National Regulator? Bah, Humbug! (Bradley)

Friday, December 23rd, 2011

From today’s Globe and Mail: “Finance Minister Jim Flaherty says Canada will not move ahead with its proposed Securities Act in light of the Supreme Court of Canada’s decision to declare it unconstitutional … The Supreme Court unanimously declared the proposed Act unconstitutional, siding with provinces that insisted the day-to-day regulation of securities markets does not belong in federal hands.”

It’s bureaucracy like this that prevents smaller firms (like Steadyhand) from offering their funds nationwide. Canada is one of few countries that doesn’t have a national securities body, which has been cited as a weakness in our system by many observers. Instead, investment firms have to deal with 13 different regulators (one for each province and territory).

The cost of filing a prospectus, and the associated regulatory expenses of dealing with each province individually, is extremely expensive. It’s the key reason why we only offer our funds in five provinces. As we grow, we hope to make our offering available in every province, but at this stage in our development, the costs are too prohibitive.

As a young business, it’s disheartening to turn down interested investors in Quebec, the Maritimes and the Territories (where the inquiries have been growing steadily). Unfortunately, the news today suggests we’re not going to see a national regulator anytime soon. Bah, humbug.

Tags: Bureaucracy, Federal Hands, Finance Minister Jim Flaherty, Globe And Mail, Inquiries, Interested Investors, Investment Firms, Maritimes, National Securities, News Today, Observers, Prospectus, Quebec, Regulators, Securities Markets, Siding, Steadyhand, Supreme Court Of Canada
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Gold Market Cheat Sheet (October 17, 2011)

Saturday, October 15th, 2011

Bank of England vault

Gold Market Cheat Sheet (October 17, 2011)

For the week, spot gold closed at $1,680.73, up $42.88 per ounce, or 2.62 percent.  Gold stocks, as measured by the NYSE Arca Golds BUGS Index, jumped 5.47 percent lower. The U.S. Trade-Weighted Dollar Index slumped 2.69 percent for the week.

Strengths

• Gold and the whole suite of precious metals had a meaningful rebound this week with the significant drop in the U.S. dollar. Not only was gold up strongly but silver rose 3.88 percent and copper, which is a byproduct of for a number of the gold miners, rose 4.65 percent.
• More significantly, the gold and silver mining stocks rose even more than the bullion prices as investors took advantage of the oversold conditions in equities.
• Considering some of the forced liquidations in the prior week or two, due to some hedge funds losing a third to half their value in September alone, the selling pressure has certainly waned as we saw a handful of companies’ share prices rise as much as 50 percent over the past five days.

Weaknesses

• The only drawback to the sharp rebound in some of the gold stock prices was the return of the investment bankers with a number of bought deal financings this week.
• While it is positive that some of the investment firms have the courage to risk their capital on an equity raise, perhaps signaling they don’t see any distressed clients on the sidelines; it is a bit worrisome that several companies were willing to issue equity with only a minor rebound in their share price.
• Perhaps their management was as shell shocked as some investors were with the precipitous decline in valuations and the hauntingly painful memory of 2008 still lingering.

Opportunities

• The opportunity before us is the potential for a significant rebound in gold and gold equities.  For our gold-oriented funds we have now marked three quarters in a row of negative performance.  This has only happened one other time in the last ten years and that was during the 2008 credit crises.  In the ensuing two years after that era, there was only one quarter out of the following eight quarters which had a negative return.
• What is also significant over the two year window post the 2008 collapse was that gold stocks were one of the few assets to appreciate beyond the high marks which were established prior to the credit crisis.
• As we are all aware, the problems of 2008 have not gone away, however, much of the counterparty risks now reside within the governments that suggested lending standards should be relaxed so everybody could buy a house or borrow money in perpetuity.  Perhaps you don’t want to own a company that sells a product or service to government, unless they sell inks and dyes, but precious metals and mining stocks were one of the strongest performers coming out of this period.

Threats

• Earnings season is upon us and gold mining companies are beginning to report production metrics for the quarter.  For the ten or so companies that have reported so far, only one company actually exceeded guidance for the quarter.
• In addition, most gold mining companies continue the practice of reporting “cash cost” metrics for gold production which artificially makes the company look very profitable.  For instance a company’s press release may show gold production costs at $450 but in actuality, the total cost of production is closer to range of $1,000 to $1,500 per ounce of production.  It’s no wonder that resource rents and windfall profit taxes have skyrocketed over the last five years of this ten year run in gold.
• Zambia is only the latest country to suggest that it now wants to increase state ownership in mining companies operating within its borders to 35 percent.

Tags: Bank Of England, Bullion Prices, Dollar Index, Financings, Gold, Gold And Silver, Gold Equities, Gold Market, Gold Miners, Gold Stock Prices, gold stocks, Investment Bankers, Investment Firms, Liquidations, Nyse Arca, Painful Memory, precious metals, Precipitous Decline, Silver Mining, Spot Gold, Three Quarters
Posted in Gold, Markets | Comments Off

News That Matters (August 10, 2011)

Wednesday, August 10th, 2011

via thetrader.se

FT.com
All UK deposit-takers and large investment firms will have to draw up “living wills” by the end of next year that would allow them to be wound down over a weekend and quickly return assets to clients, http://ftalphaville.ft.com/thecut/2011/08/10/648996/all-uk-banks-told-to-draw-up-living-wills/

Apple has won a preliminary injunction barring Samsung‘s sale of its Galaxy Tab in every European Union member nation but the Netherlands, the FT reports, in the most significant victory so far in an escalating legal clash between the two technology powerhouses. The ruling came in a case brought by Apple in Germany, http://ftalphaville.ft.com/thecut/2011/08/10/648986/apple-wins-eu-victory-against-samsung/

China’s trade surplus rose sharply in July, Xinhua says, to $31.48bn from 22.27bn in June. Exports climbed 20.4 per cent from a year earlier, reports Bloomberg, compared with the 17 per cent median forecast among economists surveyed by the news agency. http://ftalphaville.ft.com/thecut/2011/08/10/648966/chinas-trade-surplus-surges/

Meanwhile businesses are counting the cost of the riots, the FT reports, with insurers expected to face more than £100m of claims and retailers tens of millions of pounds in costs, as businesses calculate the effect of three nights of rioting http://ftalphaville.ft.com/thecut/2011/08/10/648951/focus-of-rioting-moves-beyond-london/

Standard & Poor’s has objected to an SEC proposal that ratings agencies be required to disclose “significant errors” in how they calculate their ratings, Reuters reports. S&P raised concern just days after the Obama administration accused it of making an error in calculations determining its downgrade of US debt. http://ftalphaville.ft.com/thecut/2011/08/10/648931/sp-pushes-back-against-disclosure-proposals/

