Corner is a bell-weather for the corporate bond market. Below comments come from the 04 January 16 edition of Quigley’s comments..
Ron Quigley, Mgn.Dir. Mischler Financial Group
Expect a volatile year with today setting quite the tone to kick things off. The Shanghai Index finished the session down 6.86% with the Shenchen off 8.2%. A 5% plunge triggered first-time trading halt circuit breakers as panicked investors piled on sell orders further steepening declines. The weaker yuan, manufacturing misses and the lifting of a ban on sales by major shareholders all combined to create a perfect storm for disruption on our first day back.
Taking back seat to China’s equity exchange turmoil was a critically important development in MENA in which Saudi Arabia officially cut all diplomatic and commercial ties with Iran. Saudi Foreign Minister Adel al-Jubeir requested the departure of delegates in diplomatic missions of the embassy and consulate and related offices within 48 hours. All flights to and from the Saudi Kingdom were immediately cancelled while Bahrain and Sudan joined in severing ties with Iran as well. The Saudi’s move makes one think twice about the U.S.-Iran nuclear deal that will provide the cradle of Islamic Extremism with a cash windfall as sanctions are eased and assets up to $150 billion become unfrozen. Let’s put that amount into proper perspective readers – that’s $25.7 billion MORE than the $124.3 billion the U.S. has given to Israel…..since 1948!
In reaction, the DOW opened down 400 points and as much as 467 intra-day – the worst start for the DOW in 84 years (1932) – and that, readers was all she wrote today for primary markets to decide to prudently stand down. It should be noted, however, that the DOW was strong into the close gaining back 191 points. We WILL revisit things tomorrow. Half a dozen issuers stood down today so if market tone is neutral overnight tomorrow could be a big day.
I couldn’t help but notice how many market participants and think tank experts talked about how those expecting a calm and quiet opening day to the New Year were in for a rude awakening today. If you didn’t already know that this year was going to be highly volatile, then you might want to re-think your entire annual outlook. There is nothing in the global landscape that should tell anyone otherwise. Get used to days like today.
As one of my friends and former colleagues, who is also the author of 18 books on geopolitics and currently Senior Managing Director and Chief Economist at KWR International, Inc., Dr. Scott MacDonald exposed recently that there is a significant rise in holdings of Caribbean Banking Centers (CBCs). Although record amounts of USTs have been issued, CBCs rank as the world’s third largest foreign holders of USTs behind Chinese and Japanese investors. A close fourth place is occupied by the major oil exports namely Saudi Arabia, Qatari and UAE, etc. CBC’s are defined as the Dutch isles, Britain’s Caribbean territories, the Bahamas and Panama. What it spells are very high net worth individuals and families desperately searching for safe harbor investments.
CBC’s currently hold around $322 billion which is a new high. It was only $37 billion at the end of 2000. The reasons are clear – global volatility is pushing investors into the flight to quality of U.S Treasuries compounded by the fact that the U.S. pays higher rates and with a much more palatable risk-to-growth proposition and a Fed that just increased rates last month for the first time in nine years while hinting at more. What it points to is a boat load of global market volatility and risk, aversion to a junk bond market that nearly saw its bottom fall out in late 2015, liquidity issues in corporate bond markets all on the back of our fragile and inextricably linked global economy that has lots of hotspots that can boil over on a day’s notice. As Dr. Scott put it, “perhaps the Caribbean numbers point to the need to have your crash helmet ready for 2016.”
Germany reminded us of mounting economic woes facing the EU. This morning, the engine that drives Europe posted disappointing consumer prices of 0.2% against 0.4% forecasts. The ECB stands ready to print lots more funny money to bolster the faltering Union. Given hammered commodity prices, oil at $36+ per barrel and severed ties between Saudi Arabia and Iran, it’s pretty clear to see that expectations for European inflation aren’t very realistic.
What’s Ahead for 2016?
