Archive for the ‘Politics’ Category
Monday, December 12th, 2011
Someone asked a pointed question this weekend:
âDoes the futures industry hate Jon Corzine?â
While no one person can speak for a diverse industry, it might not be true to generalize the futures and options industry hates Jon Corzine.Â Many, including myself, donât personally know the man.
What is known is that an industry has been brought to the brink and a serious test of its backbone is underway.Â Many of our business associates and friends have been dramatically impacted by actions from someone known as an arrogant individual used to getting his way most of the time, a man who demonstrated a complete disregard for MF Global and the industry in which it operated.
Not only did Mr. Corzine expect special treatment, he was surprised when he didnât get it.Â Here is a man that is said to have engineered the toppling of a CFTC regulator in 1998 over the issue of transparency.Â This lack of transparency and disregard for regulators are career trait many practitioners in the futures and options industry couldnât get away with.Â Why should a man who brought an industry to its brink and had a history of complete disregard for regulators and transparency be given special treatment?
As such, itâs time for the tough questions to be asked because we are getting close to the point where if this were regulators would descend on a mid-sized FCM or IB with the force of a predator drone attacking a domestic terrorist. (Mr. Corzine, to clarify in the previous sentence âIBâ stands for âIntroducing Broker,â not âInvestment Banker.â)
Here are key points that have emerged since his compelling testimony:
As Futures Magazineâs Dan Collins aptly noted in an article after Corzineâs initial testimony, the most significant information to come out of the testimony didnât come from the âlawyered upâ Corzine statements, but rather from the Chicago Mercantile Exchange (CME).Â The CME essentially established what had previously been undisclosed by Mr. Corzine:Â Funds were improperly transferred at 2:00 AM Monday morning.
The question is: who is responsible for that transfer?Â To think that Mr. Corzine or the top two or three officials at the top of MF Global were not aware of the transfer of $1.2 billion out of customer segregated funds might be similar to belief in the tooth fairy.
When the transfer occurred, how could it be that those âpushing the buttonâ not be aware they were violating CFTC fund segregation rules? Â Or perhaps with a history of ignoring regulation, those “pushing the button” might have assumed they would be accorded special treatment.
Are regulators expected to prevent such an action, or is their role simply to recognize how the regulation works and then enforce strict rules?
These questions should be answered in the context of a larger picture being painted.Â Here is what likely happened, pointing to the questions to which Mr. Corzine should be responsible to answer.
(Note: what follows is highly speculative and opinionated)
In the chaos of the early-morning realization liquidity was gone, a decision was made to move segregated funds.Â In almost any imaginable case inside an FCM, the only ones with access and authority to move such a large amount of capital at 2 AM was a high level official.Â At minimum, such activity would likely have been reported to top officials at MF Global early Monday morning as mid-level and high-level officials would have been alerted to the transfer through even the most basic FCM security process.Â MF Global was not a âbasicâ FCM and had a more detailed process in place, leading to a question:Â Why did it take so long for this activity to get reported?
And here is where another inconsistency appears:
Upon entering the brokerage, it was said the âaccount records were a mess.â Â Really?Â Is this disorganization consistent or did it occur only after the transfer of capital out of segregated funds? Â Â Based on subjective observations, those close to the industry might find such disorganization inconsistent.Â Does the disorganization of critical account documents point to attempts to hide the paper trail that was clearly present at MF Global before funds were missing?
But perhaps most inconsistent are Mr. Corzineâs own statements.
In a New York Times article started to uncover the critical points:
âIn testimony on Capitol Hill on Thursday, Mr. Corzine only added to the mystery. He said that transferring customer funds was âa complex processâ and, asked who could execute such a transfer, said âI wouldnât know probably who that person is.ââ
In this testimony Corzine is making two potentially inaccurate statements.
First, he claims the process is âcomplex.âÂ Ok, taking this at face value âcomplexâ likely implies a number of people associated with such a transfer and a process that would also trigger alarm bells.Â When were the alarms reported to regulators?
But more to the point, is the process really that complex for Mr. Corzine or his top deputies?Â In all likelihood there were potentially a handful of those within the FCM that had the ability to authorize a large capital transfer out of segregated funds, including Mr. Corzine.Â In many cases moving such capital out of segregated funds cannot be authorized by one individual, but might require a counter-signature.
Is Mr. Corzine seriously claiming that he doesnât know the people or the process?Â One can only imagine the day after the transfer of segregated funds was discovered, Mr. Corzine and top brokerage firm executives were notified of the transfer by the internal fraud alarm system.Â Most certainly at that point if Mr. Corzine were un-involved he would have investigated the people and the process.Â Remember, this is an individual who the New York Times noted in an article had a keen insight for remembering names.
Mr. Corzine expecting Congress and regulators to believe he doesnât know the people or process involved in transferring $1.2 billion out of segregated funds seems entirely inconsistent. Â But then the only real consistency in this story might be the specialÂ treatmentÂ Mr. Corzine typically received.
Mark H. Melin is author / editor of three books, including High Performance Managed Futures (Wiley, 2010) and was an adjunct instructor in managed futures at Northwestern University. Â Follow him on Twitter @MarkMelin or visit www.Go2ManagedFutures.com for additional information.
Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors. Â Past performance is not indicative of future results.
The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.
