"With enough courage, you can do without a reputation."
-Rhett Butler (Gone With The Wind)
On this day in 1936, Gone With The Wind was first published. If you know any Depressionista who has yet to see the movie, send me their email address - the title is a great metaphor for the consensus storytelling they plugged the manic media with only 3 months ago. Maybe I'll send them a copy. Then they'll see what a real Depression looks like.
Three months is a long time - if you're short the best quarterly move in the US stock market since 1998 that is! I often smile when I hear of Wall Street's "long term" investors - some of them can't seem to muster bucking up for stocks when they should actually buy them for the long run. Then they complain that people that do are "just traders." Leave your scorecards with the clubhouse guys, and don't forget to sign them - this game is now being YouTubed.
While the June we put up was below average at best, April and May were two of the biggest months of our careers. Looking back, I will not mistake our Q2 for anything other than what it was - not being on the wrong side of a massive market move.
As of last night's close, the SP500 and Nasdaq were up +16.2% and +20.6% for Q2, respectively. If you're not into making proactive "market calls", you can look at those returns and say goodbye. Who needs those kinds of numbers for the long run, right? Don't worry, you're definitely not going to see them again in Q3. Now they're "gone with the wind."
Tomorrow will be a new day, month, and quarter. The people of Iraq will be "free", sort of... and the price of geopolitical risk will continue to rip higher at gas pumps worldwide. If the price of gas isn't high enough by year end, the Russians announced this morning that they'll be raising it by another +10% in 2010 anyway. Ah the unintended consequences of Burning that Buck. Putin, Ahmadinejad, and Chavez, have at it.
After seeing the REFLATION trade associated with Burning The Buck morph into consensus in mid-June, we have ourselves quite an interesting setup developing in global equities. Should I stay or should I go? Will the US Dollar find a bid in July like it did in January? Or will its credibility continue to be gone with the wind? Predictably, after seeing equity deals quintuple in Q2 (vs. last quarter) to $26B, the bankers are back, and Jaime Dimon is already talking about raising them banker base salaries! Great Depression?
If you want to see who the real "short-term" investors in this country are, look no further than Washington and Wall Street - dollar down gets the bankers, politicians, and US debtors paid. Trading down at $79.64 this morning, the US Dollar Index is stoking the fires of inflation. Inflation? As Scarlett O'Hara replied, "I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow."
My Macro team's call is that REFLATION will morph into INFLATION by Q4. I know, I know... that's not what Bernanke is forecasting, but that's the point. Run an accountability check on the poor man's inflation forecasts for the last 3 years!
No one in the politicized Federal Reserve system is allowed to make this call, yet...
They will have to once reported inflation (CPI and PPI) accelerates on a year over year basis in Q4. The Q4 2008 comparisons for basically anything with a marked-to-market price are incredibly low. Do the math; it won't take your investment team very long to get answers we have.
For all of my "invest for the long run" fans out there, in terms of levels, here are 3 lines in my 27 line model that matter right now:
1. US Dollar Index $82.18
2. Oil $68.67/barrel
3. Copper $2.19/lb
If these price levels hold (i.e. the USD doesn't breakout above that line and oil/copper don't break down below those lines), we will begin to see REFLATION morph into INFLATION in Q4. If these and the other 24 prices in my model change, I will. That's it. That's my call.
So what to do with this call? Well, I'm kind of a day-to-day risk manager type of a guy. So I'll when I wake-up to new prices tomorrow, I'll let you know. While the "long term" folks seemingly don't worry so much about getting wet while walking outside on days that it's raining, I'll be sure to have some umbrellas on hand. My Scottish golf caddy, Fraser, gave me a great big one.
That great big quarter we just printed is gone with the wind. Congratulations to some of our clients who we know had monster quarters - upward and onward we go.
I have immediate term upside resistance for the SP500 at 935, and I'll start making some sales there. We crossed a critical breakout line of immediate term TRADE support at 920 yesterday. Use that tiger line as the one that needs to hold, or we'll be out of bounds again on the bullish momentum side of this market.