Bank of America has agreed to sell part of its home-loan portfolio to Fannie Mae, the WSJ says, in a deal that will give the government-controlled mortgage giant the rights to process and collect payments on a pool of 400,000 loans with an unpaid principal balance of $73bn. http://ftalphaville.ft.com/thecut/2011/08/10/648876/bofa-and-fannie-mae-in-mortgage-deal/

Japan’s prime minister, Naoto Kan, came under intense pressure to resign on Tuesday after his finance minister indicated he would compete in a race for the leadership of the ruling party, reports the FT.http://ftalphaville.ft.com/thecut/2011/08/09/648826/kan-under-renewed-pressure-to-quit/

The US Federal Reserve attempted to tackle a rapidly weakening economy on Tuesday by freezing short-term interest rates for two years and opening the door to more quantitative easing, in a move that sent the dollar and Treasury yields sharply lower. The rate-setting Federal open market committee said: “The committee currently anticipates that economic conditions – including low rates of resource utilisation and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” http://www.ft.com/intl/cms/s/0/078d0708-c2ad-11e0-8cc7-00144feabdc0.html#axzz1UVK21rdL

By buying Italian and Spanish debt, the European Central Bank has certainly done the right thing. The rise in Italian yields over the summer was less a play on Italy’s own difficulties – high levels of government debt, a bit too much “bunga bunga” – and more a reflection of existential concerns over the euro’s future.  By intervening in the eurozone’s bond markets, the ECB has become a lender of last resort following the precedent set by the Federal Reserve in late 2008 and through 2009. In a world characterised by growing financial panic, that has to be good news. http://www.ft.com/intl/cms/s/0/efd5eea8-c1f4-11e0-bc71-00144feabdc0.html?ftcamp=rss#axzz1UVK21rdL

WSJ.com
Asian shares rebounded Wednesday drawing comfort from the U.S., where the Federal Reserve’s pledge to keep interest rates low for two more years pushed stocks sharply higher. The dollar was mixed against its rivals, while the safe-haven Japanese yen held up solidly, underscoring the still-fragile market sentiment.  Regional stock markets saw one of the biggest selloffs since the 2008 financial crisis Tuesday.  Early Wednesday, Japan’s Nikkei Stock Average rose 1.8% after three straight days of losses, Australia’s S&P/ASX 200 gained 2.8%, South Korea’s Kospi Composite advanced 2.3% and New Zealand’s NZX-50 added 3.2%. http://online.wsj.com/article/SB10001424053111904140604576499090989311256.html?mod=WSJEurope_hpp_LEFTTopStories

Cleanup crews and volunteers swept up the debris from the U.K.’s worst riots in 30 years and Prime Minister David Cameron recalled Parliament to address the mess, as Britons grappled with two big questions: who perpetrated this week’s violence, and why? Many of those who witnessed the near lawlessness on London’s streets Monday night described the unrest as a straightforward criminal spree by opportunistic youths greedy for consumer goods. Mr. Cameron, returning to London on Tuesday after breaking off his summer vacation in Italy, condemned what he called “pure criminality.”http://online.wsj.com/article/SB10001424053111904007304576497323278044868.html?mod=WSJEurope_hpp_LEFTTopStories

The European Central Bank bought Italian and Spanish government bonds for a second day in a row, stabilizing borrowing costs for both countries and easing concerns for the moment that Europe’s debt crisis will spread to its larger countries. Ten-year government bond yields in Spain and Italy fell again Tuesday toward 5% after exceeding 6% as recently as Friday. Tuesday’s rally was less pronounced than on Monday after the ECB’s decision on Sunday to expand its bond-purchase program to Italy and Spain. http://online.wsj.com/article/SB10001424053111904480904576498311118854744.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Selloff Helps Emerging Nations ‘Cure’ Inflation, The drop in financial and commodity markets may set the stage for looser monetary policy and weaker currencies in some emerging markets, where unlike much of the developed world, there is room for interest-rate cuts. In China, despite government data published Tuesday showing consumer inflation hit a three-year high in July of 6.5%, expectations among investors and economists for further increases in interest rates and bank reserve requirements have actually eased in recent days. http://online.wsj.com/article/SB10001424053111904480904576498010868865494.html?mod=WSJEurope_hpp_LEFTTopStories

Singapore’s economy contracted less than previously estimated in the April-to-June quarter due to better performance in the services sector, but the government warned that global economic uncertainties have intensified with emerging concerns of the U.S. slipping into a double-dip recession. Gross domestic product contracted 6.5% in the second quarter from the first in seasonally adjusted, annualized terms, compared with the 7.8% contraction estimated last month, according to revised estimates released by the Ministry of Trade and Industry on Wednesday.http://online.wsj.com/article/SB10001424053111904140604576498972983079778.html?mod=WSJASIA_hpp_LEFTTopWhatNews

The French government said it was ready to do whatever it takes to stick to its deficit-reduction plans, signaling its determination to remain among the six euro-zone nations still sporting a top-notch triple-A credit rating. France “won’t deviate one iota from its public-finance balancing plans,” Budget Minister Valérie Pécresse told French radio Tuesday, as the cost of insuring the country’s sovereign debt against default hovered around record levels. http://online.wsj.com/article/SB10001424053111904007304576498492210959026.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

For a few moments Tuesday, Apple Inc. overtook Exxon Mobil Corp. to become the world’s most valuable company, notching another milestone in a resurrection that has seen it evolve from a maker of niche computers into a global consumer electronics powerhouse.In mid-afternoon trading in Tuesday’s seesaw session, Apple reached a market capitalization of $343 billion, pushing it above Exxon’s market value. The stock moves—for a time—changed the rankings of the top two companies, which had been separated by $50 billion in market capitalization a few weeks ago. http://online.wsj.com/article/SB10001424053111904007304576498384081275152.html#ixzz1UbAW3uDX

The Federal Reserve sent investors lurching from worry to hope as it warned that the economy would remain weak for some time but said it was prepared to take further steps to shore it up. The Fed’s statement, which included plans to keep interest rates near zero for at least the next two years, ultimately sent the Dow Jones Industrial Average up 4%, its biggest daily gain since March 2009. Yields on Treasury bonds dropped as investor demand pushed up prices. Trading was chaotic. Investors were initially discouraged by the Fed’s announcement just after 2:15 p.m. EDT, disappointed that policy http://online.wsj.com/article/SB10001424053111904140604576498380497149042.html?mod=WSJEurope_hpp_LEFTTopStories

