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Dodd Frank's long-distance paper chase - Fullermoney

Last updated: 06:30 29 Oct 2011 EDT, First published: 05:30 29 Oct 2011 EDT

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Dodd Frank's long-distance paper chase - My thanks to a reader for this informative article (may require subscription registration) by Gillian Tett for the Financial Times. Here is the opening:

A couple of days ago, a senior banker in New York showed me a memo that he had just received from his lawyers about the so-called Volcker rule for proprietary trading. This stretched to 82 pages on an iPad, replete with dense charts.

And that was merely his summary document; the "full" explanation ran to several hundred more pages. "It's mad!" he sighed, explaining that this was only one of several memos he had recently received on Dodd-Frank and Basel rules.

It is hard to disagree with that verdict. Almost two years ago, I wrote a column lamenting that the draft Dodd-Frank bill was some 1,300 pages long. After all, I observed then, almost nobody I knew had actually read those 1,300 pages in full; most people were simply too busy to wade through that paper, even as they prepared - or debated - that bill.

But now I realise that those 1,300 pages were the least of the problems. When the bill was finally passed 15 months ago, it had swelled to 2,600 pages, and since then, lawmakers have decided that they will need to make some 243 new rules to turn that bill into law, and conduct 65 studies. That has necessitated the formation of 100-odd committees, each of which is now spewing out consultation documents, which typically run to several hundred pages.

Those consultation documents, in turn, generate endless private sector legal memos. And the agencies are receiving more "feedback", too. Officials from the Commodity Futures Trading Commission, for example, say that they have now received no fewer than 25,000 - yes, thousand - comments on the proposed rule reforms; some 15,000 relate to their reforms for commodity trading limits. And the CFTC is only one of the agencies involved in this feedback process. By law, regulatory officials then have to read each and every comment before anything can be done; and those submissions can sometimes stretch - you guessed it - to several hundred pages each. That 1,300 page number, in other words, now multiplies a thousand-fold, if not ten-thousand-fold, across the system as a whole; it makes a collateralised debt obligation look almost simple.

My view - We need sound regulations to prevent systemic abuse. However, regulators can all too easily become a law unto themselves, creating jobs for the boys, swamping businesses with red tape and endless compliance overheads, while seldom if ever preventing the criminals and fraudsters from creating mayhem.


Analyst's comment on results for my second largest personal long-term investment holding -
This item is in the Subscriber's Area.


Email of the day (1) - On teaching and perceptions:

"I have set up my own company teaching emerging market finance. I am giving courses at HEC business school and other training institutions, aside from being a consultant to a small start-up fund manager. Being able to "tell it as it is" rather than being shackled by management fears of client redemptions for being too honest is very liberating.

"Your London and Monaco courses I attended almost 10 years ago, of course, inform all my teaching.

"Here is a fascinating chart suggesting things are not all they seem in the US. I am already researching the best options to play this."

My comment - Congratulations on your new venture and I am sure your students benefit far more from your experience than they would from an academic with little practical experience of the industry.

My London TCS workshops were sufficiently numerous to merge somewhat in my memory. However, I certainly remember that lively private seminar in Monaco.

Thanks for the update and also a graph likely to be of interest to many subscribers.

This item continues in the Subscriber's Area.


Email of the day (2) - On yesterday's market comment:

"I trust bond analysts more than equity. The dog that didn't bark in the night: the Italian 10year bond is unmoved by all the orchestrated hot air."

My comment - OK, but they are two different asset classes, and why buy sovereign debt of indebted countries when you can buy equivalent yields, or nearly, with companies which have earnings growth prospects and strong balance sheets? That said, even Italy could be OK when it moves beyond the Berlusconi era, raises the retirement age and privatises some of the country's numerous state holdings.


Today's interesting charts -
Price charts enable disciplined observers to monitor trend consistency and momentum, and also to recognise the dynamics of eventual trend change.

