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Sunday, June 24

24th Jun - Weekender: Trading & Markets

Sections in this week’s Trading & Markets-post: Switzerland, Central Banking, China, Banks, Regulation, Risk Markets, Strategy, The Dark Side and Other.

For weekly summaries, see Weekly Support (updated), check my yesterday’s Euro Crisis-post and follow ‘MoreLiver’ on Twitter or Facebook.  

SWITZERLAND
The Swiss economy and global economic outlookBIS (pdf)
Thomas Jordan / SNB 14 June 2012.

The Swiss National Bank's 2012 Financial Stability ReportBIS (pdf)
Jean-Pierre Danthine / SNB 14 June 2012.
 
CENTRAL BANKING
FED WatchMoreLiver’s Daily
My huge linkfest to ‘before’ and ‘after’ articles

Diagnosing Liquidity AddictionZH
Deutsche Bank: The structural problems that encouraged QE were much larger than most believed at the time and QE has limited power to actually power growth forward in such an environment…Europe more than anyone is perhaps addicted and in need of constant intervention to prosper.

The Federal Reserve Extends Operation TwistThe Big Picture
Summaries and links to three articles. See also my

Different Views on QE3 TimingCalculated Risk
ML, GS, Krugman.

The munificent sevenThe Economist
The Federal Reserve extends Operation Twist

Quantitative easing and the (lack of) responses in bond yieldsASA
when the Fed was performing quantitative easing, treasury yields rose as the economy recovered and inflation expectation rose.

The future of inflation targeting?BIS (pdf)
John McDermott / Reserve Bank of New Zealand 19 June 2012.

Strategic Briefing: Debating Monetary Policy (Still)The Capital Spectator

CHINA
Chinese Data Mask Depth of Slowdown, Executives SayNYT
prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.

Is China massaging macro data? (Ans: Yes)ASA
 

Coal inventory in various Chinese ports hit record highsASA 
Because the demand for coal fell as electricity production dropped, and as coal inventories at power plants level are also at record high levels according to the report, there are only very few buyers for the record stockpile of coal.  As a result, despite aggressive price cutting, the inventory level stays high in the port.

Asia's Downside Risk And The Three Big HopesZH
'Risks are all to the downside for Asia' is the view of UBS' global macro team. It appears the markets are pinning their optimism on growth and earnings over the next year on three hopes: that the US will not fall off its 'fiscal cliff'; that Europe will 'muddle through'; and that China will pull Asia out of the current morass.

BANKS
Moody’s downgrades firms with global capital markets operationsCredit Writedowns

Moody's Cuts Credit Ratings of 15 Big BanksDealBook / NYT

Moody’s ratifies interbank mistrustFelix Salmon / Reuters

Quarterly Report on Bank Trading and Derivatives ActivitiesOCC (pdf)

Systemic Banking Crises Database: An UpdateIMF
The database includes all systemic banking, currency, and sovereign debt crises during the period 1970-2011. The data show some striking differences in policy responses between advanced and emerging economies as well as many similarities between past and ongoing crises.

REGULATION
FSA regulator: 'No, I don't like being called an idiot'The Guardian
Who works for the FSA? Some say it's those not good enough for the banks – but a regulator says there are also those for whom the banks weren't good enough

Countercyclical regulation in Solvency II: Merits and flawsvoxeu.org
October 2011 saw the latest draft of Solvency II, the European Union’s code for regulation of the insurance industry. This column argues that the latest proposals need to be drafted again, urgently.
http://www.voxeu.org/index.php?q=node/8131

Don’t Blame Money Market FundsThe Aleph Blog

Leverage? What Leverage? A Deep Dive into the U.S. Flow of Funds in Search of Clues to the Global CrisisIMF
This paper questions the view that leverage should have forewarned us of the global financial crisis of 2007-09, pointing to several gearing indicators that were neither useful portents of the onset of the crisis nor of its ferocity. Instead it shows, first, that the use of ill-suited collateral in the secured funding operations of U.S.-based investment banks was the fatal link between the collapse of structured finance and the global malfunction of funding markets that turbocharged the downdraft; and, second, that this insight (and others) can be decrypted from the Flow of Funds Accounts of the United States.

The worrying decline of the unsecured interbank marketDeus Ex Macchiato
Benoît Cœuré, Member of the Executive Board of the ECB, recently gave an important speech. It has quite a lot in it so even the bullet point version isn’t that short, but I promise you that it is worth thinking about his essential argument.

