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SEC Announces Additional Required Disclosures on Form ADV

Recently, the U.S. Securities and Exchange Commission (SEC) adopted proposals which will require registered investment advisers to provide additional information on their Form ADV, commenting that, the “amendments are an important step in a series of rulemaking activities to enhance the SEC’s monitoring and regulation of the asset management industry.” The amendments, which include changes to the reporting requirements of separately managed accounts (SMAs), use of social media, and performance reporting, will take effect as of October 1, 2017. Specifically, the new reporting requirements will include the following:

  • Investment advisers will be required to provide additional information specific to their SMAs use of borrowing and derivative activity, designed to help the SEC staff during the risk assessments and monitoring activities of advisers.
  • Enhanced disclosures will be required related to advisers’ use of social media. Currently the SEC requires advisers to only include their company website on Form ADV. Under the new amendments, advisers will also be required to disclose the use and address of any social media outlets including Twitter, Facebook and LinkedIn. The new requirements will allow the SEC to review advisers’ use of social media, in order to compare the information provided through the use of the various outlets, as well as to prepare for an examination.
  • Performance reporting requirements under Rule 204-2 have been amended, changing the current standard of requiring advisers to maintain records supporting performance if they are distributed to 10 or more persons to now requiring advisers to maintain records if they are distributed to “any person.” In addition, the new amendment will require advisers to retain all original records of written communications received and copies of all communication sent related to an adviser’s performance or rate-of-return in connection with any or all managed accounts, as well as any securities recommendations.
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Why Millenials are Not Investing in the Stock Market

According to a recent survey, an extremely small amount of Millennials are investing into the stock market. Millennials for the purposes of the survey are those between the ages of 18 and 35. Around 65% of Millennials do not invest into the stock market with the “Silent Generation” (those 71 and older) being the next highest at 59%. Within Millennials themselves, 80% of those between the ages of 18 and 25 do not invest in the stock market compared to 53% of those Millennials between the ages of 26 and 35. The question to ask is: “Why do the younger generation not invest in the stock market?”

Growing Up During the Recession:

During the beginning of the last recession in 2007, Millennials, many of whom were in high school or college, were at a key stage of growth. Growing up seeing family and friends’ families lose money, homes, and other assets to the stock market crash left a bad taste in their mouth. While the economy has been on the rise since then, many Millennials do not trust the stock market enough to risk their money. This would explain the 27% gap between the younger Millennials (18-25) who don’t invest in the stock market versus the older Millennials who don’t. Many of the older Millennials would have been in college at the time or started working. They would have been less likely to be supported by their parents than the younger Millennials who would have been in high school or lower and saw their parents’ struggles affect them firsthand.


46% percent of Millennials said the reason they forego the stock market is because they simply do not have the money to invest into the stock market. There could be a few reasons for this. The first is the fact that more people are starting to go to grad school. A study showed that there was a 3.5% increase in grad school enrollment between 2013 to 2014 and a pretty steady increase since 2004. This keeps Millennials out of work for longer meaning they stay out of the stock market for longer. The cost of paying back grad school loans also keeps Millennials out of the stock market longer. Another reason is that a recent survey showed that 49% of older graduates from 2015 felt they were employed in a job where they were overqualified. That can make Millennials feel they need to save money now and invest when they find a better-suiting job.

Posted in the Yulish & Associates blog network.

Interest Rates: Weak Jobs Report, Brexit Likely to Sway Fed

After a weaker than expected jobs report released Friday, June 3, and with the upcoming British vote on whether to leave the European Union, analysts increasingly are expecting the Fed to sit tight on raising interest rates during its June 14-15 meeting.

Another factor that could affect Fed thinking was the European Central Bank’s announcement on Friday that it is keeping its $2 trillion stimulus plan in place, including the negative interest rates and low-cost loans to banks.

Friday’s jobs report seemed to indicate at least a temporary stall in economic growth in the United States as employers added an anemic 38,000 jobs in May. A drop in the unemployment rate to 4.7 percent from 5 percent was a factor of more Americans dropping out of the jobs market. The government also revised down the employment figures for March and April, lowering the average monthly gain for the past three months to 116,000, well below the 240,000 monthly average over the previous year. “I would say June is off the table,” Carl Tannenbaum, chief economist at Northern Trust, told The New York Times.

The uncertainty over Brexit, the British vote scheduled for June 23 on whether to remain in the European Union, already was signaled by Fed officials as a factor in the decision on interest rates. Fed Board Governor Daniel Tarullo told Bloomberg on Thursday that the uncertainty of the British vote and its effect on markets would be an important consideration for the Fed.


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What’s Next for Puerto Rico and How Will Hedge Funds Be Impacted?

