• After a thrilling career in investment banking and an exhaustive battle with regulatory officials—I decided that i needed a reset to define a new purpose and goal outside of investment banking. With over two decades of pursuing numbers and performance, I wanted to move from the empirical study of numbers beyond the balance sheets. I sought to the understand what drove the value creation by highly successful enterprises that have generated over billions of dollars in value and job creation.

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  • The Japanese stock market continued to surge giving the Nikkei 225 index a gain of 56.7% for the year—outpacing all other major markets including the Dow Jones and the FTSE 100. The Nikkei's 2013 performance was its best year since 1972, in that year the market increased an incredible 92%.

    The additional 0.7% gain on the last trading day made it the index's highest level in the last (6) six years, signaling a massive reversal of Japan Inc.'s fortunes. Prime Minister Shinzo Abe commented on the benchmark, leaving his vacation to ring the closing bell at the Tokyo Stock Exchange. Mr. Abe cited the historic highs as positive results from his administration's monetary policies dubbed "Abenomics"—the focus of these policies has been to create liquidity from loose monetary policy that will serve to power inflation in the real economy. Japan has had a 20 year period of stagnant growth and deflation. In his comments at the closing ceremony, Mr. Abe urged his countrymen to use the hundreds of thousands in bonuses provided by the performance to " keep it moving.."

    Apparently foreign investors are encouraged by the policies, as approximately over $125 billion of overseas money was invested in Japan, the highest amount since 2005. This is what caused Nikkei 225 index to rise to 16,291.31 and outpace the Topix on the final trading day of the year. The much broader Topix closed up 0.95% up to 1,302.29 with an impressive 52% gain for the year. When the Nikkei gains faster than the Topix it is a sign that overseas investors are buying equities thematically as a bet that there will be a weakening currency and stronger stock market. This is called short yen/long stocks by traders, due to the smaller composition of stocks in the Nikkei (225 companies) foreign investors find it much easier to research and invest in the Nikkei Index. In contrast, the Topix which is composed of 1755 companies, is much more complex and creates a need for a deeper understanding of the country and companies.

    Prime Minister Abe and his administration have sought to end a condition that the Japanese call "Cho Endaka"—which means ultra high yen. In one year, the Japanese currency has dropped approximately one fifth against the US dollar, this has created a tremendous boost for the export driven Japanese economy and is the result of cheap yen and rising stock prices. The close of the session saw dollar buying 105.35 yen, a dramatic increase from the 87 yen level at the end of 2012. Look for the Nikkei to be a source of volatility and a major focal point of the trading and investing community, as trading experts have called for a range of 18,000 to 20,000 in the Nikkei for 2014.

    Follow me on Twitter @ShawnDBaldwin

  • The International Monetary Fund (IMF) has taken a radical new approach in debt restructuring to lessen the pain of austerity and is developing plans that impose initial losses on bondholders of European country bailouts. The general thesis behind the new plan is that the IMF made a mistake in causing some of the debtor countries (namely Greece and Portugal) to shoulder all of the pain in their recovery.

    In the new proposals, the IMF is urging European governments to write down the loans to bailout countries in an effort to reduce the German induced austerity. The plan has received significant push back at the fund and from the United States Government—the largest financial contributor to the IMF. Many economists and financial market participants have scoffed at the idea and tagged it as a potential harbinger of doom for the feeble European credit markets.

    As expected, Germany took the lead in opposing the new restructuring plans. There has also been a fair amount of dissenting views from within the organization by some of the organization's lawyers and economists. Due to the lack of agreement, don't expect a formal presentation until June of 2014.

    The subject was a particular source of consternation at the 2013 IMF Fall meetings in D.C. The underlying reason being that the European countries have approximately $460 billion in loans to the bailed out countries versus the roughly $107 billion that the IMF has at stake. Further vexing other countries is that the IMF is a preferred creditor—so it's loans are paid back first, giving it the least risk. This has made some assert that the IMF doesn't want to pay private creditors such as hedge funds. This position harkens back to the former days of glory when the IMF was the lead and not a junior member of the bailout team, some have viewed it as a way for the IMF to assert dominance in the next bailout.

    The proposal might have chilling affects in the future as the idea of countries not paying their creditors is very likely to spook the markets and it participants. The notion of attempting to stymie bondholder's rights is likely to reduce potential investors and decrease the likelihood of countries approaching the IMF because of potential stigma. Fixed income market participants should to pay rapt attention to these developments as private investors most definitely will.

