Tuesday, June 13, 2017

Tuesday, June 13, Morning Global Market Roundup: Asia Stocks Shake Off U.S. Tech Slump

By Nichola Saminather 
Reuters
June 13, 2017

Asian stocks mostly rebounded on Tuesday despite a further slide in U.S. tech shares, while the Canadian dollar soared on the possibility interest rates might go up sooner than expected.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.4 percent, recouping about half of the previous session's losses as regional tech shares regained their composure.

The MSCI Asia Pacific Information Technology index .MIAP0IT00PUS steadied, after sliding 1.4 percent on Monday.

Some analysts had predicted Asian tech shares would not see as intense a selloff as their U.S. peers as their valuations were less stretched.

Japan's Nikkei .N225 slipped 0.1 percent.

"The view that some U.S. tech shares are going through inevitable adjustments while retaining a positive outlook is also lessening the impact on the domestic market," said Hitoshi Ishiyama, chief strategist at Sumitomo Mitsui Asset Management in Japan.

South Korea's KOSPI .KS11 gained 0.4 percent, with the biggest stock Samsung Electronics (005930.KS) up 0.5 percent after Monday's 1.6 percent slump. Naver Corp. (035420.KS) and LG Innotek (011070.KS), which led Asian losses on Monday, were flat and 1.3 percent higher, respectively.

Taiwan's tech-heavy benchmark index .TWII added 0.2 percent, with the biggest company, Taiwan Semiconductor Manufacturing Co. (2330.TW) little changed.

Major Apple supplier Hon Hai Precision Industry (2317.TW) slipped 0.5 percent, but that was a moderation from Monday's 2.9 percent slump.

Hong Kong's Hang Seng .HSI gained 0.3 percent but Chinese shares .CSI300 lost 0.3 percent.

On Wall Street, tech giants including Apple (AAPL.O), Alphabet (GOOGL.O), Facebook (FB.O) and Microsoft (MSFT.O) were sold for the second consecutive day on Monday.

That dragged the Nasdaq .IXIC down 0.5 percent, the S&P 500 .SPX 0.1 percent and the Dow Jones Industrial Average .DJI 0.2 percent.[.N]

"I don't sit in the camp that we will see a prolonged pullback in U.S. tech, but there is a good chance this hot sector now underperforms and I had been suggesting increasing exposure to U.S. financials as a trade," Chris Weston, chief market strategist at IG in Melbourne, wrote in a note.

In currencies, the Canadian dollar CAD= extended Monday's strong gains, after a Bank of Canada official said the central bank would assess if it needs to keep interest rates at near-record lows as the economy grows.

That was a change in tone for the central bank, which said earlier this year that rate cuts remain on the table.

The "loonie" strengthened about 0.4 percent to trade at C$1.328 to the dollar, a two-month high, after gaining 1.1 percent on Monday.

"It feels like a long time since markets have been treated to unscheduled hints of tightening, and this was quite apparent when you saw the positive reaction of CAD crosses overnight," Matt Simpson, senior market analyst at ThinkMarkets in Melbourne, wrote in a note.

The dollar inched higher to 110 yen JPY=D4, after falling 0.3 percent on Monday, ahead of a widely expected interest rate increase by the U.S. Federal Reserve this week.

The Bank of Japan, which is also meeting this week, is expected to keep its monetary policy unchanged.

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, crept up slightly to 97.189.

Sterling GBP=D3 was fractionally lower at $1.265 ahead of a Bank of England meeting at which the benchmark rate is expected to remain at 0.25 percent.

The euro EUR=EBS slipped slightly to $1.1198.

In commodities, oil advanced on news that Saudi Arabia would make supply cuts to customers.

U.S. crude CLc1 rose 0.4 percent to $46.24 a barrel.

Global benchmark Brent LCOc1 also added 0.4 percent to $48.46.


Article Link To Reuters:

Oil Edges Up On Saudi Pledge To Make Real Supply Cuts

By Henning Gloystein
Reuters
June 13, 2017

Oil prices edged up early on Tuesday, lifted by statements that OPEC-leader Saudi Arabia was making significant supply cuts to customers, although rising U.S. output meant that markets remain well supplied.

Brent crude futures LCOc1 were at $48.42 per barrel, up 13 cents, or 0.3 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $46.21 per barrel, also up 13 cents, or 0.3 percent.

Saudi Arabia, the world's top oil exporter, is leading an effort by the Organization of the Petroleum Exporting Countries (OPEC) to cut production by almost 1.8 million barrels per day (bpd) until the end of the first quarter of 2018 in order to prop up prices. Other countries, including top producer Russia, are also participating.

During the first half of the year, there were doubts over OPEC's compliance with its own pledges, as supplies, especially to Asia, remained high.

Saudi officials now say they are making real cuts, including 300,000 bpd to Asia for July, although several Asian refiners said they were still receiving their full allocations.

"Crude oil prices rose on the back of further supportive talk from Saudi Arabia. Energy Minister Khalid Al-Falih said that inventories are declining and reductions will accelerate in the next three week," ANZ bank said.

Although other OPEC members, like Libya and Nigeria, are exempt from the cuts, and there have been doubts over the compliance of others, including Iraq, the club's supplies have been falling since the cut's start in January.

Trade data shows that OPEC shipments to customers averaged around 26 million bpd in the last six months of 2016, while they are set to average around 25.3 million bpd in the first half of this year.

Threatening to undermine OPEC's efforts to tighten the market is a relentless rise in U.S. drilling activity RIG-OL-USA-BHI, which has driven up U.S. output C-OUT-T-EIA by more than 10 percent since mid-2016, to over 9.3 million bpd.

The U.S. Energy Information Administration (EIA) says production will rise above 10 million bpd by next year, challenging top exporter Saudi Arabia.

Overall, oil markets remain well supplied.

A sign of ample supplies is the Brent forward curve <0>, which is in a shape known as contango, in which crude for delivery in half a year's time is around $1.50 per barrel more expensive than that for immediate dispatch, making it profitable to charter tankers and store fuel instead of selling it for direct use.


Article Link To Reuters:

U.S. Shale Firms More Exposed To Falling Oil Prices As Hedges Expire

By Catherine Ngai and Swetha Gopinath
Reuters
June 13, 2017

Cash-strapped U.S. shale firms scaled back their hedging programs in the first quarter, leaving them more vulnerable to tumbling spot market prices just after OPEC reached a landmark deal to curb global supply.

The pullback in hedging was driven by rising service costs and expectations that prices would continue to rally after the Organization of the Petroleum Exporting Countries extended those cuts in May, analysts said.

However, rising U.S. production has stymied OPEC's efforts to rebalance markets. Crude oil futures have lost 15 percent of their value since February, raising the risk that unhedged companies are more exposed to market weakness.

The market peaked at $55 a barrel in January as cuts got under way, but has struggled since, and closed Monday at $48.29 a barrel [O/R], barely changed from the end of November, when OPEC agreed with nonmembers to cut 1.8 million barrels a day in supply.

For oil traders, hedging data serves as a leading indicator of future supplies. With so little hedged, dealers say producers are now looking to hedge at the next chance possible, a move that will pressure prices in coming months.

Producers hedge by buying a variety of financial options to secure a minimum price for crude and safeguard future production.