Best of luck out there today,
EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.
QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.
EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.
XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.
CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.
TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/30. Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.
EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.
XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.
XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.
SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.
UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.
EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear. The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
"With enough courage, you can do without a reputation."
The USDA Food Safety and Inspection Service announced yesterday that JBS Swift has expanded a voluntary recall to approximately 380,000 pounds of beef products following 24 reported cases of E. coli in multiple states, 18 of which have been linked to products processed by the firm. Swift is the third largest US processor of beef and pork.
We went long the ETN COW in our portfolio on June 16 based on overlapping quantitative factors, seasonal inflections and macro events in South America. Since then a cull of dairy cows driven by milk prices has contributed to the perception that US Cattle headcount will shrink further.
Now, with several slaughter facilities destroying product due to E. coli concerns, the market anticipation is that the demand for beef will increase as producers fill outstanding orders. Obviously, whether this scare is enough to put a sizeable amount of US consumers off beef for a while is the wild card.
Yesterday's health scare is an unanticipated external event helping our position, and while the full impact of this outbreak on the market not yet clear, we remain confident in our thesis.
Within the framework of volatility and volume getting annihilated, the SP500 is also in the midst of making a series of lower-highs. On balance, that's less bullish than where we were in April-May. Then again, that was when an orangutan could make money on the long side. This is tougher. Trading the range usually is.
So how high can we go? Below I have outlined 3 important lines:
1. The immediate term breakout TRADE line = 920
2. Immediate term TRADE resistance = 935
3. The YTD closing high = 946
Given that the US Dollar is starting to fall again (Bernanke has kept the free money on the tables), anything can happen here. For now, I'm playing for 935 - but into month end and an employment report on Thursday (which I think will be better than expected), be careful with those high short interest short positions.
Keith R. McCullough
Chief Executive Officer
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"Endless money forms the sinews of war."
Our guru of everything China here at Research Edge, Andrew Barber, put together the picture below. Sometimes pictures are far more powerful than prose, so I'll cut this note short.
What you see in the Ben Bernanke quote below is the product of the most highly politicized US monetary policy in American history. When the US Federal Reserve was established prior to World War I, this was not the objective. The objective was to protect the credibility of one's currency and prevent financial panics.
Free money policy will continue to erode the currency that backs it. For the immediate term TRADE, unlimited credit creation backed by nothing other than political compromise will continue to be positive for REFLATION. In the long run however, this groupthink of levering up America's future will be dead.
The Chinese are selling. Watch what they do, not what the manic media interprets them as saying.
Keith R. McCullough
Chief Executive Officer
Last week, I got hold of a Burger King advertisement that seemed so inappropriate, I assumed it was a spoof. The company's IR contact, however, confirmed that the ad was part of BKC's marketing campaign in Singapore.
The picture of the ad is so distasteful I did not even want to put in this post.
After seeing this extremely distasteful ad, I did not think it could any worse. But this weekend, I learned about CKR's "Name Our Holes" marketing campaign that is being used to promote Hardee's launch of a biscuit/ doughnut hole product. And, the television commercials that are supporting this new campaign are as bad as the name would imply.
Edgy marketing is not new to CKR. The company has featured Paris Hilton wearing close to nothing to drive awareness for Carl's Jr. among its targeted "young, hungry guys." This "Name our Holes" campaign, which the company said is being used to "entertain [its] customers," reaches a new low as it relates to social acceptability. And, Hardee's demographics are different than those of Carl's Jr. I don't know if the average consumer in Hardee's home states in the Midwest and the bible belt Southeastern states will be as accepting as Carl's Jr.'s predominantly California-based customers. Looking at Carl's Jr.'s recent same-store sales trends, one might question whether the often sexually provocative advertisements are even working for that concept.