Monday, November 21st, 2011
It is difficult to watch a great society in decline, particularly when that society is your own.
As the cradles of democracy, Greece and Italy, fight a debt crisis and potential societal meltdown that will test the very concept of democracy, the world might have been looking to the U.S. for leadership on the debt topic. Â It’s likely not to happen.
The set up for debt super committee members was reasonably easy, a starter task:
Over a ten year period of time, close a $1.2 trillion deficit.Â Politicians donât have to tackle the big problems â and the big problems are really significant.Â Itâs not like they had to deal with the nearly $2 trillion in yearly deficit spending.Â That would really cause pain, but itâs not the largest problem. No, that big problem might be the $200+ Trillion hit to the budget when baby booming seniors start to retire in three to five years.
Politicians were given the easy task, andÂ couldn’tÂ even get close.Â Not a good sign for the future.Â In fact, perhaps it is time for history to note exactly what transpired.Â Perhaps such consideration should begin with the shroud of secrecy engulfing difficult debt negotiations.Â Was this a plan designed to keep the truth from voters, who typically donât want to hear bad news or mention of that third rail word: sacrifice? Â It is this voter anguish issue, not substantive issues, to which many politicians show most sensitivity?
Remember, politicians donât often think from the same perspective as business people or investors. Politicians are masters at one thing: getting elected. Â Results matter only to the extent of getting elected. The best take the political temperature and craft a marketing message that voters want to hear.Â Right now politicians are deadly afraid to telling voters the truth. The dichotomy is that without the truth, and the related political pressure that impacts a politicianâs re-election calculus, the debt problem likely wonât get solved.
With their varied political motivations to keep the issue under wraps, asking all participants not to discuss matters in public, release of the final report was scheduled the day before Thanksgiving â an apparent failed move to âbury the news,â which is pretty much symptomatic of how the issue was handled from the start. Â But this didnât stop information from moving into the public realm.Â In fact, it is interesting to note that those who broke the code were punished.Â Consider the battered down ratings agency S&P who was really the first modern day Paul Revere, making the difficult call on U.S. debt already being discussed in professional investing circles. Â S&P was also the first to receive punishment, as well. After it released its debt downgrade truth, it was widely ridiculed, almost tarred and feathered as an unpatriotic rogue.
As S&P delivered a second accurate warning on France, that historic message was delivered Â in a fashion that indicates they learned from their last lesson.Â Instead of publically discussing the situation, the firm had a âmistakeâ with a âfat fingerâ that released an e-mail discussing the downgrade of French debt.Â Itâs hard to entirely comprehend a Rick Perry âoopsâ regarding an issue so sensitive that likely was discussed only at the highest levels.
Learning from the political punishment, there was Germany.Â While being chided by the U.S. to shore up the âEuropean debt problem,â reasonably fiscally responsible Germany likely drew the conclusion that providing bailouts might be an endless task in futility unless difficult austerity was in place.Â To announce their decision to let the weaker governments fight for survival, the foreign ministry is said to have âleakedâ their position via e-mail. Â Not only is the leak method interesting, but so, too, is the fact that it originated fromÂ foreignÂ ministry rather than an economic branch, indicating the importance of the global meltdown issues.
These releases are no different from the whispers that took place near the end of the cloaked debate.Â Democrats might have leaked significant budget cuts that hurt their political special interests.Â At one point, a little noticed change took place in the âvoiceâ of Occupy Wall Street when protesters started showing up in coordinated colors, coats and T shirts with political messages speaking out against budget cuts. Â Were they warned of the eventual likely conclusion of the debt debate?
Democrats note inside their political opposition was really using brinkmanship as a negotiating tactic, calculating that a debt crisis would likely bring down a presidency.Â Republicans, for their part, are said to have put on the table required revenue enhancements. However, a bridge between the two parties could not be built, and part of the reason for this impasse could be due to the lack of voter knowledge and related political pressure.
What is likely interesting to watch in the near future are the automated budget cuts.Â Will they even occur or will politicians continue to avoid making the difficult budget decisions? Â This is a key for investors to watch, because escaping the difficult choices are one political reality that might be most likely.
Have we missed a major opportunity with Democrats?Â They were willing to put on the table significant entitlement cuts they wouldnât have otherwise offered?Â Did Republicans make a significant move on revenue?Â Or has a perfect set up for opportunities to solve a problem been missed?
We wonât immediately know the answer. Â But it should be considered that without open discussion of the issues and risks the solution and accompanied sacrifice will likely prove elusive, creating a volatile stock market environment for years â and potentially decades â to come.
About the Author:Â Mark Melin is a leading expert at uncorrelated investing.Â He has taught managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) andÂ The Chicago Board of Tradeâs Handbook of Futures and Options (McGraw-Hill 2008) and is editor of Opalesqueâs OFI managed futures newsletter, where he writes uncorrelated investment development. He is currently writing his fourth book on the burgeoning debt crisis and building a defensive investment portfolio.
All contents copyright 2011 Â© Mark H. Melin all rights reserved.
Risk Disclosure: This article is intended for educational and informational purposes. Past performance is not always indicative of future results. There is risk of loss when investing in futures and options. Managed futures investing can involve volatility and may not be appropriate for all investors. The opinions expressed are solely those of the author, they are not appropriate for all investors and may not have considered all risk factors.
