Wednesday, December 30, 2015

EES: Foreign currency is debt, so says the IRS in this ruling

No comment.

Section 988.--Treatment of Certain Foreign Currency Transactions
An instrument that requires payments to be made in a foreign currency (that is, nonfunctional currency) can be debt for U.S. federal income tax purposes.
Original source from

Martin Shkreli's KaloBios Files Chapter 11: Full Bankruptcy Filing

Over a month ago, when observing (from as far away as possible) the farce of Marti Shkreli's attempt to squeeze KBIO shorts in the context of the infamous Joe Campbell who was short KaloBios only to suffer a $100K margin call overnight when Martin Shkreli bought a 70% stake in the company, we wrote:
Which brings us back to Joe Campbell and his now famous margin call: did he liquidate enough other assets to cover the margin call? What about the hundreds of other shorts who piggybacked and shorted at the close yesterday only to wake up with comparable massive margin calls?

And what happens if Shkreli's plan is indeed to rerun the "Volkswagen" scenario and unleash an epic short squeeze that sends the price of the company into the stratosphere,unlinked from any fundamentals, but merely soaring ever higher as desperate shorts pay any price just to get out.

We hope to find out, as suddenly this until recently bankrupt company whose price has exploded in the past two days, has become not only a poster child for everything broken and manipulated with the market (think 2014's CYNK one year forward) but has the market following with morbid fascination to find out how the tragicomedy of "Shkreli vs the Shorters" concludes.
We now know how the story ends: less than two months after KaloBios had commenced liquidation proceedings, only to be saved in the last moment by a Martin Shkreli liquidity injection, the company is right back in bankruptcy court having just filed for Chapter 11 creditor relief in Delaware bankruptcy court. This takes place a week after it lost two more directors and the Nasdaq stock market decided to delist its shares.
In its bankruptcy filing, KBIO lists $8.4 million in assets and $1.9 milion in debt.

How did the company's truncated board decide on a Chapter 11 filing? From the filing:
Effective as of this 29th day of December, 2015, pursuant to a special telephonic meeting on the same date, the board of directors (collectively, the “Board of Directors”) of KaloBios Pharmaceuticals, Inc., a Delaware corporation (the “Corporation”), upon a motion duly made and acting pursuant to the Corporation’s organizational documents, took the following actions and adopted the following resolutions:

WHEREAS, the Board of Directors has considered information regarding the liabilities and liquidity of the Corporation, the strategic alternatives available to the Corporation, and the impact of the foregoing on the Corporation’s business; and

WHEREAS, the Board of Directors has had the opportunity to consult with the Corporation’s management and financial and legal advisors to fully consider each of the strategic alternatives available to the Corporation; and

WHEREAS, the Board of Directors has been presented with a proposed petition to be filed by the Corporation in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under the provisions of chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (as amended, the “Bankruptcy Code”); and

WHEREAS, the Board of Directors desires to approve the following resolutions

NOW, THEREFORE, BE IT RESOLVED, that in the judgment of the Board of Directors, it is desirable and in the best interests of the Corporation, the creditors of the Corporation, and other interested parties that a voluntary petition (the “Petition”) be filed in the Bankruptcy Court by the Corporation to initiate a bankruptcy case (the “Chapter 11 Case”) under the provisions of chapter 11 of the Bankruptcy Code;
Thus ends KaloBios' "turnaround in progress" - two months after it was
dragged out of bankruptcy by Martin Shkreli in an attempt to crush the company's shorts and unleash a massive squeeze, Kalobios is again, well, bankrupt.
The full filing is below:
Checkout KBIO Class Action Homepage at Steinmeyer Law

Tuesday, December 29, 2015

JP Morgan Employees Said To Steal $400,000 From Eight Dead Clients

In the wake of 2008, it’s probably safe to say there isn’t a person alive who completely trusts a banker. 
If, however, you happen to be dead, it’s more difficult to scrutinize the activities of those conducting your finances, a fact underscored by the alleged theft of hundreds of thousands of dollars from at least eight accounts belonging to deceased clients of JP Morgan. 
According to an indictment filed this month in State Supreme Court in Brooklyn, Jonathan Francis and Dion Allison, employees at a Bedford-Stuyvesant branch, made hundreds of withdrawals from the accounts using ATM cards they issued. One of those charged told investigators he "used the log-on IDs of co-workers when they walked away from their desks," Bloomberg reports.
As The New York Times goes on to recount, “Mr. Allison, 30, and Mr. Francis, 27, created bank cards for several of the dormant accounts [and] with two friends, Gregory Desrameaux, 24, and Kery Phillips, 40, the men then withdrew most of the stolen money, about $300,000, by using A.T.M.s around New York City.” 
(from left: Francis, Allison, Desrameaux)
But it gets worse. Here’s more from The Times:
In April 2013 alone, members of the group made withdrawals on 26 of 30 days, according to the indictment. One night at a Chase branch at Nostrand and Church Avenues, they withdrew $1,000 from one account; 49 seconds later, group members took out $1,000 from a different account.

By May of that year, people in the group had created fake power of attorney documents. That gave Mr. Phillips control of four of the dormant accounts, Adam Zion, an assistant district attorney, said in court on Monday.

This allowed Mr. Phillips to withdraw much more money than the daily A.T.M. limit, up to $9,500 at a time, through a teller.

In another example of the scheme, in February 2013, according to the indictment, Mr. Allison created a bank card for one account. That May, at a Chase branch on Flatbush Avenue, Mr. Phillips turned in fake power of attorney documents giving him control of the account. The same day, prosecutors said, Mr. Phillips withdrew through a teller $49,929.91 — everything that remained — from the account.
The four face charges of conspiracy, grand larceny and falsifying business records and could face up to 15 years in prison if convicted.
Allison was arraigned on Monday. Francis denies the allegations as does Desrameaux. Phillips is in the wind apparently. As others have noted, this isn't the first time JP Morgan employees have stolen from customer accounts. Earlier this year, Michael Oppenheim, an investment adviser, was charged with stealing $20 million from seven of his clients while Peter Persaud, who also worked at a Brooklyn branch, allegedly sold client account numbers, Social Security numbers, and DOBs to an undercover agent. 
So while you can apparently still go to jail for robbing clients the old fashioned way, JP Morgan, like its bulge bracket brethren, can count on token fines and wrist slaps for rigging FX markets, diverting excess deposits to massive curve trades in off-the-run CDS indices, and other instances of more "innovative" highway robbery.
And the punchline to the whole story: it comes courtesy of weak internal procedures meets Washington's grossly inefficient bureaucracy:
While prosecutors believe most, if not all, of the account holders have died, benefit checks continued to be deposited because of faulty reporting to the Social Security Administration. 

Thursday, December 17, 2015

Shkreli, CEO Reviled for Drug Price Gouging, Arrested on Securities Fraud Charges