    Follow me on Twitter @ShawnDBaldwin

  • Born in Holdenville, Oklahoma in 1928 as Thomas Boone Pickens, Jr. but known through out the world as T. Boone. "Pick" is an American tycoon who rose to prominence by acquiring oil and gas companies throughout the 1980s. Before entering the oil business, Pickens attended Oklahoma A&M where he graduated with a degree in geology. Shortly thereafter, he began his career working at Phillips Petroleum. He stayed with Phillips until 1954, and in 1956 he founded his company Mesa Petroleum.

    As the founder of Mesa Petroleum, Pickens spent the decade acquiring and attempting to takeover various oil and gas companies. His first major acquisition came in 1981, when Mesa, already one of the largest independent oil companies in the world, took over the Hugoton Production Company, a company 30 times the size of Mesa. After this successful acquisition, Pickens spent much of the 1980s attempting to acquire other oil and gas companies, including attempted buyouts of Cities Service, Gulf Oil, Phillips Petroleum, and Unocal. His more successful bids included the acquisitions of Pioneer Petroleum and Tenneco. While his bids were not always successful, he managed to make a significant amount of money from his takeover bids through his sale of stock. Near the turn of the century, Pickens eventually founded BP Capital Management, a hedge fund that invests in traditional energy and nuclear power companies, such as Halliburton. He owns a 46% interest in the company, which runs two hedge funds.

    Most know the flamboyant oil man turned hedge fund manager for market calls and prognostications in energy. His latest venture is tied to energy but helps to invigorate America. In his latest venture Boone focuses on pushing the automotive industry forward with natural energy cars. Extensive value creation can be built in related areas that are tied to an industry that individuals have deep knowledge of and can then innovate.

    Pickens has also taken an interest in politics and the environment. During the 1988 Presidential election, he briefly considered running. Since 1980 he has made over $5 million in contributions to various candidates and groups, including George W. Bush, Swift Vets and POWS for Truth, Progress for America, Rudy Giuliani, and 527 other Republican groups. He once famously offered a $1 million to anyone able to disprove the claims made in political ads by Swift Vets against then candidate John Kerry. One of the striking things you notice as you enter Boone's office is that he has pictures with every American President at the White House and at formal dinners.

    Although his company deals primarily with traditional energy sources, Pickens is a proponent of alternative energy. He believes that the world’s oil production is on the decline, and thus champions the use of domestic natural gas and solar and wind power. In 2008 he proposed a major energy policy, the Pickens Plan. The plan called for a major reduction of dependency on foreign energy, the introduction of alternatives to oil, and the conversion of the nation’s commercial transport sector from OPEC diesel to natural gas.

    When I met with Boone he outline three tenets he thought were necessary for success:

    1. Drive Desire

    2. Commitment

    3. Play in a Big Game

    He frequently donates to various charities and organizations, and has given away more than an estimated $700 million to charity, $500 million of which has gone to his alma mater, Oklahoma State University. He has also committed to The Giving Pledge. Today, Pickens holds an estimated net worth of $1.2 billion.

  • The Bank of England (BOE) held their interest rates steady at their record low 0.5%—as expected, marking the 58 consecutive month of continuing the rate. Policymakers also decided to maintain the 375 billion sterling quantitative easing measures however no accompanying statement was released.

    Market participants are expecting the newly minted Central Bank Governor Mark Carney to change the forward guidance policy as conditions improve. An interest rate change would be used to accelerate the economy by improving the credit conditions in the country. This seems likely as consumer prices rose at the lowest levels in 48 months in the country, this is evidence of positive growth measures in Great Britain's economy and serve as a testament that it is on the upswing.

    Governor Carney previously stated in August of 2013, that the Bank of England would reassess it's current policy when the unemployment rate reached 7% anticipating that it wouldn't be reached until 2016—however the rate has unexpectedly dropped off far sooner that the expected, making some economists speculate that a tightening policy might be implemented much sooner than was originally planned. Some market participants say don't expect a rate increase before the middle of 2015.

    I believe that the likelihood of the BOE maintaining low rates throughout 2014 is very low given the falling unemployment rate. Bear in mind that the growth rate in 2013 was very close to 2%, If this trend continues, expect Governor Carney to raise interest rates sometime in 2014. Look for some indication of guidance next month when the Bank of England's quarterly inflation report is released.