Well, I can tell you we hope to see more deals, which in turn, will mean more deal drill-downs and wonderful Diversity & Inclusion stories. Those go without saying. However in the world of waxing poetic on all things geopolitical, I’ll have lots of opportunities when there is time to expound therein. Here are merely some of the mounting stories, getting worse NOT better, that I’m sure we’ll hear about in the “QC” in 2016 and in no particular order:
Elections.
Spreading EU Nationalism.
France’s alliance with Putin Incorporated.
Potential superpower proxy war over Syria.
A MUCH worse Brazil than we saw in 2015…….which was pretty bad.
The ECB’s pursuit of its elusive 2% inflation target resulting in yet more stimulus.
The mounting debate and nervousness over a potential Brexit as the U.K. votes in June.
Expanding Terrorism organizations and more serious attacks to come to Europe and the world.
More intrigue in China’s expansion in the South China Sea and subsequent international friction.
Turkey in the EU? Germany will gladly give Turkey what it wants to stem the flow of MENA immigrants into the EU.
Slow growth China and the mere “potential” of civil strife in a nation of 1.4 billion or 19+% of the global population.
Mounting Sunni-Shiite war throughout the Saudi Kingdom and Iran may push those two powers toward direct confrontation.
……….and lastly but not least to all of us, the best story out there, namely the flight to quality into investment grade-rated U.S. Corporate bonds.
The EU Immigration fiasco, the Schengen Agreement and tightened/reintroduction of European borders – a weakening foundational issue to the success of the EU.
………..Stay tuned, she promises to be quite an unprecedented and dramatic year in many respects.
For the full edition of Quigley’s Corner 01.04.16, please click here
You don’t need to be a MarketsMuse or a global macro guru (or any other type of pundit) to know that professional financial market traders are only as good as their last best trade. In that spirit, we look to the 2016 outlook and spotlight on the Wrong Way First (WWF) Trade courtesy of Rareview Macro’s Neil Azous and Sunday night special edition of Sight Beyond Sight–which included a wink and a nod to astrology-friendly traders who swear by the “Bradley Effect”
You’re Only as Good as Your Last Best Trade
Wrong Way First (WWF) Trading Explained
WWF Driving: High Yield (Ignition), Chinese Yuan (Accelerator), US Jobs Report (Speeding Ticket)
WWF Candidates: Two Real (Japan & Momentum) & Two Fakes (Styles & FANG)
New Trade: Short EURGBP Spot Exchange Rate
Wrong Way First (“WWF”) Trading Explained
Wall Street Jargon: Wrong Way First
Acronym: WWF
Reference: The risk the professional investment community is exposed to at the beginning of every New Year – that is, the first major trade will be a reversal in the consensus positioning and lead to significant PnL duress.
Time Frame: 20 calendar days or in this year’s case US equity options expiration on January 22, 2016.
2014 WWF Examples: Japanese Nikkei and Chinese yuan carry trade strategies
While it is true that substantial wealth is only really created over time (i.e. by investing sensibly), the money management business is still a slave to the Gregorian calendar and that means performance resets at the close of business on December 31st.
Put another way, if you manage money for a living you’re only as good as your last best trade.
Therefore, it should be of little surprise that professionals begin every January more focused on not getting caught up in a New Year’s malaise rather than trying to take advantage of opportunities by adding new risk or pressing legacy positions.
While there are many key conversations underway to start 2016, it is important to highlight that the dominant theme emerging from our discussions with the risk takers we know is concern over a WWF trading theme materializing. Such is the nature of this business, especially for absolute return strategies.
Following a flat-to-negative performance in 2015, our interpretation of these conversations is that, for most investors, there is very little tolerance to withstand PnL duress around any theme that is a current WWF candidate.
It should be noted that the sensitivity to start 2016 is also elevated on account of the much higher than the normal market beta that would be associated with this theme – short commodities and emerging markets.