Martin Shkreli, the boyish drug company entrepreneur, who rocketed to infamy byjacking up the price of a life-saving pill from $13.50 to $750, was arrested by federal agents at his Manhattan home early Thursday morning on securities fraud related to a firm he founded.
Shkreli, 32, ignited a firestorm over drug prices in September and became a symbol of defiant greed. The federal case against him has nothing to do with pharmaceutical costs, however. Prosecutors in Brooklyn charged him with illegally taking stock from Retrophin Inc., a biotechnology firm he started in 2011, and using it to pay off debts from unrelated business dealings. He was later ousted from the company, where he’d been chief executive officer, and sued by its board.
In the case that closely tracks that suit, federal prosecutors accused Shkreli of engaging in a complicated shell game after his defunct hedge fund, MSMB Capital Management, lost millions. He is alleged to have made secret payoffs and set up sham consulting arrangements. A New York lawyer, Evan Greebel, was also arrested early Thursday. He's accused of conspiring with Shkreli in part of the scheme.
Retrophin replaced Shkreli as CEO “because of serious concerns about his conduct,” the company said in a statement. The company, which hasn’t been accused of any wrongdoing, has “fully cooperated with the government investigations into Mr. Shkreli.”
Shkreli’s lawyer declined to comment. Greebel, who worked at Katten Muchin Rosenman LLP and served as lead outside counsel to Retrophin from 2012 to 2014, helped Shkreli in several schemes, prosecutors said. A spokeswoman for Katten Muchin declined to comment; a spokeswoman for Kaye Scholer, where Greebel now works, said he joined the firm after the alleged activities occurred.
Authorities outlined years of investment losses and lies Shkreli allegedly told his investors almost from the moment he began managing money. By age 26, they said, he got nine investors to place $3 million with him, began losing their money and covering it up. Within a year, his fund's account was down to $331.
Shkreli attracted another $2.35 million investment in 2010 and lost about half of that in two months, the authorities said. As the hole grew, he covered it up with scheme after scheme, telling investors that his returns were as high as 35.8 percent when he was down 18 percent. He used client money to pay for his clothing, food and medical expenses and lied to the broker handling his fund's accounts, authorities said.
His name entered public consciousness after he raised the price more than 55-fold for Daraprim. It is the preferred treatment for a parasitic condition known as toxoplasmosis, which can be deadly for unborn babies and patients with compromised immune systems including those with HIV or cancer. His company, Turing Pharmaceuticals AG, bought the drug, moved it to a closed distribution system and instantly drove the price into the stratosphere.Shkreli’s extraordinary history—and current hold on the public imagination—makes the case more noteworthy than most involving securities fraud. The son of immigrants from Albania and Croatia who worked as janitors and raised him deep in working-class Brooklyn, Shkreli both epitomizes the American dream and sullies it. As a youth, he showed exceptional promise and independence and, after dropping out of an elite Manhattan high school, began his conquest of Wall Street before he was 20.
The moves drew shocked rebukes from Congress, public-interest groups, doctors and presidential candidates, and cast an unwelcome spotlight on the rising prices of older drugs. Donald Trump called Shkreli a “spoiled brat,” and the BBC dubbed him the “most hated man in America.” Bernie Sanders, a Democratic presidential candidate, rejected a $2,700 campaign donation from him, directing it to an HIV clinic. A spokesman said in October that the campaign would not keep money “from this poster boy for drug company greed.”

Saturday, December 12, 2015

The Flaws In "Basic Income for Everyone"

Proponents claim Basic Income can be paid by redirecting existing welfare programs, but a quick review reveals this as nonsense.
Finland made the news recently by proposing a pilot program of guaranteed income for all, also known as Universal Basic Income: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens.
The goal is two-fold: by providing every household with a minimum income, regardless of what other income the individuals might earn, the program does two things: it provides everyone enough money to get by and it removes the disincentive to work inherent in the conventional welfare model: in the current model, recipients who earn money lose their benefits, leaving them no better off if their earnings are modest.
The Finnish proposal offers a basic income of around $850 to $900 per month, roughly $10,000 per year.
Proponents of Universal Basic Income (UBI) see it as the only solution to automation's replacement of human labor, a topic I discuss in depth in my new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.
Advocates of guaranteed income for all claim the program can be paid for by two mechanisms: taxing the owners of robots and software who are presumed to be banking enormous profits off automation and by cutting existing social welfare programs that Universal Basic Income replaces.
As podcast host KMO and I discuss in The Search for Scarcity, this proposed funding doesn't stand up to the most rudimentary analysis. Here's why:
1. Profits and payrolls both fall as automation replaces human labor. It's easy to understand why if we consider what happens to Company A's profits and payrolls when it replaces huge swaths of its labor force with robotics and software/AI.
Its head-count and payroll expenses immediately decline, of course, but so do its profits: as robots and software become cheaper, what's to stop Company A's global competitors from buying the same robots and software?
The reality is the tools of automation are commodities, rapidly falling in cost and available everywhere. The scarcity value of these tools is effectively near-zero, and as economist Michael Spence pointed out, profits and value only flow to what's scarce.
As Erik Brynjolfsson, Andrew McAfee, and Michael Spence explain in their 2014 article New World Order: Labor, Capital, and Ideas in the Power Law Economy, capital and labor have very little scarcity value: both are in over-supply. This is why capital earns effectively near-zero return, and why the value of conventional labor is declining.
Automation, capital, labor and everything that can be commoditized globally has near-zero scarcity value, and hence near-zero profitability. As automation eliminates jobs, it also slashes profits. rather than boost profits as Basic Income proponents anticipate, automation reduces profits along with payrolls.
Thus the more realistic projection is for record corporate profits to return to their historical average of around 5%-6% of GDP, which would mean profits falling from $1.9 trillion to $1 trillion.
So let's run some numbers. The federal government currently spends about $3.8 trillion and collects about $3.3 trillion in tax revenues; it borrows the difference ($500 billion) by selling Treasury bonds--in effect, borrowing from our grandchildren to fund our benefits today.
This is politically expedient, but morally and fiscally bankrupt.
State and local governments spend another $3.2 trillion source: U.S. Census Bureau. State and local governments collect tax revenues of $3 trillion and borrow the balance.
So government consumes about $7 trillion of the $17 trillion U.S. GDP, and already borrows at least $700 billion to fund these expenditures. (In recession, the deficit spending and borrowing quickly soars well above $1 trillion.)
Paying all 322 million Americans $10,000 a year would cost $3.22 trillion. Proponents claim this can be paid by redirecting existing welfare programs, but a quick review reveals this as nonsense.
All state and local government social welfare programs are around $500 billion, and programs such as food stamps (SNAP) that would presumably be replaced with Basic Income are relatively small budget items: SNAP is around $75 billion.
As for Social Security: those receiving around $850 per month in Social Security benefits won't mind their SSA benefit being replaced by Basic Income--they will receive the same amount. But those earning $1,500 in Social Security benefits will expect to receive $1,500, not $850.
The net result is the savings from swapping Social Security payments for Basic Income are also modest. The SSA distributes around $950 billion annually to about 69 million recipients. As a rough estimate, perhaps $500 billion could be swapped from SSA to Basic Income.
As for Medicaid and and Medicare, Basic Income does not include medical care. These programs will be untouched by Basic Income.
Bottom line, Universal Basic Income will add roughly $2.2 trillion to government spending, while profits and payrolls--the sources of tax revenues--will both decline.The only way to pay for another $2+ trillion in spending is to raise taxes or borrow it from our grandchildren--a proposal that is morally and fiscally bankrupt.
Raising $2 trillion more in addition to the current federal tax revenues of $3.3 trillion and state/local taxes of $3+ trillion is a tall order. If the economy enters a profit and payroll recession (from any of several potential causes, including automation, rampant financialization, global recession, financial crisis, etc.), tax revenues will crater. Who will pay all this additional tax?
Yes, those earning $150,000 or more will end up paying their Basic Income payment as additional taxes, but the number of high-earners (who already pay roughly 85% of all federal taxes) simply isn't large enough to skim another $2 trillion.
Even if every dollar of corporate profit was taken (not likely, given the lobbying power of corporations), that would still leave the Basic Income program $1 trillion short.
Who will pay all this additional tax? If we say the remaining employed, that leads to this question: if much of your wage is being levied to support people who don't work, what's the motivation for working at all? Why not join the work-free crowd?
And what happens when the most productive members of the workforce quit or decline to be productive? Robots can't do everything, despite lavish techno-claims to the contrary.
In sum, the psychology of punishing the productive and rewarding non-contributors is destructive to everyone. Have proponents forgotten that humans are prone to emotions such as resentment? Resentment goes both ways; the recipients of Basic Income will be getting by, but they won't be able to build capital or better their financial stake. They are in effect Basic Income Serfs.
Proponents also believe that the loss of work will free everyone getting a basic income to become an artist, composer, musician, etc. As I noted in "Super-Welfare" Guaranteed Income For All Isn't a Solution--It's Just the New Serfdom, Since meaningful work is the source of positive social roles, Hell is a lack of meaningful work.
In the myopic view of the Basic Income proponents, humans are nothing but consumer-bots who chew through the Earth's resources in their limitless quest for more of everything-- what the Keynesian Cargo Cult worships as "demand."
Tragically, this blindness to humanity's need for meaning and the elevation of spiritually empty consumerism to a Secular Religion leaves the basic Income crowd incapable of understanding this timeless truth: the only possible result of robbing people of their livelihood is despair.
Once meaningful work vanishes, so do positive social roles.
This is why guaranteed income for all is just a new version of Socioeconomic Hell. Being paid to do nothing does not provide meaningful work or positive social roles, which are the sources of positive identity, pride, purpose, community and meaning.
The petit-bourgeois fantasy of every individual flowering as an artist, musician and creator once freed of work is an abstraction, one born of the expansion of academic enclaves and private wealth-funded dilettantes fluttering from one salon to the next. (Ever notice how many trust-funders have therapists? Would they all need therapists if being freed from work automatically generated happiness and fulfillment?)
These are precisely what basic income for all doesn't provide. To the degree that serfdom is political powerlessness and near-zero access to the processes of accumulating productive capital, guaranteed income for all is simply serfdom institutionalized into a Hell devoid of purpose, pride, meaning, community and positive social roles.
This is why I say The Future Belongs to Work That Is Meaningful.
KMO and I discuss these topics and more in The Search for Scarcity. Come on, people--we can do better than the bankrupt serfdom of Basic Income.
*  *  *

Friday, December 11, 2015

US Equity Futures Suddenly Fall Off A Cliff As Europe Slides, Oil Tumbles, EM Currencies Turmoil

It was a relatively calm overnight session in which European stocks wobbled modestly, Japan was up, China was down following the Yuan's weakest fixing since 2011 as the PBOC continues to aggressively devalue since the SDR inclusion (stoking concerns capital outflows are once again surging), EM stocks stocks were weak and the dollar was unchanged ahead of today's retail sales data and next week's Fed meeting, and then suddenly everything snapped.
First it was oil, which after falling calmly all session suddenly hit an air pocket following the latest IEA report, in which the energy agency said global oil markets will remain oversupplied at least until the end of 2016 as demand growth slows and OPEC output booms, putting oil prices under further pressure, the International Energy Agency said on Friday.
The IEA said the global oil glut was set to worsen in the months to come as additional supplies from Iran - when and if Western sanctions on the country are removed - would push more oil into storage.
The immediate result: Brent slid below $39 for only the first time since 2008, while WTI is fast approaching the dreaded $35 handle. Ironically, several days ago when we noted that Brent and iron ore were both at $40 we said the two are racing each other to $0. Today, both Brent and Iron Ore hit $38. So far nobody is winning.

Almost at the same time EM currencies woke up to the threat of a USD rate hike next week, and proceeded to mini tantrum once more taking China's stealth devaluation lead, with the South African rand continuing its collapse from yesterday when in the aftermath of the sacking of the finance minister all local risk assets tumbled. Today, it's more of the same.

And then the weakness finally spread to US equity futures, which after doing what they do best for most of the overnight session, i.e., ignoring everything around them, suddenly fell off a cliff, dropping as much as 16 point in just a few minutes.
As a reminder, it was China's devaluation that launched the global market turmoil in August that ultimately forced the Fed to delay its September rate hike. If China wants to repeat this performance it has 2 days in which to do it.
For now, this is how global markets look like
  • S&P 500 futures down 0.6% to 2029
  • Stoxx 600 down 1.42% to 358
  • MSCI Asia Pacific down 0.4% to 129
  • US 10-yr yield down 1bp to 2.22%
  • Dollar Index up 0.01% to 97.95
  • WTI Crude futures down 0.9% to $36.44
  • Brent Futures down 1.1% to $39.29
  • Gold spot down 0.3% to $1,069
  • Silver spot down 0.3% to $14.07
A closer look at the markets reveals that in the final session of the week, Asian equities shrugged of the positive lead from Wall Street to trade broadly in the red, as weakness in China dampened sentiment. As such, Asian stocks headed for the biggest weekly drop since Sept. Chinese shares slid after a report billionaire Guo Guangchang was missing added to concerns that slowing economic growth. Yuan recorded its biggest weekly drop since an August devaluation.
"Asian markets had a mixed day to end the week,” said Angus Nicholson, Melbourne-based market analyst at IG Ltd. “Japanese markets have clearly reached levels where investors are happy with valuations again. Chinese markets were spooked by the ‘disappearance’ of Fosun’s chairman, quite likely by China’s anti-corruption department.”
The Shanghai Comp (-0.7%) was weighed on by financials amid growing concerns over increased capital outflows, as the PBoC continued to depreciate the CNY fix to bridge the gap with the CNH. While Chinese stocks had also been spooked following reports that the Chairman of the nation's biggest non-state-owned conglomerate (Fosun), had disappeared, igniting probe speculations. ASX 200 (-0.2%) was dragged lower by materials as iron ore sustained its downward spiral having fallen 1.4% in the prior session. Nikkei 225 (+1.0%) bucked the trend with Japanese exporters benefitting from the weaker JPY. JGBs fell amid spill-over selling in T-notes despite the BoJ entering the market.
China's State-owned Asset Supervision and Administration (SASAC) said that SOEs which are unprofitable for 3 years should leave the market and that they will shut, suspend or reorganise long-term unprofitable SOEs in overcapacity industries which fail to adhere to environment, safety and quality standards. Also in China overnight we got New Yuan Loans data, which rose by CNY708.9B, below the Expected CNY735.0B.
Top Asian News
  • Fosun Bonds Fall, Stock Halted After Report Chairman Missing: Caixin magazine reports Group has “lost contact” with billionaire Guo Guangchang
  • China to Consolidate Shipping Operations at Two Top State Firms: China Ocean Shipping Group and China Shipping Group will consolidate operations
  • Hong Kong on the Brink as Builders Offer Stealth Price Cuts: Cheung Kong, Henderson Land among developers offering inducements incl. stamp-tax rebates
  • China Ghost Town Developer May Default on Bonds Next Week: Ordos City Huayan says bondholders chose to sell back 1.14b yuan ($176.7m) of bonds early
  • Citigroup Trader Fired Over Currency Probe Sues in Singapore: Tian Yuhui was fired the day she returned to work after four-month maternity leave
  • China Losing Appeal to World Just as It Opens Bond Market Wider: The two best reasons to buy Chinese bonds are fast fading
  • Nobel Laureate Says IMF Move Won’t Propel Yuan to Rival Dollar: Yuan becoming reserve currency “mostly of symbolic value,” Maskin says
European stocks fall for 4th day, led by declines in financial services and autos, on track for a second weekly decline. Italian stocks underperform, Swiss bourse outperforms. "Although everyone is expecting a rate hike from the Fed next week, a lot of questions remain about the future of monetary policy,” Francois Savary, chief investment officer at Geneva-based investment management firm Prime Partners told Bloomberg. "You currently have one central bank in a tightening cycle, and the other can’t actually deliver on expectations. The ECB’s disappointment last week showed that Draghi’s hands are tied. That’s why investors are so unsettled now.’’
In terms of specific movers, Softness has been seen in Co.'s with exposure to South Africa, with the likes of Investec (-8.0%) and Old Mutual (-9.0%) underperforming amid the recent ZAR weakness.
Fixed income markets have moved in tandem with the risk off sentiment, with Bunds extending on recent trade, moving higher throughout the morning and heading towards the 159.00 level.
Top European News
  • Standard Chartered’s $5.1b Share Sale Gets 97% Demand: New shares are scheduled to trade in Hong Kong on Dec. 16
  • Barclays CEO Staley Said to Extend Hiring Freeze Into Early 2016: A previous ban, implemented by Chairman John McFarlane in Sept. until year-end, was due to be reviewed in Jan.
  • Denmark Set to Raise Bond Target as Demand Soars, Liquidity Lags: Will probably try to sell as much as DKK100b ($15b) in bonds next yr, or about one-third more than implied in a previous forecast, according to Nordea and Sydbank
  • Cameron Delays Heathrow Decision Until Mid-2016, Sparking Anger: Announcement put back until after London Mayoral election
  • Bellway Says Still Trading Well, Well Placed for Volume Growth: Reservation rate rose 12% to 165 homes per week in 18-wk period
  • Publicis Loses Media Account as L’Oreal Switches to WPP: Publicis earlier this week lost business with Procter & Gamble
  • Cancer Drug Quest Drives Bayer to Accelerate Pipeline Investment: Bayer may have 5 cancer drugs on the market by 2020
FX markets have seen a continuation of recent trend of softness in EM and commodity currencies , with the likes of ZAR seeing further weakness in the wake of the finance minister being replaced earlier in the week, while the RUB continued to be impacted by soft energy prices ahead of their rate decision, whereby the Bank of Russia kept rates on hold but announced intentions to cut rates in the future. AUD has weakened in tandem with softness seen in CNY and the by downbeat data out of China as European participants arrived at their desks.
A week ago today saw OPEC choose not to lower their production output and the implications are still firmly being felt across markets, with energy complex extending on weakness during the European morning as Brent and WTI both hit fresh multi year lows, with the former firmly below USD 39.50 and the latter firmly below USD 36.50. Separately Gold continues to decline amid recovery in the USD, with prices on track for a 7th weekly loss within the past 2 months, as we move a step closer to the key Fed rate decision next week.
Looking ahead at the key US releases, today's highlights include US retail sales, PPI final demand and the preliminary reading of University of Michigan sentiment.
Top Global News
  • IEA Sees Oil Glut Lasting Until Late 2016 as OPEC Keeps Pumping: Global oil surplus will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, according to the IEA
  • Dow Chemical, DuPont Said to Plan Friday Announcement of Merger: Still no guarantee that the terms of the transaction will be agreed by then, said people familiar with the matter
  • Buffett’s BNSF Open to Bid for Norfolk to Challenge CP Offer: BNSF is open to making a competing bid for Norfolk Southern, the target of a $27b takeover effort by Canadian Pacific Railway
  • Ford to Invest $4.5b in Electrified Vehicles by 2020: Will add 13 electric cars and hybrids by 2020, rising to 40% of its lineup from 13% now
  • United Technologies Plans $1.5b Restructuring Program: Restructuring, including reducing the manufacturing footprint in the U.S. and Europe, will result in $900m of annual savings when it’s done, CEO said Thursday
  • Adobe Profit Tops Analysts’ Estimates on Cloud Sales Gains: 4Q adj. EPS 62c vs est. 60c, reaffirms FY2016 rev. view ~$5.7b (Oct. 6), adj. EPS ~$2.70
  • Yahoo SVP Fuloria Leaving Company as Talent Drain Continues: Fuloria, whose duties included product and engineering for advertising products, is moving on to work with entrepreneurs and early-stage companies
  • Senate Passes Short-Term Bill to Avoid Government Shutdown: Would finance the govt. through Dec. 16, requires approval by the House, which plans to vote on it on Friday
  • Paris Climate Talks Enter ‘Crunch Time’ With Deal Divisions: Trying to narrow options in the agreement text that range from the amount of global warming that should be tolerated to how countries should review efforts to reduce greenhouse gases
  • Macau Casinos Fall on Report China to Crack Down on UnionPay Use: Fell in Hong Kong trading after the South China Morning Post reported China will introduce new measures to crack down on the use of illegal China UnionPay point of service device
  • Global Payments Said to Be in Talks to Buy Heartland Payment: A deal could be announced as soon as this month
  • All Developed Bond Markets Gain in 2015 in Face of Fed Rate Move
  • Chipotle Restaurant Shut Down in Seattle, Adding to Its Woes

Bulletin Headline Summary from RanSquawk and Bloomberg
  • EM and commodity linked currencies are in focus amid softness in energy prices and global growth concerns as China remains in the spotlight
  • European equities follow their Asian counterpart's lead to trade firmly in the red, with Bunds benefitting from the downbeat sentiment
  • Looking ahead, today's highlights include US retail sales, PPI final demand and preliminary reading of University of Michigan sentiment as well as comments from BoE's Weale
  • Treasuries rise amid losses in global equities led by EM and commodities before next week’s FOMC meeting; China’s yuan was on course for the steepest weekly drop since its August devaluation.
  • Fosun International Ltd. bonds plunged by a record and the company suspended its shares in Hong Kong after Caixin magazine reported that billionaire Chairman Guo Guangchang had gone missing
  • The baffling disappearance of Chinese executives in recent weeks has drawn attention to the ruling Communist Party’s practice of holding people incommunicado either as targets of investigations themselves or to help with probes of others
  • Ukraine may need to step up efforts to resolve a standoff with Russia over a $3b bond due this month to keep receiving aid from the IMF
  • Less than 24 hours after South Africa President Jacob Zuma sent markets into chaos by abruptly firing his finance minister and replacing him with an untested unknown, fund managers and analysts warned that the ANC’s reputation for prudent financial management was practically in tatters
  • The strong showing for Marine Le Pen’s National Front in the first round of France’s regional elections risks undermining her bid for a repeat in the second as a slew of polls suggest she may not be able to rally enough support to win major executive power for the first time in Sunday’s run-off
  • Sovereign 10Y bond yields mixed. Asian stocks lower, European stocks fall, U.S. equity-index futures decline. Crude oil slides, copper rallies, gold drops

US Event Calendar
  • 8:30am: Retail Sales Advance m/m, Nov., est. 0.3% (prior 0.1%)
    • NOTE: U.S. Retail Sales Seen Having Edged Higher in Nov.
    • Retail Sales Ex Auto m/m, Nov., est. 0.3% (prior 0.2%)
    • Retail Sales Ex Auto and Gas, Nov., est. 0.4% (prior 0.3%)
    • Retail Sales Control Group, Nov., est. 0.4% (prior 0.2%)
  • 8:30am: PPI Final Demand m/m, Nov., est. 0% (prior -0.4%)
    • NOTE: U.S. PPI Remains Depressed Ahead of Fed Liftoff
    • PPI Ex Food and Energy m/m, Nov., est. 0.1% (prior -0.3%)
    • PPI Ex Food, Energy, Trade m/m, Nov., est. 0.1% (prior -0.1%)
    • PPI Final Demand y/y, Nov., est. -1.4% (prior -1.6%)
    • PPI Ex Food and Energy y/y, Nov., est. 0.2% (prior 0.1%)
    • PPI Ex Food, Energy, Trade y/y, Nov. (prior 0.4%)
  • 10:00am: Business Inventories, Oct., est. 0.1% (prior 0.3%)
  • 10:00am: U. of Mich. Sentiment, Dec. P, est. 92 (prior 91.3)
    • U. of Mich. Current Conditions, Dec. P (prior 104.3)
    • U. of Mich. Expectations, Dec. P (prior 82.9)
    • U. of Mich. 1 Yr Inflation, Dec. P (prior 2.7%)
    • U. of Mich. 5-10 Yr Inflation, Dec. P (prior 2.6%)
DB's Jim Reid concludes the overnight wrap
Presents for investors remain few and far between and there is still no sign of a anta laus rally although the S&P 500 did climb nearly 1% on the day 90 minutes before the close before slipping to end the day only +0.23% higher. Having shrugged off most of what was another down day for Oil, it appears that the index finally succumbed to one last dip lower for WTI into the close which dragged down energy stocks, the sector closing still with a +0.62% gain but at one stage was up over +1.5%. A fifth-consecutive day of near seven-year lows was made for WTI after it finished down -1.08% at $36.76, the latest fall not helped by OPEC reporting that November crude production was the highest in three years. Brent closed below $40 for the first time in this recent sell-off. That OPEC meeting last Friday feels like a long time ago, with prices now 13% down from the pre-meeting highs that day.
Some of the more interesting newsflow yesterday in the energy sector was at the micro level. Contributing to the early bounce for the sector were announcements from Chevron and ConocoPhillips with both energy heavyweights signaling that they intend to cut capex by a further 25% next year – the latter also expecting to sell down some non-core assets. It wasn’t just the US names in focus as Glencore was out with some cutback measures of its own, specifically targeting deeper debt reductions, more capex reductions and further divestments. Those measures sent Glencore’s share price up 7% yesterday, while its 10 year maturity bonds closed some 4pts higher. There was less good news for Anglo American however. Fresh off the back of its investor day earlier this week in which the company detailed out its own set of bumper measures, Moody’s downgraded the miner one notch to Baa3 late last night. The move puts it in-line with &P, however Moody’s also kept Anglo on review for further downgrade, raising the possibility of the company being downgraded to HY.
Credit markets were under pressure yesterday on both sides of the pond. In Europe Crossover (+5bps) closed wider for the fourth consecutive day, while in the US and despite the slightly better performance for US equities, CDX IG finished nearly 2bps wider on the day. Meanwhile, catching our eye, the WSJ was out with a story last night reporting that a large HY mutual fund in the US is blocking clients from withdrawing their money and is instead seeking an orderly liquidation. According to the article, the moves come after a number of redemption requests within the fund and also difficult liquidity conditions. Notably, the fund is sizeable with $789m in assets, although that is down from $2.4bn earlier in the year. In the first six days of this month, over $120m was said to have been withdrawn from the fund alone. A warning sign in an asset class under a fair bit of stress at the moment given these latest moves in energy prices. Speaking of which, US HY energy spreads were actually 1.5bps tighter yesterday, snapping a five-day run where spreads widened 126bps.
Moving on, it’s been a reasonably quiet week for data in the U this week, although today will see the November retail sales released where expectations are currently running for a +0.3% mom gain in the headline and +0.4% gains for the ex auto and ex auto & gas prints. Our US economists are a little less optimistic and are forecasting an unchanged reading at the headline and +0.2% and +0.3% gains for the two respective core readings. More important in their view however is the core retail control figure. This is the core print which excludes autos, gas and building materials and is the component used to estimate goods spending in the GDP accounting. Market expectations for this is a +0.4% mom gain.
Before we get there though, aside from a gain for the Nikkei (+1.00%) this morning, it looks like the bulk of bourses in Asia are to set to close out the week on a down note. Indeed the Shanghai Comp is down -0.72% while there are falls also for the Hang Seng (-0.76%), Kospi (-0.34%) and ASX (-0.16%) – the latter seeing resources names under pressure. Oil markets are down around half a percent while credit indices in Asia and Australia have both widened a couple of basis points.
Staying in Europe, equity markets continued their slide as yesterday the Stoxx 600 finished the session -0.27%, marking the 7th time in the last 8 sessions that the index has closed lower. Some of this may have reflected comments from the E B’s Praet who, commenting on the reaction post the E B meeting last week, said that ‘the markets exaggerated the situation’ and that ‘there was speculation about a package of measures that had never been up for Data in Europe yesterday was firstly centered in France where we saw the November inflation print come in softer than expected (-0.2% mom vs. 0.0% expected), which dragged down the YoY rate by one-tenth to 0.0%. French Industrial production (+0.5% mom vs. 0.0% expected) was significantly better than expected, although this was offset by a soft manufacturing production print (-0.5% mom vs. +0.1% expected). In the UK the BoE left rates on hold as expected by a vote of 8-1 with Ian McCafferty the lone dissenter after again arguing for a 25bps hike. The minutes revealed not much change in view relative to the November inflation report, while it was acknowledged that there ‘was no mechanical link’ between UK policy and policy of other central banks.
In the US yesterday we saw initial jobless claims tick up by 13k last week to 282k (vs. 270k expected) which was a five month high although this was blamed on seasonality more than anything else. Meanwhile the November import price index fell by less than expected last month at -0.4% mom (vs. -0.8% expected).
Turning over to the day ahead, this morning in Germany we’ll get the final reading for November CPI where no change is expected from the early +0.1% mom flash. In the UK the latest construction output numbers are due. Over in the US this afternoon the main focus will be on the retail sales data, although it’s also worth keeping a close eye on the November PPI print, particular the details on the healthcare industries series which is used to construct the healthcare services component of the core PCE deflator. Elsewhere, business inventories data for October and the preliminary University of Michigan consumer sentiment print for December are due out.
Finally, while preparations for the holiday season will likely be on a lot of our readers’ agendas for the weekend, it’s worth keeping an eye on the next slug of China data due out tomorrow morning with the November retail sales, industrial production and fixed asset investment readings all expected. This will likely dominate the opening on Monday morning as we start a week that's likely to see the first Fed hike for 9 years!

Thursday, December 10, 2015

Ruble Rebound Puts Currency Out of Touch With Oil Before Rates

The ruble gained for a third day, sparking concern the currency is overvalued relative to the price of oil and threatening government efforts to cover its budget.
The exchange rate, which has fallen 6.3 percent in the past month, strengthened 0.6 percent per dollar to 68.9300 by 6:28 p.m. in Moscow. Brent crude, the benchmark for the country’s main export blend, fell 0.7 percent to $39.83.
The price of Brent crude in local currency terms declined Thursday to a five-year low, a day before the Bank of Russia meets to discuss monetary policy. The low price Russia gets for oil puts a strain on budget revenue at a time the government is struggling to contain its biggest budget deficit in five years.
“The ruble seems to be ignoring oil,” said Alexei Egorov, an analyst at PAO Promsvyazbank in Moscow. “Despite the fact that the oil price is hitting new lows, there’s low demand for dollars among people and companies." Egorov predicted the central bank will hold its key rate at 11 percent because it doesn’t want to risk stoking inflation.

Rate Forecast

Policy makers will probably leave rates on hold at 11 percent on Friday for a third consecutive meeting, according to the median of 34 estimates in a Bloomberg survey. Forward-rate agreements signaled 40 basis points of key rate cuts in the next three months, the smallest reading since October. Even leaving rates unchanged will have only a limited effect on the ruble, Egorov said.
“Of course, such a combination of oil and ruble is inconvenient for the budget,” Yury Tulinov, the head of research at Societe Generale’s Rosbank PJSC unit in Moscow, said by e-mail. “Traders are waiting for oil prices to recover and don’t want to sell the ruble."
A weaker ruble risks stoking inflation, while a stronger currency may threaten competitiveness and hurt budget revenue that’s dependent on the price of oil and the ruble. Brent in rubles dropped 1 percent to 2,755 rubles, trading below the 3,284 average for the past 12 months.
Brent crude stabilizing around $40 and unchanged rates should prevent the ruble from weakening past 70 per dollar, according to Piotr Matys, a strategist for emerging-market currencies at Rabobank.
“We expect the Bank of Russia to keep rates unchanged,” said Matys. “Such a decision should provide the ruble with some support, but it will not prove sufficient if Brent crude starts leaning lower."
The benchmark Micex Index of stocks rose 0.1 percent to 1,735.41, with Lukoil PJSC gaining 2.2 percent. Market Vectors Russia ETF had outflows of $6.2 million on Dec. 9, according to data compiled by Bloomberg. The yield on Russia’s five-year government bond was little changed at 10.14 percent.

Forex as an investment of the future, What is Forex, what is investing, what is the future?

Origins of Modern Finance - We must reference regulations, because regulations are the framework that the majority of finance operates in.  Theories, strategies, and products, which do not fit into regulatory framework, are only hypothetical.
Financial regulations are based on a series of laws created during and after the Great Depression, such as “The Securities Act of 1933” and “The Federal Reserve Act (of 1913) and others.  In 1933:

  • Technology: The modern day computer did not exist, nor did lasers, the iPod, stealth,  satellites, and most importantly, the internet
  • Society: Roughly 2 Billion people on the planet compared to today’s 6.7 Billion.  Hitler was coming to power.
  • Health: Life expectancy of the average American (male and female) was 59, compared to today’s 76.  Since 1980, there has been a greater than 30% decrease in deaths due to Stroke in Heart Disease , presumably due to advances in medicine.
  • Finance: The derivative didn’t exist, markets were not electronic and real-time, and credit cards didn’t exist, nor did check cashing and instantaneous international payment.
You wouldn’t drive an automobile made in 1933 unless you are an antique collector.  Most people wouldn’t drive a car that’s more than 10 years old.  Most users wouldn’t use a computer that’s more than 5 years old.  Banks are using state of the art supercomputers to run a 75 year old system – with origins over 200 years old.  In fact, the leading banking computer is the mainframe system IBM System Z, originally developed as System/390 in 1964 .  While the Federal Reserve Act was enacted in 1913, its origins of design are much older, as the bankers who designed the Fed were influenced by the European system, dominated by the British Bank of England, originally established in 1694 .
History of Forex
How many people know why Forex exists at all?  They know about the “Nixon Shock” , but why did Nixon float the dollar, who suggested it, and how does that impact modern Forex?  The simplest solution being the most likely would indicate the US Administration was politically stretched out and had few options in response to demands by the French for payment in Gold, and the West German removal from Breton Woods.  According to the Wikipedia entry:
By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, [3] the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. The year 1970 was the crucial turning point, which, because of foreign arbitrage of the U.S. dollar, caused governmental gold coverage of the paper dollar to decline 33%, from 55% to 22%. That, in the view of Neoclassical Economists and the Austrian School, represented the point where holders of the U.S. dollar lost faith in the U.S. government’s ability to cut its budget and trade deficits.
In 1971, the U.S. government again printed more dollars (a 10% increase) [3] and then sent them overseas, to pay for the nation's military spending and private investments. In the first six months of 1971, $22 billion dollars in assets left the U.S.[citation needed] In May 1971, inflation-wary West Germany was the first member country to leave the Bretton Woods system — unwilling to deflate the deutsche mark to prop up the dollar.[3] In order to prevent the dumping of the deutsche mark on the open market, West Germany did not consult with the international monetary community before making the change. In the next three months, West Germany’s move strengthened their economy; simultaneously, the dollar dropped 7.5% against the deutsche mark.[3]
Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfilment of America’s “promise to pay” — in the form of gold from the U.S., in exchange for paper dollars, thus, did Switzerland trade $50 million of paper for gold in July. [3] France, in particular, repeatedly made aggressive demands, and acquired large amounts of gold ($191 million), further depleting the gold reserves of the U.S. [3] On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign price-gougers. [3]Still, on 9 August 1971, as the dollar dropped in value against European currencies, Switzerland withdrew the Swiss franc from the Bretton Woods system.[3]
Arbitrage can be painful if you are on the wrong side of it.  Nixon may have had few options but to float the dollar; the market is a powerful force even with government regulations. 
This implies that it was a reaction, not an action.  In other words, it wasn’t part of a grand master plan, a scheme designed by international bankers to make the world’s financial markets crumble 35 years later.  It seems that it was a random, haphazard solution, as they say “Crisis Management”.   But while waiting for Bonanza to finish, to announce the new global Forex regime, Nixon’s team actually spent more time debating how to announce and when to announce to the public than the plan itself:
To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 per cent import surcharge, and, most important, “closed the gold window”, making the dollar non-convertible to gold — except on the open market. The President and fifteen advisors took that decision, without consulting the members of the international monetary system, thus, the international community informally named it the Nixon shock. Given the importance of the announcement — and its impact upon foreign currencies — presidential advisors recalled that they spent more time, at Camp David, deciding when to publicly announce the controversial plan, than they spent creating the plan. [4]
As a politician, the President did not want to interrupt television viewers watching the tremendously popular TV series Bonanza, not wishing to potentially alienate those voters who fanatically followed the cowboy series. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On 15 August 1971, that speech and the price-control plans proved very popular and raised the public’s spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis. [4][5]
This would also hint it was a knee-jerk reaction more than a carefully planned event.  Since then, banks have been creating models ‘on the fly’ based on what seems to be working, with little or no understanding of the underlying forces.  And being as banks are for profit private institutions, any available data or models they have is not public.
No Forex Model
Since the Nixon Shock, economic theories were not redesigned.   Although there are some fresh ideas about what Forex is, there isn’t any unified theory of Forex, a model that describes it for what it is, mathematically.  In fact, several papers have been written with the hypothesis that existing ‘models’ are severely flawed, and provide evidence; here’s one:
Roger D. Huang published a paper in 1981 for the American Finance Association ( ) with the following abstract:
The variance bounds on exchange rate movements implied by the monetary approach to exchange rate in an efficient foreign exchange market is shown to be violated by sample data. The paper also presents evidence showing that the forecast errors implied by the monetary model can be forecasted using historical data. The results are interpreted to suggest either the incompatibility of the monetary approach with sample data, or an inefficient foreign exchange market or both.
Richard J. Sweeny, in 1986, goes on to claim that there is Alpha in Forex not explainable by risk:
Filter rule profits found in foreign exchange markets in the early days of the current managed float persist in later periods, as shown by statistical tests developed and implemented here. The test is consistent with, but independent of, a wide variety of asset pricing models. The profits found cannot be explained by risk if risk premia are constant over time. Inclusion of the home-foreign interest rate differential in computing profits has little effect on the comparison of filter returns to those of buy-and-hold.
If Forex is truly a reactive solution to a pressured Nixon administration, and still no unified model exists, this indicates that there are large opportunities in trading Forex, like an asset class.  These opportunities will exist, and persist, until the floating currency system is replaced by something else (not likely anytime soon), or there is a unified Forex model that becomes widely proliferated as much as “Modern Portfolio Theory ” is.
Rembrandt: The Moneychanger 1626
Up late, pouring over account statements, under the dim glow of candlelight?  Is this an audit or a daily routine, not enough day-time to do all the calculations?  Or does he do this at night so no one can question the numbers?
UBS Trading floor: modern times.  Who is running the show, the humans, or the computers?  Are the humans telling the computers what to do or are values on the computer screen telling the humans how to behave?

Purpose of Capital Markets

What’s the point of investing?
  • To achieve a return not possible by other activities – (i.e. someone else can do something better than you and achieve a larger profit than if I did myself)
  • To act as a savings account for the future
Investors all have an underlying assumption: someone else can do a better job than me.  Small businesses, and farmers, and other types of businesses, would never think of investing somewhere outside of their family run business.  Corporatism has turned investing into something you outsource to Wall St. 
Those from the Greatest Generation  would rarely invest in stocks, except maybe in the company they worked for.  They bought Government bonds (mostly as a store of value and wealth for the future not to achieve a return), Gold or Silver, and they may have invested in a vacation home or some tools.  They didn’t buy stocks, but they didn’t have electronic access to the markets or a means to freely educate them, such as exists with the internet.
Trading as an investment
Traders are seen by the retail market as gamblers, high frequency spread betters .  Funds, institutions, and some savvy investors know better, but they are the minority.  Can active day trading strategies, and other types of real-time trading strategies such as automated Forex systems, penetrate our commonly accepted views of investing?
DBFX, the FX division of Deutche Bank, stated in an October 2008 press release that this is already happening: sees sharp increase in managed accounts as individual investors and managers turn to FX to diversify portfolios.
A managed account is one way that an investor can turn a trading strategy into an investment.  There are thousands of managed accounts in the world, each offering a unique strategy and approach to the markets.  Although managed accounts are currently mostly dominated by commodities traders, there is a growing emergence of FX managed accounts.
There are other ways investors can turn trading into investing, such as the active investor who purchases an automated trading system to trade their own account.  There are a growing amount of companies that offer fully automated systems investors can lease or purchase that can be executed on their own account.
Modern day hedge fund is a family farm
What is a farmer?  A farmer is similar to a hedge fund manager.  Farmers are seen as old men with pickup trucks, straw hats and mud on their shirts.  Aside from this stigma, farmers are actually some of the most sophisticated investors; a farmer must decide constantly where to invest and when to hedge.  His family, and possibly the entire town, depends on the farms’ survival.  There isn’t any room for creativity or unnecessary investments (such as purchasing a decorative rug). 
The origins of the futures markets are based on agricultural and eventually industrial demands for hedging ‘organic’ business .  Many family ‘mom and pop’ businesses are run in this style, but farms illustrate the basic needs of knowing when to hedge due to a bad growing season, crop rotation, and investment in farming machinery. 
The future of investing could see a return to family run hedge funds, what Trusts refer to as ‘family offices’ and boutique investment firms offering niche specialized services to a small elite group of clients.  This trend is already taking place, as London based boutique broker Shore Capital revenues are up 12 percent, beating larger rivals .
"I think there's a change in the attitudes of fund managers – they used to give a significant proportion of business to the bigger houses because they thought they were a better counter-party risk.

"I think the institutions no longer think they are a superior counter-party risk, having had the experience of last September and October. Although, the overall volume of business available has reduced, more of it's going to the medium-sized brokers." Shore believes financial services staff disillusioned with life in London following the banking crisis may opt to work in Edinburgh instead.
Who is to blame: regulators or customers?
In 2005 Harry Markopolos sent a letter to the SEC outlining a logical analysis why in his opinion, Madoff was running a ponzi scheme .   The SEC didn’t act on his letter, but many questions are raised by this action, such as:
  • How was a private individual, representing Rampart Investment Management Co. able to obtain and analyze data sufficient  to conclude that Madoff was running a Ponzi scheme, using NO private, confidential information from Madoff Securities (the SEC and other regulators are privy to certain confidential records that are not public)
  • Why didn’t other customers, or at least a few others, take the time to do their own due diligence and come to similar conclusions?  What was so special about Mr. Markopolos?
Clients have unreasonable expectations about many of their investments.  Why is this so?   A survey conducted by PricewaterhouseCoopers in Switzerland identified two related problems: clients poorly understand investment reports and 2) they make unrealistic reporting demands 
It goes on to present the obvious solution for global regulation: a standard in documentation and reporting.  Investors are bombarded with reports designed differently according to different standards and yet with the designers own interpretations of their standards.
Would a fair conclusion be, that regulation could simply be a ‘database’ that could be accessed by ‘clients’ (investors) served by ‘servers’ (money managers), administrated by ‘admins’ (regulators). 
Forex Forums a form of Self-Regulation
While Forex trading itself is unregulated, Forex has a means of self-regulation for highly sophisticated investors, for those who are willing to do their homework.  Work is required (in the form of time, reading, and understanding), and there is no vertical subordination, and no official authorities in this space.   Admins monitor the discussion to make sure it’s focused on topic, but they don’t normally intervene in discussions (such as deleting posts they don’t like). 
The forums do not provide any type of identification proofing, so there isn’t stopping anyone from spreading misinformation anonymously.  For all the value they provide, and they do provide a unique critique service untouched by commercial interests, they seem to have an equally devastating counterbalance, the ‘rotten apple that spoils the bunch’.
The significance of the forums is they represent a powerful new force defining how information is exchanged among the investing public.  Some investors may remember ‘investment clubs’ popular in the 80’s and 90’s.  Now, investors can read forum posts without anyone ever knowing – comments, opinions, and some facts, are out there for all to see.  Although much of the content is unsubstantiated babbling, there are many hidden gems.  Sites such as WikiLeaks (   ) and Zero Hedge  ( ) have been significant forces in disseminating information that otherwise would have been kept from the public.
At the most recent TED conference, Gordon Brown quipped that:
"Foreign policy can never be the same again." The power of technology - such as blogs - meant that the world could no longer be run by "elites", Mr Brown said.
Policies must instead be formed by listening to the opinions of people "who are blogging and communicating with people around the world", he said .
This implicates a new user-driven de-centralized internet model will lead new paradigms, not the 20th century, centralized model.  The current debate about regulation is all centered on a centralized government authorized regulator.
The problem with the centralized approach, with modern technology including the internet and modern government systems, a company can relocate its offices in a matter of hours in another legal jurisdiction.  For example, after the NFA enacted rules affecting the way trades must be accounted for, such as the hedging rule and the FIFO rule , many Forex FCMs shifted their operations to London due to customer request .  This was not to thumb the NFA for their rules, but in response to angry customer emails demanding they continue to allow hedging or they would simply move their accounts to London based firms who wouldn’t ban hedging anyway.  It’s a conundrum of control, the more they squeeze the more customers will move overseas, or cease to exist (result is the same).
The internet has a downside – unsavory marketing groups can register ‘private’ domains which sell ‘sham’ products, competing with legitimate providers.  For those who don’t know what to look for, the marketing sites can be deceptive and misleading.  But since criminals usually don’t register with the police, there is little regulators can do. 
In some cases, vigilante groups have sprung up with the sole purpose of having the scam sites shut down while providing a review service similar to consumer reports. 
The Forex Metaphor
A metaphor is an appropriate tool to explain something from another dimension, not easily explainable in the first dimension.  George Lakoff states:
"We are neural beings," Lakoff states, "Our brains take their input from the rest of our bodies. What our bodies are like and how they function in the world thus structures the very concepts we can use to think. We cannot think just anything — only what our embodied brains permit."[2]
In his 1980 book “Metaphors we live by” with Mark Johnson, he explains ‘the great metaphor’ known as a conceptual metaphor:
There are two main roles for the conceptual domains posited in conceptual metaphors:
  • Source domain: the conceptual domain from which we draw metaphorical expressions (e.g., love is a journey).
  • Target domain: the conceptual domain that we try to understand (e.g., love is a journey).
mapping is the systematic set of correspondences that exist between constituent elements of the source and the target domain. Many elements of target concepts come from source domains and are not preexisting. To know a conceptual metaphor is to know the set of mappings that applies to a given source-target pairing. The same idea of mapping between source and target is used to describe analogical reasoning and inferences.
A primary tenet of this theory is that metaphors are matter of thought and not merely of language: hence, the term conceptual metaphor. The metaphor may seem to consist of words or other linguistic expressions that come from the terminology of the more concrete conceptual domain, but conceptual metaphors underlie a system of related metaphorical expressions that appear on the linguistic surface. Similarly, the mappings of a conceptual metaphor are themselves motivated by image schemas which are pre-linguistic schemas concerning space, time, moving, controlling, and other core elements of embodied human experience.
Conceptual metaphors typically employ a more abstract concept as target and a more concrete or physical concept as their source. For instance, metaphors such as 'the days [the more abstract or target concept] ahead' or 'giving my time' rely on more concrete concepts, thus expressing time as a path into physical space, or as a substance that can be handled and offered as a gift. Different conceptual metaphors tend to be invoked when the speaker is trying to make a case for a certain point of view or course of action. For instance, one might associate "the days ahead" with leadership, whereas the phrase "giving my time" carries stronger connotations of bargaining. Selection of such metaphors tends to be directed by a subconscious or implicit habit in the mind of the person employing them.
The principle of unidirectionality states that the metaphorical process typically goes from the more concrete to the more abstract, and not the other way around. Accordingly, abstract concepts are understood in terms of prototype concrete processes. The term "concrete," in this theory, has been further specified by Lakoff and Johnson as more closely related to the developmental, physical neural, and interactive body (see embodied philosophy). One manifestation of this view is found in the cognitive science of mathematics, where it is proposed that mathematics itself, the most widely accepted means of abstraction in the human community, is largely metaphorically constructed, and thereby reflects a cognitive bias unique to humans that uses embodied prototypical processes (e.g. counting, moving along a path) that are understood by all human beings through their experiences.
It is difficult to explain philosophy to a dog, because they do not have a means of understanding the language, hence the need for doggie metaphor.  Everything to a dog can be equated to throwing the ball (in the case of Labradors, for other dogs a smelly metaphor can be used).  Dogs and other animals have an intelligence which can be measured, such as the Monkey who outperformed the human memory champ in a memory test .  Modern humans struggle with basic math skills; the understanding of money and finance is 95% numbers and mathematics.  Finance is math, not magic, as many would like you to believe.  It is possibly the last subject yet to be understood by the scientific method. 
Is it ironic that the country with the most money, and the most dynamic capital markets, struggles with basic math skills, and money and finance is understood only by the understanding of math?   Why is it that Americans have the highest per capita GDP and some of the lowest scores in mathematics globally?  Could this be connected to Consumerism, multiple market bubbles, and a growing problem in financial literacy?  Americans nearly flunk financial literacy, says
America gets a "D" for the second year in a row in's Financial Literacy Survey. (See our newest Financial Literacy Survey.)
That's disappointing enough, but the statistically valid survey of 1,000 Americans, conducted for Bankrate by RoperASW, also shows that Americans are in "debt denial." They're unwilling to admit that credit is a problem -- in fact the only thing Americans are more secretive about is their love lives.
Finance is not tree-cutting.  Making an investment portfolio is not like chopping a branch of a tree, while the analogy is a powerful tool to educate, it can’t turn a caterpillar into a butterfly.
Making a cup of coffee is an algorithm:  plug in machine, put filters, put water in tank, put ground coffee in filter, turn on coffee maker, pour coffee into cup, wait to cool down, drink. 
Educators use analogies like this to explain algorithms to those who have never been exposed to them.  An algorithm is a process, a procedure, a series of steps – it must have a beginning and an end .
Just because making coffee is also an algorithm, doesn’t mean if you brew a cup of coffee you can design a good Forex algorithm. 
Forex Systems as an investment of the future
Forex features:
Forex is Shariah compliant
Finding Shariah compliant investments is not easy.  Forex trading is 100% Shariah compliant.  A Shariah compliant portfolio could be created using Forex Automated Systems.  Also, these types of systems offer a diversity in a particular market.  The difference between a “Mean Reversion” Forex system and a “Correlation” Forex system can be as different as investing in emerging markets and Treasuries.
95% of people lose money trading Forex
This would imply that it’s ‘difficult to make money in Forex’ as some claim.  From another perspective, is it easy for the 5% who are winning?  Also consider in Forex a lot of money is lost due to hedgers, commercial requirements, central bank interventions, and other non-investment losses.  That means there are profits that can be obtained by traders in Forex that don’t necessarily need a loser on the other side (such as the case with equities). 
Comparative statistics:  53% of workers aged 16 and older in Los Angeles county were deemed functionally illiterate 
Los Angeles is the home of many famous authors , writing clubs such as The LA writers Group and WritersBloc .
Considering the high illiteracy rate in Los Angeles, why don’t these authors change their profession to something that doesn’t require reading, or relocate to another area where there is a higher literacy rate?
The reason is clear; anyone in the world can read their books, not only LA residents.  Secondly, they are writing for the 47% that can read, which in a city with a population of over 4 Million , is still at least 2 million readers.
Financial Education
Why are people interested in Music, Movies, Gadgets but not Money?  Why does the interest in Finance become less as generations grow? They all want it (money), but they don’t want to bother understanding how it works.  They want to be super-consumers without understanding what consuming is.  That’s not to suggest that every person who wants to eat should study biology, agricultural science, and the Food & Restaurant business, but you do want to understand what you are digesting.  In fact, recent consumer demand has forced food companies and drug companies to display certain information in a standardized format on every box of food sold in the US .  Why doesn’t something like this exist for financial products? 
In the old days, family homes used to be a manufacturing base, a source of entertainment, a vacation spot for other family members, and a large storage and distribution facility.  Now the home is a source of wealth and investment (that you shouldn’t actually ‘live’ in), vacation is done on cruise ships and in casinos, and public storage facilities are used like PODS and Public Storage. 
Forex lacks hard data
Unlike other markets, there is little data available for Forex.  For example, the annual BIS numbers that are commonly referenced when you hear “3 Trillion per day” turnover is conducted by survey .  The institutions that are surveyed have no reason to lie, but they also have no reason to be 100% transparent.  The problem, like the problem with fraud, is not the honest bankers who report, but those who don’t, who have something to hide in off-balance sheet transactions.  Other markets have hard facts, verifiable data.  The NYSE publishes daily end of day data that can be downloaded from their website here: . Other exchanges publish similar data, because they are required, but more importantly, because they have it. 
Only each Forex counterparty has access to his own data, and many of them are reluctant to release it.  For example, Forex brokers could publish statistics:
  • Number of positive accounts for the day, week, month, year
  • Average percent gain or loss for each account
  • How many accounts are profitable after 1 year
The question is why don’t they, why is data like this unavailable anywhere, in stark contract to non-forex rivals where it is possible to obtain overwhelming amounts of data on the performance of mutual funds .
Why is there no central database where traders and customers can log onto and verify authenticity, receive economic data in a standardized format, including performance information?
This is a regulatory question, but in the context of Forex, the answer is that there is no reason for the counterparties to divulge such information without any tangible benefit.  Why should they open their books, when much of their business is based on perception? 
Forex companies growing fast
In 2009, GAIN Capital is ranked #32 in the Financial Services category “Fastest Growing Private Companies List” .  GAIN Capital is a Forex broker, and their revenue is primarily derived from Forex brokerage.  Their growth can be explained by a popularity of Forex as an asset class, and as a new way to trade and invest.  Why else?
Forex Genome Project
Pandora has created a ‘Music Genome Project ’ that tracks what songs you like and creates suggestions, a quasi form of Artificial Intelligence .  Although Pandora does not disclose what it’s algorithm is, Wikipedia states:
The Music Genome Project, created in January 2000, is an effort founded by Will Glaser, Jon Kraft, and Tim Westergren to "capture the essence of music at the fundamental level" using almost 400 attributes to describe songs and a complex mathematical algorithm to organize them. The company Savage Beast Technologies was formed to run the project.
A given song is represented by a vector (a list of attributes) containing approximately 150 "genes" (analogous to trait-determining genes for organisms in the field of genetics). Each gene corresponds to a characteristic of the music, for example, gender of lead vocalist, level of distortion on the electric guitar, type of background vocals, etc. Rock and pop songs have 150 genes, rap songs have 350, and jazz songs have approximately 400. Other genres of music, such as world and classical music, have 300–500 genes. The system depends on a sufficient number of genes to render useful results. Each gene is assigned a number between 1 and 5, in half-integer increments.[1]
Given the vector of one or more songs, a list of other similar songs is constructed using a distance function.
To create a song's genome, it is analyzed by a musician in a process that takes 20 to 30 minutes per song. Ten percent of songs are analyzed by more than one technician to ensure conformity with the standards, i.e., reliability.
The technology is currently used by Pandora to play music for Internet users based on their preferences. Because of licensing restrictions, Pandora is available only to users whose location is reported to be in the USA by Pandora's geolocation software.[2]
While this is compelling, it could be argued that the application in Music is not necessary.  For example, if you choose the wrong CD it’s not a life or death situation; there isn’t any monetary or material punishment (aside from angry listeners possibly throwing things at you).  Make a poor decision in the markets, and entire counties budgets are wiped out. 
For example, in 1994 the County of Orange County declared bankruptcy due to suffering $1.6 Billion in losses on interest rate derivatives .
Would a genome project have a more tangible economic (and thus overall) benefit if used for Forex?  Imagine a system that instead of determining for the user what type of music they like to listen to, it could determine what kind of investment to implement on your account?
Forex Myths
It’s hard to make money in Forex
Could that be said for any market?  Is making money ever easy?  Also, how can that be substantiated?  Hard for who? 
No one’s making money in Forex
Bank of America claims foreign exchange as a major source of income.  Money managers such as FX Concepts, John Henry, and Alex Merk are all making millions.  FX Concepts has roughly 10 Billion assets under management by some measures.  FX Brokers are some of the fastest growing companies in USA according to Inc. 500.  Interbank FX is ranked #8, Gain Capital is ranked #32 .  George Soros made much of his fortune speculating in currencies .
The conclusion of this article is that for the Forex market, there isn’t enough data to make any solid conclusion.  Significant effort should be spent compiling and analyzing data about Forex trading and investing.  In a series of articles, we will attempt to first define the problems, collect data and sources of data, and engage FX experts in a series of interviews and discussions.
With existing tools it is possible to trade and invest in Forex, but without full information sufficient to make any conclusion, we are left with only the path taken by Diogenes , searching for an honest answer. Before the North American futures market originated some 150 years ago, farmers would grow their crops and then bring them to market in the hope of selling their inventory. But without any indication of demand, supply often exceeded what was needed and unpurchased crops were left to rot in the streets! Conversely, when a given commodity - wheat, for instance - was out of season, the goods made from it became very expensive because the crop was no longer available. Among existing clients, there is often a lack of understanding of technical reporting concepts, leading to unreasonable expectations that cannot be met. A survey conducted by PricewaterhouseCoopers in Switzerland identified two related problems: Clients (1) poorly understand investment reporting matters and (2) make unrealistic reporting demands. Establishing a standard and providing guidance on client reporting will certainly help to educate clients, as well as their asset managers, and reduce the expectations gap between them. In the Los Angeles region, 53 percent of workers ages 16 and older were deemed functionally illiterate, the study said. WASHINGTON — U.S. teenagers are making little headway when it comes to financial literacy, a survey out Wednesday shows.
High school seniors on average answered 52.4% of a 30-question financial survey correctly. That was up from 52.3% when the survey was last conducted two years ago but down from 57% in 1997, the first year for the survey, according to the Jump$tart Coalition for Personal Financial Literacy.
"Financial literacy is still a very significant problem. It doesn't seem to be getting any better," says Lewis Mandell, a professor at SUNY Buffalo School of Management who oversaw the survey, which was conducted in December and January. It includes topics such as investing and managing personal finances.
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By Joe Gelet Elite E Services FX Systems   See more articles at