Some of the names used in the commercial are "goody balls," "ball munchers," "tasty nuts" and "iced b-holes"?
As I have said before in reference to Burger King, a successful advertising campaign is critical to driving incremental traffic into restaurants within the mature QSR market. Burger King's Sponge Bob Square Pants advertisement that featured a beloved children's character along with women dancing suggestively drew criticism and seemed to do nothing to drive traffic (company experienced significant traffic declines in March which appears to continue into the most recent quarter).
Bernanke-Panky - Congress is Shocked At Politics in High Places
SEC / CFTC - The Regulatory Smackdown
And: ETFs - We Don't Want To Say We Told You So... Actually, We Do!
"Paulson - BofA is the turd in the punchbowl."
This quote - reported in Friday's Wall Street Journal as "Jan. 9 note by participant in call among Fed, Treasury, OCC, FDIC" - is being waved under Fed Chairman Bernanke's nose as evidence of skullduggery on the part of the Gang of Two - Paulson and Bernanke - in their alleged manhandling of BofA CEO Ken Lewis. Lewis has stated under oath that he was "threatened" by Paulson and Bernanke. One comment we have not seen in this Brouhaha in a Brown Betty is the fact that, an out-of-work Ken Lewis is not exactly to be pitied.
"Threatened"? We recognize that, at over six feet, former football player Paulson is physically imposing. But what was he going to do to Lewis - beat him up?
Reality check: Wall Street Journal staff reporter Kate Kelley has come out with a book - Street Fighters - based upon the series of articles she wrote about Bear Stearns that ran in the WSJ last year. The book is a quick and lively read. It purports to chronicle the blow by blow of the last three days of Bear's independent existence and comes complete with personal portraits of key players. For all the excitement that fills its pages, we found by far the most important passage is a brief paragraph on pages 164-165, describing Treasury Secretary Paulson's discussions with Deutsche Bank Chairman Josef Ackermann.
Ackermann, whom Paulson considered a possible buyer for Bear, responded to Paulson's query by saying that Deutsche would be making no such offer. Further, Ackermann said "if those guys go down, we're not interested in doing business with any bank in the United States."
We thought that sentence worth the entire price of the book, and then some. Whether we agree or disagree with the program Paulson and Bernanke pursued, they certainly saw with crystal clarity that the entire US financial system - and with it, the American way of life - was on the line. Paulson may, in fact, have fully believed what he was saying when he told members of Congress, in his famous secret late-night call, that there would be rioting in the streets, nation-wide unrest, and martial law if the TARP were not passed and implemented. In light of the projections made in the latest IMF report, we fear Secretary Paulson's predictions may yet prove true.
Fast forward to BofA CEO Ken Lewis whining to New York AG Cuomo that Paulson and Bernanke "threatened" him over the Merrill acquisition. Then faster-forward to Thursday of this week, when Chairman Bernanke sat before a Congressional panel and took it on the neatly-whiskered chin.
Bernanke testified that the decisions at issue "were taken under highly unusual circumstances in the face of grave threats to our financial system and our economy" (WSJ, 26 June, "Bernanke Blasted In House"). Reality check, Part II: Lewis, Paulson, Bernanke - don't let the Ivy-League veneer fool you - these three guys are tough and smart, and they do not - repeat, Do Not - take "No" for an answer. Lewis and Bernanke, both having been well coached by their counsel, are walking the finest of lines - they have to balance avoiding perjury, with avoiding screaming back at Congress and asking why they are going through this self-serving Inqusition, instead of supporting those who did the dirty work of keeping the markets afloat.
For this Deluge in the Royal Doulton is nothing more than a self-serving exercise for Congress to distract public attention from the fact that they caved in to the pressure from the Dynamic Duo, giving Paulson and Bernanke carte blanche over... uhmmm... a really large amount of money.
If one believes - as Congress clearly did at the time - that the rescue of the US financial system depended on extraordinary measures, one can not have it both ways and now go after those who forced the issue.