The turmoil in the stock market raises an unexpected challenge for luxury retailers by shaking what has been the industry’s steadiest source of growth—wealthy consumers. Well-heeled shoppers splurge when their portfolios are riding high and scrimp when they fall. That retail adage has helped luxury retailers post big sales gains quarter after quarter since the recession despite the unease gripping the broader mass of consumers. As stock markets have fallen sharply this month, sparked by the downgrade of the U.S.’s credit rating and broader economic concerns, luxury retailers have taken it on the chin. Since the end of July, shares http://online.wsj.com/article/SB10001424053111904480904576498632940394432.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Marketwatch.com
speculation is mounting that its Australian counterpart will soon begin cutting rates, as global economic uncertainty drains consumer and business confidence in the nation. Recent move by Australia’s major banks to lower their fixed mortgage rates has been viewed as foreshadowing the switch from Australia’s tightening cycle to an easing. Australia’s policy cash-rate target currently stands at 4.75%, higher than rates in other advanced economies, such as a 0-0.25% target range in the U.S., 0-0.1% in Japan, and 1.5% in the Europe Union. The Reserve Bank of Australia’s most recent rate increase was in November of last year. http://www.marketwatch.com/story/will-australia-hike-rates-or-cut-them-2011-08-10

Reuters.com
Gold ticked higher on Wednesday, hovering near a lifetime high around $1,778 an ounce struck in the previous session, but further gains could be capped by a rebound in equities after the U.S. Federal Reserve’s vow to keep rates near zero. Gold added $13.09 to $1,756.49 an ounce by 0404 GMT, having hit a record at $1,778.29 on Tuesday, in its biggest three-day rally since the financial crisis in late 2008 after equities plunged on fears over the threat to economic growth from the U.S. and euro debt crises. http://www.reuters.com/article/2011/08/10/us-markets-precious-idUSTRE7781Q420110810

Brent crude rose $3 on Wednesday after the U.S. Federal Reserve’s promise to extend near-zero interest rates for two more years weighed on the dollar and helped reverse a steep slump in oil. Brent crude for September rose as much as $105.67 a barrel and traded at $104.77 by 0356 GMT. It ended post-settlement trading up $1.76 at $105.50 a barrel, after settling at $102.57, down $1.17, the lowest since February 18 and sliding as much as 15 percent in a week. http://www.reuters.com/article/2011/08/10/us-markets-oil-idUSTRE77838320110810

China’s price rises may have peaked but the country still faces inflationary risks, including the possibility of a new round of monetary easing by the United States, China’s top economic planner said on Wednesday. Reiterating recent comments about China’s inflation, the National Development and Reform Commission also noted that the U.S. Federal Reserve may buy more U.S. Treasuries, but it did not say why it thought that is likely. http://www.reuters.com/article/2011/08/10/us-china-usa-fed-idUSTRE7790LR20110810

Bloomberg.com
South Korea banned equity short sales for three months while the two biggest state-run funds said they may boost investments as the government seeks to shore up a market that’s had its biggest six-day drop in three years.  The Financial Services Commission said it will ban short selling on all shares until Nov. 9 from today. http://www.bloomberg.com/news/2011-08-09/south-korea-bans-short-selling-as-state-run-funds-signal-increased-buying.html

Singapore cut its forecast for export growth this year as a struggling U.S. economy and Europe’s debt crisis threaten overseas sales, valued at more than half of the island’s gross domestic product. Non-oil domestic exports will probably rise 6 percent to 7 percent in 2011, less than a previous forecast for shipments to grow 8 percent to 10 percent, the trade promotion agency said in a statement today. Gross domestic product fell an annualized 6.5 percent in the second quarter from the previous three months, compared with a preliminary estimate of 7.8 percent, the trade ministry said separately.http://www.bloomberg.com/news/2011-08-10/singapore-cuts-export-growth-forecast-as-risks-to-global-recovery-increase.html

California faces “drastic” cuts to universities, schools and social programs if revenue continues to trail budget forecasts, the state controller said after July collections fell short by about 10 percent. A series of “triggers” written into the most-populous state’s $86 billion general-fund budget would cut spending on universities, home care for seniors and the disabled, libraries and other programs if revenue falls $1 billion short of plan. A $2 billion gap would mean a seven-day cut in the school year and an end to busing subsidies. http://www.bloomberg.com/news/2011-08-09/california-revenue-falls-10-3-short-of-forecast-in-july-on-expired-taxes.html

Treasuries fell, snapping a two-day rally, as gains in Asian stocks cut demand for the relative safety of government debt before the U.S. auctions 10-year notes today and 30-year bonds tomorrow. nvestor appetite waned after 10-year rates plunged to a record yesterday as the Federal Reserve promised to hold down borrowing costs to support the economy. The extra yield the securities offer over the upper end of the Fed target for its benchmark interest rate narrowed to 2 percentage points yesterday, the least in 30 months. The U.S. will probably avoid a recession, according to Michael Hasenstab at Franklin Templeton Investments. http://www.bloomberg.com/news/2011-08-08/treasuries-rise-reversing-loss-as-asian-share-slide-boosts-debt-demand.html

Japan’s Finance Minister Yoshihiko Noda said that one-sided moves in the yen can hurt growth as the currency strengthened against the dollar to close to the level where authorities intervened last week. “Recent one-sided movements in the currency market risk hurting the economy’s recovery from the earthquake,” Noda said in parliament in Tokyo today, reiterating remarks made on Aug. 4 when authorities sold the yen. The government may include measures to help companies combat the strong yen in its next reconstruction package, Chief Cabinet Secretary Yukio Edano said. http://www.bloomberg.com/news/2011-08-10/japan-s-noda-signals-concern-as-yen-strengthens-to-near-intervention-level.html

Australian consumer confidence deteriorated for a fourth straight month to the lowest level in more than two years, and the head of the nation’s largest bank said he doesn’t see a turnaround soon. The sentiment index dropped 3.5 percent in August to 89.6 from a month earlier, the lowest since May 2009, according to a Westpac Banking Corp. (WBC) and Melbourne Institute survey of 1,200 consumers taken Aug. 1-6 and released today in Sydney. It’s the longest sustained decline since early 2008. http://www.bloomberg.com/news/2011-08-10/australia-consumer-confidence-deteriorates-as-banking-chief-sees-no-relief.html

The $9.4 trillion U.S. government bond market is proving Federal Reserve Chairman Ben S. Bernanke matters more than Standard & Poor’s. Even though the U.S. is poised to run a budget deficit of $1.6 trillion and S&P removed the nation’s AAA rating, investors are lending the government money at record low rates. Four days after the first downgrade to AA+, the Treasury sold $32 billion of three-year notes to yield 0.5 percent. When the U.S. was running budget surpluses from 1998 through 2001, Treasuries of similar maturity yielded an average of 5.23 percent. http://www.bloomberg.com/news/2011-08-10/downgrade-doesn-t-matter-as-bond-investors-show-faith-in-fed-after-s-p-cut.html

Cnbc.com
Global oil demand will grow less than previously projected this year, according to forecasts on Tuesday from the U.S. and OPEC, as a worsening economic outlook will curb consumption in developed countries. The cut by the U.S. Energy Information Administration and a more pessimistic forecast by the Organization of the Petroleum Exporting Countries were in line with reductions by other forecasters such as investment bank Barclays Capital, as slowing growth hits consumers and businesses. http://www.cnbc.com/id/44082324

