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Looks Like A Classical Pump&Dump Setup

In Financial Engeneering, Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Technology, Views, commentaries and opinions on 14.01.11 at 22:04

The global stocks markets are reaching for new highs, sending the benchmarks to the highest level since August 2008. Once again it’s the financials that’s leading the race after Wells Fargo raised its rating for large banks on prospects for higher dividends, JPMorgan Chase says it will use some of its reserves to boost earnings and Morgan Stanley says banks and insurance companies will be winners in the stock market this year. Well, it sounds like the same old song and dance routine to me, just like we’ve seen it over and over again for the last two years – a classical pump & dump scheme.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

Philip Dow


Personally, I don’t think there’s many investors who actually believe a word of what the bankers and their stock pushers are saying. But that’s not the point. The point is, however, that the big financials are setting up another stock market rally so they can cash in a couple of billion dollar more before the new regulations takes effect and prohibit them from trading with their own money, shutting down their most lucrative area of business.

This may very well be the biggest opportunity investors will get in 2011. The financial shares have, more or less, controlled the stock market over the last two years – pushing the average prices up, then pulling them down again.

But this is no game for amateurs. You never know when the big players turn around, stop buying and dump the load right in your face. The so-called “swing trade,” where the goal is to figure out exactly when the market turns, is one of the most difficult investment strategies there is. It can also be the most rewarding.

But remember; there is nothing – I emphasize; nothing – that indicates that the problems are over for financial firms. On the contrary; several signs points to more trouble ahead.

The greatest factor of uncertain right now is the European debt crisis. Even if it’s the national governments that is about to go bankrupt, it is the financial industry who’ll get the punch when countries starts to default.

Something the credit market investors have figured out a long time ago.

(Read also: Smart Money Is Not Stupid (Or Is It?))

The second bomb about to detonate is the dodgy foreclosure case.

At the moment, the banks are allowed to accrue interest on non-performing mortgages  until the actual foreclosure takes place, which on average takes about 16 months.

This “phantom interest” is not actually collected, but still it’s booked as income until the actual act of foreclosure.

As a resullt, many bank financial statements actually look much better than they actually are.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, and hundreds of other smaller institutions, can report interest due to them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed, according to Forbes.

“Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans,” says Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

However, the central banks, and the governments will be pumping money into the financial markets as long as they can in order to keep the financial system running. And they might be able to do that for a year or two more (maybe even longer).

“The markets can stay irrational longer than you can stay solvent.”

(John Maynard Keynes)

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Anyway – who gives a shit?

The KBW Bank Index, which tracks 24 US financial companies, was up 13% in the four weeks through Jan. 5, three times the gains of the Standard & Poor’s 500.

And there’s also a third landmine in store for US banks.

According to Forbes, investors are now betting that the GOP-controlled Congress will water down the financial-services overhaul, and the great Wall Street reform will be just a joke, as many have feared.

On paper, the Dodd-Frank financial-services overhaul bill looks like a bank-stock killer.

It restricts how banks can trade for their own accounts, it raises capital requirements and it tightens supervision. By some estimates it will cut big bank profits by $22 billion annually—what the industry makes in a decent quarter.

Yet, bank stocks is rallying like it’s 2009.

Investors are banking that House Republicans will modify the new law, says Terry Haines, a senior analyst Potomac Research Group: “Back in July 2010, when Dodd-Frank became law, investors expected the quick imposition of rules with an immediate impact on the financial sector. But a lot of the key components of Dodd-Frank have not yet been implemented. And now there is a more favorable and moderate political environment as well.”

Note that any statement of just how much of the Dodd-Frank law will be changed by House Republicans is only speculation.

Investors may be overestimating the GOP‘s nimbleness.  The regulatory agencies could, in fact, begin to implement rules before the House Financial Services Committee holds any hearings on the matter, and the republicans may be distracted by efforts to reform the congressionally chartered mortgage giants Fannie Mae and Freddie Mac.

And some of the new regulations will simply not go away by themselves.

Banks will have to adhere to higher capital of some kind – the same goes for liquidity requirements – and the banks’ cost of deposit insurance and regulatory compliance are sure to increase significantly, regardless of what the GOP may accomplish.

“Every page of the law has something that impacts the bottom line,” banking lawyer Thomas Vartanian points out.

(The law is 848 pages long!)

