Oct 212014
 
Bill Longbrake

Bill Longbrake

In recent days, market sentiment has shifted from optimism and complacency to pessimism and fear. Significant and troublesome imbalances have been building in the global economy for a long time but the threats they pose to global economic well-being have largely been ignored. But now the possibilities of much slower growth in China, failure of Abenomics in Japan, and deflation in Europe, not to mention the existential threat to the euro and the European Union, are being discussed more openly.

In this month’s letter, Bill Longbrake explains why unfavorable demographic trends, excess supply of goods and services relative to underlying demand, monetary profligacy, negative real rates of interest, and huge and rising debt-to-GDP ratios collectively are fostering a global deflationary bust in which increases in prices and output slow, or even fall, and bankruptcy potential rises for firms and countries.

View the full report.

Oct 172014
 

The extreme volatility across financial markets over the past week overshadowed several interesting developments with respect to dark pools, which garner about 15% of all equity trading.  One major US bank decided to close their dark pool, while another brokerage house announced new rules with respect to how orders are executed in anticipation of a change in regulations.  The SEC confirmed they are investigating how orders are routed and payment systems, topics covered at the CFP conference held in September with FINRA.  Please visit the CFP’s website to view the papers and presentations from that event.

Over the last few weeks this round-up highlighted several stories outlining the risks related the fixed income market’s structural shortcomings.  The lack of liquidity and transparency in the fixed income market isn’t an issue created by the financial crisis, but it has been exacerbated by the regulations aimed at preventing another.  The Dodd-Frank Act’s provisions regarding capital requirements and restrictions on prop trading effectively reduce a bank’s incentive to hold an inventory of bonds and by extension their market-making capabilities.  The net result is a dramatic reduction in liquidity in the secondary market, which has even led to questions over the valuation of some rarely traded issues.

Professor Pete Kyle believes the fixed income market’s current structure is similar to the NASDAQ market in the 1980’s and early 1990’s, when almost all trades involved registered market makers on one side of the trade or the other. After the Department of Justice and the SEC forced changes in order handling rules in the late 1990s, non-broker-dealers were able to post limit orders and trade with one another, like they had been able to do for many years on the NYSE.  Professor Kyle thinks that these change decreased bid-ask spreads on NASDAQ relative to the NYSE. There have been a number of attempts by fixed income market participants to create customer-friendly trading platforms.  Professor Kyle thinks that now is the time for such platforms to gain permanent traction.  Platforms which allow non-broker-dealers to supply liquidity to one another directly will allow market participants themselves to overcome some of the tendencies of the Dodd-Frank Act to reduce liquidity.

 

ConvergEx to change dark pools ahead of regulations

http://www.reuters.com/article/2014/10/10/convergex-group-darkpools-idUSL2N0S52XZ20141010

Wells Fargo to shut its ‘dark pool’ as demand falls

http://www.reuters.com/article/2014/10/16/us-wells-far-darkpool-idUSKCN0I52WA20141016

High-frequency trading firm fined for wave of last-minute trades

http://www.marketwatch.com/story/high-frequency-trading-firm-fined-for-wave-of-last-minute-trades-2014-10-16

High-Frequency Trader Athena Capital Settles Stock-Manipulation Charges

http://online.wsj.com/articles/athena-capital-settles-stock-manipulation-charges-with-sec-1413486055

Dark Pools Face More Enforcement Actions, SEC Lawyer Says

http://www.bloomberg.com/news/2014-10-14/dark-pools-face-more-enforcement-actions-sec-lawyer-says.html

Volckerized Wall Street Dumping Bonds With Rest of Herd

http://www.bloomberg.com/news/2014-10-16/volckerized-wall-street-dumping-bonds-with-rest-of-herd.html

Fund Traders Dig Deep for Bonds

http://online.wsj.com/articles/fund-traders-dig-deep-for-bonds-1413157900?mod=WSJ_hps_MIDDLE_Video_Top

 

 

Oct 102014
 

News regarding the shortcomings in the fixed income market’s structure and liquidity, as noted in previous round-ups, continued to develop this week.   A consortium of banks announced an initiative to set up a one-stop shop for corporate bonds to help ease the liquidity shortage, due in part to post-crisis capital requirements on banks and broker-dealers.  These requirements reduce a bank’s incentive to hold an inventory of bonds and act as a traditional liquidity provider, especially in the secondary market.  The New York Times Dealbook reported that banks and regulators are expected to agree on a change in derivatives regulation intended to contain damage to the broader financial system if a large bank were to fail.  The Financial Stability Board could announce a change as early as this weekend.