    Follow me on Twitter @ShawnDBaldwin

  • As of late, it seems that finance has been under attack and demonized by various sources from the government to the media. As a finance person I might be admittedly biased in terms of the derision, but as a practical person I understand the need for modern finance and trading to make all components of the society work.

    If people thoroughly don't believe this: eschew bank and credit cards and resort to paying cash for any and all of your transactions from your home, to your car and education—most people aren't in a position to do this, so we are enabled with additional mobility by modern finance.

    Proselytizing aside, I see these grumblings as a form of protest because of the underlying issue: most people don't see how they can benefit in the broader economy outside of finance. I constantly receive a number of messages asking for ideas that don't require extensive knowledge of trading and capital markets because they don't see how they can participate in it. That is a false perception because the markets actually are a meritocracy and will lift those who are willing to take the risk.

    With that being said, I wholly agree that the broader society needs to see upward mobility. Subsequently, I believe that there needs to be a focus on value creation along with the consequential creation of jobs, in which everyone can participate. I have been bombarded with questions on how can people outside of the confines of finance participate in the upswing in the markets. Most all of the questions start with, "I only have.."as they believe that since they do not have millions or tens of millions that they can't participate in what I outline. That isn't particularly true, but it is evidence of the need to define the methods of successful people in arenas other than finance.

    To that extent, I decided to move beyond the study of numbers, prices and balance sheets to the thesis, plans and actions of a number of my clients along with the businesses that I follow. The Value Creation series will serve to interpolate how they extrapolate value in the broader economy from their companies. I have spent the greater part of my adult life in financial transactions, economic prognostication and securities analysis—so I will always be a trader in my heart— but after a long career, however, I believe that now is the time to explore value creation beyond the numbers in a intrinsic and involved fashion.The purpose will be as my business role model, Reginald F. Lewis stated "..to get behind the numbers.." and determine what moves and drives value.

    In this critical period after the financial crisis, America is in grave need of new creators of value that will assist in generating new jobs.The greatest evidence of job creation through value creation is in the technology industry and can be seen in the wealth and jobs that are created on the west coast. We are constantly seeing examples of young undaunted college kids who create billions in value, by dint of will and effort and as a result build monolithic companies in relatively short periods.

    This is the spirit that built America and it needs to be spread abroad.

    In homage to that spirit, I will present the stories and methods of people such as Carlos Slim, Patrick Soon Shiong, T.Boone Pickens and others who have conspicuously and inconspicuously created billions of value in companies in sundry areas not directly tied to finance. It is my hope that these articles will inspire others, serve to ignite their passion, give them direction and help to motivate and move them to action.

    Follow me on Twitter @ShawnDBaldwin

  • Today the Japanese Yen dropped against all major currencies after a short lived rally for the past 3 days, it was weakened by the latest record current account deficit. The yen has weakened significantly due to the Abe administration's resolve and commitment to fight the deflation that has plagued the country over the last thirty years. These initiatives have been dubbed the "Third Arrow" of the "Abenomics" monetary policy.

    The 592.8 billion yen shortfall was far larger than the median analyst forecast estimates of 368.9 billion yen of 24 economists by Bloomberg, the previous deficit account was 127.9 billion yen in comparison. This deficit is the largest in nearly 30 years, expect it to assist in keeping the currency weak. Japan is an export driven economy and the weakness in the yen, when coupled with the increased demand on energy that was substituted due to the shutdown of the nation's nuclear plants—has effectively driven up the import costs for the country. Japan is sensitive to oil prices since it is devoid of natural resources and it will be sensitive to energy price volatility in the future. These challenges will be accompanied by a new sales tax in April and the combination of these factors could cause complications in the economic plan.

    If confidence begins to wane—it could drive the yen even lower. This phenomenon could cause the country to eventually become a deficit nation that uses funding from foreigners versus the current situation of Japanese investors holding 95% of their country's investments. The latest economic data clearly outlines this and Cabinet Minister Akiri Akmari, stated this tenet after the economic meeting. This is key because he is responsible for economic revitalization. Particular risks to note are deficit dependency which could create a need for servicing of the enormous debt by the international investing community.

    This isn't the first time we have heard these concerns voiced, after the release of the Bank of Japan's October minutes, members stated that potential risks to the economy loomed and voiced caution outlining their concerns over future growth. Bank of Japan (BOJ) board member Sayuri Shirai stated that" attention should be paid to the downside risks" along with outlining uncertainty in overseas economies. Despite Haruhiko Kuroda's attestations to sustain stimulus aggressively.The focus of the central bank was 2% inflation in (2) two years. Due to these policies the yen decreased 13 percent last year alone.