Puerto Rico is undergoing financial trouble — the commonwealth government couldn’t make a $422 million payment on its Government Development Bank notes last week. Overall, Puerto Rico owes about $72 billion to creditors and will certainly struggle to make a scheduled July 1 payment of $1.9 billion, $800 million of which is General Obligation debt.

This is likely to be bad news for U.S. hedge fund investors. The island’s economy has been stagnant for years and debt per capita is increasing. But there could be some benefits for the right hedge funds, under some circumstances.

How Hedge Funds Could (Eventually) Come Out Ahead

What does this mean for hedge fund managers who hold Puerto Rico’s municipal bonds in their portfolios? It’s estimated that hedge funds hold around 36 to 37 percent of Puerto Rico’s bonds; funds don’t have to report their bond holdings so that number is a guess.

If fund managers can somehow force Puerto Rico’s government to service their upcoming bond payments in full, they will profit. Even if they must be patient and hold on to unpaid notes, savvy hedge fund managers have the legal know-how to collect from the debtor. In fact, some hedge funds may take the risk of buying deeply discounted debt with an eye to collecting down the road, as happened with Argentina earlier this year.

Bondholders can also continue to do what a committee that included Brigade Capital Management, Fir Tree Partners and Avenue Capital Management agreed to last week: Change roughly $900 million of unsecured bonds they hold for new, secured bonds valued at about $513 million, or 56 cents on the dollar. That return could go even lower — to 47 cents on the dollar — if Puerto Rico manages a global restructuring of debt into “superbonds.” The benefit to investors? Those superbonds are easier to trade and analyze than the existing Government Development bank debt.

What Happens if Congress Steps In?

Another factor is what steps U.S. Congressional leaders will take to rescue Puerto Rico. Congressional action could take a few different routes. Most likely, lawmakers will allow the island government to restructure debt in a way that resembles Chapter 9 bankruptcy — it won’t be exactly that, since Puerto Rico doesn’t technically qualify for this form of municipal bankruptcy, but it may look similar — which means they’ll get time to restructure their debts.

Legislators may also create and empower some sort of oversight committee to manage Puerto Rico’s finances until they are better controlled. But Puerto Rico’s government isn’t backing this idea, as it would mean they’d lose rights and power as democratically elected officials to manage financial policy. But Treasury Secretary Jack Lew has said that having an oversight board making the decisions about how to balance spending is important, and that will likely be part of any bill that passes the U.S. House and Senate.

Finally, a Congressional bill to restructure Puerto Rico’s debt will, by necessity, have to leave the commonwealth government with enough money to pay pensions and fund basic services for citizens over paying off investors. While this is good news for the people of Puerto Rico, and for U.S. taxpayers who won’t have to fund financial support, investors may be forced to take a back seat.

It’s looking like investors will have to be patient on debt repayment if they hope to get any reasonable return on their investment in Puerto Rican government debt. Meanwhile, keep an eye on the outcome, as what happens in Puerto Rico could have an impact on borrowing rates for U.S. states in the near future.

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Federal Reserve Seeks to Avoid Another Lehman Fail

The Federal Reserve on Tuesday, May 3rd, released a statement announcing a proposed rule they believe will bring more stability to the United States financial system. A stress test has been in place since 2009, applied to major corporations to verify financial stability. However, the new rule for banks would limit the ability to cancel contracts if there is a bankruptcy.

In a press release, it was stated, “These contracts, called qualified financial contracts (QFC), are used for derivatives, securities lending, and short-term funding transactions such as repurchase agreements.” The new rule would apply to bilateral, uncleared qualified financial contracts. Global systemically important banking institutions use these contracts to conduct a large volume of transactions. Their mass termination could lead to the disorganized and messy uncoiling of the GSIB, and the chaos igniting the fire sales assets and spreading financial risk throughout the U.S. financial system.

All GSIBs, including foreign GSIBs, operating in the United States will fall under the new rule. This is just the latest attempt by the Federal Reserve to end the so-called “too big to fail” financial institutions and protecting against another 2008-like collapse. The hope is to avoid the widespread sale of assets sparked by the Lehman Brothers’ bankruptcy.

As an example, there would be an immediate stay on hedge funds canceling contracts for specific loans or derivatives issued by large banks that filed bankruptcy. They would instead have a 48 hour waiting period. This gives the bank the opportunity to separate healthy assets and performing units from failing divisions.

Gov. Daniel K. Tarullo said that this proposed rule will complement other actions done by the Federal Reserve Board and the FDIC to address the risk qualified financial contracts place on financial stability through their review of the firms’ resolution plans.

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Will The Stock Market Make Records in 2016?