The United States could launch a new round of quantitative monetary easing, China’s top economic planner said on Wednesday in a statement addressing the country’s future inflation risks. Reiterating recent comments that China’s inflation may have peaked, the National Development and Reform Commission also noted that the U.S. Federal Reserve may buy more U.S. Treasurys, but it did not say why it thought that is likely. http://www.cnbc.com/id/44084630

FoxBusiness.com
The United States faces one-in-four odds of slipping back into recession, and a weaker economic outlook is raising the likelihood the Federal Reserve will soon do more to boost growth, a Reuters poll shows. The world’s biggest economy is still expected to pick up in the second half of the year as it shakes off high gasoline prices and factory disruptions created by Japan’s earthquake in March, according to the monthly survey of more than 70 economists. http://www.foxbusiness.com/markets/2011/08/09/chance-us-recession-rise-to-1-in-4/#ixzz1UbEkslFE

HuffingtonPost.com
American state and city governments already struggling to balance their books now must brace for the prospect of increased borrowing costs as Standard & Poor’s plans to reevaluate their credit ratings. Fresh off its unprecedented downgrade of the federal government’s creditworthiness, the rating agency said that it will evaluate local governments — many of which are still struggling to recover from the Great Recession — after federal lawmakers announce specific spending cuts later this year. Lower ratings could make it more expensive for governments to borrow money in a market where investors use these grades to judge credit quality. http://www.huffingtonpost.com/2011/08/09/sp-downgrades-city-state-municipality_n_922620.html

WashingtonPost.com
Germany’s robust economy is showing signs of a slowdown, raising fears that the linchpin holding together Europe’s fragile financial health could be weakening. On Tuesday, the country revealed that its exports in June rose by only 3.1 percent, compared with a 20.1 percent increase in May, marking the smallest increase in 16 months. A few days earlier, an index of German manufacturing activity dropped from 54.6 in June to 52 in July — the lowest level since October 2009, marking the third consecutive month of declines. http://www.washingtonpost.com/business/economy/european-financial-crisis-germany-shows-signs-of-slowdown/2011/08/09/gIQArs5b5I_story.html

Telegraph.co.uk
UK manufacturing output unexpectedly falls as trade deficit widens, British factory output unexpectedly fell in June and the trade deficit hit its widest since December, figures showed on Tuesday, demonstrating the fragility of the economic recovery even before the recent market turmoil. http://www.telegraph.co.uk/finance/economics/8690904/UK-manufacturing-output-unexpectedly-falls-as-trade-deficit-widens.html

Facebook usage falls to three-year low. Facebook usage in the UK fell nearly 4pc in July to its lowest level since 2009, sparking concerns that the social network has hit its peak and may be declining in popularity.  The site, which is preparing to make a $1bn (£610m) initial public offering this year, is still the most popular of its kind in the country and accounts for just over half (50.1pc) of all internet visits to social networks.  However, it has slipped from its 53.7pc share of the UK market in June – a “significant loss”, according to research company Experian Hitwise.http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/8691681/Facebook-usage-falls-to-three-year-low.html

800,000 homeowners in negative equity. Seven per cent of all homeowners with mortgages are now in negative equity – owning houses that are worth less than the loan that they still have against the property. Before the credit crunch, the number of people in negative equity was “negligible”. Collapsing property values and the availability of high loan-to-value mortgages shortly before the financial crisis helped to fuel the increase. http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/8692378/800000-homeowners-in-negative-equity.html

Independent.co.uk
the european Central Bank yesterday urged eurozone governments to speed up the implementation of new measures agreed as part of the second Greek bailout as it continued to buy Italian and Spanish bonds to soothe the markets. The ECB moved in to put out the fire around Italian and Spanish debt on Monday, with the EU’s bailout fund still lacking the authority to buy government bonds in times of turmoil. The new powers for the European Financial Stability Facility (EFSF) were agreed in tandem with the second Greek rescue in July, but still need to be ratified by the eurozone’s members.http://www.independent.co.uk/news/business/news/trichet-calls-on-eu-leaders-to-implement-crisis-plans-2334960.html

Smh.com.au
The federal government’s leading employment index has fallen for a fourth straight month in August, following on from three consecutive monthly increases. The Department of Education, Employment and Workplace Relations says its monthly leading indicator of employment fell 0.063 points to 0.322 in August. The department said all four components of the indicator subtracted from its growth rate in August. http://www.smh.com.au/business/jobs-index-falls-for-fourth-straight-month-20110810-1im3k.html#ixzz1UbHh2rPX

Spain hsa rejected outright any need for a rescue to avert a sovereign debt crisis even as European Central Bank intervention halted a market attack on its bonds. Fears that the major European economies of Spain and Italy could be the next dominoes of a widening eurozone debt crisis have gripped financial markets. Those concerns have been overshadowed for now by an historic downgrade of the United States’ AAA-rated debt and by the shaky outlook for global economic growth, which have hammered stocks worldwide. http://www.smh.com.au/business/world-business/spain-rejects-need-for-rescue-20110810-1ilep.html#ixzz1UbHqabrz

Xinhuanet.com
The economic crises in the United States and Europe will likely affect ASEAN countries, whether directly or not, through foreign direct investment and third- party trade, the Jakarta Post quoted a top official as saying on Wednesday. “(The crisis) will certainly have some implications for us, maybe not in the short term; but in the long term, it will have a negative impact,” ASEAN Secretary-General Surin Pitsuwan told the daily in an interview. http://news.xinhuanet.com/english2010/business/2011-08/10/c_131040601.htm

Argentina’s Economy Minister Amado Boudou said Tuesday his country is prepared to deal with the global economic crisis, after world stock markets plunged on Monday. Boudou said the government has adopted several new measures to sustain the growth of its domestic market, though the Buenos Aires stock market sank 10.73 percent Monday following Friday’s downgrade of the U.S. credit rating by Standard & Poor’s. http://news.xinhuanet.com/english2010/business/2011-08/10/c_131040561.htm

The downside risks for the Singapore economy have increased, though the impact of high oil prices and supply chain disruptions from the Japan earthquake have subsided, Singapore’s Ministry of Trade and Industry said on Wednesday. http://news.xinhuanet.com/english2010/business/2011-08/10/c_131040563.htm

South Korea’s jobless rate fell to 3.3 percent in July from a year earlier as private sector increased employment amid brisk exports and economic recovery, a government report showed Wednesday. The unemployment rate stood at 3.3 percent in July, down 0.4 percentage point from the same month a year earlier, the Statistics Korea said in a month report. The rate was unchanged from the 3.3 percent tallied for June. The number of unemployed, who failed to land work despite job-hunting efforts, decreased 837,000 last month from 932,000 a year before. http://news.xinhuanet.com/english2010/business/2011-08/10/c_131040377.htm

TheHindu.com
The Centre on Tuesday accorded a two-year extension to Reserve Bank of India Governor D. Subbarao beyond his term ending September. The extension will be with effect from September 5 this year till September 4, 2013.  “The Prime Minister approved the extension to D. Subbarao, Governor of RBI, for two years,” a PMO spokesman said. http://www.thehindu.com/business/Economy/article2339508.ece

Sweden is keen on expanding its business and investment legacy in India as it explores symbiotic trade ties across a range of sectors, Ambassador of Sweden to India Lars-Olof Lindgren said on Tuesday. Addressing reporters after a luncheon meet hosted by the Confederation of Indian Industry (CII) -Southern Region, Mr. Lindgren said the one thing that he emphasises at meetings with the Indian business class, politicians, and bureaucrats, is that although Sweden and India are different in many aspects, there is great potential for both countries to do more together for mutual benefithttp://www.thehindu.com/news/national/article2340760.ece

Despite the duty cut on crude and petroleum products in June, indirect tax collections in July registered a 27 per cent growth. The Chairman of Central Board of Excise and Custom, Mr S. Dutt Majumdar, told Business line, “The current rate of growth shows that economy is on the strong path.” These numbers are for the first full month since the duty reduction on crude, petrol and diesel on June 25. http://www.thehindubusinessline.com/industry-and-economy/article2340566.ece?homepage=true

EconomicTimes.com
Indicating that European debt crisis is hurting Indian businesses, a new survey has found that many domestic firms operating in Europe have suffered up to 15 per cent revenue losses in 15 months till June, 2011. The survey by industry body Ficci, conducted from end of June 2011 till July, covered companies in diverse sectors including IT, finance and textiles.http://economictimes.indiatimes.com/news/economy/finance/indian-cos-in-europe-suffered-15-revenue-losses-till-june11/articleshow/9543005.cms

Yonhapnews.co.kr
South Korea’s central bank is widely expected to freeze the key rate for August as the grim global economic outlook sparked by a U.S. credit downgrade upped external economic uncertainty despite persisting inflation woes, a poll showed Wednesday. Sixteen out of 17 economists forecast that the Bank of Korea (BOK) will freeze the benchmark seven-day repo rate at 3.25 percent for the second straight month on Thursday, according to the survey by Yonhap Infomax, the financial news arm of Yonhap News Agency. http://english.yonhapnews.co.kr/business/2011/08/10/59/0503000000AEN20110810004300320F.HTML

TheMoscowtimes.com
Russia could borrow up to $900 million per year from development banks and $300 million from international financial organizations in 2012-14, the Finance Ministry said in its draft debt policy outline for the period, posted on its web site.  The country has not taken loans for budgeting purposes from international organizations since 2002 and has concentrated instead on joint projects with multilateral development banks in priority areas and sectors of the economy, using investment loans with a considerable portion of co-financing by Russia itself. http://www.themoscowtimes.com/business/article/international-borrowing-for-projects-could-reach-12bln/441754.html#ixzz1UbKgSKFB

Fin24.com
Johannesburg – Transnet and Eskom bonds are now more highly rated than US government bonds, according to the latest ratings by Fitch and Moody’s Investment Services. After revising the parastatal’s outlook last month, Fitch affirmed Eskom’s national long-term rating at AAA(zaf) with a stable outlook, according to the Business Report on Wednesday. The agency also affirmed Transnet’s government guaranteed bond issue at AAA(zaf). http://www.fin24.com/Markets/Bonds/SA-bonds-have-better-ratings-than-US-20110810

TehranTimes.com
Iran retains its position in 2010 as the second largest oil exporter in the Organization of Petroleum Exporting Countries, data from the British Petroleum Statistical Review of World Energy 2011 and the U.S. Energy Information Administration (EIA) indicated. OPEC in its Annual Statistical Bulletin has put Nigeria ahead of Iran in regard to export of oil in 2010. The issue has been faced with reactions of Iran’s officials, called that report ‘ambiguous.’ http://www.tehrantimes.com/index.php/economy-and-business/1379-iran-still-second-largest-exporter-in-opec-data-shows

KhaleejTimes.com
The Central Bank of the UAE on Tuesday re-affirmed its commitment to maintain its currency’s peg to the US dollar, despite a backdrop of rising global economic uncertainty that has caused the greenback to fall against other major currencies.  “On the issue of the exchange rate policy, the Board of Directors affirmed that the peg of the dirham to the US dollar is continuing without change,” the central bank said in an emailed statement. The central bank hoped that the nation’s banks would not be impacted by the on-going turmoil on international markets. After the meeting of its board of directors, the central bank said the nation’s banks are “in good position.” http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/business/2011/August/business_August200.xml&section=business

Tags: August 10, Bank Of America, Crude Oil, Fannie Mae, Ft Reports, India, Investment Firms, Living Wills, Loan Portfolio, Member Nation, News That Matters, Outlook, Powerhouses, Preliminary Injunction, Reuters Reports, Riots, Sec Proposal, Trade Surplus, Uk Banks, Union Member, Wsj, Xinhua
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How the VAR Model and Japan’s Tragedy Affect Investors

Monday, March 21st, 2011

Our thoughts and prayers are with the people of Japan. The videos, images and stories of the devastation caused by last week’s earthquake and tsunami have touched our hearts and rattled investor psyches around the world.

The threat of disaster from the damaged Fukushima nuclear power plant unleashed a ferocious sell-off of Japanese equities, but the damage to other major markets has been limited. Already experiencing a slight pullback prior to the events on March 11, U.S. equities and emerging markets have held up quite well. The MSCI Emerging Markets Index has only pulled back 2 percent since the earthquake and the S&P 500 Index only 3 percent.

Japan has experienced similar disasters before on a smaller scale. In 1995, the Great Hanshin Earthquake severely damaged the port city of Kobe, killing more than 6,000 people. Japanese industrial production (IP) fell by 2.6 percent during the January following the earthquake, according to Societe Generale analyst Takuji Okubo. However, that drop-off was short lived. Okubo reports that IP sprang up 2.2 percent the following month and 1 percent during March.

Goldman Sachs estimates that the total cost of damage from the March 11 earthquake will be $198 billion—roughly 1.6 times that of the Great Hanshin earthquake. That works out to roughly 4 percent of GDP. However, Martin Wolf from the Financial Times points out that as of March 17, Japan has lost $344 billion worth of market cap since March 11, equaling nearly 7 percent of the country’s GDP.

Why have investors reacted this way? Investor anxiety and the selloff have been exacerbated by two trends which have plagued Wall Street over the past few years: The excessive use of Value-at-Risk (VAR) models and a risk-averse herd mentality.

The VAR Model is used by investment firms and others to measure the market risk of their asset portfolios by calculating the probability of maximum loss given a certain time period, i.e. “how much could I lose in a really bad day (month)?”

VAR models have three different components: A time period (generally a day or a month), a level of confidence (generally 95 or 99 percent confidence level) and an estimate of investment loss. There are three mathematical models used to calculate VARs: Variance-Covariance, historical simulation and Monte Carlo Simulation. (Editor’s note: For an in-depth explanation of these concepts, see Investopedia and HedgeFund-Index.)

All of the major investment firms have a risk management officer who uses some form of a VAR model. Their biggest concern is the daily, weekly, and monthly volatility. There’s a certain level of volatility that financial institutions can’t stomach because they are leveraged themselves.

It’s similar to the freezing point when water turns to ice. Once this level is reached, the risk management officers give portfolio and money managers a “tap on the shoulder” to reduce risk and raise cash levels. Since risk managers all over the world are using very similar models, it creates a herd mentality and stock sales all get triggered at the same time. Similar herd mentalities and groupthink have led to some of history’s most infamous financial calamities such as the crash of 1987 and 2008 after the fall of Lehman Brothers.

The VAR herd mentality shows up in the volatility index, or VIX, which is a measure of stress in the system. Currently, it’s a combination of forces (the ongoing turmoil in the Middle East and North Africa and Japan’s natural disaster) that is injecting stress into the system. The VIX pushed toward the 30 level last week, a level that has historically been associated with “extreme market turbulence.” As of mid-week, the two-week change in the VIX represented the sixth largest move in the past 20 years, according to Greg Weldon.

Once stability returns and a new equilibrium is found, the VIX then falls and the risk management officer allows the money managers to invest again.

Periods of high volatility and uncertainty generally cause investors to head for cover and liquidate assets but we think investors should do the opposite—classic contrarian thinking.

A prime example occurred two years ago. On March 18, 2009, we highlighted for investors in a special alert that a shift in government policy—an amended FASB-157 “mark to market” rule, a change to the short sell (uptick) rule and a $300 billion liquidity injection from the Federal Reserve—meant a strong wind was hitting the market’s sails and was likely to cause a massive price reversal. We were confident of this shift because these events fit into one of our core tenants of our investment process—that government policies are precursors to change.

Two years later, large growth funds, large value funds and world stock funds have all risen 40 percent or more, according to Morningstar. Some asset classes such as midcaps and natural resources stocks have doubled off of their lows but are still working to regain previous highs.

Unfortunately, instead of buying into the opportunity, more than $25 billion was pulled out of domestic and international stock funds while $22 billion flowed into bond funds, such as intermediate-term, short-term and intermediate government bond funds. The returns on those asset classes over the same March 2009 to March 2011 period were 11.9, 6.8 and 5 percent, respectively.

Another example is last year’s explosion of the Macondo Well in the Gulf of Mexico. Many investors dumped their investments in British Petroleum because of the regulatory uncertainty and growing costs of the cleanup, but BP’s stock has recovered more than 67 percent since its June 2010 lows.
The key difference between the events of two years ago and today is that natural disasters tend to cause great short-term anxiety but have minimal lasting effect, while shifts in government policy are generally precursors to significant change. BCA says that “natural disasters rarely change an economy’s growth trajectory and this earthquake should be no exception.” They continue to say that “the earnings picture of the Japanese corporate sector is unlikely to be significantly affected by this natural disaster.”

In fact, the total impact of the earthquake on Japan’s economy is likely to amount to 0.5 percent of GDP, not even comparable to the global credit crisis that reduced Japan’s GDP by 10 percent between the first quarters of 2008 and 2009, according to the Financial Times.

In America, following Hurricane Katrina, we saw that there are basically six to 15 weeks of misery before the rebuilding begins. Estimates show Japan will spend $500 billion to rebuild its economy and given the government’s long history of investing in the country’s infrastructure, we expect they will waste no time in rebuilding and repairing. Reconstruction spending will probably kick in some time during the second quarter, supporting the country’s growth rate, according to BCA.

We are also seeing nuclear projects being pushed back until engineers from around the globe can learn from this tragedy. This makes coal, natural gas and crude oil more attractive in terms of near-term demand.

A final variable to consider is the immense patriotism and pride inherent in Japanese culture. In his Financial Times column, Martin Wolf says “if any civilization is inured to such tragedies it is Japan’s. Its people will cope. This seems certain.” Japanese culture has a very strong family unit with high savings rates. If the picture of the family above is any indication, this strong culture of family will help them endure, adapt and move forward.

Director of Research John Derrick contributed to this commentary.

Tags: Asset Portfolios, Emerging Markets, Financial Times, Gold, Goldman Sachs, Great Hanshin Earthquake, Herd Mentality, Infrastructure, Investment Firms, Japanese Equities, Market Risk, Martin Wolf, Maximum Loss, Msci Emerging Markets, Msci Emerging Markets Index, Nuclear Power Plant, oil, Psyches, Pullback, Selloff, Societe Generale, Thoughts And Prayers, Value At Risk, Videos Images
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How the VAR Model and Japan’s Tragedy Affect Investors

Saturday, March 19th, 2011

How the VAR Model and Japan’s Tragedy Affect Investors

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Our thoughts and prayers are with the people of Japan. The videos, images and stories of the devastation caused by last week’s earthquake and tsunami have touched our hearts and rattled investor psyches around the world.

The threat of disaster from the damaged Fukushima nuclear power plant unleashed a ferocious sell-off of Japanese equities, but the damage to other major markets has been limited. Already experiencing a slight pullback prior to the events on March 11, U.S. equities and emerging markets have held up quite well. The MSCI Emerging Markets Index has only pulled back 2 percent since the earthquake and the S&P 500 Index only 3 percent.

Japan has experienced similar disasters before on a smaller scale. In 1995, the Great Hanshin Earthquake severely damaged the port city of Kobe, killing more than 6,000 people. Japanese industrial production (IP) fell by 2.6 percent during the January following the earthquake, according to Societe Generale analyst Takuji Okubo. However, that drop-off was short lived. Okubo reports that IP sprang up 2.2 percent the following month and 1 percent during March.

Goldman Sachs estimates that the total cost of damage from the March 11 earthquake will be $198 billion—roughly 1.6 times that of the Great Hanshin earthquake. That works out to roughly 4 percent of GDP. However, Martin Wolf from the Financial Times points out that as of March 17, Japan has lost $344 billion worth of market cap since March 11, equaling nearly 7 percent of the country’s GDP.

Why have investors reacted this way? Investor anxiety and the selloff have been exacerbated by two trends which have plagued Wall Street over the past few years: The excessive use of Value-at-Risk (VAR) models and a risk-averse herd mentality.

The VAR Model is used by investment firms and others to measure the market risk of their asset portfolios by calculating the probability of maximum loss given a certain time period, i.e. “how much could I lose in a really bad day (month)?”

VAR models have three different components: A time period (generally a day or a month), a level of confidence (generally 95 or 99 percent confidence level) and an estimate of investment loss. There are three mathematical models used to calculate VARs: Variance-Covariance, historical simulation and Monte Carlo Simulation. (Editor’s note: For an in-depth explanation of these concepts, see Investopedia and HedgeFund-Index.)

All of the major investment firms have a risk management officer who uses some form of a VAR model. Their biggest concern is the daily, weekly, and monthly volatility. There’s a certain level of volatility that financial institutions can’t stomach because they are leveraged themselves.

It’s similar to the freezing point when water turns to ice. Once this level is reached, the risk management officers give portfolio and money managers a “tap on the shoulder” to reduce risk and raise cash levels. Since risk managers all over the world are using very similar models, it creates a herd mentality and stock sales all get triggered at the same time. Similar herd mentalities and groupthink have led to some of history’s most infamous financial calamities such as the crash of 1987 and 2008 after the fall of Lehman Brothers.

The VAR herd mentality shows up in the volatility index, or VIX, which is a measure of stress in the system. Currently, it’s a combination of forces (the ongoing turmoil in the Middle East and North Africa and Japan’s natural disaster) that is injecting stress into the system. The VIX pushed toward the 30 level this week, a level that has historically been associated with “extreme market turbulence.” As of mid-week, the two-week change in the VIX represented the sixth largest move in the past 20 years, according to Greg Weldon.

Once stability returns and a new equilibrium is found, the VIX then falls and the risk management officer allows the money managers to invest again.

Periods of high volatility and uncertainty generally cause investors to head for cover and liquidate assets but we think investors should do the opposite—classic contrarian thinking.

A prime example occurred two years ago. On March 18, 2009, we highlighted for investors in a special alert that a shift in government policy—an amended FASB-157 “mark to market” rule, a change to the short sell (uptick) rule and a $300 billion liquidity injection from the Federal Reserve—meant a strong wind was hitting the market’s sails and was likely to cause a massive price reversal. We were confident of this shift because these events fit into one of our core tenants of our investment process—that government policies are precursors to change.

Two years later, large growth funds, large value funds and world stock funds have all risen 40 percent or more, according to Morningstar. Some asset classes such as midcaps and natural resources stocks have doubled off of their lows but are still working to regain previous highs.

Unfortunately, instead of buying into the opportunity, more than $25 billion was pulled out of domestic and international stock funds while $22 billion flowed into bond funds, such as intermediate-term, short-term and intermediate government bond funds. The returns on those asset classes over the same March 2009 to March 2011 period were 11.9, 6.8 and 5 percent, respectively.

Another example is last year’s explosion of the Macondo Well in the Gulf of Mexico. Many investors dumped their investments in British Petroleum because of the regulatory uncertainty and growing costs of the cleanup, but BP’s stock has recovered more than 67 percent since its June 2010 lows.

The key difference between the events of two years ago and today is that natural disasters tend to cause great short-term anxiety but have minimal lasting effect, while shifts in government policy are generally precursors to significant change. BCA says that “natural disasters rarely change an economy’s growth trajectory and this earthquake should be no exception.” They continue to say that “the earnings picture of the Japanese corporate sector is unlikely to be significantly affected by this natural disaster.”

In fact, the total impact of the earthquake on Japan’s economy is likely to amount to 0.5 percent of GDP, not even comparable to the global credit crisis that reduced Japan’s GDP by 10 percent between the first quarters of 2008 and 2009, according to the Financial Times.

In America, following Hurricane Katrina, we saw that there are basically six to 15 weeks of misery before the rebuilding begins. Estimates show Japan will spend $500 billion to rebuild its economy and given the government’s long history of investing in the country’s infrastructure, we expect they will waste no time in rebuilding and repairing. Reconstruction spending will probably kick in some time during the second quarter, supporting the country’s growth rate, according to BCA.

We are also seeing nuclear projects being pushed back until engineers from around the globe can learn from this tragedy. This makes coal, natural gas and crude oil more attractive in terms of near-term demand.

A final variable to consider is the immense patriotism and pride inherent in Japanese culture. In his Financial Times column, Martin Wolf says “if any civilization is inured to such tragedies it is Japan’s. Its people will cope. This seems certain.” Japanese culture has a very strong family unit with high savings rates. If the picture of the family above is any indication, this strong culture of family will help them endure, adapt and move forward.

Director of Research John Derrick contributed to this commentary.

Tags: Chief Investment Officer, Emerging Markets, Financial Times, Frank Holmes, Gold, Goldman Sachs, Great Hanshin Earthquake, Herd Mentality, Infrastructure, Investment Firms, Japanese Equities, Martin Wolf, Msci Emerging Markets, Msci Emerging Markets Index, Nuclear Power Plant, oil, Psyches, Pullback, Selloff, Societe Generale, Thoughts And Prayers, U S Global Investors, Value At Risk, Videos Images
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Nice Guys, Naughty Information?

Thursday, November 25th, 2010

Nice Guys, Naughty Information?

by Leo Kolivakis, Pension Pulse

Nathaniel Popper of the LA Times reports, Major investment firms subpoenaed in insider trading probe:

A number of high-profile investment firms — including two that manage mutual funds owned by millions of Americans — have received subpoenas in a federal probe of alleged insider trading on Wall Street.
Janus Capital Group Inc., a Denver-based mutual fund family, reported in a regulatory filing Tuesday that it had “received an inquiry regarding the recently disclosed insider trading investigation on Wall Street calling for general information.”

Boston-based Wellington Management, which invests money for a number of pension funds and mutual funds, also received a government request for information, Bloomberg News reported.

One of the biggest names in the hedge fund world, SAC Capital Advisors, wrote in a letter to clients Tuesday that it had received a government request for information, according to a person who saw the letter.
Another big hedge fund operator, Chicago-based Citadel Asset Management, and at least two smaller hedge fund firms also were reported to have been subpoenaed.

Shares of Janus slumped 2.8% on the news. SAC Capital and Wellington are privately held.
News of the subpoenas came a day after FBI agents raided the offices of three hedge fund firms as part of the insider trading probe. Although a raid requires a search warrant approved by a judge, a subpoena can be issued without judicial approval.

Wellington has $598 billion in assets under management. Janus manages $161 billion. SAC Capital and Citadel manage many fewer billions than Wellington or Janus, but charge much higher fees relative to the size of the portfolios they handle.

The government’s interest in SAC Capital caused a buzz on Wall Street because of the firm’s successful track record and an air of mystery surrounding its secretive founder, billionaire art collector Steven A. Cohen, who has been called the “hedge fund king” by the Wall Street Journal.

Two of the firms raided Monday were started by alumni of SAC Capital.

Yahoo’s Tech Ticker said that according to initial reports, the investigation could ensnare Wall Street’s biggest names: Goldman Sachs, SAC Capital, Wellington, Jennison, MFS Global, Maverick, Citadel, and others. (Here’s a who’s who of who might get nailed.)

For Rolling Stone contributor Matt Taibi, author of Griftopia, there’s nothing shocking at all about revelations of possible widespread insider trading on Wall Street (see video below):

“Everybody is trading on the inside somehow or another; so this isn’t particularly surprising,” Taibbi says. “A lot of sources I talked to suggested this is endemic to the entire culture.”

The current investigations center around alleged insider trading prior to merger announcements such as MedImmune’s takeover by AstraZeneca in 2007 and Merck’s buyout of Schering-Plough in 2009, The WSJ reports.

While gaming takeovers is a “classic” form of insider trading, Taibbi says it’s also evident in high-frequency trading, where exchanges provide a millisecond sneak peak at buy and sell orders, or the practice of clients front-running big orders by institutions.

“The real issue here is that it’s everywhere,” he says. “And the fear is there’s no end to it.”

Taibbi, who became widely known in financial circles in 2009 when he dubbed Goldman Sachs “a vampire squid on the face of humanity,” says he is not cynical by nature. “But this Wall Street stuff is overwhelming,” he says. “The more you look into it, the less you see the way out. The government seems so completely helpless to do anything positive in this situation.”

Finally, Holman Jenkins Jr. of the WSJ reports, Nice Guys, Naughty Information?:

Beating a dead horse in argument is frowned upon, but sometimes it takes a good thrashing to reveal the absurdity beneath the surface reasonability. So it has been with the evolution of insider trading law.

Once it was deemed that the person acting on the information was naughty because, however valuable and accurate the information, acting on it involved a betrayal. An executive who traded on inside information betrayed his shareholders. A lawyer who traded on advance word of his client’s deal betrayed his client.

You could buy or not buy this theory, based on whether you think the benefit of having the information in the stock price outweighs using criminal law to improve the climate of trust between principals and agents. But it was not insane. Insane is what has happened to insider trading law over the past generation, and by all portents may reach its culmination in today’s widely leaked FBI crackdown on hedge funds and research firms.

Insane is treating the information as the offender. Insane is seeking serially to expand the circle of people who can be criminalized for trading on it, as if it were desirable to keep accurate information out of stock prices.

The latest investigation has led to raids on hedge funds and people who run research shops being visited by the FBI and threatened with jail. That much we know. The papers delight in hinting between lines that the climatic target is hedge fund impresario Stephen A. Cohen, whose vast wealth and semi- colorful history you can read about on Wikipedia.

The probe may yet reveal something we can properly hold our noses over. Bribes were distributed to betray corporate confidences. Agents were induced to sell out those whom they were duty-bound not to sell out.

It may also turn out—many years hence, after careers and lives have been ruined—to be an instance of the dead-horsers at the FBI and SEC running amok.

We can already cite one considerable irony. The effort over many years to police “insider” information has made such information more valuable. From “your bunny has a good nose” (a line that got an investment banker charged with insider trading in the 1980s) to today’s crackdown on what leaky investigators describe as an insider information “trading network,” the government has injected fertility drugs into a sub-industry of specialists devoted to winkling out whatever corporate information is not yet in the share price.

Lately books have been written debunking the efficient markets hypothesis, claiming it does not account for all known human phenomena. But a hypothesis does not have to be comprehensive to be valuable. And the securities markets, whatever their vagaries, manifestly do finally deliver prices that accurately reflect what an investor can expect back on the money he puts in. Romantic as it may seem, some of us even believe the stock research industry is worth putting up with if it contributes to creating accurate, up-to-date stock prices. Society is served, after all, when investors and management get the best possible feedback on what products and services and business models are most demanded by the public.

The SEC has a different view. The logic of insider trading law, taken to its dead-horse extreme, is to keep good information out of stock prices. In the SEC’s ideal world, any information originating inside a company will be reflected in stock prices only after the company has publicly announced it to the world’s investors simultaneously.

As a colleague said of Stalin, there is no way to get the SEC’s ideal world without mangling the real world beyond repair. A company cannot do business without revealing itself to its customers, its suppliers, the guy who drives by and sees a parking lot more full (or empty) than the day before. Yet under “misappropriation theory” anyone can be prosecuted for trading on information that the government decides they should have known they shouldn’t have known.

More ridiculous is the claimed motive: because it’s “fair” to small investors.

Huh? In a world where hedge funds spend millions so their computers can be a nanosecond closer to the stock exchange, the average small investor is supposed to secure his retirement by betting on his ability to beat the world to some market- moving bit of information? Let us suggest an ironic and contradictory theory: What really improves the small investor’s confidence in the market’s fairness is when he buys a stock, is blindsided by some corporate announcement, and yet notices the stock barely moves anyway thanks to the sharpies who made sure the information was already in the price.

The SEC touts on every possible occasion its political bona fides with blather about its devotion to small investors. But if the agency really had our interests at heart, it would preach daily the unwisdom of most us ever buying an individual stock. We should be free-riding on the efforts of the people the FBI is trying to criminalize. Let the pros do the work of keeping stock prices “right” (a problematic concept, we understand). Let the rest of us sit back on our index funds while this marvelous, greedy, roiling system keeps Corporate America’s nose to the wheel.

Mr. Jenkins’ argument has merits but he uses twisted logic. The stock market is rigged and it’s ridiculous to hear the SEC is devoted to maintaining a level playing field between small investors and large banks and their large hedge fund clients. Joe and Jane Retail can never compete with the Goldmans, Citadels and SAC Capitals of this world. Not in their wildest dreams. To even suggest you can create a level playing field is a farce!

Keep in mind, however, this nonsense has been going on for years. Matt Taibbi is dead right, it’s endemic and pervasive across the entire financial industry. Pension funds who invest in these mutual funds and hedge funds are probably very nervous, weighing the reputation risk of being linked to these funds, especially if criminal charges are laid. When the ship goes down, everyone is looking to cover themselves. Also, the prospect of major hedge funds and mutual funds getting redemption notices makes traders on Wall Street very nervous.

This is the type of stuff that makes me nervous too because you don’t know how it’s going to play out. It might turn out to be nothing and blow over, or it might snowball and wreak havoc in financial markets. Citadel and SAC Capital are two of the biggest and best multi-strategy hedge funds. I don’t want to blow this up until I hear all the facts, but now might be a good time for pension funds to cut risk across the board and assess the implications of these investigations. I keep asking myself why is this happening now? What else is lurking out there? Is this the beginning of a series of investigations? If so, we’re in for a long, tough slug ahead.

Tags: Art Collector, Assets Under Management, Capital Group Inc, Federal Probe, Government Request, Hedge Fund, Insider Trading, Investment Firms, Janus Capital, Janus Capital Group, Janus Capital Group Inc, Judicial Approval, La Times, Nice Guys, Pension Funds, Sac Capital Advisors, Search Warrant, Steven A Cohen, Subpoenas, Wellington Management
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