China's Shanghai A-Shares Index (weekly & daily) has had a number of false starts over the last two years, during which the economy has continued to grow strongly, enabling valuations to improve. Interestingly, after a significant decline since April, we have seen two upside key day reversals off reaction lows this month, and a weekly key reversal has also occurred over the last five days. These reversal dynamics indicate that a low of at least near-term significance has been reached and a new closing low for the year would be required to offset current scope for sideways to higher ranging in a further recovery over the next few months.

This section continues in the Subscriber's Area.


Email of the day (3) - On the USD/JPY:

"I would very much appreciate if you can comment on the usd/yen cross rate in one of your future comments and/or audio.

"As always, thanks for the wonderful service."

My comment - Thanks for your kind words and especially for a question certain to be of interest to many subscribers.

This item continues in the Subscriber's Area.


Interesting report on distressed sovereign debt - This item is in the Subscriber's Area.


Quote of the week (1) - On "the power of greed", from a protestor occupying a street in front of Toronto's stock exchange:

"It's weird protesting on Bay Street. You get there at 9 a.m. and the rich bankers who you want to hurl insults at and change their world view have been at work for two hours already. And then when it's time to go, they're still there! I guess that's why they call them the one percent. I mean, who wants to work those kinds of hours? That's the power of greed."
Jeremy, 38 (courtesy of Laura)


Quote of the week (2) - On democracy:

"We all know what do to...but we don't know how to get re-elected once we've done it."
Jean-Claude Juncker, Prime Minister of Luxembourg (courtesy of Thomas)



Additional commentary by Eoin Treacy

Base formation completion and the Healthcare sector - Healthcare is a very broad theme encompassing everything from residential care and insurance to reliable dividend payers and cutting edge innovation. The healthcare, energy and technology sectors share an ability to introduce efficiencies and new practises which can radically improve how we live our lives. More than most, these sectors have the ability to literally create value and are therefore worth monitoring for their potential to represent the 'next big thing'.

On March 5th 2010, I clicked through the constituents of the Nasdaq-100 looking for shares which were completing long-term bases. I did not know it at the time but exposure to cloud computing was a theme common to almost all of the technology results. At the time a number of pharmaceuticals were also moving to a position of outperformance but the crowd appeared to be focusing more on technology.

In yesterday's piece focusing on shares hitting new highs, two healthcare stocks particularly attracted my attention. Biogen completed a very lengthy base within the last year and Bristol Myers Squibb appears to be in the process of doing the same. Base formation completion is a sufficiently rare occurrence that it prompted me to attempt to ascertain whether there are other healthcare shares completing lengthy bases.

To do this I used the Chart Library High/Low Filter to scan the constituents of NYSE, AMEX and the Nasdaq Composite for shares that hit at least new 3-month highs or lows in the last five days. There were 1294 results. I next used Bloomberg to identify sectors and subsectors for these shares. The various segments of the Healthcare sector were well represented in the list. The presence of many food and restaurant as well as apparel companies was also noteworthy. I will concentrate on these in a subsequent review. I next isolated 114 healthcare related shares that have made at least new 3-month highs in the last five days. By excluding insurance, REITS and hospital shares from my review, the number was decreased further. I put these shares into a section of my Favourites and used the 'View All Charts' function to quickly scan through the charts on a 20-year basis.

This section continues in the Subscriber's Area.


Newmont Profit Beats Analysts' Estimates as Gold Prices Climb - This article by Liezel Hill for Bloomberg may be of interest to subscribers. Here is a section:

Newmont Mining Corp., the largest U.S. gold producer, reported third-quarter profit that topped analysts' estimates after bullion prices rose to a record.

Net income fell 8.2 percent to $493 million, or 98 cents a share, from $537 million, or $1.07, a year earlier, Greenwood Village, Colorado-based Newmont said today in a statement.

Earnings excluding an impairment charge related to securities held by the company were $1.29 a share, beating the $1.24 average of 14 analysts' estimates compiled by Bloomberg.

Sales rose 5.7 percent to $2.74 billion from $2.6 billion a year earlier.

Chief Executive Officer Richard O'Brien plans to spend about $7 billion to boost annual gold production by 35 percent to 7 million ounces by 2017, he told investors in April. Gold, which has risen for 10 straight years, averaged $1,705 in the third quarter, 39 percent more than a year earlier. The metal reached a record $1,923.70 an ounce on Sept. 6 in New York.