Terry Haines points out that  the  regulators charged with writing regulations under the act will be scrutinized by the House Appropriations Committee as well as the Financial Services Committee.

“The Appropriations committee could limit the funding of controversial regulatory initiatives under Dodd-Frank, or even defund them entirely,” Haines says .

Perhaps. But the republicans could also easily be “Stewartized” into submission (mocked by the Daily Show’s John Stewart). And the general public is still quite upset over the fact that the hot-shots responsible for wrecking the economy still have their jobs and their bonuses, while about 8.5 million American workers lost theirs.

Something is going to hit the banking industry – whatever it will be…

“The people who took a political gamble on the sector in December most likely are traders who will take their money and run at the first sign of wavering by the House GOP,” Forbes writes.

If that’s the truth – the sector is set up for a classic pump and dump scheme.

Bank and life insurer stocks should see the biggest gains in 2011, according to a team of Morgan Stanley analysts. The team says its call is based on low valuations in the sectors, as well as increasing clarity about regulation that has weighed on the shares. An improving economy and the company’s increased capital deployment should drive return on equity.

Property and casualty insurers should also get a boost late in the underwriting cycle.

Morgan Stanley says its favorite names are Bank of America, Comerica and TD, for large cap, mid cap, and Canadian  banks, respectively.

In insurance, Prudential is the team’s pick for life insurers, with Axis Capital as a standout in P&C.

“Bank dividends and M&A activity signal the economy is transitioning from recovery to expansion,” says Philip Dow, director of equity strategy at RBC Wealth Management in a market comment at Bloomberg.com.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

That’s right! Pump, baby. Pump!

 

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So, You Think You Can Blog? (Econotwist’s Greatest Hits 2010)

In Financial Engeneering, Financial Markets, Health and Environment, High Frequency Trading, International Econnomic Politics, Law & Regulations, Learning, National Economic Politics, Natural science, Philosophy, Quantitative Finance, Technology, Trading software, Views, commentaries and opinions on 09.01.11 at 20:40

Every serious blog is presenting their top lists for 2010 these days, so I better get my lists out there too. Frankly, I’m quite surprised by the response I’ve got. After all this was my first year as a full-time blogger. By summer last year, the econotwist’s blogs – mainly The Swapper and The Econotwist’s – reached 20.000 unique visitors per month. Some articles was also republished by other blogs, or featured on the publishing sites like Scribd. I estimate the top articles of Econotwist’s in 2010 was read by at least 200.000 people. And as usual I managed, completely unintended, to make some people a little bit angry.

“That article is about as credible as me writing about nuclear technology. Off-balance sheet transactions? SPEs? Interest Rate and Currency Swaps? Has that idiot even looked at an Annual report for BP?”

Reader’s response


The quote above was in response to the July 2 post – “So, You Thought BP Was An OIL Company?” I haven’t got that much pepper since I described DnB NOR‘s subsidiary in the Baltic region as at “financial lab rat”. Anyway, I see all feedback, good or bad, as extremely valuable. I have not been able to reply to all comments or requests. For that I apologize, and promise I’ll spend more time on your responses in 2011. As for themes I will be focusing on the technological side of the financial markets in addition to my other specialties – the relations between economy and ecology.

And I will have a couple of new prominent contributors joining in, as well as some other surprises…

But right now I want to give my sincere thanks to all of you who’s been cheering me on this year, making my first year as a blogger a definitive success.

To quote one of my favorite artists, (Keith Richards): GOLD RINGS TO YOU ALL !

And here is a summary of the most popular posts and publications by The Econotwist’s Blogs in 2010.

 

TOP POSTS

  1. So, You Thought BP Was An OIL Company?
  2. Mother Earth On Crack
  3. Volcano Ash Can Send The Earth Into “Deep Freeze”
  4. The Worlds Most Contagious Countries – Here’s The List
  5. Cyber Criminals Attack Critical Water, Oil and Gas Systems
  6. More Mysterious “Monster Fish” Comes To Surface
  7. The Ultimate Trading Weapon
  8. Norwegian Day Traders Convicted Of Market Manipulation
  9. Goldman Sachs: “Damn American Bastards!”
  10. Flight to Mystery
  11. The Sun Is Speaking!
  12. Here’s The REAL Norwegian PIIGS Exposure