According to a Reuters analysis of hedging disclosures by the 30 largest U.S. shale firms, most stayed on the sidelines in the first three months of 2017, a stark contrast from a year ago when firms rushed to lock in prices, even though oil was trading $15 a barrel lower.

In total, 18 companies reduced outstanding oil options, swaps or other derivatives positions by a total of 49 million barrels from the fourth quarter to the first quarter, the data shows. Another 10 companies increased their hedging positions by 91 million barrels; two others did not hedge at all.

Compared with a year ago, the group is more exposed to falling oil prices, with one-fifth fewer barrels hedged, or the equivalent of 28 million barrels, and three times more barrels rolling off, or the equivalent of 38 million barrels.

"A lot of producers held back on locking in hedges in the first quarter because OPEC cut their historic deal and they thought there would be a linear shift higher in prices. But then, we saw several pullbacks," said Michael Tran, director of global energy strategy at RBC Capital Markets.

Prices are too low now for producers to lock in large volumes of future production, Tran said. In addition, pent-up demand for hedging will pressure any moves higher in the oil market, he said.

Under-Hedged Anxieties 


Morgan Stanley said in a recent note that producers are hedged at around 12 percent of their 2018 output and 40 percent for their current 2017 output.

The increases were driven by Hess Corp and Apache Corp, which had previously remained unhedged. They added a combined 54 million barrels.

Analysts expect U.S. oil drilling to taper off as old hedge positions wind down, leaving smaller producers exposed to market prices at below break-even levels.

"I think companies are a little bit nervous that they are underhedged right now and they will try to take advantage of any hedging opportunity they get at about $50 per barrel," said Bill Costello, a portfolio manager at Westwood Holdings Group.

Some New Players


In total, the 30 companies held hedged positions equivalent to about 483 million barrels at the end of March, compared with 441 million at the end of 2016. Excluding Hess and Apache, the two highest hedgers, the group held only 428 million barrels.

Some large players refrained from building a larger buffer. Anadarko Petroleum Corp - which held 33.2 million barrels hedged for 2017 in the fourth quarter - had 8 million barrels roll off through the first quarter. EOG Resources had nearly 6 million barrels unwind after terminating its hedges.

Analysts said much of the hesitation has to do with rising service costs. Firms that supply rigs and crews are clamoring to take back discounts extended during the height of the slump early last year, in some cases boosting prices by 10 to 15 percent.

"Producers are working in an environment where they see service cost increases on the horizon. They see their expenses going up, but their revenues are not going up correspondingly, which is why they do not want to hedge and compress their margins," said Rob Thummel, a portfolio manager at Tortoise Capital Advisors LLC.


Article Link To Reuters:

Trump Fired Comey. Why Not Mueller, Too?

Dumping a special investigator is kind of tricky. Shades of 1973.


By Albert R. Hunt
The Bloomberg View
June 13, 2017

It’s pretty crazy in Washington these days. Soon it could get even crazier.

Prominent lawyers and politicos have started to chatter about the odds that President Donald Trump might fire Robert Mueller, the independent counsel looking into Russian influence in the 2016 presidential election.

This isn't just inside-the-Beltway gossip. Over the weekend, a Trump lawyer publicly refused to rule out that possibility, stressing that the president has the necessary authority. Then on Monday, Trump's friend Christopher Ruddy, a right-wing media executive, told PBS NewsHour: "I think he's considering perhaps terminating the special counsel. I think he's weighing that option." Although Ruddy, who said he spoke to the president by phone over the weekend, said he personally thought it would be a mistake to take that step, other Trump cheerleaders, including former House Speaker Newt Gingrich, have begun assailing Mueller, a former director of the Federal Bureau of Investigation with a sterling reputation.

Ruddy said Mueller has some "conflicts" because his former law firm, Wilmer Hale, also represents Ivanka Trump, the president's daughter, and her husband Jared Kushner. Also, Ruddy said, Mueller was considered for FBI director before he was appointed special counsel.

Democrats, reacting to the chatter, said that if Trump fired Mueller they'd try to enact an independent counsel statute so they could appoint him. They didn't explain how they'd push that idea through a Republican Congress.

Attorney General Jeff Sessions is scheduled to appear Tuesday afternoon before the Senate Intelligence Committee, which is conducting its own inquiry into the matters before Mueller.

Trump defied conventional wisdom last month when he fired FBI director James Comey after entreating Comey to back away from the FBI’s Russia probe. That showed that Trump is not one to be impeded by political protocol – Comey’s 10-year term wasn’t set to expire until 2023. Mueller was appointed to investigate whether Trump or his associates had links to Russian hackers, and Trump lacks the direct authority to dismiss him.

But he could order the Justice Department to do so. There, the job would first fall to the person who appointed Mueller, Deputy Attorney General Rod Rosenstein, because Sessions has recused himself from involvement in the probe.

If Trump instructs Rosenstein to dump Mueller, it would evoke memories of 1973, when the two top Justice Department officials, Elliott Richardson and Bill Ruckelshaus, resigned rather than obey President Richard Nixon's order to fire Archibald Cox, the special prosecutor conducting the Watergate investigation.

Rosenstein would probably refuse. A highly regarded Justice Department careerist, he tapped Mueller -- infuriating Trump -- after the White House tried to pin the Comey firing on him.

It then would get complicated. In 1973, Nixon turned to the third-ranking Justice official, Solicitor General Robert Bork, who fired Cox in his capacity as acting attorney general. Legal experts say that only a Justice official who has been confirmed by the Senate, as Bork had been, would have the authority to fire Mueller.

Apart from Rosenstein and Sessions, the only confirmed Justice official is Rachel Brand, the associate attorney general, whom the Senate approved on a party-line vote. It seems questionable that she would put her reputation at risk by going along with such a directive.

That would leave Sessions himself. First he’d have to reverse his recusal. Trump, who expressed displeasure with Session's withdrawal from the case, wouldn’t hesitate to apply pressure. But the counter-pressure would also be strong.

Sessions, a major Trump campaign supporter, disqualified himself on the advice of the department's ethics office after he had failed to disclose several meetings he had with top Russians during his confirmation hearings. At Tuesday’s Senate committee hearing, Democrats are likely to press Sessions for a commitment to remain recused.

Mueller has wide authority to look into matters related to Russian election meddling, including collusion with Trump operatives, financial links between Trump and Russia and whether the president tried to obstruct the inquiry.

In 1973, there was such a firestorm following Nixon's move against Cox that the White House was forced to appoint another special prosecutor, Texas attorney Leon Jaworski. He proved as tough as Cox, successfully suing the White House for information, including Oval Office tapes that led to Nixon's resignation nine months later.


Article Link To The Bloomberg View:

GE's New CEO Flannery To Review Portfolio With 'No Constraint'

By Alwyn Scott and Arunima Banerjee
Reuters
June 13, 2017

General Electric Co's incoming chief executive said he will conduct a swift review of the conglomerate's business portfolio with "no constraint," but signaled no major changes as the company sticks with its strategy of selling software-related services across its many divisions.

The maker of jet engines, power plants, medical scanners and railroad locomotives on Monday named veteran insider John Flannery as its next CEO, taking over from longtime leader Jeff Immelt, who reshaped one of corporate America's icons to focus more on technology but failed to deliver profit growth fast enough for some investors.

