For most commercial end-users of swaps, the mandatory clearing requirement under Dodd-Frank first became applicable on September 9, 2013. Since then, many commercial end-users have relied on the so called “end-user exception” from the clearing mandate to continue executing uncleared swaps with their dealer counterparties. The end-user exception is subject to several conditions, which for SEC filers include undertaking certain corporate governance steps. The generally applicable conditions include reporting of certain information including how the entity relying on the exception generally meets its financial obligations, which reporting may be done annually. In discussing the corporate governance steps that SEC filers must undertake to avail themselves of the exception, the CFTC noted that it expects policies governing the relevant entity’s use of swaps under the end-user exception to be reviewed at least annually (and more often upon triggering events). With the one year anniversary of the initial clearing mandate approaching, this post reviews the scope of the mandate as well as important related requirements and exceptions (including the annual reports and reviews that may be undertaken in the course of qualifying for the exception).
What was Yellen’s speech about? Let’s go to the word cloud – MarketWatch
The hedge fund and the despot – Bloomberg Businessweek
The lies we tell ourselves – The Ad Contrarian
The chase for no yield – Reformed Broker
A musical interlude: Bruce Springsteen; Jackson Cage – YouTube
A short list of excellent boring companies – Crossing Wall Street
Federal Reserve Chairwoman Janet Yellen’s noncommittal take on the economy and labor markets failed to juice the markets.
In the latest installment of MoneyBeat Week, our Friday podcast, the crew dissected Ms. Yellen’s highly anticipated speech in Jackson Hole, Wyo. She acknowledged the improving job market, but stopped short of saying how the progress would affect the central bank’s monetary policies.
For all that and more, grab a set of headphones and take a listen to MoneyBeat Week. Or catch us on iTunes along with other Journal podcasts in the WSJ What’s News section.
Welcome to BitBeat, your daily dose of crypto-current events, written by Paul Vigna and Michael J. Casey.
Bitcoin Latest Price: $513.41, down 0.5% (via CoinDesk)Crossing Our Desk:
- It’s one thing for a retail business to say it’s going to start accepting bitcoin. From Expedia to Dish Network to Dell, there are plenty of those. But we’ve never heard of a company saying it won’t accept dollars. Until today, that is.
We were intrigued by a story online, reporting that Denver-based precious metals dealer Amagi Metals said that by the end of 2016, it will no longer accept dollar-denominated business, and will do all of its business in cryptocurrencies (or gold, of course). Surely, that couldn’t be. Why would any retail business decide not to accept the world’s most widely distributed and widely used currency? We had to talk to somebody at the company, to see if this story was right.
Yeah, it’s pretty right. “I’m a big advocate of sound money,” CEO Stephen Macaskill told us over the phone. The dollar, no longer backed by gold, is controlled by “political whim,” he said. It’s not a currency he wants to hold.
Okay, that’s fine, that’s his opinion. But that’s different than stating you won’t accept dollars. We pressed him, sensing a fudge. Surely, we asked, on Jan. 1, 2017, if somebody wanted to hand you dollars for gold, you wouldn’t turn that business away, would you?
“I think we’re going to have a very different world in five years,” he said. “We’re pretty close to the last leg of the dollar.”
Ah, ha, but five years is not two years. So, we asked again: in 2017, if the dollar’s still here, would you really not accept it?
“I don’t want to be left holding dollars when they’re not valuable.”
Mr. Macaskill thinks the dollar’s going to go the way of Zimbabwe. He thinks the greenback’s going to collapse, and disappear, and bitcoin is going to rise up in its place and become the world’s de facto currency. Mr. Macaskill is both a gold bug and a bitcoiner, and is positioning his business now for it.
Well, that’s, like, your opinion, man.
Amagi Metals has been accepting bitcoin since 2012, and cryptocurrencies comprise roughly 30-40% of its business, which is all done online, so it’s already further toward being a complete bitcoin business than most other retailers. But that is still different from saying you will not accept U.S. dollars.
We pressed again.