 

TOP PUBLICATIONS

  1. Goldman Sachs: Global Economics Weekly. June 2010.
  2. Non Performing Loans, Europe June 2010. PriceWaterhouseCoopers
  3. Letter From Geithner
  4. SULTANS OF SWAP: BP Potentially More Devastating than Lehman!
  5. Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the US Federal Reserve System, at Princeton. 09242010.
  6. Goldman Sachs: “On The Eve of The Bank StressTests”
  7. Tudor Investments Letter October 2010
  8. Saxo Bank. Quarterly Outlook. Q3 2010.
  9. BP Annual Report and Accounts 2009
  10. Bank of International Settlement. Quarterly Report. June 2010
  11. Oslo District Court. Final Verdict In The Case of Market Manipulation by Day Traders. 10122010.
  12. Fitch. Special Report. “CDS Spreads and Default Risk – Interpreting the Signals”- October 2010.

 

Econotwisted T-Shirt (Limited Edition)

OTHER SMASHING HITS AND PERSONAL FAVORITES

 

BEST PHOTO COMMENTS

The Greatest Conspiracy

 

The Dark Side of The White House

 

Trade Hard - Mega Hard

 

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MOST VIEWED iROCK VIDEOS


 

#1. “Nobody Lnpws The Bubbles I’ve Seen” (By Versusplus.com)

 

#2. “It’s Beginning To Look A Lot More RiskLess” (By Versusplus.com)

 

 

No matter what happens in 2011 – don’t forget to have some fun!

All The Best

At The End of Another Decade

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Quantitative Finance, Technology, Views, commentaries and opinions on 02.01.11 at 01:29

New Years Eve 2010 (around midnight): It’s not only another year, it’s also the beginning of a new decade. Looking back at the past 10 years, the stage is set for a mind-blowing decade of technological breakthroughs that have the potential to change or lives completely. unfortunately, we’re probably also in for a long period of financial instability and high levels of unemployment.

“It is possible that we are facing one of the most important decades in a very long time.”

econotwist


I remember New Years eve of 2000; dot-com-mania, emerging markets,Y2K. However, I also remember 1990; deregulation, digital revolution and another collapse in our financial system. I think I’ve detected two major screw-ups over the last two decades.

I covered the stock market crash in 1987, as one of my first assignments as a financial reporter.

By 1989 economists and politicians had declared the troubles were over, the major  global economies was back on track, producing new jobs.

In my mind, the most memorable from headlines from 1991 was delivered by the Swedish newspaperDagens Industri.”

Like the page 2 editorial:

“Dear God, please cool down our economy.”

And the – now historical – headline from the day the Swedish bank central bank kicked up its key interest rate to 500%:

“Good Night, Sweden”

This was about six months before the crisis hit the Scandinavian banks like a Norwegian heat-seaking Penguin missile, and forced the governments in both Sweden, Denmark and Norway to take public control over the private banks.

They were downsized, sliced up, sold out and merged, and the result was five, six   major banks who orderly divided the Nordic home markets between them, and have so far managed to keep any serious competition out of the region.

All three governments still holds significant ownership in the Nordic banking sector.

The Scandinavian banking crisis was recently held up as an example on how to handle a crisis in the financial industry.

Well, we now have five or six banks in three small countries that have become so “systemically important” that they are “too big to fail,” and will have to be bailed out of “no matter what.”

On a global scale; the creation of financial companies that are of “systemically importance” so they cannot be allowed to default must be (at least one of the) “Biggest Screw-up of the Decade – 1990/2000.”

As for the decade now ending, not keeping up with the developments in the financial industry, allowing it to become an invisible, almost uncontrollable, monster, and not putting a stop to it, is a really heavy regulatory blunder.

In the aftermath of 2001, several financial companies and their executives were accused or convicted of fraud for misusing shareholders’ money, and the U.S. Securities and Exchange Commission fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors.

Thinking back, it seems like we’ve been moving around in a circle.

Systemically we’re right back where we was in 1992, financially we’re in even deeper trouble.

The new international regulations, as they emerge in the final reports from the Basel Committee (Basel III), doesn’t provide anything that will make any significant and systemically changes.

So, my guess is that we’ll have to struggle with a dysfunctional financial market, debt and “systemically important”banks for still a long time – perhaps another decade.