Wednesday, November 16th, 2011
To say the MF Global situation is a mess may be the understatement of the century. What began as an excuse to extol the segregated account’s safeguards against an FCM stock slide as MF Global shares lost 70% of their value in a week rapidly morphed into a full-fledged industry disaster as bankruptcy papers were filed and executives acknowledged a shortfall in those previously sacrosanct accounts.
This admission, in conjunction with the bankruptcy, has caused over $5 Billion of customer funds held by MF Global to be frozen, unable to be accessed or transferred out.Â Right on cue, the lawyers have begun to circle, with employees, bondholders, and the customers themselves filing claims for their piece of the $40 Billion in Assets MF Global reportedly had on hand.
What was a very small probability just two weeks ago now looks to be a near certainty â that over 150,000 futures industry customers who held accounts at MF Global will have their money locked up for anywhere between several months to several years. Before a single penny can be distributed, a legal team charging $1,000 an hour will have to go line by line through books that have been described by regulators as a “disaster,” making the potential (and incentive) for a speedy turnaround non-existent. Even then, once the books have been closed on the accounting side, the legal battle royale begins, and if theÂ Sentinel case is any indication, we’ll be waiting for quite a while to run through all the cases,
My firm, Attain Capital, uncomfortable with the direction MF Global was taking, moved all of its accounts from MF Global 2.5 years ago. Even with that foresight, we have had clients close their accounts in the MF Global aftermath because they are worried about the safety ofÂ their segregated funds, while many others heatedly question what the industry is going to do to make sure this never happens again.
While the lawyers fight with JP Morgan over who should get what money (how would you feel about being a taxpayer who bailed out the big banks only to have them get priority over your money in bankruptcy?), the rest of the industry needs to be talking about how to salvage our collective business.
Many of you may be feeling lucky you didnât have exposure to MF Global, or even enjoying an uptick in business because of the MF Global accounts being transferred to you, and that’s understandable. However, that joy becomes short-lived as one realizes that this mess threatens theÂ continued growth of not only your firm, but our entire industry.Â Brokers, CTAs, service providers, technology companies, and more will all go out of business because of this â some immediately because they wonât get their most recent payments due from MF Global, and others over the next several months as their business falls due to their client base’s inability to access the funds held at MF Global that they need to trade.
But the biggest threat is to the future. It’s that large investor whoÂ would have happily opened a futures account just a month ago, but now chooses not to because he is unsure what would happen to his funds should a bankruptcy occur at his broker of choice.
How do we make sure that such an investor regains confidence in the industry, and chooses to go ahead with that investment? The hollow emails by FCM presidents and owners to their clients saying theyÂ care is simply not enough; actual solutions and fixes to the problems which allowed the MF Global mess to happen need to be enacted.
The industry needs to change to protect that which was formerly held most dear â the segregated account. Here is what we propose:
Create a coalition to make all the MF Global customers whole, immediately.
There are billions of dollars of profits between the exchanges, brokerage firms which just received free business from the MF Global demise, and others in the industry.Â Someone (ahem… CME) Â needs to step up and create a coalition of these industry giants and pony up the money to make each and every one of the MF Global accounts whole, immediately.
If the government didnât think that MF Global was too big to fail, the industry surely needs to. Do you think the CME put forth their $250 million guarantee or $50 million recovery fund out of the kindness of their hearts? No- they are worried about volumes, and rightfully so. With about $5 Billion worth of customers now unable to trade, the sooner those customers can pump those funds back into the markets, the better for the CMEâs bottom line.
How is this supposed to work? Weâre not saying this coalition needs to pony up the money and never get repaid. Weâre saying they should step in and cover the money until the bankruptcy runs its course and the funds are released.Â Why canât the industry put together a fund which covers the customer segregated funds, and in exchange for making the customer whole, the customer signs over any claim they had to their money in bankruptcy court to the fund?
Think of it more asÂ fronting the money. After all, nearly all agree that it is just 10% or so of the money which is missing.Â At worst, the fund would be out the $600 million in missing segregated funds (and that’s only if the trustee is unable to get any of the $41 Billion in MF Global assets to cover that shortfall). The problem here is less about there beingÂ no money than it is about the money being frozen up.
The industry simply canât afford to wait for the bankruptcy to run its course. Every moment of inaction that passes is a moment without those funds coursing through the industry’s veins. Consider that MF Global reported in its Q2 financials that it cleared 575 million contracts over the three months that ended June 30th, 2011.Â IfÂ the exchanges are getting $0.25 per contract, without taking action, thatâs aboutÂ $575 million in lost revenues per year. If the brokers who just received the accounts could get $0.25 per contract on the business moved to them, thatâs $575 million inÂ new revenue for them (assuming those accounts can get back trading).
There is plenty of money to go around, especially in the name of saving what has been the cornerstone of this industry since its inception-Â the sanctity of the segregated account. Hell, Attain will even pony up our share. Without taking this step, there is little any of us can do to help our clients feel secure. Industry participants will likely be worried about setting a precedent, but that is, in fact, the whole point. We need to be able to point to this time in our industryâs history and say,Â “Yes, it was ugly, but the industry stepped in and made the accounts whole.”