If you apply this theme to actual positioning it reveals that the top WWF candidates across the major asset classes are:
Equities
RV: Long Japan and Europe vs. Short/Underweight US
Quantitative: Long US and EU 12-month momentum
Style: Long Growth vs. Short/Underweight Value
Market Cap: Long US large vs. short small caps
Sector: Long Banks
Directional: Long stock baskets (FANG, NOSH, Top 20)
Currencies
Long USD vs. short c/a deficit (ZAR, TRY, BRL)
Long USD vs. short crude oil (NOK, CAD, RUB)
Long USD vs. short Chinese yuan (USD/CNH)
Cross-Asset
Short Gamma
Fixed Income
Short US front-end
Long US flattener (2yr/10yr and 5yr/30yr)
Long 5-10yr Italy vs short Germany Bunds
Commodities
Short crude oil
Short base metals
Long EM oil importers vs. Short exporters
Credit
Long US vs. short EU High Yield
Personally, while we are mindful, if not darn right respectful of WWF trading, it is not a strategy we look to exploit largely because we are process driven. Additionally, it is our experience that in general contrarian strategies perform badly because they get on the wrong side of trending markets. By that, we mean that the big themes have the ability to persist for a number of years. They do not mean-revert after one year or simply because the Gregorian calendar undergoes its annual reset.
So not only do we tend to side with the majority who look to “weather” a potential 20-day storm, but we hope that a WWF trading event actually materializes and creates enough dislocation to enter positions at much better prices than we initially envisioned to start the year, and at the same time reveal which trends are strong- or weak-handed.
That said, we recognize this is a newsletter and many of you want to actively trade.
So in that spirit, here are the most important questions and answer related to WWF trading to start 2016.
Before that, it should, however, be noted that this year begins with an added twist.
Sometime in the next 72 hours, there will be a “Bradley turn date”. (H/T CP)
The Bradley Siderograph (literally: star chart) is illustrated below but those who use astrology, numerology and cycle analysis to forecast market turns are highlighting this indicator as a catalyst for risk asset weakness. The 2016 Bradley Siderograph Turn Dates are in green. The first one is January 5, 2016, or this Tuesday.
Note that the siderograph looks like a price chart with smooth sloping lines going up and down. However, the turn dates are only indicators of a change in the trend – not in the direction of the markets.
While we are not ourselves great believers in the ability of the stars to influence the markets, just as we don’t read our horoscopes, it is important to recognize that more professionals follow this indicator than they care to admit in public. For example, disciples of Bradley give themselves a +/-4-day grace period and argue that Equities and Gold are the two assets most prone to turning when it does.
With that in mind, however, here are three things we are watching down here on earth.
WWF Driving – High Yield (Ignition)
Which asset class matters the most, or is the ignition switch?
Answer = US High Yield Credit
Which market proxy is second most important, or the accelerator pedal?
Answer = Chinese yuan (CNY)
Which event in the first week of the year breaks the speed limit?
Answer = Monthly US Employment Report (this Friday)
See the below correlation matrix that shows how the various market proxies are all a “One Beta” trade – they’re all going in the same direction.
To continue reading the 3 January edition of Rareview Macro’s Sight Beyond Sight, please click this link(subscription is required; free trial available without need to insert credit card)
(Bloomberg) — A European stock trade that deployed the use of ETF products as a means of hedging currency exposure is one that enamored global investors throughout 2015 and drew more money than practically anything else in equities is blowing up in people’s faces.
As the moves in the the WisdomTree Europe Hedged Equity Fund (NYSE:HEDJ) show, the strategy of going long the region’s shares while hedging to mute the euro’s swings is unraveling. The exchange- traded fund has plunged a record 14 percent in December, erasing annual gains that swelled to as much as 23 percent in April and were still above 18 percent in July. Hit by withdrawals, its market value has fallen to $17 billion from more than $22 billion as recently as August.
Investors are pulling money from the fund like never before after Mario Draghi’s increase in European Central Bank stimulus failed to live up to expectations, triggering a decline in the region’s stocks and a strengthening of its currency.