Sadly, this means that the much debated economic recovery, in form of a helluva lot of new jobs, probably not is going to happen anytime soon.

I’m afraid it could take about another decade to get where we would like to be last year, in terms of labor market conditions.

But I’m also sure the next decade will bring a boom in one particular sector:

On this new years eve, we have more people using Facebook than Google, 60.000 new pieces of malware released on the internet every 24 hours and the banks are setting up high frequency information systems, with super fast connections from major central banks, financial authorities and government offices directly into their high frequency trading machines.

It’s all set for another golden age for computer engineers.

As far as the financial industry goes, it reflects the new market conditions imposed by law makers worldwide.

It’s not that amusing to engineer new financial derivatives, so the focus have shifted to the technical side.

The danger is that the financial markets grows even more complex and unpredictable, tied together in an unofficial, unregulated intranet of dark fiber cables.

And this goes beyond the markets and the economy.

Judging by the rapid pace of development over the last 10 years, the next 10 is definitively not gonna be slower.

With the so-called quantum computers just three to five years away, the computer technology, and our whole way of life, is destined for another evolutionary quantum leap, practically.

It is possible that we are facing one of the most important decades in a very long time.

I wish you all the very best.

Happy New Year!

PS:

I’d like to add a special greeting to all new readers/follower in 2010. Thanks for all your encouraging comments.

This summer the econotwis’t blogs (Swapper and Econotwist’s) blasted above  20.000 unique readers per month.

Many of you follow my Twitter, and I’m specially honored to welcome among my followers; the State of Israel, US Homeland Security and the EU Council.

Now that I got your attention; will you please tell the State of Kuwait to stop trying to hack into my computer!?

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China: Still Pumping Up The Economy

In Financial Engeneering, Financial Markets, International Econnomic Politics, Law & Regulations, National Economic Politics on 02.12.10 at 23:22

Fitch Ratings today published a special report stating that credit growth in China has not even begun to slow down, and is booming just as rapidly as in 2009. According to the special report from Fitch. there’s a “burgeoning of channels” outside China’s banking system through which credit is flowing and being hidden.

“Credit conditions remain extremely loose, which helps explain why inflation and property prices remain stubbornly high.”

Charlene Chu

Fitch Ratings  says that Chinese banks have been offloading trillions inof CNY loans in 2010 by artificially reducing their holdings of discounted bills and by re-packaging the loans into investment products for sale to investors.

“Talk of a substantial slowdown in credit growth in China is premature, but understandable given the visible drop in official figures on net new loans,” Charlene Chu, head of financial institution ratings in China, says in a statement.

“However, in reality lending has not moderated, it has been diverted into other channels.”

The report examines discrepancies in Chinese banks’ portfolios of discounted bills and acceptances in 2010, and provides an update on recent trends in informal securitisation, i.e. the re-packaging of loans into wealth management and trust products.

According to the report, the balance of Chinese banks’ discounted bills was understated by as much as CNY1.65 trillion (USD250bn) at end-Q310.

Meanwhile, by end-November 2010, upwards of CNY2.5 trillion (USD 375bn) in credit was sitting off bank balance sheets in credit-related wealth management products.

“Adjusting for these factors, the amount of new credit extended through end-Q310 is on par with the CNY9.3trillion extended through end-Q309. Credit conditions remain extremely loose, which helps explain why inflation and property prices remain stubbornly high,” says analyst Charlene Chu.

The agency states that even if Chinese authorities set a conservative target of CNY6-7 trillion in new loans for 2011, credit conditions are likely to remain loose until the problem of leakage is effectively contained and/or the cost of capital rises significantly.

“An economy that will have received more than CNY11 trillion in new credit for two consecutive years cannot get by with trillions less overnight in this type of environment without seriously stunting growth. We expect that hidden channels will continue to fill this gap,” Chu says.

According to the report, in recent years there has been a burgeoning of channels outside China’s banking system through which credit is flowing and being hidden.

Whereas in the past nearly all non-capital market funding was provided by banks, today scores of trust, finance, guarantee and leasing companies have joined the fray, in addition to 1,940 new micro lenders that have been established since late-2008.

The agency states that in this new environment even if regulators take a harsh stance against both activities in the coming months, new pathways and innovations are likely to take their place, leaving regulators and analysts chasing new channels of leakage.