    The current account deficit could significantly undermine investor confidence in Japanese Government Bonds (JGB's). Key measures to observe for Abenomics are real wage increases and export volumes. Most expect that exports will increase mainly due to economic recovery and an increase consumption in the United States. However, Japanese companies must begin to increase wages and prices, this is something that they have shown reticence to do.

    Currently, international capital flows of approximately $125 billion in overseas money is invested in Japan, as I stated in the RISE OF THE JAPANESE STOCK MARKET don't expect the debtor status change overnight or to occur in the immediate future— but it should be on the radar if these trends continue. I participated in a conference in Tokyo and one of the participants of my panel was Jesper Koll, the Managing Director and Head of Japanese Equity Research for JP Morgan. Jesper has been in Japan for over (3) three decades and is an incredibly bright fellow—he hinted at this during our conversation and enlightened me along with the group on this trend. Please see the link to the G1 Global Conference on Monetary Policy of Abenomics

    I believe that these events may signal a new range of 100-105. The dollar yen is one of the most widely traded currency pairs in the world and information released by the CFTC shows that short positions have increased by $2.1 billion to over $14.4 billion in last December alone, creating the largest net short position since before the financial crisis.

    Concurrently, the Bank of Japan is seriously considering a two hour extension of the functional operating hours settlement system, this will most likely occur in the beginning of 2016 when the bank revamps it's settlement system. This will initially affect the commercial banks using the system for interbank transfers—and Japanese firms engaging in business globally. The extension would make the cut off period 9pm Tokyo time making same day settlement possible throughout Asian countries. Another beneficial point of this change is an extension into the London market hours, this will ostensibly create an environment in which Japanese companies and investors can purchase foreign funds using JGB's as collateral—a market dynamic created by Abenomics that shouldn't be over looked and will be a key driver.The nation's economy bought 1.48 trillion yen of dollar bonds while investors in Asia increased holdings of dollar bonds for the fifth consecutive month. Most believe that the BOJ will increase purchases this year. I expect that the BOJ most likely will attempt to push the currency lower in 2014.

    From a traders perspective it will pay to be medium term bearish JPY, an additional reason to short the yen are Abe's comments to China over airspace, these factors will reduce the currency being viewed as a safe haven.

    In terms of international investing, Abenomics will have additional benefits as evidenced by the purchase of Jim Beam by Suntory for $16 billion USD including debt. This was was driven by the underlying economics of a weaker currency, as it gives Japanese companies economic incentives to gather higher returns, that then translate to greater profits and currency arbitrage opportunities. Expect to see Japanese focused funds do incredibly well along with exposure to them be highly sought after by institutional investors and super high net worth individuals alike. Get on the train now, it has already left the station and will pick up speed.

    Follow me on Twitter @ShawnDBaldwin

  • Paul Volcker still looms large literally and figuratively in finance, the 6' 7" former Federal Reserve Chairman's proposed rules are as imposing in finance today, as he was during his career at the Federal Reserve Bank during the Carter Administration. As the Obama Administration and the S.E.C. have dramatically increased their efforts to regulate Wall Street risk taking—the push to restructure financial regulation has reached a tipping point, as the negotiations between the (5) five agencies that are coordinating in the writing the rules become more tense. The central tension in the debate on the rules circles around their rigidity and severity, the main focus of which is to ban banks from trading for their own gain and to eliminate bank participation in proprietary trading.

    The Treasury Secretary Jacob J. Lew has been pushing the groups to complete the rules as he has pressure from President Obama, who is seeking to meet the initial compliance deadline of July 2014. Positioning and negotiations have thwarted a fast implementation as the various agencies have encountered tremendous lobbying from Wall Street. The significance of the negotiations serves to outline the Volcker Rule’s importance as a barometer for the strength of Dodd-Frank.

    Analysts expect the Federal Reserve Bank to extend the compliance date for the Volcker Rule to July 2015 to give banks additional time to make the necessary effective changes. It is within the Federal Reserve Bank's powers to delay compliance dates over one year increments to accommodate any unforeseen exogenous events, if a delay is forthcoming it will most likely be announced next month. Even if the compliance is delayed, banks would still need to eliminate pure proprietary trading desks by July of 2014. However, the banks will still be responsible for collecting data, making specific financial disclosures along with additional compliance measures in their systems. Experts expect the rules to be very stringent with tough reporting and trading limits. The top banks have already shut down their proprietary trading operations that they believe the law will eliminate.