“A lot of investors have been protecting themselves against a weaker euro, aiming for European equity returns which have been very strong this year as long as you hedged the euro,” said Ewout van Schaick, head of multi-asset portfolios at NN Investment Partners in The Hague. His firm oversees 180 billion euros ($198 billion). “That story seems to be over after the recent central bank actions. Investors are positive on European equities but are less sure it has to be on a hedged basis.”
The fund’s popularity grew earlier this year, when its hedge became of paramount importance as the ECB started its bond-buying program, triggering a weakening of the euro to levels not seen since 2003 and a 22 percent surge in the region’s stocks. In the first four months of the year, traders poured $13 billion in the ETF, making it the favorite vehicle to bet on European equities.
Euro Stoxx 50 Index NYSE:FEZ
FEZ Fizzles. Fast forward to December, and things don’t look as good. The Euro Stoxx 50 Index, whose ETF tracker is NYSE:FEZ is down 7.1 percent through yesterday’s close, heading for its worst ending to a year since 2002, while the euro is set for its biggest monthly advance since April against the dollar.
Forecasters don’t see the currency moving much from now. It’ll weaken to $1.05 and stay at that level for the first three quarters of next year, before starting to rebound, according to projections. It’s hovered around $1.09 for most of December.
That doesn’t mean the consensus is turning bearish on European equities. Even without a significant weakening of the currency, strategists expect euro-area equities to climb another 12 percent by the end of next year, aided by a recovering economy, ECB stimulus and low valuations. The Euro Stoxx 50 rose 1.2 percent at 11:47 a.m. in London. At 14.2 times estimated earnings, companies on the gauge are cheaper than those on the Standard & Poor’s 500 Index or MSCI All-Country World Index.
“We still believe in European equities,” Van Schaick said. “The European economic recovery is in the earlier stage, so all the lights are green for Europe. They’re going to do a lot better than U.S. equities next year.”
Blythe Masters, once considered the “Babe of Investment Banking” in view of her long tenure and celebrity senior role at JPMorgan—which included her being credited for helping to create those snarkly financial derivative products known as credit default swaps (CDS), has since aspired to become known as either the “Blockchain Batgirl” or the “Babe of Blockchain” through her latest career role as CEO of the bitcoin-buttressed fintech startup Digital Asset Holdings. But, now that Blythe is no longer flying with the superpowers that came with her JPMorgan superhero costume, she is rapidly discovering that startup land has more sharp elbows than JPM’s bond trading floor.
photo courtesy of Bloomberg Markets
Despite the fact Ms. Masters is undeniably a bona fide member of any Masters of the Universe Club (sic Tom Wolfe/Bonfire of the Vanities)—and however much “blockchain technology” has inspired a cadre of brokerdealers and banks to get on board a train that could evolutionize the financial industry at large, and even despite a potential “death-knell magazine cover” courtesy of October’s Bloomberg Markets Magazine, Masters’ foray into the world of fintech startup funding is proving to be bumpy at best. The “blue ocean” this famously-fetching, blue-eyed blonde banker is now swimming in is populated not only with sharks, but with migrant bankers’ bodies floating ashore and otherwise left beside the yellow-brick road to billion dollar Unicorn valuations.
Notes NY Times business news journalist Nathaniel Popper—one of the 4th estate’s leading bitcoin industry experts (and a MarketsMuse in his own right), Digital Asset Holdings is running into the types of startup funding challenges that mostly all mortals encounter when pitching ideas scrapped from a whiteboard: questionable valuation, untested technology value proposition, a highly-fragmented and often dysfunctional target audience, and last but not least, an investment structure that is being increasingly challenged across the institutional investing world for giving preferential ownership treatment to a select group of early investors. In this case, Digital Asset Holdings is providing a very sweet deal and a very exclusive suite of follow-on round financing options to its anchor investor, which happens to be her former employer, JPMorgan.
Here’s an excerpt from Popper’s piece—“Cash Call For a New Technology” which appeared on the front page of the 29 December edition of the New York Times business section.
The newest venture from Blythe Masters, until recently a star banker at JPMorgan Chase, appeared to be an overnight success story in the making.