"I'm going to do a fast but deliberate, methodical review of the whole company," Flannery told Reuters in an interview. "The board has encouraged me to come in and look at it afresh."

In an earlier call with investors, he said the review would have "no constraint."

Immelt, who will step aside Aug. 1, led GE for 16 years, steering it through the financial crisis but leaving it worth a third less than when he took over.

GE's shares closed up 3.6 percent at $28.94 on the New York Stock Exchange on Monday.

Flannery did not mention any specific plans for GE, but said digital efforts will be at the heart of its strategy.

The company has spent billions of dollars building a digital business that marries electronic sensors and analytic computing to industrial equipment, even though those efforts have not yet boosted GE's bottom line as much investors hoped.

GE will make the results of the review public in the fall, but major changes are not needed, Flannery said. "We're not starting from a weak position at all."

The company will press ahead with its target of cutting overhead costs by $2 billion by 2019 and boosting profits to $2 a share next year.

Pressure For Urgency 

Flannery, a 55-year-old who joined the company 30 years ago and is now the head of its healthcare unit, will also become chairman after Immelt retires on Dec. 31.

Known previously as a dealmaker at GE, Flannery has been credited with nursing that unit back to improving sales and profits by focusing on organic growth.

He takes over from 61-year-old Immelt, who succeeded Jack Welch in 2001 and oversaw the divestment of its massive lending unit GE Capital, TV network NBCUniversal, and famed appliances business, shifting the conglomerate's focus toward technology, healthcare and manufacturing.

Despite investing heavily on developing digital products, from sensors in jet engines to augmented reality software, shareholders have been wary of the company's new direction.

Since Immelt became CEO, GE's shares have declined 30 percent, while the S&P 500 index more than doubled. That underperformance had some pressing for more urgency.

Activist investor Nelson Peltz's Trian Fund Management bought a stake in GE in October 2015, the largest single investment the firm had ever made, and now worth about $2 billion. Trian immediately pushed for asset sales and cost cuts. Trian declined comment on the CEO change on Monday.

GE said Immelt's departure was not triggered by outside influences and was the culmination of six years of succession planning. It said its board set the summer of 2017 for Immelt's departure as far back as 2013.

The timing was not surprising given the serial underperformance of the stock and "investor fatigue with management's continued perceived ungainly portfolio actions," said Stifel analyst Robert McCarthy.

During Immelt's tenure, GE bought French peer Alstom's power business. On Monday it got U.S. antitrust approval to merge its oil and gas business with Baker Hughes Inc .

Despite Immelt's efforts to kick-start growth, the oldest surviving member of the Dow Jones Industrial Average has struggled to boost sales significantly in the past few quarters. In particular, the company's cash flow has been a cause for concern.

Flannery, who joined GE Capital in 1987, focused on leveraged buyouts and later led the corporate restructuring group. He has also ran GE's India business, its equity business in Latin America and the GE Capital business for Argentina and Chile. His new salary will be $2 million a year, GE said.


Article Link To Reuters:

Tech Rout Sparks Search For Value

By Rodrigo Campos and Chuck Mikolajczak 
Reuters
June 13, 2017

The "sell in May" memo arrived a bit late in some investors' inboxes this year.

A technology sector rout extended to its second trading day on Monday, with the Nasdaq Composite on track for its biggest two-day loss since September. The tech selling dragged down all three major indexes, causing concerns of wider bearishness in equities.

"We're having a hard time deciding whether it's really a tech-specific sell-off or if this is a valuation pullback, so we're just holding pat right now," said Scott Goginsky, a co-portfolio manager of the Biondo Growth Fund.

However, investors took comfort that rather than totally abandoning equities, some were rotating into value sectors of the market. Losses were contained by a continuing rebound in energy and bank stocks.

"The overall equity market health is reasonably good because people are rotating - they are not frantically getting out of stocks," said Michael Purves, chief global strategist at Weeden & Co.

Up nearly 14 percent since President Donald Trump's inauguration in January, the technology sector of the S&P 500 .SPLRCT had ballooned to its most expensive since early 2008 in terms of price to earnings expectations.

Tech took over the market leadership from financials and other sectors that outperformed after the Nov. 8 presidential election on hopes that Trump's agenda of deregulation and tax cuts would benefit the sector.

The five largest U.S. companies by market capitalization, Apple (AAPL.O), Alphabet (GOOGL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and Facebook (FB.O) added more than $600 billion in market cap in 2017 before the sell-off started, making some analysts wary of sector over-extension.

The Technology Select Sector SPDR exchange-traded fund (XLK.P) was down 0.8 percent Monday after having fallen as much as 2.2 percent - on track to post its largest two-day percentage decline in nearly a year.

The decline was led by Apple, stung by a broker downgrade for a second straight week on Monday.

Short sellers had already been building their position in Apple since the end of May, according to financial data firm S3, with short interest topping $9 billion for the first time since May of last year. Apple is now the third-largest worldwide short, behind Alibaba Group (BABA.N), with $16.7 billion of short interest, and Tesla Inc(TSLA.O), with $10.5 billion.

The tech sell-off "is a reminder that markets that have full valuations are prone to quick reversals," said Dan Ivascyn, group chief investment officer at Pacific Investment Management Co, which oversees more than $1.5 trillion in assets.

The recent reversal in technology has given new life to the "value trade," in which investors bet on large, undervalued companies and seek dividend payments.

The iShares S&P 500 value ETF (IVE.P) is up more than 4 percent over the last two sessions. The fund's top holdings include Exxon Mobil (XOM.N), Berkshire Hathaway (BRKa.N) and JPMorgan (JPM.N).

At the same time, the technology rout has left some investors finding opportunities to add to their tech holdings at lower prices.

"We're not worried at all about tech. We just think it’s a correction and a dip," said Louis Navellier, chairman and founder of Navellier & Associates , in Reno, Nevada.

"Guys like me are net buyers right now… It'll be fine."


Article Link To Reuters:

Cleaning Up The Superfund Mess

Obama put climate gestures above toxic waste remedies.


By Review & Outlook
The Wall Street Journal
June 13, 2017

One cost of making climate change a religion is that more immediate environmental problems have been ignored—not least by the Environmental Protection Agency. New EPA Administrator Scott Pruitt plans to address that in an underreported effort to clean up toxic waste sites under the so-called Superfund program.

In a memo to EPA staff last month, Mr. Pruitt announced a plan to reform the Superfund program created in 1980 and to accelerate the clean up of hazardous waste sites such as old industrial properties or landfills. The effort is long overdue. Superfund has too often become a sinecure for the bureaucracy and a cash cow for lawyers. EPA staff offices can wait years or decades to assess a Superfund site, figure out who’s liable for what, consult with the community, decide on a remedy and assign the actual work.

Take the West Lake Landfill Superfund site in Bridgeton, Missouri, which was used for quarrying in the 1930s and later as a landfill. In 1973, 8,700 tons of leached barium sulfate from the Manhattan Project was dumped there, along with soil and waste. The EPA listed the 200-acre facility as a Superfund site in 1990.