As the quote from Josef Ackermann makes clear, the credibility of the US markets was mighty tenuous. The trillions thrown at the marketplace notwithstanding, the ice upon which we tread still seems perilously thin. For all its economic clout, China is not as much creating global events, as taking advantage of them, and the current campaign to uproot the US dollar as the world's reference currency is a sign that the tide has turned definitively away from our markets as the sole beacon for the global economy. The only questions now are, how much influence will the US lose, and how quickly will we lose it?
The failure of a deal to rescue Merrill Lynch would have blown a hole right through the hull of the US market and our economic ship would have been sunk for good.
What next for these hearings? Our nickel is on Mr. Bernanke for another term. He will surely get Geithner's vote - and it is clear that President Obama is giving Secretary Geithner enough rope to either tie down the monster, or hang himself and the Ship of State and all who sail in her. For all the screeching on the Hill, if Congress goes after Chairman Bernanke for his role in the BofA / Merrill deal, Congress itself will have to admit that they were reckless in approving the TARP and handing the money over to the Pair Extraordinaire.
As just one example of how this might have turned out differently, ranking Republican Darrell Issa went hellbent-for-leather after Chairman Bernanke for Bernanke's failure to report Merrill's undisclosed losses to the SEC. Lawyers can debate whether the Chairman should have done so, or at what point. But as a practical matter, we can think of no worse lapse of judgment than bringing Chris Cox into the mix as the deal teetered on the brink.
Ken Lewis is no pansy. He may have not known the full extent of Merrill's financial pain, but - not to be facetious - there isn't a hell of a lot of difference between $9 billion in undisclosed losses, and $12 billion in undisclosed losses. And when he went to Paulson and Bernanke, no doubt trembling with rage, we envision Paulson - football player, high-powered investment banker, all-around tough guy - telling him, "shut yer trap and quit yer whining, and don't expect us to bail you out if you go shooting off your mouth now in the middle of the deal." Paulson was right: BofA was the turd in that punchbowl. Where else were they to put it now?
Yes, under proper corporate governance standards, Lewis should probably have evoked the Material Adverse Condition clause. Yes, under proper regulatory and oversight standards, the public sector should not encourage the private sector to pursue highly irresponsible expenditures of shareholder capital. Yes, under the standards of free market capitalism, federal monies should not be offered to support these highly irresponsible transactions. And yes, under proper legislative procedures, Congress should not allocate a single dollar - much less nearly a trillion of them - without having heard full testimony and performing a thorough review of the uses to which the monies would be put, the persons and mechanisms in place to ensure proper management of the programs to be financed, and what measurements would be applied to determine success of the programs in question.
If Congress does not re-affirm Chairman Bernanke when President Obama nominates him for another term, who will answer for all of this?
Do you get it now?
The reigning market regulators - the SEC and the CFTC - are engaged in a careful minuet. Even as they embrace, it is not clear whether they are dancing with one another - and impossible to tell who is leading.
As SEC Chair Schapiro arms her minions, CFTC Chair Gary Gensler appears to be making a quieter bid for dramatically increased power - one he may well win with no fanfare.
Gensler's proposal makes sense, and may be the only practical way of achieving the public policy objective of market transparency and stability. The CFTC has a much lower public profile than the SEC. Their brief is to promote market efficiency and transparency - as distinct from the SEC, which is designated an investor protection agency. To most professional observers, the CFTC does its job fairly well - the SEC, in the past decade or so, not at all.
Gensler tells the Wall Street Journal (26 June, "CFTC Targets Derivatives Dealers") "The lack of regulation of dealers is 'one of the great lessons' of the financial crisis." Alternatives, such as Senator Harkin's proposed legislation requiring OTC derivatives to be cleared through regulated exchanges, may gum up the works because they fail to take into account the mechanics of the marketplace they seek to regulate.