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RISK MARKETS
Citi Doubles Down Goldman Sell Call, Support Around 1285ZH

Goldman Goes Short The S&P 500: 1285 TargetZH

Mr. Market's Estimate Of Expected Stock ReturnsThe Capital Spectator

Sorting Country Equity Markets By Value and Momentummebane faber

Risk Markets Remain Macro-DrivenZH
Barclays notes that the correlation between global equities, the USD, emerging market FX, high-grade credit, and commodities remains near cyclical highs and rising. Furthermore, 'safe haven' correlations are at record levels relative to risk assets

Summer of 2011 redux?Sober Look
The Citi Economic Surprise Index continues its relentless slide.

Dr. Copper says watch out belowSober Look
The dislocation between US equities and Brent crude (discussed here) is by no means unique. A very similar picture is developing between S&P500 and copper.

STRATEGY
The allure of long-term treasuries has been the reduction in portfolio volatilitySober Look
long-term treasuries can significantly reduce portfolio volatility… It is unclear however whether treasuries will continue having the same volatility-reducing properties over the long-term.

Damodaran: Passive Value Investing – Screening for BargainsStone Street Advisors

Are Trading Algos Proprietary?Points and Figures
But is trading code a patentable proprietary thing? When we were in the trading pits, nothing was patentable.

The ever-evolving wall of worryAbnormal Returns
Ironically those markets that have performed the best, that have supplanted whatever worries existed and now seem invulnerable, are actually the riskiest.

Four Real-World Investing Rules That Should Be Taught in SchoolsMinyanville
1) what you know, everyone else probably knows, too. 2) timing is everything. 3) you may be suffering from confirmation bias 4) in isolation, valuation ratios are useless

It’s All a Big MistakeOaktree Capital Management (pdf)
Superior investing is about mistakes. For someone to make a big profit, someone else must make a big mistake.

The Fallacy of Relative ReturnLeigh Drogen
If you are investing to beat a benchmark, and not to make money, or better, not to not lose money, I would take a long hard look at why that is.

THE DARK SIDE
Keeping up appearances: The Wall Street marketing machineThe Globe and Mail

The Party IndicatorThe Reformed Broker
The idea that bubbles can't be predicted and measured is one of the biggest lies told by our monetary and political authorities.

Too Much Finance?IMF
This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be "too much" finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the "vanishing effect" of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.

Executive coach: 'Finance is an amoral world, bordering on the immoral'The Guardian
A psychologist compares the 'twisted minds' of some executives to those of paedophiles he has tried to treat in the past

The Rise of the Ax-Wielding, Market Moving AnalystMinyanville
A thoughtful review of both the role and impact of stock analysts on financial markets.

Investment managers at-risk of disruption: a debateAbnormal Returns
One could characterize the rise of ETFs as a disruptive force in the world of investment management. By embracing the twin trends of indexing and lower costs ETFs have shown many investors a new and better way to invest. Financial advisers are now getting on board this trend after having sat it out for some time now.

Active Managers Sell Hope, UnderperformanceGreenbackd
The empirical evidence that the average fund manager underperforms and the recent top-performing funds do not outperform subsequently are irrefutable. Why, then, do investors insist on paying for investment management expertise, which isn’t all that useful?

So long, suckers — I’m leaving Wall StreetMarketWatch
Commentary: Some lessons from 15 years observing the industry

OTHER
Top Finance People to Follow on Twittermarket folly

High frequency trading and the volume clockPortfolio Probe

A Survey of Experiences with Emerging Market Sovereign Debt RestructuringsIMF
Knowledge of these might become useful in Europe.

The Economic History of the Last 2000 Years: Part IIThe Atlantic

India's currency spirals out of controlSober Look

Daddy’s Home John Mauldin / The Big Picture
Long newsletter on Fed policy, low investor income and Europe: The “smart” money is betting on Germany deciding to bite the bullet and go along

Book BitsThe Capital Spectator
8 quick book summaries and links.

Mutual Fund Performance PersistenceCXO

Applied Academic Research, June 2012Empiritrage

Julian Robertson on the Hedge Fund Industry Past & Presentmarket folly

Stabilizing prices is immoralInterfluidity
The first thing to recognize is that a policy of enforced “price stability”, whether implemented in terms of levels or rates, is a form of goverment-provided social insurance, just like unemployment or disability benefits.  (also see FT’s excellent piece from 8-Jun)

On the varieties of capital arbitrageDeus Ex Macchiato
There are only a few basic types of capital arbitrage trade.
 
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