Yet it took 18 years for EPA to decide how to clean up West Lake, finally settling in 2008 on a “multi-layered engineered cover and a system of new monitoring wells.” In 2009 the Obama EPA ditched that solution and re-opened the file. In 2010 an underground chemical reaction ignited a fire that is still smoldering.

Another example is the Bunker Hill Mining and Metallurgical Complex in Idaho and Washington state that polluted the air and soil with heavy metals such as lead. The EPA put Bunker Hill on its original list of 406 Superfund sites in 1983, but it too remains an open case.

Or Portland Harbor, in Oregon, which was listed in 2000. The private companies EPA found responsible spent years and tens of millions of dollars on a clean-up study that the agency eventually discarded. Obama EPA chief Gina McCarthy didn’t choose a remedy for the site until this January, days before President Trump’s inauguration, using information that was more than a decade old.

These are examples of the 1,336 Superfund sites on the EPA’s National Priorities List. Mr. Pruitt has directed a new task force, chaired by senior adviser Albert Kelly, to review Superfund management and business practices. He has also taken power from EPA regional offices to make decisions about projects estimated to cost $50 million or more, which should speed decision-making.

The response from critics, especially from the previous Administration, is that the problem is lack of federal funding. They’re upset that President Trump’s budget proposes a 30% cut in Superfund for next fiscal year, $330 million less than this year.

But Superfund delays aren’t the result of insufficient funds, especially since private parties now shoulder most clean-up costs, as envisaged in the original legislation. At the end of fiscal 2016 the Superfund’s special accounts, which hold settlement money for specific projects, totalled $3.3 billion. EPA projects it will spend $1.3 billion of that over the next five years. That’s on top of Superfund’s 2018 budget request for $762 million.

In 2009 the Obama Administration pumped $600 million into the program as part of the stimulus plan. Yet the EPA’s data on “construction completions,” which track Superfund sites that have finished physical construction and dealt with long-term threats, shows a downward trend even as the money flowed in. There were 18 completions in 2010, down from 20 in 2009, and 47 in 2001. In 2016 only 13 sites were completed.

The real obstacle is a combination of bureaucratic inertia and legal or political disputes over who pays what. Washington typically measures success by money spent rather than on results. Yet Superfund ought to be measured by how many sites it cleans up—until it is no longer necessary. The green lobby puts symbolic gestures against climate change above all other priorities, but if Mr. Pruitt can accelerate Superfund cleanup he’ll do far more for the environment.


Article Link To The WSJ:

The Snowballing Power Of The VIX, Wall Street’s Fear Index

Created to track expectations of volatility, it has spawned a giant trading ecosystem that could magnify losses when turbulence hits.


By Asjylyn Loder and Gunjan Banerji
The Wall Street Journal
June 13, 2017

Wall Street’s “fear gauge” has neared all-time lows this year. That hasn’t stopped retail investor Jason Miller from making a nice chunk of change betting it will go even lower.

The Boca Raton, Fla., day trader says he has made $53,000 since the start of the year by effectively shorting the CBOE Volatility Index, nicknamed the VIX. That includes a white-knuckle day on May 17, when the VIX spiked 46% following reports that President Donald Trump had pressured former FBI Director James Comey to drop an investigation into former National Security Advisor Michael Flynn.

As the 40-year-old Mr. Miller recalls, he rode out the storm, confident the market would revert to its torpid ways—which it did. “One person’s fear is another person’s opportunity,” says Mr. Miller.

Volatility—or the lack of it—has become the central obsession of the markets as the S&P 500 trades around its all-time high. Invented 24 years ago as a way to warn investors of an imminent crash, the VIX has morphed into a giant casino of its own.



Volatility trading has wormed its way into many corners of the investing universe, including insurance products that guarantee retirement income and mutual funds that try to avoid the worst declines. Once the obscure province of academics and derivatives experts, volatility is now traded by would-be retirees alongside the most sophisticated hedge funds in the world.

Even investors who have never heard of the VIX are exposed to its gyrations. There’s an estimated $200 billion in so-called “volatility control” funds that use the VIX to decide whether to buy or sell stocks. “Tail risk” strategies, designed to steer clear of sudden slumps, often rely on it. Pensions such as the San Bernardino County Employees’ Retirement Association have profited from bets the VIX would fall. Asset managers including AllianceBernstein incorporate volatility into retirement-date savings funds, adjusting stock exposure based on the severity of market swings. And insurance giant AIG sells annuities with fees that rise along with the VIX.

Lately, the VIX has been signaling a near-complete absence of fear, and the preternatural calm is making some people nervous. Opinion is divided on whether it is a bullish signal for stocks or a worrying sign of complacency. After all, the VIX also approached a record low in early 2007, just before the subprime crisis began unspooling. In recent days the VIX nudged higher, rising more than 10%, as technology stocks fell.

Some analysts see low volatility as a sign of increased efficiency, where shocks are more quickly absorbed by the markets. Others credit the growth of passive investing with overriding the herd mentality that exacerbates panicked selling. And yet another theory claims VIX trading itself has smoothed the market’s jagged edges by allowing traders to easily offset risks.

Whatever the reason, becalmed stock markets have become a feature of the post-crisis world. Central bankers have lulled investors with record-low interest rates and flooded the market with cash. Even though the Federal Reserve is slowly withdrawing those supports, stocks have lost none of their appeal, notching new highs despite U.S. political turmoil.

This leads to the VIX paradox: The lack of fear scares some investors who say bloated stock prices portend a painful reckoning when monetary policy tightens.

“They’re not adding to market stability. They’re just building a bigger bomb,” says Tom Chadwick, a New Hampshire financial adviser who uses VIX options to help protect his clients’ portfolios from downturns. He says the Fed’s policies have kept volatility artificially low for so long that the speed of any reversal will be more severe. “When this goes, you’re going to see the mushroom cloud from Saturn.”

The VIX was conceived after the Black Monday crash in 1987, when the market fell 23% in a single day. The measure used stock-market bets, known as options, to gauge expectations for the speed and severity of market moves, or what traders call volatility. Options prices rise and fall based on the perceived odds of a payoff, akin to the way home insurance costs more on a hurricane-plagued coast than in an untroubled inland suburb.

Unlike home insurance, options prices fluctuate constantly as traders react to news and reassess their risks. Those prices feed into the VIX. The CBOE launched the original index in 1993, and it quickly became a staple of the financial press.

It took Wall Street another decade to figure out the VIX wasn’t just a market weather vane but also a potential gold mine. In the summer of 2002, newly minted billionaire Mark Cuban called Goldman Sachs Group Inc. looking for a way to protect his fortune from a crash. Because the VIX typically rises when stocks fall, he wanted to use it as insurance. But there was no way to trade it.

Devesh Shah, the Goldman trader who fielded the call, says he instead offered him an arcane derivative called a “variance swap,” but Mr. Cuban wasn’t interested.

Lamenting the lost opportunity, Mr. Shah met up with Sandy Rattray, a Goldman colleague and erstwhile indexing buff with a knack for packaging investment products. What if, the pair speculated, they could tap the VIX brand and reformulate the index based on their esoteric swaps?

“The world wanted to drink Coca-Cola,” says Mr. Shah, who retired from Goldman as a partner in 2011. “They didn’t want the white label.”