Her start-up, Digital Asset Holdings, is working in one of the hottest areas of growth on Wall Street today: the blockchain technology that underlies the virtual currency Bitcoin. And Ms. Masters has already received a promise from JPMorgan, her former employer, to be the lead investor on the new project, pitching in around $7.5 million.
But Ms. Masters’s company has been struggling for months to close the deal with other investors. Most recently, large banks including Goldman Sachs and Citigroup have balked at putting money into Digital Asset Holdings after learning that JPMorgan was being given better terms than other investors, according to several people briefed on the deal.
The banks and financial firms looking into investing, the people said, have also expressed doubts about the actual software solutions Ms. Masters’s start-up is working on, much of which has been put together through purchases of smaller start-ups.
“The deal would need to improve materially for us to get involved,” said one executive at a financial firm, who has been looking at putting money into Ms. Masters’s company, speaking on the condition of anonymity because negotiations were continuing. “It’s not supercompelling.”
Digital Asset Holdings’ chief marketing officer, Beth Shah, said assertions that the company was facing challenges in raising funds were inaccurate but she declined to provide further details. All of the potential investors declined to comment.
The challenges that Ms. Masters is facing reflect in part the increasingly difficult environment facing start-ups of all sorts as investors have begun to worry that the tech industry has been overhyped and overvalued, pushing down values for companies both public and private.
She is also contending with the difficulty of building a viable business around the virtual currency Bitcoin and the various technological concepts it has introduced to the financial industry, most of all the blockchain.
Digital Asset Holdings is proposing to build something similar to the blockchain database, in order to provide a cheaper and faster way to trade other sorts of financial assets, such as loans and foreign currencies.
The problem for Ms. Masters is that several other start-ups are trying to do something similar, and there is no guarantee that any of the start-ups will ultimately succeed. Many industry experts think that it could take years to get to the point where the blockchain technology can be used effectively by banks — if it works at all.
The New York-based start-up ItBit, which is building its own blockchain-like technology, had been out trying to raise $100 million based on the assumption that the company was worth $250 million. More recently, it has scaled that back and is now hoping to get $50 million from investors, with a valuation of $135 million.
Ms. Masters hopes to raise from $35 million to $45 million, valuing the company at $100 million.
In recent months, the software that Ms. Masters has shown to potential investors allows for the issuance and trading of so-called syndicated loans — large loans broken into pieces and sold to different investors. It can take weeks for trades in this market to go through, a time span that D.A. is trying to shorten.
Investors who have looked at the software, though, say they are not convinced that Ms. Masters’s technology will fix the problems in the loan market, which are attributed as much to human cooperation as to bad software.
There are also indications that Digital Asset Holdings has not had an easy time integrating all the outside technology start-ups it bought. For example, two of the three employees who worked at Blockstack, which the company acquired in October, have already negotiated to leave D.A., people briefed on the situation said.
“All employees who were offered permanent positions at the time of the acquisitions of Bits of Proof, Hyperledger and Blockstack are still with the company,” said Ms. Shah, D.A.’s chief marketing officer.
One of Ms. Masters’s competitors, known as R3, has approached the problem from a different angle and is trying to determine how the banks want to use the blockchain before building specific software. With that strategy, R3 has signed on over 40 banks as partners in recent months, including all of the big banks that Ms. Masters is trying to persuade to invest in her company.
None of this has scared off JPMorgan, which has agreed to lead the Series A investment round in Digital Asset Holdings, people briefed on the negotiations said. To reward JPMorgan, the people said, D.A. plans to grant it warrants to buy a bigger share of the start-up in the future at the same price it is getting now. JPMorgan is said to have committed to helping Ms. Masters’s company improve and secure adoption of its technology.
Some of the other banks looking into investing in D.A. raised concerns about the JPMorgan deal in a meeting this month at the Sandler O’Neill offices that included Citi, Goldman and Bank of America representatives. Smaller financial companies, like Nasdaq and Markit, have also remained on the fence, the people briefed on the negotiations said.