Despite the stock market‘s dismal five-day start to 2016, and upward swing evidenced since the years’ lows in February, has analysts underlining the current 14% hike during this much-needed rally. This momentum could potentially ride the U.S. indexes to record-breaking levels. Bolstered by the tenuous but upward rebound in oil prices and the Federal Reserve’s cautious decision-making regarding interest rate hikes, the Dow finds itself in familiar territory. Currently at 2.3% below its historic closing of18312.39 (reached on May 19, 2015) the Dow Jones Industrial Average is hoping to make the hurdle which has several times been thwarted by sluggish global growth and less than desired corporate earnings.

The Pitfalls Towards Hitting the Mark

This past weekend OPEC and non-OPEC oil producers failed to reach an agreement on a cap on oil prices that would stabilize the volatile commodity. The member 18 countries that gathered at Doha in Qatar noted a “need for more time,” and passed the buck until the next scheduled meeting in June. This news affects U.S. markets which suffered earlier this year to the fluctuations of a 13-year low, $30 per barrel prices. Analysts are predicting a severe fall from the current $45 per barrel value due to the latest negotiations inaction.

In addition, Saudi Arabia’s threat to unload $750 billion dollars in US assets if the U.S. Congress passes a bi-partisan sponsored bill aiming to hold the Saudi government accountable for purported back-alley support of the terrorist attacks of September 11th, 2001. The bill would make the investigation and subsequent lawsuits of surreptitious Saudi government officials legal and seek to make them liable for damages owed to the families of the victims of 9/11. Saudi Arabia maintains it had no involvement in the terrorist activities, but its bellicose financial retaliation seems to have more weight than just a veiled threat.

The Outlook

Analysts see hopeful signs that the U.S. indexes could reach record levels this time around. The New York Stock Exchange shows a greater number of advancing stocks over those in decline, with an increase in numerous stocks on the NYSE hitting a 52-week high. Despite other factors, the American Association of Individual Investors is reporting in its weekly survey that the percentage of bullish investing has increased from 17.9% in January to 27.85% as of last week. The IMF’s recent downgraded forecast on global growth notwithstanding, the upward trend is powerful and giving investors good reason to hope for a record-breaking 2016.

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Federal Reserve Hopes to Prevent Another Financial Crisis with Rule

On Friday, March 4th, the Federal Reserve put forward a new rule expected to limit the risk of excessive credit, a primary cause of the 2008 crisis. Janet L. Yellen, Federal Reserve Board Chair, stated that they intend to reduce or eliminate the risk of one troubled big bank bringing down other big banks.

The suggested rule will apply to banks with assets greater than $50 billion.

  • The rule restricts all global systematically important banks (G-SIB) to a limit of 15 percent of the institution’s tier 1 capital to another systematically important financial firm, and a limit of 25% of their tier 1 capital to any other entity.
  • There is also a restriction on any bank with more than $250 billion in consolidated assets, or $10 billion in foreign exposure, to a limit of 25% of their tier 1 capital to any other entity.
  • Restrictions on banks with $50 billion or more of consolidated assets is 25% of their total regulatory capital to another entity.
  • Banks with less than $50 billion in total consolidated assets is not subject to this proposed rule,

The rule was unanimously approved, and there is now a 90-day commenting period. Additionally, the new rule puts into action part of the Dodd-Frank Act of 2010. It also continues to build on earlier proposals from the Federal Reserve put in place in 2011 and 2012. The Board is using the international large exposures framework, released by the Basel Committee on Banking Supervision in 2014, to help create global consistency.

Daniel K. Tarullo, a member of the Board of Governors of the United States Federal Reserve Board since 2009, remarked that the regulation would help perfect capital requirements, which focuses on the nature and size of a bank’s assets but does not address the risk concentration in specific borrowers or counterparties.

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China’s Top Stock Market Regulator Removed After Chaos

China’s state-run Xinhua news agency is reporting authorities terminated  Xiao Gang as the head of the China Securities Regulatory Commission (CSRC) and replaced him with Liu Shiyu, former chairman of the government-owned Agricultural Bank of China.

Xiao is being held accountable for the collapse in June of last year, which motivated stock purchases by the Chinese government and short-term bans on initial public offerings. In January, the CSRC removed circuit breakers, four days after their introduction, when they increased stock market turmoil.

The circuit breakers were to protect investors from market disturbances. However, the Shanghai Composite fell 19% after the implementation. The mechanism was to lessen stock market volatility and curb panic selling but had the reverse effect.

China’s stock market reached record levels the first half of last year, but then the bubble popped and the Shanghai Composite crashed, reducing its value by almost a third in roughly a month. The collapse motivated Chinese authorities to employ harsh measures, including prohibiting large investor selling and outlawing some types of short-selling.

Moreover, the Chinese government has been actively hunting down those perceived as responsible. In November, Yao Gang, a vice chairman at CSRC, was under investigation along with others in the finance industry for corruption.

Chinese authorities criticized Xiao for promoting the stock market rally which led to a bubble. China is now discussing reorganizing financial regulators and making changes to their IPO structure. China’s response has been one of taking responsibility and holding those in positions of authority accountable.