“As long as Chinese policymakers continue to focus on managing credit supply, issues of credit leakage are likely to remain at least over the near term,” Fitch writes.

“However, the more serious inflation becomes, the less leeway there is to deal with large breaches in credit quotas,” she concludes.

Here’s a copy of the full report.

Related by The Swapper:

The Pros & Cons of Credit Default Swaps

In Financial Engeneering, Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, Learning, National Economic Politics, Quantitative Finance on 02.12.10 at 02:51

The CDS market, currently perceived as the most toxic market of all, has existed for nearly 20 years. But most people have only just begun to understand what all the fuzz is about. Said as simple as possible; a CDS is a kind of  insurance a lender buys to secure oneself against a possible default by the borrower. These insurance contracts usually has a maturity period between 1 to 10 years, and usually prized as a percentage of every 10 million units (dollars, euro, yen). A new research paper shred a little more light on this rather unknown market.

“In general, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. Nevertheless, CDS trading has also introduced a new source of risk.”

Ilhyock Shimy/Haibin Zhu


According to the two researchers employed by the Monetary and Economic Department of the Bank for International Settlements, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. The positive impact is stronger for smaller firms, non-…nancial …rms and those fi…rms with higher liquidity in the CDS market, while the negative is that companies included in CDS indices must face higher bond yield spreads than those not included.

The rise and fall of the credit derivatives market is considered the single most important event in the global credit market in the past decade.

Even thou it has existed for nearly 20 years, no one has paid much attention to it.

Until it blew up like an Icelandic volcano in 2008 and covered the whole world with a black cloud of hidden financial risks, that is.

By then the credit derivative market had swollen up to a huge, unmeasurable, uncontrollable market, with an estimated value of more than 60 trillion dollar. Credit-default swaps is one of the most traded credit derivatives, making up almost 90% of the totals.

According to the new research, the notional value of this market have been cut in half since the peak in 2008.

A Short Lesson

By the way – to compare a CDS with a credit insurances is not quite accurate:

A (CDS) is a swap contract and agreement in which the protection buyer of the CDS makes a series of payments (referred to as the spread) to the protection seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) experiences a credit event. In fact, it’s a form of reverse trading.

The simplest credit-default swap is a bilateral contract between the buyer and seller of protection. The CDS will refer to a “reference entity” or “reference obligor”, usually a corporation or government.

The reference entity is not a party to the contract. The protection buyer makes quarterly premium payments—the spread —to the protection seller.

If the reference entity defaults, the protection seller pays the buyer the par value of the bond in exchange for physical delivery of the bond, although settlement may also be by cash or auction.

A default is referred to as a “credit event” and include such events as failure to pay, restructuring and bankruptcy.

So, with that out-of-the-way, I’ll go on.

A Double-Edge Sword

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The CDS contracts have been perceived as the main root of all evil in the credit market because of its complex distribution of risk.

The new research paper by Ilhyock Shimy and Haibin Zhu do not confirm, nor dismiss the allegation.

They point, however, to the fact that the CDS market have both positive and negative impact on the financial markets in general.

This is their main findings:

“First, we …find strong evidence that CDS trading is associated with lower cost and higher liquidity for new bond issuance in Asia. This is consistent with the hypothesis that CDS trading helps create new hedging opportunities and improve information transparency for investors. Noticeably, this result is contrary to similar studies based on US data. This contrast provides supporting evidence for our conjecture on the jump-start e¤ect in Asia.

“Second, we …find that the positive impact of CDS trading on the bond market tends to be more remarkable for smaller fi…rms and non-f…nancial …firms. In addition, those …rms with higher liquidity in the CDS market bene…t more in the primary bond market in terms of cost and liquidity.”
“Last, we also …nd that the impact of CDS trading on the bond market is di¤erent during the crisis period. The global …nancial crisis that occurred during the sample period o¤ers a good case study to examine the behaviour of the CDS and bond markets under distress and their linkages. Our analysis shows that, at the peak of the global …nancial crisis, those firms included in CDS indices had to face higher spreads than those not included in CDS indices, above and beyond the general increase in credit spreads observed in the bond market during this period. This suggests that CDS trading could be a double-edged sword: it also introduces new sources of shocks to the bond market.”

Here’s a copy of the full report.