For the full story from the NY Times, please click here
(BrokerDealer.com)- The Financial Industry Regulatory Authority (FINRA) has given a $7.3mil spanking to broker Cantor Fitzgerald consisting of a $6 million fine and an order to pay $1.3 million for commissions, plus interest, it received from selling billions of unregistered microcap shares in violation of federal law in 2011 and 2012. In addition to its role broking a broad assortment of securities, Cantor is one of the securities industry’s leading ETF brokers.
Frmr Head of Equities Jarred Kessler
In addition to the monetary fines, FINRA suspended Jarred Kessler, executive managing director of equity capital markets, for three months in his principal role at the firm and fined him $35,000 for supervisory failures, while equity trader Joseph Ludovico was suspended for two months and fined $25,000. The regulator also sanctioned Cantor for not having adequate supervisory or anti-money laundering programs to detect “red flags” or suspicious activity tied to its microcap activity. The suspension of Kessler from serving in a principal role for Cantor has proven to be an exercise, as the 5-year Cantor employee resigned from the firm last week.
“If a broker-dealer is looking to increase its revenues by expanding a high-risk business line, the firm and its supervisors must tailor their supervision to the risks associated with those businesses. This is especially true when the new business involves the mass liquidation of microcap securities, which presents overwhelming risks of fraud and investor harm,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement, in a statement.
“FINRA has no tolerance for firms and business executives who choose to engage in this business without robust systems designed to ensure that they do not become participants in illegal, unregistered distributions,” Bennett said.
Kessler resigned from the firm last week to pursue “a significant opportunity,” according to his lawyer, Ross Intelisano, of Rich, Intelisano & Katz LLP.In settling this matter, Cantor Fitzgerald neither admitted nor denied the charges, though it did consent to FINRA’s findings.
BOJ ¥300bil plan to support “companies investing in physical and human capital” via high cap-ex indices is missing one ingredient: the high cap-ex ETF investment vehicles.
(Bloomberg) by Yuko Takeo-Bank of Japan Gov. Haruhiko Kuroda has a new plan. He’s going to buy ¥300 billion ($2.5 billion) of something that doesn’t exist.
Markets were roiled Friday after the BOJ unveiled measures including purchasing exchange-traded funds that track companies which are “proactively making investment in physical and human capital.”
The central bank will spend ¥300 billion a year from April buying such securities to offset the market impact as it resumes selling stocks purchased earlier from financial institutions.
The only problem is such ETFs have never been made in Japan, at least not yet. Even as fund providers start hundreds of “smart beta” products that choose stocks based on everything from dividends to volatility, ETFs that pick companies for how they deploy their cash are rare in global markets.
“These kinds of ETFs don’t exist now. Using capital spending as a factor in deciding what goes in an ETF is quite unusual,” said Koei Imai, who oversees $25 billion of ETFs at Nikko Asset Management Co. in Tokyo. “I think the message from the BOJ is for us to go out and make them.”
The central bank is aware such products aren’t yet available and in the meantime will buy ETFs tracking the JPX-Nikkei Index 400, a government-backed equity measure started last year that chooses companies based on return on equity and operating profit. The BOJ also already purchases ETFs linked to the Nikkei 225 stock average and Topix index and owns roughly half of the market for ETFs in Japan.
“High-capex indexes are in their infancy in all markets but it is something we have looked at in the past and have some familiarity with,” said Jason Miller, head of BlackRock Inc.’s ETF unit in Japan, who says his company offers no such ETFs globally. “It is no surprise to see greater demand for this tilt to quality, particularly given the macro backdrop.”
In May, Elkhorn Investments started an ETF in the U.S. that tracks the S&P 500 Capex Efficiency Index, which invests in companies that have boosted sales through capital expenditures. The ETF has attracted $1.2 million in assets.
No products like the ones the BOJ intends to buy are listed on the Tokyo bourse, according to Japan Exchange Group Inc. spokeswoman Miwa Aonuma. She declined to comment on whether there are plans to start such ETFs.