Liu Shiyu, the new chairman of the China Securities Regulatory Commission, is on the record being critical of what he called a “gambling mindset.” He believes short-term investments and wealth management products are driving up costs within the economy.

The CSRC oversees China’s centralized securities supervisory system. It is similar to the Securities and Exchange Commission (SEC) in the United States. with the power to regulate and supervise securities issuers, and to investigate illegal activities related to securities and futures.

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Recent SEC Actions Against Hedge Funds and Their Managers

Several hedge funds and their managers have been in the news in recent months; unfortunately, it’s the kind of press no hedge fund, manager or employee wants. Recent SEC actions include the following:

  • On February 5, Bloomberg reported that the SEC is investigating BlueCrest Capital Management for potential conflicts and adequacy of disclosures. The investigation does not indicate that BlueCrest has done anything wrong and the company’s statement indicated they were cooperating fully. If the investigation reveals deficiencies, the SEC could choose to take future enforcement action against the firm.
  • On January 28, the SEC announced it had agreed to settle charges with QED Benchmark Management LLC and Peter Kuperman, its fund manager and founder, alleging that investors were misled about the fund’s historical performance and investment strategy. Under the settlement, the firm will reimburse investors $2.877 million in losses;
  • On January 8, hedge fund manager Steven Cohen was prohibited from supervising funds that manage outside money at any broker-dealer or investment adviser until 2018. The move was part of a settlement related to charges that Cohen failed to supervise a former portfolio manager who engaged in insider trading. In addition to the prohibition, Cohen’s family office firm is also required to retain an independent consultant and will be subject to SEC exams.
  • On December 15, the SEC took action against hedge fund adviser Owen Li, whose fund was Canarsie Capital LLC, barring Li from the securities industry for “making a series of false statements to investors and ultimately causing a fund’s collapse.”

These examples are just a sampling of the most recent charges, investigations and sanctions.

In its annual “National Exam Program” notice released in January, the SEC again included an outline of focus areas for 2016, providing a guide of sorts to help fund managers and advisers be better prepared for potential examinations. This is a good starting point for funds and their managers to begin ramping up their compliance programs so that headlines about their firms will be for all of the right reasons, and not for SEC actions or investigations.

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Prepare for a Turbulent Stock Market Ride in 2016

If you’ve invested in the stock market, chances are you’re feeling a bit queasy at the beginning of 2016. USA Today reported on January 6, 2016 that the DOW has hit its worst new year-three day stretch since 2008. There are a number of factors driving the current volatility.


Chinese service sector data is weaker than expected, worrying investors, and driving the yuan to a five-year low against the dollar. This started a cascade effect as markets around the world reopened for the new year. China has extended its selling ban on large shareholders who hold more than 5% of a company. China extended the ban for six months. This may help in the short-term, but will not hold over the long-term.

Geopolitical Instability

With tensions rising between Saudi Arabia and Iran, and reports of North Korea testing a hydrogen bomb, geopolitical uncertainty is driving some of the loss in share prices. North Korea’s nuclear saber-rattling may only cause short-term effect in the markets. This remains unclear, but many investors are moving money into the fixed income market as a safe haven. Oil prices rose briefly due to the growing tensions between Saudi Arabia and Iran only to drop again on Wednesday. Brent Crude reached an 11 year low after dropping 6% to $34.23. U.S. traded crude was also down approximately 3%. Demand for refined product is down 2.2 million barrels in the first week of the new year, while global production and supplies remain high.

The Fed

Many investors were anxiously awaiting the release of the minutes from the December Federal Reserve meeting. There was some anxiety as to what the Fed will do with future rate hikes. The minutes indicate a series of gradual rate hikes. They also show that some members still have concerns about raising rates.Stocks remained mostly unchanged upon release of the minutes.

Preparing for 2016

Here are a few reminders to help you make the most of another roller coaster year in the markets.

  • Unless you plan to retire soon plan for the long haul. Research your investments thoroughly and invest in companies that will provide good returns over the long-term. If you are planning to retire in the next few years, you should consider lower risk investments than the stock markets.
  • Ensure your portfolio is sufficiently diversified. Don’t put all of your eggs in one basket. Under diversification has been the bane of many investors. On the other hand don’t go overboard with too many stocks that you can’t keep track of. Find the right balance.
  • Keep your emotions in check. Don’t freak out at dips and turns in the market. Being strongly emotional about the whims of the market most often results in bad decisions which can wreak havoc on your investments. Be prepared to take the good with the bad, and remember you’re in it for the long haul.
  • Do your research. This deserves mention again. Most articles about individual stocks mention the pros of that stock. Do your research and weigh the pros and the cons before buying.

2016 seems to promise another difficult year for the markets, but if you follow the guidelines above, you can hopefully maintain and grow your investments.