If youâre still not on board, why not backstop the coalition fund with a rule granting the ability to increase NFA fees from the current $0.02 per trade to $0.03 to cover any shortfall the fund has to cover? And as a final brushstroke, how about making the coalition memberâs investments in the fund count 100% towards their net capital computations, treating it like cash in the bank?
The choice is a known cost in a temporary, defined and shared burden or an unknown cost in an inequitable and unquantifiable loss of business in the long run. Howâs that for risk calculation?
While this may put out the fires in the short-term, at the end of the day, there’s still much more work to be done. It’s not enough to simply react; we need to be proactive about preventing this from ever occurring again. How? We’re glad you asked.
1. Extend SIPC protection to futures investors. When it came to light that the SIPC was rapidly moving to ensure that all claims to the assets of MF Global were resolved, the initial reaction of many industry participants was to breathe a sigh of relief. However, as many soon found out, SIPC protection is currently only offered to securities customers- meaning only those trading stocks and bonds would be covered, and not our beloved exchange traded futures investors. In our minds, there isÂ zero reason why investors in traditional asset classes should be afforded such protection while investors in the alternative space are not.
As such, we propose that regulations governing the SIPC be amended to ensure protection of futures clientsâ holdings as well, with guarantees on the individual account level (the sub-account of the customer segregated account on the FCMâs books) and not just the main overall account level containing all of the customer funds.
The CME and ICE should cut 10% off their marketing budget and put that to lobbying Congress for this protection. This isnât 1970, when stocks and bonds were the only game in town. If the world turns to the CME to manage risk, the CME needs to turn to Congress to lower the risk of managing that risk.
2. Amend CFTC rule 1-25 to limit segregated funds investment to US Treasuries only. One of the issues that’s gotten a lot of press since the shortfall in funds at MF Global went public is the idea that Corzine might have used those funds to finance his European bets. There’s no proof of this yet, but the concept alone rattled many. The general belief was that FCMs could not, under any circumstances, touch segregated funds.
That’s not true. Under 1-25, FCMs are allowed to gain interest on excess segregated funds through specific investments under explicitly outlined circumstances. There are three limitations that really matter here: preservation of capital, preservation of liquidity, and adherence to risk standards.
Under the rule, FCMs can invest in 6 different vehicles (U.S. treasuries, state bonds, government agencies, commercial paper, corporate notes or bonds, sovereign debt, and money market mutual funds), but, with the exception of U.S. Treasuries or money markets, these vehicles have to have the highest rating possible from one of the NRSROs- or, official ratings agencies. This means that, technically speaking, the allegations flying around that FCMs may legally use segregated funds to invest in high-risk junk bonds are utterly incorrect. That being said, we’re still not satisfied with the requirements.
If we learned anything from 2008, it is that ratings agencies were doling out the highest ratings possible on toxic mortgage-backed securities right up to the point that things blew up. In fact, the rating agencies even downgraded MF GlobalâŠwait for itâŠ.Â after they went bankrupt.Â Our trust in their ability to assess risk adequately enough to ensure the preservation of segregated client funds is nil. As such, our recommendation is that 1-25 be amended to prohibit investment of segregated account funds in anything but U.S. Treasuries. While a statement issued today by CFTC Commissioner Scott O’Malia pointed out that we do not know the root cause of the missing funds, and that it’s possible the missing funds have nothing to do with investments permitted under 1-25, in our minds, this changes nothing; this rule needs to be altered regardless of the MF Global investigation’s conclusions.
3. Â Establish regulation under which language must be added to all creditor agreements for any registered FCM in which those creditors agree to the assignment of the customer segregated accounts as the primary lien holder on all assets of the company. Under current provisions, segregated accounts are given what is, in our minds, inadequate protection during the bankruptcy process. True, their accounts cannot be tapped to meet outstanding financial obligations of the bankrupted FCM, but there’s also no guarantee of those funds being made whole in the event of a shortfall, nor protection from a too big to fail bank like JP Morgan sending in armies of attorneys arguing that their claim should take precedence over the customers.Â While clients may, after a pro-rata distribution, file a claim with the Trustee in an attempt to get their missing money back, it appears that there are back door methods for big creditors like JP Morgan Chase and those who held MF Global bonds to get in front of the customers in the claims process. AsÂ TheStreet summarized:
“The group of customers, led by James Koutalas, chief executive of a Chicago-based commodities trading firm, are taking issue with a lien and other protections offered to JPMorgan in exchange for a $8 million loan the bank extended to MF on the first day of its bankruptcy, according to the report. That would allow JPMorgan the right to some assets over other creditors.”
In our minds, segregated account holders should absolutely come first in the claims process. Unlike the creditors and bold holders, who knowingly accepted the risk of default when they handed over their money, MF Global clients were paying MF Global to hold their funds- not lose them. With this in mind, we believe that the law must designate segregated accounts as the primary creditor if an FCM goes belly up, ensuring that, should there be a shortfall in client segregated funds, available assets of the bankrupt FCM will be tapped to make those accounts whole before any other creditor gets their day in court.
You can be sure that the big creditors would take an immediate and very big interest in insuring that any FCM they lend money to has the adequate procedures and safeguards in place to protect customer funds knowing that they are second in line behind said customer funds. If you canât rely on morality to protect the funds, rely on greed and the invisible hand of those who would stand to lose money should the customer segregated funds be breached.
4. Establish regulation outlining standard operating procedures in the wake of an FCM bankruptcy. Part of the reason that the MF Global situation has been so chaotic was the result of poor planning. Positions were stuck in limbo. There was no infrastructure for facilitating an orderly transfer of accounts, which led to an ad-hoc distribution among arbitrarily selected FCMs without the transfer of legal documents- including those necessary for a CTA to trade on behalf of a client. Without any stipulations regarding timeframe, the process was drawn out to the detriment of all parties involved. Add to that a failure to effectively communicate what was going on to the clients involved, and it’s no wonder the situation turned into the nightmare it did.
In the wake of both the Refco and Sentinel scandals, one would think that remedies would already have been put into place for such administrative Bermuda Triangles, but unfortunately, that did not occur. In order to prevent such a disorderly dissemination from occurring again, we suggest that new regulations be developed; outlining exactly what is to happen in the event of an FCM going bankrupt. The old plan seemed to be, wait for a suitor to step up and take on all of the accounts. That clearly worked out wonderfully this time around. Coming up with standard operating procedures outlining the immediate impact on open positions, where the client funds are to be transferred to and within what timeframe, and so forth would help avoid the confusion we’ve seen to date.
A Call to Action
We are not about to claim that we have all the answers. Have we researched these subjects? Yes. Have we consulted with others in the industry? Absolutely. Does that mean that the solutions proposed here are perfect? NO.
But someone needs to start the dialog. The CME has made a nice first step with its $250 million guarantee to the trustee. The efforts of Koutoulas and Roe to provide a voice for the clients in the bankruptcy proceedings are certainly admirable. But at the end of the day, we all know that there is a long road ahead of us. Laws need to be changed and rules rewritten. Â The industry needs to step up and reclaim its image. At the end of the day, perception is all that matters. If this situation is not resolved effectively, every CTA, FCM, CPO, Commodity Broker, Introducing Broker and Exchange will lose a sizable amount of business. There’s no getting around it. People aren’t going to invest in something where they don’t feel secure.
Make no mistake- these are extraordinary times we face, and they require an extraordinary communal effort to be survived. Despite the challenges on the horizon, we have no doubt that, in one way or another, this industry will rise to the occasion.Â Because as important as it may be to understand what’s transpired and what’s at risk here,Â what comes next matters even more.
CAIA Â | Â CEO, FOUNDING PARTNER
ATTAIN CAPITAL MANAGEMENT, LLC.
Monday, November 14th, 2011
Last Friday the markets cheered news of leadership change in the center of Europeâs debt crisis.Â However, there is reason to believe this wonât be the end of a thorny problem that will likely add volatility to the markets for decades.Â There is one reason for this:
The debt crisis wonât end until voters accept sacrifice in the way of budget cuts and revenue enhancements â or the markets force action.Â In fact, if the debt crisis ends quickly, it will mean the markets have forced action.Â The more likely event is a long, political debate over how sacrifice is carved out.Â If you think this is easy or a European problem, look no further than how the U.S. Debt Super Committee is dancing around anything that would jeopardize their re-election efforts.Â Word is that traders have baked debt committee failure into their fundamental analysis of the situation, but never say never.Â Markets frequently surprise even the most astute and seasoned observers.
With government spending is far in excess of revenue in both Europe and the U.S., the changes required to solve the debt problem involve societal change.Â This wonât be easy.Â Political constituencies might be required to give things up.Â Economists note the hard truth that a culture of government spending, bloated pensions and politically popular tax breaks may be required to give way to budget requirements and a different social atmosphere.
When voters meet difficult austerity measures, get ready for a volatile political environment.Â To assume that the debt crisis is over because a change in leadership occurs is to assume that the budget problems and fiscal austerity required will be able to tucked away without facing voters.Â There will be a point at which voters will be required to face the debt crisis.Â It is when this moment occurs that the rubber meets the road in the government debt crisis.
Government debt crisis discussions have historically been conducted behind closed doors, as if the problems created by politicians can be solved through the same fashion.Â That is unlikely, as the shear numbers behind the debt problem are just too big to achieve a political solution that doesnât include revenue enhancements and spending cuts.Â Speaking on CNN Money yesterday, Robert Bixby of the Concord Collation said it is better that government shine light on the problem rather than keep it behind a political cloak.Â Efforts from Bixby and various ratings agencies to warn regarding debt should be lauded.Â In fact, S&Pâs âfat fingerâ episode where an e-mail warning a potential French bond downgrade is interesting. Â Was it a mistake or a method of the ratings agency warning about the debt truth?Â The fact that S&P might have felt it couldnât come right out and publically downgrade Eurozone debt, much as it was criticized for downgrading U.S. debt over the summer, shows just how clandestine honest talk about the debt situation has been. However, this secrecy is viewed by many as a major tactical error.Â Voters need to understand the U.S. can easily become the next Italy if solutions and sacrifice are accepted now.Â That is the message voters must understand if anyone is to accept the difficult sacrifices required to keep a great nation great.
As example of the failure of the policy of keeping debt discussions under wraps, one needs to look no Look at the November 8, 2011 vote on collective bargaining in Ohio.Â This is a vote when government, fighting the difficult fight to reduce spending, lost a battle when voters re-affirmed the right of unions to continue to battle politically sensitive government in pension and wage negotiations.Â Voters educated in the budget crisis might have made the logical connection between bloated government pensions and the need for tax increases or spending cuts.Â But when such issues are taken on their own, out of this financial context, voters tend to be soft on human suffering and less sympathetic to very real budget matters.Â This is something political marketers understand and exploit, which is too bad.Â The real issue Ohio voters should have faced: Are you willing to pay higher taxes or cut critical social spending to support government workerâs right to bloated pensions and socialistic work rules? Had the vote been phrased in this fashion the outcome might have been very different, indeed.
It is time the debt crisis is moved from the backroom and into the limelight.Â Only with such transparency into the real issues and problems will solutions be found.Â Qualified investors should recognize the very real nature of the debt crisis and the potential for volatility to the upside and downside and look for new methods of diversification.Â All investors should have a risk management plan that is designed with the goal to hold up under a number of circumstances, particularly at this moment in history.
All contents Copyright Â© 2011 Mark H. Melin
Mark Melin is currently writing his fourth book on uncorrelated investing. Â He is previous author / editor of three books, including High Performance Managed Futures (Wiley, 2010) and an adjunct instructor in managed futures at Northwestern University. Â He can be reached at email@example.com or visit the book’s web site at www.Go2ManagedFutures.com
Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors. Â Past performance is not indicative of future results.
The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.
Friday, October 14th, 2011
Itâs hard to work in finance and ignore the Occupy movements. In Chicago, the participants march past our offices on a regular basis. The whispers and rumors of some of the supposed policy proposals could have wide-sweeping consequences for the financial sector as a whole if realized. Much of the press and government have expressed confusion over what, exactly, theyâre trying to do. Even in our own offices, opinion on the occupations is divided.
Ambiguous, wide reaching and controversial, what started as Occupy Wall Street has become a worldwide movement, withÂ OccupyTogether.org reporting 118 confirmed occupations globally- many of which are U.S-based. Critics have argued that the movement is a form of class warfare comprised of hippies, anarchists and socialists, but with the numbers of supporters online and at the occupations themselves increasing daily, there comes a point where it doesnât do us any good to pretend this isnât happening. There comes a point where we need to understand whatâs happening, and why.
The general reaction of the finance world (with notable exceptions likeÂ Soros andÂ Bernanke) has been to dismiss the protests as a temporary annoyance, but if you read our blog, you know we rarely take anyoneâs word for anything. In true Attain fashion, we decided to research the Occupy movement ourselves. After extensive reading, interviews and several trips down to the Occupy Chicago events themselves, hereâs what we found.
Click here to read the full piece:Â http://bit.ly/qCnVAq
To read more Managed Futures research pieces, visit Attainâs Managed Futures Newsletter archive and our Managed Futures Blog.
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The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices:Â such as survivorship and self reporting biases, and instant history.
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Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the clientâs commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Wednesday, September 28th, 2011
Sheila Krumholz, director of the Center for Responsive Politics, discusses the Republican presidential candidates, key donors and the big campaign contributions flowing from industry groups.
“If Christie were to mount a viable âŠ a real campaign, I think he would be in the cat bird’s seat to raise money from across the board, across the board from business interests. But clearly hailing from New Jersey there is a substantial source of financial and securities and investment, so Wall Street, interests that he would be able to fund-raise from,” Krumholz says. (more…)
Thursday, August 18th, 2011
The US government is currently exercising the largest amount of leverage usage in the history of civilization. If Uncle Sam were an uncorrelated managed futures investment program he would have received a margin call long ago â and in all likelihood would have already flamed out in a blaze of infamy.
For those unfamiliar with investments uncorrelated to the performance of the stock market, a margin call occurs when an investor has over-leveraged themselves.
To understand the situation, consider the US financial position for a moment from the perspective of a homeowner:
Right now the government is essentially making mortgage payments with a credit card. It issues new bonds to pay interest on old bonds, a ponzi scheme to make Bernie Madoff proud.
Ever since the logical confines of the gold standard were lifted in 1971, and the political establishment began to realize in 1978 it could simply crank up the printing press to give voters what they wanted without raising taxes, our society embarked on a debt party the likes of which have never before been seen.
My father always said there is no such thing as a free lunch. Â The US government has been enjoying their lunch for close to thirty years under the delusion it can simply print free money without consequence. Â But alas, it will learn its lesson the hard way â and unfortunately stock investors might take the fall.
As of this writing the US government is spending nearly twice what it makes â racking up annual debt of $3.8 trillion and bringing in $2.2 trillion in revenue. While that’s been the headline number everyone discusses, its not the real number to pay attention to as it doesn’t include all the government’s liability.
A real number to watch is the projected fiscal gap. Â That’s the massive $211 trillion difference between spending and income that occurs in a few years when baby boomers start to retire and claim their god-given right to government medical benefits. Add to this the fact that interest rates could dramatically rise, particularly with the excessive printing of money. Â Running the printing press overtime could lead to the US Greenback being supplanted as the currency of choice. Â When this happens, watch out. Â The fiscal prospects for the US government, and stock investing, won’t look particularly attractive. It gets even uglier when you consider the political realities required to solve the problems.
This summer, politicians logically tried to close the existing budget gap, but couldn’t even get close. Relying on deeply entrenched Republican and Democratic political agendas to give way to one another could be a tall if not impossible order. Try asking a senior to give up a little Medicare and it’s like you are taking away their birth right. Itâs almost as bad as asking Democrats to end fast and loose social spending or Republicans to tax the rich. Asking people to give something up, to sacrifice, is something our generation is not accustomed to doing. If you think it’s got to be easy to close his budget gap, think again. It will be a constant battle that could generate strong moves stock market moves to the upside and downside.
It is said that identifying the middle of a secular bear market is always difficult. While hindsight is always 20/20, one item to consider is the volatility that can occur in bear markets. Investors have already witnessed significant volatility in 2008, 2009, 2010 during the flash crash, and most recently 2011 when a debt warning shot was fired. Increasingly there could be a cause and effect relationship with such volatility and the loose management of a government printing press for the purposes of political expediency. How do investors know when this could unravel? If the US currency starts losing favor as the reserve currency of choice, something once considered unthinkable, we could be in for rough investing ahead. When US interest rates start to rise precipitously, investors would do well to find a nice investment uncorrelated to the performance of the stock market. But perhaps the real early warning signal is that voters are unwilling to give anything up, and their elected politicians represent their wishes. If a trend follower could somehow arrange an algorithmic formula to monitor public opinion, this might be its sell signal.
At this moment in history, investments unhinged from economic supply and demand at the performance driver level should be given significant consideration. Managed futures is in the right place, providing a needed service at the right time.
To read the full article: http://bit.ly/p9xEXR
About the Author: Mark Melin is author of three books, including High Performance Managed Futures (Wiley 2010), and has taught managed futures at Northwestern University in Chicago. Mr. Melin consults with financial advisors, pension funds, family offices and high net worth investors on developing uncorrelated investments. Â The author is an associated person registered with the National Futures Association NFA ID#: 0348336. For further information visit his web site at www.Go2ManagedFutures.com or via e-mail at info@Go2ManagedFutures.com
All contents copyrightÂ Â©Â 2011Mark H. Melin all rights reserved. Â This work can be re-distributed with permission from the author. Â Contact info@Go2ManagedFutures.com
Risk Disclosure: Past performance is not indicative of future results. Â There is risk of loss when investing in futures and options. Â Always review a complete CTA disclosure document before investing in any Managed Futures program. Â Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. Â The opinions expressed are solely those of the author, they are not appropriate for all investors and may not have considered all risk factors.
Thursday, July 7th, 2011
A year after the passage of the Dodd-Frank financial regulatory reform act, much of the law’s changes remain unimplemented and in limbo. They may stay that way until the 2012 election. Until then, buyer beware.
“Republicans have very different ideas about these issues than the Democrats,” said Hal Scott, Nomura Professor at Harvard Law School. “So a wildcard here is if stuff’s not implemented by November 2012, the Republicans get control of the White House and the Congress, all bets are off.” (more…)
Thursday, October 14th, 2010
A couple of notes on the Barney Frank-Donald Sussman kerfuffle. To review, the Boston Herald reported Wednesday (Oct. 13) on a Christmas 2009 trip Frank and his partner, Jim Ready, took to the Virgin Islands with Sussman, who heads up Paloma Partners, and Sussman’s fiancĂ©e, Rep. Chellie Pingree (D-Maine). Frank, who represents Massachusetts’ Fourth Congressional District in the U.S. House of Representatives and who serves as the chairman of the House Financial Services Committee, didn’t pay anything for the trip. Not for the flight aboard Sussman’s luxury jet or to stay at Sussman’s mansion.
In today’s Herald, a Frank spokesman defended the trip, saying, “They’re friends. Are you not supposed to have friends if they’re wealthy?”
Which, of course, is a ridiculous question on its face and isn’t the point at all. The point is that by taking the trip with Sussman, who runs a firm that conceivably could fall under the purview of Frank’s committee, and not paying anything, Frank not only appears to be walking a fine line with respect to conflict of interest, but he’s reinforcing the notion that there are two sets of rules: one set for people inside The Club of Wealth, Power and Influence, and one set for people outside The Club. Most of us are not in The Club.
From the Herald: “Gural said Frank reported all required expenses.” That’s a classic hair-splitting statement. “All required expenses.” Who makes the requirements regarding reporting of Congressional expenses? Congress, which is not a body known for being overly hard on its members.
“Before he did any of this, he went to the Ethics Committee and cleared it. He wanted to make sure he stayed within the lines completely,” Gural said.
Right. Those would be the lines drawn by Frank’s fellow representatives. Those lines often seem to those outside The Club to be dotted.
And of course, Frank’s Republican opponent in the 4th District House race, Sean Bielat, and other Republicans have slammed Frank at every opportunity. Which is laughable, too, since neither Barney Frank nor Democrats have cornered the market on marginally or even blatantly unethical behavior. The Club knows no political boundaries. The only criteria for acceptance are money, power or other influence, and the willingness to put those to work for one’s own best interest. Just wait, Sean. You may find out for yourself.
For the record, Barney, the correct response to your friend Donald Sussman, when he asks if you’d like a free ride on his private jet to stay at his private mansion in the Virgin Islands this Christmas, for free, is “Thanks so much, Don. I really appreciate it. But as a public servant I just can’t do it. I’m sure you can understand the appearance of a conflict of interest. While I’m in office, I have to pay my own way. But we’d love to fly down on our own dime, stay in a hotel on our own dime, and hang out.”
It doesn’t seem so difficult, but apparently it is.
No, Barney, it’s not a crime to have rich friends. And it’s not a crime to vacation with them. But as a public official, you are held to a higher standard. If you don’t like it, don’t hold public office. Then you can take all the free trips you want with Sussman, or anyone else.
The same goes for the rest of the elected/appointed public officials out there. There should be a double standard when it comes to public service, but not the one currently being observed by members of The Club.
Tuesday, August 31st, 2010
Reading Daniel S. Loeb’s second quarter investor letter (PDF) one way, one could surmise he believes the financial crisis and the nation’s economic problems began shortly after Barack Obama and his administration of, as Loeb puts it, “brilliant academics that have had experience in creating the very regulation and overseeing the very institutions that have failed” took office in January 2009. Which is interesting given that Loeb is a Democrat who supported Obama.
Loeb’s letter, dated Aug. 27, is on one level discouragingly banal in hitting the predictable “blame-the-government” and “Obama is a wealth redistributing socialist” themes. Elsewhere, Loeb comes almost eloquently describes the role that abdication of personal responsibility and leadership played, and continues to play, in the problems we face today.
In his letter, Loeb traces the current crisis of investor confidence not to the collapse of Bear Stearns, or Lehman Brothers, or AIG, or subsequent revelations of massive fraud and mismanagement at all levels of finance and investment banking. What is his breaking point? The government suing Goldman Sachs over alleged misrepresentations to investors about its mortgage CDOs. “This politically laced lawsuit was a tipping point for shaky investor confidence against an increasingly worrisome landscape of new laws and proposed regulations that are perceived by many market participants to promote ‘redistribution’ rather than growth, and are contrary to free market ideals,” Loeb writes.
And here I thought the new U.S. financial reform legislation, as misguided and useless as the final product turned out to be, was a response to the pillaging of the free market system by a gang of investment banking insiders who created financial products only they understood that, while intended to transfer risk, actually just multiplied risk times greed and added the perversion of the “American Dream”-as-home-ownership and then spread the resulting toxic garbage around.
Loeb continues: “As every student of American history knows, this country’s core founding principles included non-punitive taxation, Constitutionally-guaranteed protections against persecution of the minority, and an inexorable right of self-determination. Washington has taken actions over the past months like the Goldman suit that seem designed to fracture the populace by pulling capital and power from the hands of some and putting it in the hands of others.”
OK. So? Tax policy is about taking money from some and giving it to others. The yowls of protest are loudest when they come from those with the means to project them the farthestâthose with the most wealth. When the perception is that money is being taken from the wealthy and given to the poor, hear the wealthy scream. When it’s reversed, for example when my tax money goes to bail out an AIG run into the ground by bad decision making and risk controls, and then AIG executives head to a resort, or the company pays out bonuses to the guys manning the ship when it hit the iceberg, and I complain, I’m told I just don’t understand how the system works. Those resort trips are important for planning and the bonuses are necessary rewards to keep talented people. Or so I’ve been told, not by Loeb, but by others who equate tax breaks for the wealthy with “capitalism” and leaving companies to police themselves with the “free market.”
Loeb himself reserves plenty of venom for the corrupt and lazy board members of badly run companies. “When we hear the chorus of former executives and regulators exclaim that the crisis was “impossible to see coming”, while at the same time walking away with millions or going on to greater levels of responsibility in government, it is both puzzling and demoralizing. It is easy to see why so many people have concluded the entire system is rigged.” You go, Dan.
“Having analyzed hundreds of proxy statements from the outside and having had the ‘pleasure’ of sitting on several corporate boards, giving me the chance to walk the sausage factory floor, I have personally witnessed the incompetence of many boards of directors. One can only conclude that the incentive systems put in place for directors reward luck and station more than they do talent, skill or creation of shareholder value.” Eloquently put.
We are experiencing a crisis of leadership at all levelsâcivic, corporate, family. Loeb is getting down to it in his letter, digging at the tick below the surface, where it lives. But then, he shifts back to the easy target: the government.
“So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.”
There are two sides to this sword, as I see it. We can’t just define “leaders” as elected officials, and especially elected officials we don’t like, or even “the administration” or “the government.” The individuals who make up these institutions must be held to account, sure. But we must also hold to account corporate leaders, who are charged by their position with safeguarding capitalism.
And we must hold ourselves to account. The mortgage crisis, and the resulting credit and economic crises, were brought on as much by irresponsible personal borrowing in the pursuit of easy money as they were by housing policy, tax policy, economic policy, monetary policy, lax government oversight or too much government intervention.
Loeb is a smart guy who has done well by his investors. Which is precisely why it would be so refreshing for him to bypass the convenient “government” bogeyman. Who is the government, anyway? We have seen the enemy, and it is us.
Apart from that, Loeb lays out in his letter his rationale for the investment decisions he has made for Third Point, which Clusterstock sums up succinctly: he doesn’t trust the government and is no longer investing in companies affected by public policy.
In any case, whatever motivations Loeb had for backing Obama in 2008, that worm has apparently turned. As DealBook’s Andrew Ross Sorkin wrote on Tuesday, Loeb’s widely distributed letter looks like more evidence that Obama’s supporters in the financial industry are deserting him.