Related by The Swapper:

UK And France Want Ban On High Frequency Trading

In Financial Engeneering, Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Quantitative Finance, Technology, Trading software, Views, commentaries and opinions on 26.11.10 at 18:31

Britain and France is planning a crackdown on ultra-fast stock trading that they belive caused the so-called “flash crash” in the US stock market on May 6th this year, alarming both regulators and global investors, Reuters.com report.  Jepp, here we go again. Why don’t we just forbid the whole internet and get it over with…and don’t forget the cell phones!

“My natural tendency would be at least to regulate, to oversee it very strictly and after a cost-benefit analysis of these methods, maybe to forbid it.”

Christine Lagarde

They have the Internet on computers, now?!

 

French Economy Minister Christine Lagarde says the form of computerized trading, known as high-frequency trading (HFT), may need banning in some cases. She’s being backed up by the UK Financial Authorities.

“My natural tendency would be at least to regulate, to oversee it very strictly and after a cost-benefit analysis of these methods, maybe to forbid it,” Lagarde said at a parliamentary commission hearing on financial speculation. Reuters.

“Or at least give market authorities the power to forbid it in circumstances that are considered exceptional,” she added.

Britain, Europe’s biggest stock market, where HFT accounts for about a third of trading on the London Stock Exchange, also signals tougher rules were needed – but emphasise that the rules must be proportionate and targeted.

“HFT was simply the evolution of trading to a much faster pace due to advances in technology,” Alexander Justham, director of markets at the UK’s Financial Services Authority, told a TradeTech 2010 markets industry conference.

Adding: “We are not here to turn the clock back.”

Computerized trading and methods such as algorithmic trading transacts a huge number of shares in microsecond.

“If you drive so fast, the technology should be that you can break as fast as well,” Justham says.

Justham also says, according to Reuters, that HFT has narrowed bid/offer spreads,  but the jury was out on whether it has led to more efficient trading or whether it has created unfair advantages in trading.

Arguing that there’s a key differences between the US and European stock markets, such as controls on who can trade, and the availability of so-called “circuit breakers” to stop the most brutal moves.

“We are absolutely not complacent about the general risk of what all this means. Has the playing field been tilted?” Justham asks.

Well, in this bloggers view it’s the authorities that’s been tilted.

And just to be completely precise: I do definitely see the problems related to high frequency trading. Especially the fact that some market participants are able to get sensitive information before anyone else in the market does, and that’s just plain unfair. However, it’s the exchanges themself who offer this service to selected customers.

So, in my view the regulators should start by regulating themself before they impose yet another set of rules on the investors.

Anyway – Bank of France governor, Christian Noyer, said about the same in front of a French parliamentary panel on Wednesday evening,  that HFT was a real problem.

“I would only see advantages if it was scrutinized as much as possible,” Noyer said.

Read the full story at Reuters.com.

Related by The Swapper:

Will Supervising Hedge Funds Put An End To Systemic Risk?

In Financial Engeneering, Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Technology on 19.11.10 at 15:24

To put an end to systemic risks is the ambitious aim of Europe’s new laws to supervise hedge funds, the EU Parliament’s own TV channel reports.

But the new regulations, which will come into force in 2012, already have their detractors, the EU informator reports:

Vodpod videos no longer available.

Gold – The Utimate Bubble?

In Financial Engeneering, Financial Markets, Health and Environment, High Frequency Trading, International Econnomic Politics, Learning, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 13.11.10 at 17:04

Jonathan Burton has an interesting piece at MarketWatch Saturday morning. San Fransisco based Burton, the website’s money and investment editor, argue that investors are being lured into a speculative gold bubble comparable with the oil spike of 2008. Mr. Burton points out that gold in reality is an insurance against a total market collapse and other catastrophes, and that an even higher gold prize means that the value of most other assets will crash.

“Gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it.”

Jonathan Burton


Rate hikes are kryptonite for gold; accordingly, concerns that China will move aggressively on rates, and that the US and developed Europe will ultimately follow, have dulled gold’s glimmer over the past week, Jonathan Burton at MarketWatch writes.

Gold has become highly prized bling-bling, with the prize per ounce reaching another all-time-high this week at 1.395 dollar per ounce.

Anxious and astute buyers, from hedge-fund players to central bankers, flock around the “currency of fear.”