These were the heady days after financial deregulation, and Wall Street was busily securitizing everything from weather reports to bundles of sliced-and-diced mortgages. Turning the VIX into something tradable was nothing more than a math problem, says Mr. Rattray.

The pair rewrote the VIX formula, expanding it to a larger universe of stock-market bets and making it possible to create a tradable futures contract. Their equation synthesizes thousands of trades and distills them all into a single number meant to represent the collective expectations for the market. When the VIX is at its current level of around 10, it implies that traders believe the S&P 500 will move by an average of less than 1% a day during the next 30 days.

The more stocks move, the higher the VIX goes. Since the market typically falls much more sharply than it rises, the VIX tends to surge when the market crashes—hence its potential as insurance.

Messrs. Shah and Rattray handed their invention to CBOE Holdings Inc., the owner of the VIX trademark. Neither had any idea that their brainchild would transform the markets for years to come.

“I didn’t realize how big it would be,” says Mr. Rattray, who is now the chief investment officer for Man Group PLC, an $89 billion hedge fund.

The formula allowed the CBOE to cash in its marquee index. The exchange launched VIX futures in 2004, and VIX options two years later. The firm billed VIX trading as a new risk-management tool, banking on the same appeal that had drawn Mr. Cuban. Trading grew steadily, but slowly.

Then the financial crisis hit, serving up a huge marketing opportunity. Amid an economic tailspin akin to the Great Depression, surging unemployment, and more than $5 trillion erased from the S&P 500, the only thing rising in the U.S. was the VIX, which topped 80 in late 2008. Who wouldn’t pay just a little bit more to protect their nest egg from the wipeout?

At Barclays PLC, a farsighted few realized access was a big problem. Trading futures and options was too complicated and costly for many investors. The bank instead devised a product that tracks VIX contracts but trades on an exchange just like any a corporate stock. Suddenly anyone with a brokerage account could trade like the pros. The Barclays iPath S&P 500 VIX Short-Term Futures ETN launched in January 2009, just months before the S&P 500 hit a 12-year low.

VIX trading exploded. Terrified investors piled into Barclays’s new product and similar ones that followed, desperate for anything that might help them repair their dented fortunes.

“I think of it as the great democratization of volatility,” says Bill Speth, vice president of research and product development at CBOE. “Investors who never would have opened a futures account or traded an option could and did trade these exchange-traded products.”

Amid the panic, investors were willing to pay to insure their portfolios. The costs would be a drag in bull markets, but looked like a small price to pay in the immediate wake of the crisis.

“It was the Wild West,” says Bill Luby, who quit a 20-year consulting career in 2005 to become a full-time trader. “If you knew the landscape, there was a lot of money to be made.”

Trading the VIX, however, is a lot different from watching it on TV, and its idiosyncrasies left some investors feeling burned. No trading strategy can exactly replicate the VIX index, and traders rely on proxies like futures and options, which can veer widely from the VIX itself.

VIX exchange-traded products are especially susceptible to this divergence because of the peculiar structure of VIX futures. Uncertainty increases with time, and the further away an anticipated downturn is, the more expensive it is to insure against. That means VIX futures for this month are typically less expensive than next month’s contracts, which are less expensive than the month after that, and so on.

Some of the most popular exchange-traded products invest in a combination of this month’s VIX futures and next month’s. To maintain their exposure, they sell the contracts that are nearing expiration and buy contracts for the following month. Put simply, they buy high and sell low almost every day, steadily bleeding money. A share of the original Barclays product, bought at its January 2009 debut, would be nearly worthless today.

This decay is difficult to comprehend, even for sophisticated investors, and leveraged funds can compound those losses. Market experts say the products are designed for short-term tactical trading, not long-term passive investment.

When the VIX dipped in September, Larry Tabb, president and founder of the Tabb Group, a consulting firm, thought volatility would rise and bought an exchange-traded product that aims to double the daily gain of VIX futures. And even though the VIX rose 28% in October, the VelocityShares Daily 2x VIX Short-Term ETN lost money.

“It just kept going down and down and down,” says Mr. Tabb, who blames himself for not reading up on its mechanics before buying. “I got completely screwed.”

Janus Henderson Group PLC, owner of VelocityShares, declined to comment.

The flip side of the punishing decay favors short sellers, allowing them to profit when volatility is flat and sometimes even when it rises. Instead of buying insurance, selling it became the new hot trade. Traders like Mr. Miller see spikes in volatility—such as those ahead of the U.S. presidential election— as opportunities to bet that the VIX will quickly collapse again.

Such bets have paid off in the past year as market shocks proved fleeting. The ProShares Short VIX Short-Term Futures ETF that, like Mr. Miller, shorts the VIX, is up 70% this year. Pravit Chintawongvanich, head of derivatives strategy for Macro Risk Advisors, estimates that traders and investors now have a near-record $512 million at stake for every single-point move in VIX futures.

In a twist, the very funds that are meant to protect against volatility may make any correction worse, says Rocky Fishman, an equity-derivative strategist with Deutsche Bank . So-called “volatility control” funds aim to provide investors with a smoother ride by sidestepping the worst dips. A rising VIX signals the funds to shed stocks in favor of safer assets, accelerating the selloff and spooking other investors into joining the exodus.

Rising volatility triggered $50 billion in stock selling during the market gyrations of August 2015, and $25 billion in the wake of the U.K.’s surprise vote to exit the European Union last year, according to Mr. Fishman.

“It’s a feedback loop that can make selloffs unfold faster,” says Mr. Fishman. “There are fund managers whose job it is to sell equities when volatility goes up. And that affects everyone.”


Article Link To The WSJ:

Now Bitcoin Is Crashing Along With Technology Stocks

-- Bitcoin topped $3,000 for the first time Sunday.
-- But the digital currency suddenly dropped Monday afternoon ET, erasing about $500 in value as multiple bitcoin exchanges reported problems.
-- Bitcoin remains more than 150 percent higher year to date.


CNBC
June 13, 2017

Bitcoin suddenly plummeted Monday, amid increased worries that the young digital currency system is growing too quickly.

The decline came as major U.S. technology stocks fell for a second straight day on concerns that the sector has risen to unsustainable levels.

At least two major bitcoin exchanges also had problems, while a new blockchain project raised a record high level of funds Monday.

"We are seeing greed being exhibited in the open," said William Mougayar, author of "The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology. "This is not good for the overall ecosystem. Eventually, something more normal will prevail."

Bitcoin One-Day Performance




Bitcoin climbed above the psychologically key $3,000 level Sunday to hit a record high of $3,041.36, according to CoinDesk. The gains were helped by news that several major Chinese bitcoin exchanges were allowing withdrawals of the currency after a months long hiatus.

However, a sharp move lower Monday afternoon ET illustrated how volatile the cryptocurrency can be.

Bitcoin suddenly dropped more than 16 percent on the day to $2,532.87 before recovering slightly, CoinDesk data showed. The digital currency recovered to trade near $2,721 shortly after 9:00 p.m.

Even with Monday's decline, bitcoin remained more than 150 percent higher for the year so far. The currency first topped the $2,000 level on May 20, less than four weeks ago.

Exchange Outages


The Coinbase exchange said Monday in a statement on the exchange's status website dated 2:08 p.m. ET that, "Coinbase is currently experiencing high traffic & customers have receive(d) a 'service unavailable' message when visiting Coinbase.com."