  • The passage of the Volcker Rule will probably be one of the most important determinants of financial firms performance in the upcoming year, mainly due to the combination of the pervasiveness and ambiguity of the almost 900 page document.

    I have had several discussions with CFTC Commissioner Bart Chilton who—despite the seemingly sanguine look on my face—I have the utmost respect for. I consider the Commissioner to be a diligent, intelligent regulator with only the best of intentions and a true understanding of the markets along with the realistic capabilities and the limits of financial firms. The Commissioner was a key person at the CFTC in regards to the completion of the Volcker rules, he struck a great balance between pragmatism and doing the utmost to protect investors. Bart has worked tirelessly and the financial community will miss his presence and intellect when President Obama replaces him next year.I hope that the next appointee will be as involved and as open as Commissioner Chilton has been.

    After 3 years of development, the passage of the rules by the regulatory quintuplet of the Federal Reserve Board, Federal Deposit Corporation (FDIC), Securities Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) was finally unveiled along with key tenets of the proposed reform law passed by Congress in response to the financial crisis. Ironically, although proprietary trading wasn't the reason for the financial crisis, it was a particular focus of prohibited banks activities. Along those lines neither hedge funds or private equity firms caused any of the financial malaise but both were also excluded from bank participation by Congress. Look for the latter two sectors to perform incredibly well in 2014 as the banks are sidelined from participation and the rules are not applied to either respective industry.

    The rules do however affect any financial concern with federally insured deposits, this now includes the investment banks as they were forced to become BHC's (Bank Holding Corporations) by the Federal Reserve Bank during the financial crisis—whether they wanted to or not—and forced to take capital. Financial experts and academics agree that while reform advocates praised the initiative, it is effectively fixing something that wasn't broken and it doesn't address the roots of the financial crisis.

    I initially discussed the timing additional year delay to July 2015 along with the coordination issues and implications of the proposed rules in Volcker Rules! Most notably, the former Federal Reserve Bank Chairman made it a point to distance himself from the final product that bears his name and similarly outlined some of the points that I voiced in this commentary when I met with him at the International Monetary Fund meetings in Washington, D.C.

    A particularly gray area for regulators and lawmakers alike was the concept of hedging. When it comes to liquidity providing and the eventuality of making profits due to the risk taking there isn't a clear demarcation between client activities and trading profits or losses. After over almost 20 years of capital markets participation as a trader, investment banker and asset manager—I can't clearly discern the difference and I have not met any professional trader who can. It initially would seem that the litmus test is whether the firm made a profit. The comparisons of market-making and permissible hedging in juxtaposition to proprietary trading—is incredibly hard to distinguish between on an institutional trading desks. Banks will still be allowed to participate in the proprietary trading of US government, state and municipal bonds along with other US government backed financing firms such as Fannie Mae and Freddie Mac—entities which, strangely enough were in the center of the last crisis. The Volcker rules will also allow the banks to invest in foreign bonds.

    The financial community applauded that market making activities were left intact, this is incredibly important to financial firms because the total annual revenue of these practices exceeds over $40 billion USD—that translates into $10B a year in pre tax profits according to Standard and Poor’s. A number of top firms like Goldman Sachs, JP Morgan Citibank and Bank of America previously generated significant portions of their revenue from trading. Those activities and revenues will have to be generated elsewhere if they are to remain competitive. The general trading environment has dropped 30% since 2007 and those that are left have seen a corresponding 35% reduction in pay, we can expect that trend to continue and far less capacity in the financial industry in the future taking away from GDP.

    With over 892 pages, who are the other groups applauding the rules? Lawyers, Lobbyists and Consultants! The ensuing confusion should create lots of billable hours as the documents are the perfect trifecta of vague, voluminous and ambiguous. The extensive interpretations should add to the economy's GDP as the lawyers look for loopholes, consultants advise both sides and lobbyists push for legal change of the existing rules.

    A key point in the rules is that CEO's will have to attest to compliance programs making them fully accountable as the CEO assures responsibility. The banks are required to create and monitor compliance programs that the CEO now has to certify. This means that they can be prosecuted for malfeasance as the CEO is ultimately responsible and subject to litigation.This tenet was seen as a key victory by finance critics.

    Ultimately these measures will raise costs for US banks causing them to be less competitive than foreign banks while reducing their profitability. Expect foreign banks and the unregulated "shadow banking" sector to capitalize on their conspicuous absence.

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