The credit derivatives business is, by definition, a vast market of individual contracts. These contracts are not standard, and will thus not be amenable to exchange trading. As portfolio holdings, they are impossible to price in a mark-to-market environment, and traditional clearers will be hard pressed to take them into their systems, as there is nothing to hold. As Gertrude Stein said, "there's no there there." (She was speaking about the city of Burbank, CA. The way things are going, this comment may take on renewed meaning.) This makes exchange clearing more complicated than it needs to be - and still does not address the instruments at their heart, which is the issuers. Could it be that Senator Harkin is putting out a red herring, making himself look tough, while keeping hands off the investment banks that are sources of campaign contributions?
Chairman Gensler's proposal, to regulate the issuers, looks to go straight to the heart of the matter. Which is why it may face stiff opposition.
SEC Chair Schapiro, meanwhile, is gaining praise (Financial Times, 26 June, "Schapiro Gets Troops Ready For Regulatory Turf War"; Floyd Norris, 22 June, "Good News At The SEC") for her recent appointment of University of Texas law professor Henry Hu to "a senior risk position." Professor Hu has done recent work on the "empty creditor" problem - the phenomenon of investors who buy credit default protection, then force companies to credit events. The investors lose out on their equity or corporate debt holdings, but they make a multiple of those losses on cashing in their credit default swaps.
Critics are saying Professor Hu's work might be deemed more important if he had published at the start of this decade, on the heels of the Marconi restructuring. In the Marconi transaction, UBS insisted that the restructuring be packaged in such a way as to create an ISDA-defined "credit event", so it could collect on its default protection contracts. After considerable haggling, this finally transpired in 2002. Professor Hu published his first paper on the "empty creditor" problem in 2007. Still, this was as an academic, and not a market participant. We are willing to give Chairman Schapiro the benefit of this particular doubt and see how Professor Hu operates with his finger on a live pulse.
A loyal reader of this Screed has written: "Hey! I just want to know how many of those 'seasoned, Wall Street vets' Mary Shapiro has hired so far. THAT will tell you how much CHANGE we are going to have."
Point taken, my friend.
The cynic in us says that Chairman Gensler, with an imminently sensible proposal, will encounter tremendous resistance. Chairman Schapiro, by contrast, will find herself praised for her new appointment. After all, she is bringing in, not the UBS bankers who figured out how to force Marconi into bankruptcy, but the law school professor who wrote about it five years after the fact.
ETFs - Again?!!!
None of them along the line knows what any of it is worth.
- Bob Dylan, "All Along the Watchtower"
We have spent a fair amount of virtual ink, going back to the start of January, addressing what we see as critical issues in the ETF / ETN space. These issues focus around disconnects between the way the ETFs are advertised to work, and the way they actually do - or threaten to - act in the marketplace where, despite all representations to the contrary, they create additional volatility in the underlying securities, commodities and contracts on which they are based.
We have also been particularly vocal about the way ETFs have been marketed to retail investors, and the lack of apparent training - and especially the lack of regulatory oversight - in this end of the market.
Now that the biggest players in the world are getting into this business, with PIMCO issuing ETFs, and with BlackRock buying Barclay's iShares business, we believe the risks have gone to warp.
Now the regulators have finally gotten antsy about these instruments. This week saw an alert issued by FINRA about the marketing of these instruments to private investors. The Wall Street Journal (23 June, "Finra Urges Caution On Leveraged Funds") reports that FINRA "has reminded brokers and registered investment advisers about their fiduciary duties when selling ETFs that offer leverage, are designed to perform inversely to the index or benchmark they track, or both." Specifically, the article reports, FINRA "reminded the brokers and advisers that these instruments are complex and typically unsuitable for retail investors who plan to hold them longer than one trading session."
Looking into FINRA Release 09-31, we learn that, between December 1, 2008, and April 30, 2009:
"The Dow Jones US Oil & Gas Index gained 2 percent, while an ETF seeking to deliver twice the index's daily return fell 6 percent and the related ETF seeking to deliver twice the inverse of the index's daily return fell 26 percent.
An ETF seeking to deliver three times the daily return of the Russell 1000 Financial Services Index fell 53 percent while the index actually gained around 8 percent. The related ETF seeking to deliver three times the inverse of the index's daily return declined by 90 percent over the same period."
We find it noteworthy that FINRA itself makes no mention of any analysis a prospective investor should perform - such as reading the prospectus, or even asking one's stockbroker (Oops! Sorry, Guys. One's "Financial Adviser") to explain how these things work. Seemingly, FINRA itself also has not performed this analysis. If it had, we are confident it would have found - not two things, but one thing.
The one thing it would have found is that the typical ETF structure is about as complex as any OTC derivative contract, and beyond the patience, if not the ken, of the average investor.
There would be a second item to notice, which is that these ETFs reset daily, and that it is likely a bad plan to hold them for long terms. We do not believe FINRA would have arrived at that conclusion, which would require analysis of the ETF, because they are no smarter than any of us. To put it as gently as possible.
Heads up to you folks who are putting these instruments into your customers' accounts: the Notice refers to NASD Rule 2310, relating to Suitability. It starts by observing that, prior to soliciting the purchase of ETFs, a firm must first make a determination as to whether such an instrument is a suitable investment for any customer. Once it has passed this hurdle, the firm may then proceed to determine suitability investor by investor.
In other words, they are leaving it up to the firms that are marketing these things - and to investment advisors who are putting them into managed accounts - to determine whether they should even be touched with the proverbial ten-foot pole.
One of our contacts, who has served in senior compliance roles at the Exchanges, and at major trading desks, told us that his experience reading ETF prospectuses was every bit as confusing as reading the contracts that went along with complex OTC swaps, and in much the same way.
This immediately does not sound like a product that is suitable for any retail investor.
A friend out in the financial ether has recommended that brokers treat ETFs like options. We think this is a brilliant idea, for brokerages that want to continue to do this business.
ETFs and ETNs are new instruments, and they entail unique risks. Risks that have not been widely available in the marketplace heretofore. Just as with options, we recommend creating a separate Risk Disclosure Document, together with a separate suitability approval process for investors who wish to trade these instruments. They could be held in a separate account type, so they would be readily visible to branch managers and compliance officers charged with trade and suitability reviews.
The one concrete bit of guidance that FINRA hands out is that "While the customer-specific suitability analysis depends on the investor's particular circumstances, inverse and leveraged ETFs typically are not suitable for investors who plan to hold them for more than one trading session, particularly in volatile markets."
FINRA goes on to invoke IM-2310-2(e) (Fair Dealing With Customers with Regard To Derivative Products Or New Financial Products), and then to make specific mention of Communications With The Public, Supervision, and finally, Training of sales personnel.
If you are in the business of trading ETFs for your customers - or in your managed portfolios - you must read this Regulatory Notice in full and take it to heart. As we saw with earlier NASD / FINRA initiatives (you may remember the issues around the marketing of hedge funds prior to the SEC's requiring registration) the regulators are using the Sales end as the very large tail to wag a much larger dog.
ETFs originated as institutional contracts and were frequently issued for high-frequency traders to arbitrage against. It was, of course, inevitable that they should become a retail product. It is now inevitable that those who market them shall be smacked first.
We will have to see who will be first to flinch. We believe it will not be PIMCO or BlackRock - their money management arms are big enough to be major purchasers of their own ETF product - but suddenly Goldman and those other guys who dropped out of the bidding for iShares are looking just a bit smarter.
So, for brokers and bankers who want to find the next unregulated item to pump and dump, where will they turn? We have an abiding faith in the creativity of Wall Street. There will be diligent professionals who will create viable ETF strategies for their customers.
And there will be crooks who even now are working to bring you the Next Big Thing.
Last note: with the SEC proposing that a fiduciary standard be applied to brokers, this looks ready to become a hot button.
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