But by nearly 5:00 p.m. U.S. time, the company updated that it had "identified and resolved the issue caused by high traffic today."

Coinbase accounts for nearly 17 percent of U.S. dollar-denominated bitcoin trade volume, according to Cryptocompare, and had reported outages in late May amid "unprecedented traffic and trading."

Another exchange, BTC-e tweeted at 2:06 p.m., ET, that it was hit by distributed denial-of-service attacks, or DDoS.

BTC-e's website was back online as of 4:01 p.m., after giving an error message earlier in the afternoon around 2:26 p.m. The exchange accounts for about 6 percent of U.S. dollar-denominated bitcoin trade, according to Cryptocompare.

Record High Raised In "Initial Coin Offering"

Several digital currency experts also highlighted a massive raise of funds for a new blockchain-based project in a process known as an initial coin offering.

Bancor raised about $153 million Monday, a record high.

Bitcoin and ethereum, another digital currency, began to fall in price as the Bancor sale began at 10 a.m. ET Monday, Alex Sunnarborg, research analyst at CoinDesk, told CNBC in an email.

The massive amount of money Bancor raised "for a product that's still in very early testing phases has drummed up some skepticism about cryptocurrencies valuations," Sunnarborg said, noting worries that more and more traders are just trying to chase returns.

Bancor did not immediately return a CNBC request for comment.


Article Link To CNBC:

The Wall Street Rules Trump Could Overhaul Without Congress

By Lisa Lambert and Pete Schroeder 
Reuters
June 13, 2017

U.S. President Donald Trump will be able to overhaul many of the Wall Street reforms put in place after the 2007-2009 financial crisis without the blessing of Congress, where Senate Democrats could throw up procedural roadblocks.

The Treasury Department on Monday released a long list of suggested changes to banking rules, and said most of them could be carried out by agencies now, or soon to be, headed by Trump appointees. The 2010 Dodd-Frank Wall Street reform law gave those agencies great leeway in how to interpret the rules.

The only speed bump is the lack of appointees in place.

Just one of Trump's financial regulatory nominees has been approved by Congress, Securities and Exchange Commission Chair Jay Clayton. Other agencies are operating under "acting" chiefs or have leaders appointed by Trump's Democratic predecessor, Barack Obama.

Here are some of the changes suggested in Monday's report that could be done without Congress.

Stress Tests

* Change the timing of the tests to a two-year cycle and the scenarios used to assess if banks can weather a crisis

* End assumption that firms will continue to make capital distributions in distressed times

* Make models and other parameters in the test subject to public comment and de-emphasize the qualitative review at the Federal Reserve

* Clarify the capital buffers banks would have in the severely adverse scenario and make the method of calculating operational risk capital requirements more transparent

AGENCIES: Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC)

Living Wills

* Change the timing of submitting the plans for how a bank would unwind in a crisis without a bailout to once every two years

* Develop specific guidance for submissions

* Make the assessment framework subject to public comment. Remove the FDIC from the process of reviewing the living wills.

AGENCIES: Federal Reserve, OCC, FDIC

Volcker Rule


* Only banks with at least $10 billion in trading assets and liabilities will have to prove compliance with this rule

* Match compliance requirements to the risk profiles of banks' activities

* Eliminate unnecessary reporting requirements

* Simplify the definition of "covered funds"

AGENCIES: Fed, OCC, FDIC, Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC)

Consumer Financial Protection Bureau Enforcement

* Issue rules or guidance for public comment rather than create rules via enforcement

* Only levy fines on violators that have received reasonable notice they broke the law

* Make no-action letters easier to obtain

* Prosecute charges in federal district court instead of administrative proceedings

AGENCY: Consumer Finance Protection Agency (CFPB)

Mortgages

*Change some loan qualifications and standards for determining borrowers' debt and income levels

* Raise the loan amount that can have its points and fees capped to encourage smaller balance loans

* Ease the way to correct errors found after a sale has closed

*Make the loan-originator compensation rule more flexible,

* Place a moratorium on new rules for mortgage servicing

* Help secondary market investors understand their assignee liability

* Change the risk assessment of securitized products

AGENCIES: CFPB, SEC

International Standards


* Revisit rules on the additional capital charges on major U.S. banks and the mandatory minimum debt ratio

* Establish a global risk-based capital floor

* Consider the implications for the United States of implementing Basel III's approach for credit risk

* Lead efforts to narrow the scope of new standard-setting initiatives and advocate for standards that align with domestic regulatory objectives

AGENCIES: Federal Reserve, OCC, FDIC


Article Link To Reuters:

Uber Insiders Are Eager To Sell Shares But They Can't Find A Market

-- Uber could boost morale of current employees by loosening rules on private sales of its shares.
-- There's an imbalance in the market for private sales of Uber as insiders look to cash out.


CNBC
June 13, 2017

As Uber's workplace scandal widens, a growing number of insiders are seeking to sell their shares. But buyers are hard to find.

"The demand side has dried up relative to the sell side," said Larry Albukerk, managing director of EB Exchange, a San Francisco broker that has arranged private sales of tech-company shares since 1999. "We're getting calls all the time from people who want to sell" at least part of their Uber stake, said Albukerk.

Uber employees have long faced tighter restrictions on share sales compared to workers at other tech start-ups. Arranging private share sales for Uber insiders has been notoriously difficult, said Albukerk, because CEO Travis Kalanick has kept a tight grip on transactions.

Another secondary market broker, who asked not to be named so as not to endanger his relationship with clients, said Uber has a "lockdown" on private sales.

Should the board decide to loosen restrictions and let employees sell some shares, the market imbalance creates another potential challenge. While Uber was valued at about $68 billion in its last financing round, investors would likely have to take a sharp discount at this point to find willing buyers.

Uber is in the throes of its biggest crisis since Kalanick co-founded the ride-hailing company in 2009. An internal probe led by former U.S. Attorney General Eric Holder that stemmed from complaints of sexual harassment has led to the departure of more than 20 employees.

On Monday, Emil Michael, Uber's No. 2 executive, told fellow employees in an email that he's leaving. Uber's board of directors is widely expected to begin a sweeping effort this week to overhaul the company's culture.

Kalanick has widespread control over the company. That includes imposing a strict right-of-first-refusal policy that allows the company to repurchase insider shares at the price set in its latest funding round rather than allowing the stock to be sold at a higher price to wealthy individuals via exchanges. Those types of rules are common at start-ups, but Uber enforces them more strictly than its peers, Albukerk said.

Secondary markets have grown much larger in recent years as more managers of hedge funds and mutual funds seek to buy shares of fast-growing startups before they go public. Insiders at Facebook, Twitter and Zynga, for example, all sold hundreds of millions of dollars worth of shares years before those company's respective IPOs.

Loosening restrictions at Uber could boost employee morale and make the company more attractive to prospective talent. Doing so now, however, could cause a rush to sell by early employees and investors, who so far have been unable to realize any gains.

An Uber representative didn't immediately respond to a request for comment.