"I think they're starting to win people over," John Stephenson, who helps manage $2.7 billion at First Asset Management Inc. in Toronto and owns Newmont shares, said in an interview before the results were released. "I think they have come a long way by getting upfront with the dividend program, they've shown some leadership there."

Newmont, the second-biggest gold miner by production, said in April it would link its dividend to the gold price, and announced last month it was sweetening the payouts for quarters in which gold exceeds $1,700 an ounce. The company said on Oct. 26 it raised its quarterly dividend 17 percent to 35 cents, from 30 cents.

My view - The NYSE Arca Goldbugs Index has been largely rangebound for much of the year while gold has been considerably more volatile. The gold price now looks more likely than not to have formed a medium-term low near $1550 which should be a positive for companies with un-hedged production. Newmont mining, by linking its dividend payment to higher prices, is making an explicit attempt to highlight the benefits of owning gold shares rather than physical metal.

This section continues in the Subscriber's Area.


ETFs and the Present Danger to Capital Formation Testimony of Harold Bradley and Robert E. Litan before the Subcommittee on Securities, Insurance, and Investments of the Senate Banking Committee - Thanks to a subscriber for this interesting testimony which is in line with our view that the proliferation and increasing complexity of ETFs is not a healthy development. It is posted without further comment but here is a section:

With the preceding mechanics in mind, it will come as no surprise that there can be enormous one-way moves in ETF-driven stocks in very short periods of time. This happened en masse in May 2010 during the so-called Flash Crash (chart 2), and again in October 2011 when stocks experienced a "Flash Up" as the Russell IWM (Russell 2000 small cap ETF) rallied almost 7% in the 20 minutes prior to the close (chart 3). This happens as buyers of futures and ETFs, generally triggered by news or technical price patterns, all jump in the water at the same time. The APs, who by regulatory requirements must provide constant bid and ask prices for each ETF, then scramble to purchase other closely related packages of the same securities or the underlying stocks themselves.

High co-movement of securities is not new, often occurring when markets reflect crowd panic or euphoria. What is new, however, is how ETFs decrease diversification benefits, with stocks and sectors worldwide moving together, even when there is no panic. Stocks move together today more than at any time in modern market history with recent data indicating that individual common stock prices that make up the S&P 500 index now move with the index 86% of the time (chart 5 and chart 6). As has been described, there are now so many products consisting of the same common stocks that it would be surprising only if this tight linkage was not evident.


Semiconductor and Technology Primer - This 353-page report contains everything one might need to know about the technology sector and its various facets. It is posted in the Subscriber's Area.


Email of the day (1&2) -
on an addition to the Chart Library:

"Really informative piece on China once again. Many thanks. Can you please add a chart for Corvus Gold (TSE: KOR)?"

And

"Can you include this chart in library -----Winton Futures Fund - ticker symbol is STAMWIF:VI.

"Thanks for the fantastic service- last 3 months have been testing but Fullermoney keeps us sane"

My comment - Thank you both for your kind words and for these suggestions which has been added to the Chart Library.


Speaking engagements - I have agreed to participate in couple of events at this year's World Money Show in London. The times and dates for these are.

Panel discussion "Global investing: Where in the world are the next breakout winners?" 4.30 pm - 5.30pm on Friday November 11th.
I will also host The World Money Show's inaugural Alumni Coffee/Tea Meet & Greet between 8.15 am - 9.15am on Saturday November 12th.


The Chart Seminar November 3rd and 4th - The next TCS will be in London, on the fast approaching dates above and held at the Radisson Edwardian Hampshire Hotel. This is in the heart of London's West End, with the main entrance on the lower side of Leicester Square and views overlooking Nelson's Column in Trafalgar Square.

Bearing in mind the adage: Wealth is accumulated in down markets and realised in up markets, this is a good time to develop and hone one's behavioural, technical skills.

Come along to learn, contribute, profit and enjoy.

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