Gold at around $1,400 an ounce is almost double what it commanded two years ago, and gold’s price is up almost 25% so far this year alone.

“It’s been a great ride. Except gold is a bad investment,” Mr. Burton states.

Adding: “Gold’s feverish run has made a lot of people a lot of money, and though the rally has taken a breather in the last few days, there’s no shortage of flag-waving supporters who claim gold is on a march to $1,600, $1,800, $2,000 and beyond. After all, gold is still well below its 1980 peak, when it was worth around $2,300 an ounce in today’s dollars.”

Pure Speculation

The MarketWatch editor also emphasise that the recent raise in gold prizes is caused by nothing else than pure speculations.

“Certainly there are reasons to own gold in a diversified portfolio. Yet gold isn’t like a stock or a bond. It offers no income, no dividend, no earnings. It is considered a store of value, an alternative currency that’s safe beyond reproach, but it is not cash in the bank, or even the mattress. Gold has no untapped intrinsic value; it is worth only what people are willing to pay for it. And lately, many people have been only too willing,” Jonathan Burton writes, backed up by the following quotes:

“Gold is going up because people are buying it, and people are buying it because it’s going up.” (Leonard Kaplan, president of Prospector Asset Management).

Gold is always a speculation. (James Grant, editor of Grant’s Interest Rate Observer).

“Gold may be a good speculation; even cautionary voices concede that gold is not yet displaying the parabolic hockey-stick pattern that frequently forms an ugly bubble. Low yields on safer assets such as bonds and cash encourage risk-taking and speculation, which favors gold, silver, metals, commodities and many stocks. If the U.S. dollar continues to decline, gold will be a main beneficiary,” Burton continues.

According to the last disclosure in June, the three giant hedge fund managers, George Soros, John Paulson and Eric Mindich, controls 10% of the worlds leading gold ETF, SPDR Gold Trust.

Of course, they staked their claim early, and their view on gold and the dollar may now have changed, as investors will soon discover when these influential funds release Sept. 30 portfolio holdings.

“But gold buyers beware — the karat can be a sharp stick. As with any speculation, gold can lose luster as fast as hedge funds and other traders can unload it,” Burton warns.

The Greater Fool Theory

To Jon Nadler, senior analyst at Kitco Metals Inc. and a veteran gold-market watcher, Wall Street’s buy recommendations remind him of speculation in 2008 that propelled another must-have commodity — oil, the “black gold” — to stratospheric heights.

“I don’t think gold is an opportunity at $1,400 an ounce,” Nadler says. “Just because gold has been above $1,000 for 14 months, everybody thinks it’s a new paradigm. This is very much what we heard about oil a couple of years ago.”

“An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.” (Lenord Kaplan at Prospector Asset Management).

Perhaps Leonard Kaplan at Prosoector Asset Management clarifies the issue best: “Gold at $1,400 is not what I would call an investment. An investment is something you buy near its value. If gold costs $450 or $500 to produce, at $1,400 you don’t have value, you have momentum.”

And as any experienced trader should know by now – momentum is just another word for the greater fool theory. (The strategy of buying with no other intent than selling at a higher price – until the rally stops and the greatest fool is not able to find any new buyers).

It is similar in concept to the Keynesian beauty contest principle of stock investing.

An Insurance You Don’t Want To Use

“I called gold the ultimate bubble, which means it may go higher,” Soros told an investor conference in New York in mid-September, repeating a warning he’d made earlier this year. “But it’s certainly not safe and it’s not going to last forever.”

The recommended strategy at the moment is to hold between 5 and 10 percent of a clients’ portfolio in gold.

But this is not a new strategy. In fact, it’s an essential part of the old school investment lesson on long-term planning,  designed to expect the unexpected.

“If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”  (Karl Mills, president of investment advisory firm Jurika, Mills & Keifer.)

“We actually hope it doesn’t work too well,” Karl Mills, president of investment advisory firm Jurika, Mills & Keifer. says. “If it works really well, chances are the other things in the portfolio aren’t going to be looking so good.”

Jonathan Burton

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“Indeed, that’s how most individual investors should look on gold, as a way to mitigate investment risk — and an insurance policy you hope never to use,” Jonathan Burton at MarketWatch concludes.

Well, that’s actually how it’s always have been, and always will be.

PLease, don’t forget that.

Now, read the full story at www.marketwatch.com.

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