Article Link To CNBC:

Fed Set To Raise Interest Rates, Give More Detail On Balance Sheet Winddown

By Lindsay Dunsmuir 
Reuters
June 13, 2017

The U.S. Federal Reserve is widely expected to raise its benchmark interest rate this week due to a tightening labor market and may also provide more detail on its plans to shrink the mammoth bond portfolio it amassed to nurse the economic recovery.

The central bank is scheduled to release its decision at 2 p.m EDT (1800 GMT) on Wednesday at the conclusion of its two-day policy meeting. Fed Chair Janet Yellen is due to hold a press conference at 2:30 pm EDT (1830 GMT).

"The expectation of a rate hike...is widely held, and has been reinforced by the most recent round of Fed communications," said Michael Feroli, an economist with J.P. Morgan.

Economists polled by Reuters overwhelmingly see the Fed raising its benchmark rate to a target range of 1.00 to 1.25 percent this week.

The Fed embarked on its first tightening cycle in more than a decade in December 2015. A quarter percentage point interest rate rise on Wednesday would be the second nudge upwards this year following a similar move in March.

Since then, the unemployment rate has fallen to a 16-year low of 4.3 percent and economic growth appears to have re-accelerated following a lackluster first quarter.

However, other indicators of the economy's health have been more mixed. The Fed's preferred measure of underlying inflation has retreated to 1.5 percent from 1.8 percent earlier in 2017 and investors are growing increasingly doubtful policymakers will be able to stick to their anticipated pace of tightening of three interest rate rises this year and next.

There are also growing doubts on the size and scope of fiscal stimulus the Trump administration may inject into the U.S. economy with campaign promises on tax reform, financial regulation rollbacks and infrastructure spending either still on the drawing board or facing hurdles in Congress.

Balance Sheet In Focus


Fed policymakers' confidence in their outlook will be on show on Wednesday when they release their latest set of quarterly projections on growth, unemployment and inflation as well as their expected rate hike path.

Few economists expect major changes in the Fed's overall forecasts this time around, although the extent of jitters on inflation moving away from the Fed's 2 percent goal will likely be reflected at an individual level.

Markets are, however, increasingly anxious for the Fed to give a clearer steer on the timing and details of its previously announced plan to reduce this year its $4.2 trillion portfolio of Treasury debt and mortgage-backed securities, most of which were purchased in the wake of the financial crisis to help keep rates low and bolster the economy.

"If the Fed is serious about reducing the size of its balance sheet this year and wishes to communicate those plans well in advance, it is running out of time to do so," said Michael Pearce, an economist with Capital Economics.

More detail could come as part of the policy statement or during Yellen's press conference. The central bank used the minutes of its last policy meeting to flag up a plan that would feature halting reinvestments of ever-larger amounts of maturing securities.

Under the proposal, a limit would be set on the amount of securities allowed to fall off the balance sheet every month. Initially, the cap would be set at a low level, but every three months the Fed would raise it, allowing deeper cuts to its holdings.

The Fed has yet to indicate the size of the monthly caps or their quarterly increases. After this week's meeting, policymakers meet four more times this year, with the Fed seen actually reducing its holdings either in September or December.


Article Link To Reuters:

Markets Want The Fed To Answer A $4.5 Trillion Question

-- Markets are most interested in what the Fed will say about reducing its balance sheet, when its meeting ends Wednesday.
-- The Federal Reserve is expected to raise interest rates by a quarter point.
-- The Fed is expected to give a nod to the fact that inflation will be weaker than it was several months ago.


By Patti Domm 
CNBC
June 13, 2017

As the Federal Reserve starts its two-day meeting Tuesday, markets are primed for more information on how the Fed will begin the long process of shrinking its balance sheet.

The Fed's balance sheet ballooned to $4.5 trillion as it bought bonds in its quantitative easing program. That was the policy it created to help rescue the economy from the financial crisis and, later, to keep it from falling back into recession.

The Fed is expected to raise interest rates Wednesday, and it also expected to disclose more details on how it plans to reduce the mountain of Treasury and mortgage securities it holds. About $2.5 trillion of those securities are Treasurys.

"That's what everyone is going to be looking for. I don't think it's any surprise that they're going to be moving by 25 basis points. It's going to be a question of how they incorporate that with the balance sheet. If they don't say much about it, that's going to be viewed as very dovish by the market," said Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management.

The unwind is part of what is the Fed's biggest policy experiment ever, but it's unclear how it will progress and what kind of impact it will have. The Fed has said it could begin to unwind the balance sheet this year, and it laid out part of a possible process in the minutes of its last meeting. The Fed currently reinvests in the Treasury and mortgage market when its securities roll down or mature, and it is likely to gradually phase out replacing them.

Besides the balance sheet, the Fed on Wednesday is likely to give a nod to the fact that inflation has been weak. There are two inflation reports before the Fed makes its rate decision. The Producer Price Index will be released at 8:30 a.m. ET Tuesday and is expected to come in flat. Consumer Price Index inflation will be reported Wednesday, as are retail sales.

"There's little that could change their mind," said Diane Swonk, CEO of DS Economics.

The market is pricing in the June rate hike, but there is not very high conviction for a second one before the end of the year. Caron expects the next hike in September, but he says some Fed watchers expect the Fed to stay on hold in September because the U.S. could hit the debt ceiling. One of the concerns is that Congress will not resolve budget issues before the government runs out of money. That could upset financial conditions, making it impossible for the Fed to hike.

Treasury Secretary Steven Mnuchin spoke to that concern Monday. "If for whatever reason Congress does not act before August, we do have backup plans to fund the government. So I want to make it clear that that is not the time frame that will create a serious problem. However, markets do not want us to wait," Mnuchin said.

As for the balance sheet, Caron said Fed Chair Janet Yellen appears set on beginning the balance sheet reduction program before her term ends at the beginning of next year.

"My guess is it will be like a reverse taper, and then go up. Given we don't have any road map — and it's unprecedented — we are once again in uncharted waters. The Fed has their view of what's important, and the market has theirs," said Swonk.

The market is looking for details on the timing and what conditions the Fed would need to see in order to start the process. The markets also would be interested in seeing how much the Fed would plan to let roll off and what the caps would be.

Analysts said the Fed balance sheet reduction could send yields higher at the long end of the curve — affecting 10-year and 30-year instruments.

Caron said studies have shown there could be a slight impact. For instance, $350 billion of balance sheet roll off would equal a quarter point.

"The key question is whether the market is even responding to this balance sheet roll off? The answer is no," he said.

There is also NFIB small business survey data due at 6 a.m. ET Tuesday.


Article Link To CNBC:

Trump Administration Calls For Major Revamp Of Wall Street Rules

The Treasury urges agencies to weaken Dodd-Frank constraints; Report on financial regulations is panned by Democrats.


By Robert Schmidt and Elizabeth Dexheimer
Bloomberg
June 13, 2017

The Trump administration laid out its highly anticipated plan for overhauling bank rules, calling on the government to ease, though not eliminate, many of the strictures that were imposed on Wall Street after the financial crisis.

The changes, outlined in a report released Monday evening by the Treasury Department, urge federal agencies to re-write scores of regulations that bankers have frequently complained about in the seven years since the passage of the Dodd-Frank Act. They include adjusting the annual stress tests that assess whether lenders can endure economic downturns, loosening some trading rules and paring back the powers of the watchdog that polices consumer finance.