Banks Unite to Set Up One-Stop Shop for Corporate Bonds

Bond Managers Struggle with Liquidity Risk

Regulators Revisit Criteria For Systemically Important Firms

Metlife Contest Systemically Important Label from FSOC

Expected Change in Derivatives Aims to Curb Damage From Bank Failure

Change in Derivatives Doesn’t Resolve Question of Safe Harbors

Regulatory Pressure Leads Banks to Sit out Funding of TransFirst Buyout

 

Oct 032014
 

Financial markets had plenty to chew on this week between Bill Gross’ resignation from PIMCO last Friday, the protests in Hong Kong, the spread of the Ebola virus here in the U.S. and this morning’s non-farm payroll report; but there was little news on the policy front.  Last week’s round-up noted the issues regarding liquidity (or the lack thereof) in the fixed income markets, which Mr. Gross’ departure and the outflows from PIMCO’s flagship Total Return Fund highlight.

The CFP’s academic advisors were busy this week with Professor Cliff Rossi presenting on Capitol Hill and Dr. David Kass commenting on Berkshire Hathaway and investing.

 

CFP Senior Fellow, Professor Cliff Rossi Proposes Steps to Undo Federal Takeover of Twin Mortgage Giants on Capitol Hill

http://www.rhsmith.umd.edu/news/reforming-fannie-and-freddie-without-congress

Read the full paper here

You Know It’s a Tough Market When Bernanke Can’t Refinance

http://www.bloomberg.com/news/2014-10-02/you-know-it-s-a-tough-market-when-ben-bernanke-can-t-refinance.html

 

CFP Senior Fellow, Professor David Kass on investing:

https://www.youtube.com/watch?v=ZIjhXaTVWwQ&feature=youtu.be 

 

High-Frequency Trader Charged With Manipulating Commodity Prices

http://online.wsj.com/articles/high-frequency-trader-charged-with-market-manipulation-1412266535?mod=dist_smartbrief

http://www.bloombergview.com/articles/2014-10-02/prosecutors-catch-a-spoofing-panther

When Debt Markets Don’t Really Act as Markets

http://dealbook.nytimes.com/2014/10/01/when-debt-markets-dont-really-act-as-markets/?_php=true&_type=blogs&emc=edit_dlbkpm_20141001&nl=business&nlid=69558033&_r=0

Dark pools draw trade away from stock exchanges in September

http://www.cnbc.com/id/102052822

Tough Rules Gave Canada Banks Advantage

http://www.bloomberg.com/news/2014-09-30/rigorous-rules-gave-canada-s-banks-advantage-says-osfi-s-rudin.html

Sep 262014
 

by Mandy Chen

After months of posturing, the Treasury Department finally made a move to curb the wave of tax inversions, which entails U.S. companies moving their headquarters overseas to reduce their tax burden. The Treasury announced five revisions to the tax code, though tax experts debate whether they have the authority to do so.

SEC actions this week focused on valuation of assets, examining whether a PIMCO ETF and some hedge funds inflated the prices of some of their assets in order to boost the NAVs of the funds. This inquiry highlights the increasing risk the ETF market presents to the overall stability of the bond market. The FSB highlighted their concern regarding the potentially destabilizing effect the growth of ETFs in less liquid markets may have on the broader market in a Bloomberg interview this week.

In response to the SEC’s June call, FINRA’s board made several proposals to improve transparency in dark pools, high-speed trading and fixed-income markets. Algorithmic trading strategies and names of developers must be disclosed along with quotation information for corporate bonds and agency debt securities in alternative trading systems.

 

Obama Administration Moves to Crack Down On Tax Inversions

http://www.forbes.com/sites/jeremybogaisky/2014/09/22/obama-administration-moves-to-crack-down-on-tax-inversions/

 SEC Valuation Examinations

http://dealbook.nytimes.com/2014/09/24/s-e-c-is-examining-pimco-exchange-traded-fund/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1&

http://www.bloomberg.com/news/2014-09-26/pimco-etf-probe-spotlights-270-billion-market-vexing-regulators.html

http://online.wsj.com/articles/sec-finds-deficiencies-at-hedge-funds-1411403677

FSB Examination on stability and trends in ETFs

http://www.financialstabilityboard.org/publications/r_110412b.pdf

http://www.bloomberg.com/news/2014-09-23/etf-liquidity-risk-a-concern-for-regulators-wilkins.html

http://blogs.barrons.com/focusonfunds/2014/09/24/fsb-concerned-about-etf-liquidity/

U.S., Europe Hit Impasse Over Rules on Derivatives

http://online.wsj.com/articles/u-s-europe-hit-impasse-over-rules-on-derivatives-1411672215?mod=WSJ_hp_LEFTWhatsNewsCollection

Euro Drops to 14-Month Low Amid Stimulus Speculation

http://www.bloomberg.com/news/2014-09-23/n-z-dollar-rallies-from-one-year-low-after-trade-gap-narrows.html

FINRA Puts out Proposals to Improve Transparency of Dark Pools’ Trading Systems

http://www.pionline.com/article/20140919/ONLINE/140919813/finra-puts-out-proposals-to-improve-transparency-of-dark-pools-trading-systems

CFTC Seeking Comment on Overseas Impact in Swap-Collateral Rules

http://www.bloomberg.com/news/2014-09-17/swap-collateral-rules-with-end-user-safeguards-set-for-cftc-vote.html