“There’s going to be a point when I will turn away business for dollars, and that’s going to be 2017,” he said. “I’m pretty sure we’re not going to change that position.”
Huh. Well, okay, then.
Mr. Macaskill did offer one caveat: if the dollar were to “evolve,” if the U.S. government were to back it with gold – or a cryptocurrency – so that it stopped losing value, he’d still take it.
Ah, ha! (Paul Vigna)In the News:
- St. Petersburg is going coco loco for bitcoin. The city on Florida’s west coast may not be anybody’s idea of a bitcoin hotbed, but it does seem like affection for the cryptocurrency is growing. Today the St. Petersburg Museum of History announced that it will start accepting bitcoin, according to a story in the Tampa Bay Times. The museum, the oldest in Pinellas County, dating back to 1922, would reportedly become the first in the state to accept the cryptocurrency.
The museum is looking to draw a little action from another prominent bitcoin-related event in the area: the 2014 Bitcoin Bowl – formerly known as the Beef O’ Brady Bowl. BitPay bought rights to the college football game in June, and this is the first year under the new name. “We expect the Bitcoin Bowl to bring many more visitors to St. Petersburg, and of course the Museum of History,” executive director Rui Farias said in a press release.
The game will be played Dec. 26.
The Bitcoin Bowl’s host committee held a press conference on Friday, which was hosted at the museum, outlining its plans to use the game to boost bitcoin’s acceptance in the city. We weren’t able to attend personally, for obvious logistical reasons, so we’re waiting for details of the meeting. (Paul Vigna)
In my “Intelligent Investor” column this weekend, I interview Charles Ellis, often called “the dean of the investment-management industry,” on his views that “active” stock-picking fund managers are an endangered species. He even suggests that many of them will be thrown out of work—and might want to pursue second careers as financial planners.
The trend that Mr. Ellis describes has been in the making for four decades.
In 1974, the Nobel prize-winning economist Paul Samuelson wrote in the inaugural issue of the Journal of Portfolio Management that “a respect for evidence compels me to incline toward the hypothesis that most portfolio managers should go out of business—take up plumbing, teach Greek, or help produce the annual GNP by serving as corporate executives.” He added, “Even if this advice to drop dead is good advice, it obviously is not counsel that will be eagerly followed.”
In 1975, Mr. Ellis himself wrote a famous essay in the Financial Analysts Journal called “The Loser’s Game,” in which he predicted that “institutional investors will, over the long term, underperform the market.” With so many smart people competing so intensely to outperform, bargains would disappear almost instantly. Instead of trying to win by beating the market, he argued, investors should seek to avoid losing—by buying an index fund. These autopilot funds buy and hold all the securities in a market, rather than trying to outsmart the market.
In 1976, John Bogle, founder of Vanguard Group, launched the first index fund for individual investors, enabling just about anyone to own a broad swath of the market.
But only in more recent years has the rise of indexing come to resemble a juggernaut, as this chart courtesy of Morningstar shows:
Since 2000 alone, the share of total fund assets in index funds has tripled, to 28.5% from 8.9%. If anything, the trend is accelerating. And there’s no logical reason to expect it to reverse anytime soon.
At least Mr. Ellis’s advice that fund managers should consider becoming financial planners is more palatable than Prof. Samuelson’s suggestion that they should become plumbers.
Toms built its brand and reputation through its innovative one-to-one giving campaign, which gives one pair of shoes (and now eyeglasses) to a child in need for every pair it sells.
This week, Toms inked a deal to sell half of itself to Bain Capital, the private-equity firm co-founded by Mitt Romney that inspired a thousand attacks on the strategy of the leveraged buyout. The deal values Toms at about $625 million, according to people familiar with the terms.
Now the question becomes: Can Toms and its charismatic founder, Blake Mycoskie, sell to private equity without selling out? Can it keep up the charitable arm of the business that helped it catch on with consumers?
The answer: Most likely.
Bain has promised to maintain the company’s commitment to charity by continuing the one-on-one matching program in both existing product lines and new ones. A portion of Toms’ profits beyond that is given to its charitable arm, and Bain has clauses in its contract that will force the private-equity firm to scale up this giving at the same rate of profit growth, people close to the deal said.
The practices of Bain and other private-equity firms came under attack during Mr. Romney’s presidential campaign. Private-equity firms use different strategies to increase the value of the companies they buy, with a goal (generally) of selling them five to seven years later for a steep return. In some cases, that means massive job cuts and store closures. In others, it’s a push to expand and grow a business to get that return.
Bain’s strategy with Toms is the latter. The firm thinks it can rapidly move the Toms’ brand into a host of other products, the person close to the deal said.
Howard Davidowitz, chairman of the retail consulting firm Davidowitz & Associates, said he fully expects Bain to have a home run with Toms. “What Bain sees is a business that can expand exponentially. There’s no cutting needed.”
“If you’re in the shoe business, it’s easy to expand into accessories, and that’s the best area of retail,” Mr. Davidowitz said. “They can just start adding categories that are on fire, like wallets, handbags, watches. It will all fit together.”
Bain said it plans to bring in a new chief executive to take over for Mr. Mycoskie.
Mr. Mycoskie and the board of Toms chose Bain not just on price but also based on what he viewed as Bain’s willingness to continue the charitable giving that has become a hallmark of Toms, said the person close to the deal. Mr. Mycoskie originally entered the sales process considering selling off more of the company but ultimately decided that a 50-50 partnership made the most sense, the person said.
Mr. Mycoskie did not respond to a request for comment.
Active fund management is outmoded, and a lot of stock pickers are going to have to find something else to do for a living.
The debate about whether you should hire an “active” fund manager who tries to beat the market by buying the best stocks and avoiding the worst—or a “passive” index fund that simply matches the market by holding all the stocks—is over.
So says Charles Ellis, widely regarded as the dean of the investment-management industry.
Stock picking “has seen its day,” he told me this past week, as assets at Vanguard Group, the giant manager of market-tracking index funds, approached $3 trillion for the first time. “With rare exceptions, active management is no longer able to earn its keep.”
If he is right, hordes of portfolio managers will eventually be thrown out of work—and financial advice could end up cheaper, better and more plentiful than ever before.
Mr. Ellis, 76 years old, is revered among money managers. He is the founder of the financial consulting firm Greenwich Associates, a former adviser to Singapore’s sovereign-wealth fund, the author of 16 books and former chairman of Yale University’s investment committee.
In an article in the latest issueof the well-respected Financial Analysts Journal, news are engaged in an arms race resulting in a kind of mutually assured destruction of outperformance.
The faster and smarter each manager becomes, the more efficient the market gets and the harder it is for any manager to beat it. As a result, he writes, “the money game of outperformance after fees is, for clients, no longer a game worth playing.”
No one gave a hoot about fees in the 1980s and 1990s, when 2% in fund expenses barely made a dent in the 18% average annual returns of U.S. stocks.
But since the beginning of 2000, stocks have returned an average of just 4% annually. A 1% fee is a quarter of that return.
Fees will come down because they have to.
And that, Mr. Ellis warns, will lead to “a wave of creative destruction” comparable to the changes that swept through the steel industry decades ago.
“Part of me thinks he’s right, part of me doesn’t want him to be right,” says Theodore Aronson, an active manager who oversees $25 billion in institutional assets at AJO in Philadelphia.
Of his firm’s 15 portfolios, most available only to institutions, 14 have beaten their benchmarks since inception, and money continues to flow in. “I don’t think the whole world is going to index,” Mr. Aronson says, “but I’m not sure.”
Humans always have believed in magic and miracles, and investors will probably never stop hoping to find the next Warren Buffett under some rock.
Furthermore, some managers will beat the market, some by skill and many by luck alone, even in today’s hypercompetitive environment. While no one has ever come up with reliable ways of identifying those managers ahead of time, that won’t stop many investors from trying.
So active management won’t disappear entirely.
But index funds and comparable exchange-traded portfolios now account for 28% of total fund assets, up from 9% in 2000. And no wonder. Over the past one, three, five and 10 years, only one-fourth to one-third of all stock funds have beaten the index for their category, according to investment researcher Morningstar.
Meanwhile, index funds effectively match the returns of those market benchmarks at fees that often run only one-tenth of those of active funds.
Skeptics have pointed out that if individual investors—those Wrong-Way Corrigans of the financial world—are rushing into passive funds, then active funds might be due for a resurgence. Others cite the financial analyst Benjamin Graham: “There are no dependable ways of making money easily and quickly, either in Wall Street or anywhere else.”
But the net supply of outperformance always is zero; one fund manager can beat the market only at the expense of another who must lag behind it. And owning index funds is neither easy nor quick: You must give up all hope of ever beating the market, resign yourself to a stupefyingly boring portfolio and wait years for the advantages of the cost savings to pile up.
So there isn’t any reason—other than human nature—for investors not to put all their money into index funds. Or, if you like, reserve a tiny fraction for managers who are so active that they thumb their noses at market benchmarks.
To Mr. Ellis, the future for many portfolio managers is clear: “Lots of them are going to have to go find something else to do, because the line of work they originally trained for will be fading away.”
One obvious destination, he says, is financial planning. Tens of millions of Americans need a financial adviser, but only a few hundred thousand advisers are available—many of whom aren’t investing experts. Who better to fill the insatiable demand for financial advisers than former portfolio managers who know firsthand how hard it is to beat the market?
This way, Mr. Ellis says, “investors will get better, more-valuable service from smarter people.”
In short, many stock pickers should get out of the business of managing investments and get into the business of managing investors.
China’s anticorruption drive is creating some truth in advertising.
Consider a company called China VAST Industrial Urban Development, an industrial real estate planning firm that plans to raise $160 million in an initial public offering in Hong Kong and list on Monday. It admitted outright in its IPO prospectus that “bribery and other misconduct which may be committed by our employees or third parties may be difficult to prevent or deter on a timely basis, or at all, despite our internal control and corporate governance practices.”
This “risk factor” always existed for anyone playing in Chinese real-estate markets. But it may have suddenly become more apparent with President Xi Jinping’s nationwide corruption crusade. China VAST also has to convince investors about its fundamentals. Revenue fell 60% in 2012, then rebounded in 2013 mostly because it restructured debt, notes J Capital’s Anne Stevenson-Yang.
If a corruption crackdown further hurts business, the company’s problems will really look vast.
Royal Bank of Canada doesn’t yet plan to put the brakes on the heady growth in its capital-markets business even though it risks again breaching a long-standing pledge to limit that division’s contribution to roughly 25% of total earnings.
The division accounted for nearly 27% of its overall profit in the latest quarter, underscoring the risk dilemma facing one of the world’s largest lenders.
Newly minted Chief Executive Officer Dave McKay said Friday he is confident there is room for growth in the business even as RBC hews to its “strategic guideline” calling for the business to contribute about 25% to total profits. That’s partly because Mr. MacKay still sees plenty of opportunities to expand in other areas, including wealth management.
“It’s not a cap – I think some people refer to it as a cap,” said Mr. McKay of the approximate 25% threshold, on Friday’s conference call with analysts.
“A cap, to me, [connotes] drastic action … I think as we look at the ebbs and flows of the business, we feel confident we can maintain the balance of our business model,” he added.
Nonetheless, RBC Capital Markets’ record-setting third-quarter profit 641 million Canadian dollars ($586 million), which increased 66% from a year earlier, is bound to fuel a growing debate about whether the bank is demonstrating an increased appetite for risk.
For years, RBC promised investors and credit raters that it would limit its capital markets’ contribution to about 25% of total earnings. In the third quarter ended July 31, the division accounted for 26.95% of the bank’s overall C$2.38 billion profit.
“If that were to become something that was consistent over a 12-to-18 month period where they exceeded the 25% target, then that would cause some concern,” said David Beattie, a credit analyst with Moody’s Investors Service.
For his part, Mr. McKay noted that RBC has crossed the 25% threshold before. In the latest quarter, capital-markets profits were boosted by a couple of outsized trades, and stronger equity and debt markets fueled vigorous growth in trading and loan origination.
RBC made its pledge on the capital-markets limit to assuage investor concerns about its risk appetite–an issue that was brought to the fore after ratings downgrades by Moody’s Investors Service in 2010 and 2012. Moody’s currently rates RBC’s long-term senior debt as “Aa3” with a negative outlook. That negative outlook, however, mostly reflects unrelated concerns over the Canadian Government’s proposed bail-in plans for banks considered “too big to fail.”
“If they blow the lights out again, I would say clearly it starts to become a ratings issue. And probably there has been some change in risk appetite,” said Justin Fuller, senior director of financial institutions for Fitch Ratings, which ranks RBC as the highest-rated financial institution in the world, with a double-A rating. “If you’re going to have quarters like this where all the stars align, presumably you can have a quarter where everything goes wrong. And so, then do you see results 50%,60% because of that? I think that’s our concern ultimately.”
Strong U.S. loan syndication, high-yield debt distribution, along with the bank’s ambition to realize a bigger contribution from its European trading books are all areas of concern for credit raters.
Earnings generated from capital-markets activities are considered more risky for banks because they tend to be more volatile than earnings from more-conventional deposit-taking, lending and wealth-management activities.
The chief concern for both investors and credit raters is whether capital markets will continue to outpace growth in RBC’s mainstay retail business, where it earns the bulk of its profits. In the latest quarter, RBC’s personal and commercial bank earned C$1.14 billion, down 2% from a year ago.
Meny Grauman, an analyst with Cormark Securities Inc., said investors are now more comfortable with RBC’s growing capital-markets business.
“There has been a change in terms of people’s risk tolerance. During the crisis, people were shell-shocked. You were seeing investment banks fall left, right and center — big ones and very established ones,” said Mr. Grauman. “Times have changed.”
This is what the market waited for all week: Federal Reserve Chair Janet Yellen‘s keynote speech at this year’s Jackson Hole symposium. Given that the gathering’s theme this year is labor and the jobs market, that is where Ms. Yellen directed her energy.
The market rose all week, betting on a “full dovish” speech, as we wrote earlier. Did they get that? What exactly did they get? Roger Bayston, a senior vice president in Franklin Templeton’s fixed income group, joined the MoneyBeat show this morning with his take on the speech, and what it holds for the economy and the markets.
Should investors be buying bonds from higher-rated companies?
Analysts at the Schwab Center for Financial Research, which provides guidance for individual investors, say the answer is yes.
High-yield corporate bonds recently saw a selloff, spurred by geopolitical tensions overseas and worries that the debt prices had risen too sharply. But bonds from investment-grade companies fared much better, said Collin Martin, senior research analyst at Schwab, underscoring the risks associated with investing in high yield.
Mr. Martin said the selloff shows the high-yield bond market is more illiquid—meaning it is more difficult to buy and sell debt compared to higher-rated securities. The reduced liquidity makes price swings more volatile.
“With high-yield bonds, we don’t think we’re going to see a big pickup in the default rate, but we do think at current levels, yields don’t really justify the risks involved,” Mr. Martin said. “We’d wait for a better entry point in high yield, and for now we continue to focus on investment grade.”
High-yield, or junk-rated, bonds are currently yielding 5.26%. That amounts to 3.65 percentage points in more yield compared to benchmark U.S. Treasurys, according to Barclays data. Near the end of June, the yield was 4.83% and the “spread” to Treasurys was 3.23 percentage points. But by early August the spread had shot up to 4.09 and the yield to 5.87%. Higher yields indicate lower prices.
Investment-grade bonds, meanwhile, are yielding 2.91%, for a spread of 1.02 percentage points, according to Barclays. That’s largely unchanged from around the end of June, when the yield was 2.92% and the spread was 0.97 percentage point.
“We’ve been cautious in high yield for a while now, and we saw a little shakeout at the end of June and into July,” Mr. Martin said. “We think a lot of investors are most likely moving too low in quality to get just a slight pickup in yield.”
That demand from investors, however, has allowed both high-grade and high-yield companies combined to sell about $1 trillion worth of corporate bonds so far this year, the fastest pace on record, according to Dealogic. The issuance boom is driven in part by low interest rates, and companies are using the proceeds to refinance debt and help pay for mergers and capital expenditures.
The record issuance marks an increase of more than 4% over last year’s pace, and has been a major surprise to many experts who track the bond market. At the start of the year, many analysts believed U.S. Treasury rates, to which corporate bond prices are pegged, would rise this year as the economy improved, making it more expensive for companies to borrow. Instead, rates have fallen amid the turmoil overseas and uneven economic growth in the U.S.
“We were surprised with the movement we’ve seen in Treasury yields to begin the year,” Mr. Martin said. “Like most people, we expected rates to gradually rise in 2014 and of course the opposite has happened.”
Mr. Martin said he still thinks rates will ultimately rise, but says “it could be a bumpy road.”
With interest rates surprising everybody this year and not rising, corporate America’s taken advantage of the unexpected windfall, issuing debt at a record clip. U.S. businesses are on the cusp of crossing the $1 trillion mark in debt issuance, hitting that number faster than at any time in the past and setting itself up for another record year of issuance.
The real issue, though, is what businesses are doing with all that new money, and the answers are less than encouraging for people hoping the U.S. economy can finally get itself moving under its own steam. WSJ’s Mike Cherney dropped in on the MoneyBeat show this morning with the story.
Investors betting on big market moves following Janet Yellen’s speech at Jackson Hole, Wyo., didn’t get what they were hoping for.
The Federal Reserve chairwoman was noncommittal on how the improving labor market would impact the central bank’s monetary policies. Stocks wavered between small gains and losses following her speech. Treasurys fell slightly, with the 10-year yield rising to 2.433%. In the bond market, yields and prices move inversely of one another. Gold prices edged up slightly.
Ms. Yellen pointed to the economy’s progress and even noted a continued improvement in the labor market could prompt the Fed to raise rates sooner than expected. But she also countered that statement by saying rates could remain near zero for longer than currently anticipated if economic performance disappoints.
The word “however” appeared in Ms. Yellen’s speech eight times, underscoring the noncommittal nature of her presentation, said Dan Greenhaus, chief strategist at BTIG.More In Yellen
“Today’s speech from Janet Yellen is more or less what should have been expected,” said Mr. Greenhaus. “She maintains the view that more work lay ahead but presents a set of ‘on the other hand’ explanations for number of indicators and observations.”
Stocks rallied sharply this week in anticipation of Ms. Yellen’s speech. The S&P 500’s 1.9% rally this week was the biggest pre-Jackson Hole rally at least over the past decade, according to Deutsche Bank. Jackson Hole has historically been a positive event for stock bulls. In the past 10 years, the S&P 500 has rallied the week after every keynote Jackson Hole speech, Deutsche Bank says.
With the S&P 500 nearing 2000, traders aren’t finding much in Ms. Yellen’s speech to make a push to that level just yet.
“At seemingly every turn, when articulating the view that a given indicator suggests labor market weakness or slack, she balances the observation with an alternative argument,” Mr. Greenhaus said. “On the one hand, this is more of the same from Chair Yellen who has struck a more balanced view than for which many have given her credit. On the other hand, it speaks to the level of uncertainty felt both in and out of the Fed with respect to the economy and labor market’s evolution.”
So is there anything new in the speech at all?
“There’s nothing necessarily new in today’s speech (as expected) but if we had to make a singular statement, the speech suggests those calling for an earlier rate hike did not today receive additional support,” Mr. Greenhaus said.