The Treasury said its plan was designed to spur lending and job growth by making regulation “more efficient” and less burdensome. Unlike the bill passed last week by House Republicans, the report consistently calls for most Obama-era rules to be dialed back, not scrapped.

“Properly structuring regulation of the U.S. financial system is critical to achieve the administration’s goal of sustained economic growth and to create opportunities for all Americans,” Treasury Secretary Steven Mnuchin said in a statement.

Democratic Criticism


The Treasury review, which President Donald Trump requested in an executive order in February, opens a new front in the administration’s deregulatory push. While Mnuchin said the administration backs congressional efforts to roll back Dodd-Frank, the study focuses heavily on changes that can be made without legislation.

The House bill passed June 8 isn’t expected to go through the Senate without major revisions because of the need for Democratic support.

Democrats, who say Dodd-Frank is vital for keeping Wall Street in check after its risky trading helped bring the U.S. economy to near collapse in 2008, were quick to criticize the Treasury report as a big bank-inspired wish list.

“Too many hardworking Americans still haven’t fully recovered from the financial crisis, and Washington should be focused on protecting them by holding Wall Street accountable, not doing its bidding,” Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, said in a statement.

Industry Praise


Representatives of the banking industry generally applauded the report and said they hoped it would spur action.

“We urge regulators and Congress to take up these recommendations expeditiously, and to consider additional changes so banks can continue to play their important role in accelerating economic growth,” Rob Nichols, president of the American Bankers Association, said in a statement.

It is not clear how quickly regulators can act on many of the recommendations in the Treasury’s 150-page report.

Key positions at the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp. are either unfilled or held by Obama appointees. Also, the byzantine process for approving regulations doesn’t lend itself to quick fixes. Rules must be written, offered for public comment for several months and then deliberated internally before a final vote.

Unpopular Regulations

Some of the most unpopular regulations that the report asks to re-do, such as the Volcker Rule ban on banks’ proprietary trading, were put together by five different agencies. Each one would need to sign off on revisions following those onerous steps.

Much of the report covers complex areas like how much of a capital cushion lenders should have or how to calculate the amount of leverage a bank takes on. The Treasury is also highly critical of international capital standards that the largest banks are required to follow.

On the Volcker Rule, Treasury outlined several ways that regulators and Congress should consider weakening it. Banks with less than $10 billion in assets should be exempted altogether, the report argued. It also said all lenders should have more leeway to trade and that restrictions on banks’ investing in private-equity and hedge funds should be loosened.

The review takes particular issue with the CFPB, a centerpiece of the Dodd-Frank law, calling the agency “unaccountable” with “unduly broad regulatory powers.” To rein in the bureau, the Treasury report calls for the president to be able to fire its director for any reason, not just for cause as is now the case. It also recommends the agency to be funded annually by Congress instead of being able to set its own budget.

To “curb excesses and abuses in investigations and enforcement actions,” the report said the CFPB should make a number of changes to how it probes wrongdoing, including bringing cases in federal courts rather than administratively.

Stress Tests


On the annual stress tests now required of banks, the report says that they should instead be performed every two years. In addition, lenders that “maintain a sufficiently high level of capital” should be exempt from the exams, the Treasury said. Living wills, the plans lenders must submit to regulators to show they can be broken up without threatening the financial system, would also be required every two years instead of annually.

The report calls on Congress to boost the threshold for when a bank gets extra oversight from the Fed though no level is specified. It is currently $50 billion in assets.

The Treasury’s study criticized agencies for making overlapping requests to banks and said the “fragmented” regulatory system should be streamlined. The Financial Stability Oversight Council, a group of regulators tasked with monitoring risks to the banking system, should have more power to determine which agency writes and implements a particular rule, the Treasury said.

The Treasury review was spearheaded by Craig Phillips, a former BlackRock Inc. executive who was major fundraiser for Hillary Clinton’s presidential campaign. He is currently a senior aide to Mnuchin.

The banking report is one of several the department will release in the coming months to fulfill Trump’s executive order, which demanded a reevaluation of financial rules.


Article Link To Bloomberg:

Gold Is Bound To Disappoint The Bulls -- Again

Throw out all the fancy analysis and realize that gold is an emotional trade.


By Shelley Goldberg
The Bloomberg View
June 13, 2017

Gold has been trending higher, and is again flirting with $1,300 per ounce. For traders, the question is whether to build their positions from here in anticipation of further gains, or is this just another teaser that presages yet another turn lower for the precious metal? The fundamentals might suggest the former, by traders would be well advised to expect the latter.

After breaking through a six-year downtrend line, gold rose last week to its highest level since Nov. 4, and is up an impressive 10.5 percent this year. There are a number of reasons why gold is in demand. For one, it's been known as an inflation hedge. And while there’s no real inflation to speak of at the moment, it’s more about expectations as evidenced by money flowing into U.S. Treasury Inflation-Protected Securities and other inflation-linked instruments.

Secondly, gold, like all global commodities traded in U.S. dollars, is negatively correlated to the greenback, which has been losing value since February due to mounting doubts that President Donald Trump will succeed at pushing his pro-growth agenda through Congress. 



Third, gold is considered an alternative to fixed-income assets when interest rates are low, which is the case in much of the developed world. The European Central Bank charges banks 0.4 percent to hold their cash overnight. Citizens in Sweden, Switzerland and Denmark can be charged to keep their money in banks. JPMorgan said last week that the amount of negative-yields bonds globally is ticking back up again, reaching $9.8 trillion.

Fourth, gold seems to be the only commodity in the complex showing any signs of strength, thus appealing to commodity traders. That also applies to volatility, which has broken the downward trend seen in other parts of the commodities markets.



Fifth, the U.S. stock market is trading at or near record highs, leading more pundits to warn investors of overvalued sectors (think tech) and to predict a market crash. Unlike equities, gold doesn’t have an inherent earnings per share value play, justifying its inclusion as a haven asset.



And sixth, there is plenty of global geopolitical risk to popularize haven investments, from the spreading of radical Islamic terrorism, to unpredictable North Korean, Philippine and Russian strongmen, to Brexit and the potential for other European Union members to exit, to Gulf Cooperation Council nations severing ties with Qatar and heightening tensions in the Middle East. Add to that global warming, climate risk and wars over water. Then consider the U.S., where a special counsel has been set up to investigate Russian meddling in the 2016 election and where hopes are fading for a economic bump from President Donald Trump's pro-growth fiscal agenda.

Surely the physical demand for gold is picking up as noted by the number of new gold vaults opening in Europe. Gold backed exchange-traded funds are seeing greater inflows. Gold is attractive because of the lack of faith in sovereign currencies as seen in the rising value of Bitcoin and other cryptocurrencies. There’s also rising demand for gold in China, the world’s largest gold market, driven by currency risk and concerns over property, share and bond markets amid a government drive to reduce leverage.



So, with so many valid reasons for gold to rally further, why am I a doubter? The most rudimentary reason is that gold is also an emotional trade and $1,300 is a round number. One need not be a superstar technical analyst. Just consider that for both psychological and systematic reasons, traders and algorithms like to sell on landmark numbers that also serve as a testing ground for a rally’s sustainability. Looking back at gold over a 10-year period, these round numbers were persistently prodded.


Article Link To The Bloomberg View: