by Paul Springer

In a compelling sign of the times, U.S. regulators are forcing big banks to envision their own demise in “living wills” that outline financial emergency plans. And things always go according to plan.

“U.S. regulators approved two sets of guidelines that banks including Citigroup Inc. and JPMorgan Chase & Co. will have to follow in drafting plans to protect the broader economy in the event of their own collapse,” Bloomberg says.

The contingency planning requirement also needs Fed approval before it can go into effect.

The New York Times reports the new plans will require a lot of oversight from regulators, all with an eye to avoiding another too-big-to-fail bailout:

The documents will open a window into the financial industry’s investments, trading counterparties and concentration of risk. The firms also must share what amounts to a Plan B — details for how the company can be wound down through the bankruptcy process  . . . Armed with the contingency plans, regulators say they can prevent a repeat of the chaotic Lehman Brothers bankruptcy, which still lingers on today.

So the “living wills” appear to require a lot more than just contingency planning. Regulators will apparently be able to peek in and admonish bankers for stocking the larder with toxic RMBS securities, sub-prime loan packages, Greek debt, what have you.

Alvarez & Marshall managing director Paul Cantwell told The Financial Times that the wills sound like hands-on regulation:

Companies pursuing activities that may not be easily wound down in the event of failure could be forced to either abandon those business lines or restructure them to make their failure much easier for regulators to handle, he said.

That’s a great idea: plan your failure so it’s easier for regulators to clean up. Really, the prospect of close collaboration between bankers and regulators is amazing.

Combine the iron-fisted oversight that ignored the Madoff mess for a decade with the kind of investing insight that destroyed Lehman Brothers and scorched any number of other banks . . . and maybe we should all be planning for an economic nuclear winter scenario.

by Paul Springer

Performance numbers for August and recent legal developments show that some hedge funds were extremely busy this summer – in court and in the markets.

August was a mixed bag for hedge funds according to data just obtained by CNBC. Funds lost ground, but still faired better than the S&P 500:

Hedge funds declined by more than 2 percent in August, according to new data from Hedge Fund Research. While that performance significantly outpaced the S&P 500 (which lost roughly 5.7 percent over that same period), it has thrown the industry into negative territory for the first time in 2011.

Funds that made a habit of shorting the market were up 7% on average, CNBC says.

Those who fared particularly badly were some of Maverick Capital’s funds and vehicles managed by Paulson & Co., Reuters says.

While August’s volatility after the debt-ceiling deal kept traders busy, the wheels of justice were grinding along at their usual lackadaisical pace. The wheels have ground to a halt right on top of former Galleon head Raj Rajaratnam, who is awaiting sentencing on Sept. 27. Rajaratnam has not show the contrition evinced by some others tried in the matter, and The Guardian says his attitude may not impress the judge favorably:

The hedge fund manager convicted of conducting America’s biggest insider trading scheme has told court officials he isn’t “clear” that what he did was wrong. The admission may lead to an ever harsher sentence, say legal experts.

Former SAC Capital Advisors portfolio manager Donald Longueuil will have plenty of material to work with if asked to prepare a “what I did last summer” essay. After receiving a two-and-a-half year jail sentence in July for criminal charges of securities fraud and conspiracy, Longueuil has now agreed to pay the Securities and Exchange Commission about $250,000 in disgorgement. The  Wall Street Journal says Longeuil will receive credit for $1.25 million in the criminal case.

It was a good-news and bad-news scenario for Louis Bacon’s Moore Capital Management. The good news was the dismissal of a lawsuit that Reuters says disgruntled investors filed, alleging they had lost money because of illegal activities at the fund:

The settlement resolved claims over [trader Christopher] Pia’s alleged efforts in the last 10 seconds of trading days to enter large trades in “illiquid” platinum and palladium markets that pushed prices higher, a strategy known as “banging the close.”

The bad news: The fund already paid $25 million last year to settle charges of manipulating markets in the two metals. This year Pia agreed to pay $1 million to settle with the Commodity Futures Trading Commission.

An allegedly phony hedge fund is at issue in a civil lawsuit that the SEC filed to stop a deaf  Texas man who purportedly drew on connections with other deaf people to solicit capital for investing in traded endowment polices (TEP), the U.K. equivalent of viatical settlements. The SEC’s complaint alleges that over 7,000 deaf investors sent money to Jody Dunn, who neglected to mention that he was allegedly using some of the money to make car and mortgage payments.

Victims were told that an initial $50 investment would allow clients to receive an $80,000 loan to purchase a TEP that yielded 1.2% per day.  The ultimate destination of customer funds is not entirely clear at this point, but the commission says the money was not invested in anything – nor was it returned to investors.

by Todd Shriber

There are plenty of wild ideas for stock indexes out there, but this one may take the cake: The Dow Jones Summer/Winter Games Index. Yes, that’s right. An index has been formed to track companies that are corporate sponsors of the upcoming 2012 Summer Olympics in London and the 2014 Winter Olympics in Russia.

Believe it or not, this index has been around for a while. Dow Jones says it was initially calculated on Dec. 6, 2007. And until Tuesday, the Dow Jones Summer/Winter Games Index was home to 37 stocks, seven more than are found in the Dow Jones Industrial Average.

Prepare to welcome Olympic index member 38: General Mills (GIS), the second-largest U.S. food company. Big G’s Nature Valley brand will be the official cereal snack bar supplier to the London games, Dow Jones said in a statement. Dow Jones said the index is reviewed quarterly and General Mills was added as part of the September. No members were deleted.

With a median market value of $14.6 billion, the Olympic index isn’t home to a bunch of no-name companies. In fact, six Dow components are found among the index’s top holdings. Those are Coca-Cola (KO), Procter & Gamble (PG), General Electric (GE), McDonald’s (MCD), Cisco (CSCO) and General Mills rival Kraft (KFT).

Since indexes aren’t securities that can be purchased, perhaps the biggest question surrounding the Dow Jones Summer/Winter Games Index isn’t why it even exists, but why hasn’t an ETF been created to track it? After all, ETF issuers love the obscure.

*Disclosure: Writer is long General Mills.

by Paul Springer

So far this week, news from Europe has been driving the direction for U.S. equity markets. It’s usually the other way around. Trading has been reflective of the classic good-news-and-bad-news situation.

Stocks don’t necessarily plunge, but are weak and biased to the downside. Traders know that the bad news – at best – will linger for some time as investors worry that Greek sovereign debt problems would destroy the Euro or even the European Union itself.

Indeed, news from Greece just keeps getting worse. Bloomberg has reported that markets reflect a 98% chance that Greece will default on its debt in the next few years. But market players are looking for something in the much nearer future:

“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “Clearly this austerity plan is not working.”

It’s probably not a coincidence that the S&P choked a bit around the same time as that report hit the wires.

In response (anticipation?), the Euro fell to a seven-month low against the U.S. Dollar, AP reports.

The idea of a global economy once sounded pleasant, but the interconnectedness in Europe continues to pose problems. “French banks reportedly have some of the biggest exposure to Greece and could be vulnerable if the government defaults on its debt,” according to Reuters, which says people are buying Euro puts at a time when the Euro hit a ten-year low against the Yen. Several French banks were downgraded by Moody’s Wednesday.

EU critic Dennis Gartman says the Union is pretty nearly kaput at this point, according to The Wall Street Journal’s reading of his investment letter. Here’s what Gartman is saying now:

This thing that was European Monetary… and eventually European political… Union was a chimera. A falsehood . . . The end-game is upon us. The experiment, from our perspective, is over, and all that is left is the final recognition of that fact.

A report from MarketWatch says some investors are planning for the Euro to exist stage left — and using various rationales for Euro pessimism. One factor is a spike in the Euro/Dollar exchange rate volatility. Another is less well known:

More worrying, a wonky gauge called a “risk reversal,” which tracks investor demand for bearish put options on the euro/dollar rate relative to bullish calls, is at its most extreme level since the euro was created in 1999. This suggests investors are scrambling to buy puts that grant the right to sell the euro at a predetermined rate in the future to avoid losing money if the euro collapses.

While it’s premature to write an epitaph for the Euro or the EU, there is little in the way of obvious solutions to economic problems in the U.S. or Europe.

A BNY ConvergEx Group managing director told The Economic Times that it was not so much the Europe problem as the lack of a solution that’s sucking life out of markets: “We have no timeline about when we could get any clarity, and financials will continue to be the most egregiously hit in this environment.”

Meanwhile, as the economic masters of the universe wonk away about Europe’s sovereign debt difficulties, this is one crisis that is also hitting at the guy on the street who might normally remain oblivious to economic currents.

This is certainly the case in Greece, whose new austerity plan brings layoffs, new taxes, and wealth cuts seemingly directed at higher income earners.

The austerity is already threatening to trickle down, according to The Sydney Morning Herald:

Though designed to target mainly high earners, the tariff could further anger the crisis-weary middle class and pose political risks for the socialist government, which repeatedly has pledged to protect households from being hurt by further austerity measures.

People are rioting in Greece over the new austerity plan, and photos in The Herald and elsewhere paint a grim picture.

In the U.S., we’re fortunate the market’s difficulties since last spring have played out in the indexes and not the streets. Some other nations aren’t having it so lucky.

We’ve learned FOX Business Network is planning to change the name of their 4 PM/ET program from “Bulls & Bears” to “After the Bell”. Word on the street is the name change takes effect Monday, September 12; anchors Liz Claman and David Asman stay the same.

Claman also anchors “Countdown to the Closing Bell” in the 3 pm hour, so the show title is a very apt description of the post-market analysis Claman and Asman provide. The new show will debut Monday with Claman anchoring live from the floor of BGC Partners for their 7th annual Global Charity Day.

by Todd Shriber

With another Republican candidate debate and President Barack Obama’s long-anticipated jobs speech this week, it’s fair to say that we’re already in the throes of election season. Sure, Election Day 2012 is still 14 months away, but in the world of politics, it’s never too early to start pandering for votes.

Along those lines, Trader Daily decided to take a look at the 10 most important states in the 2012 election, either to Obama’s re-election hopes or the designs any Republican challenger has on defeating the incumbent. California, Illinois, New York and Texas were not included on this list because, based on recent trends, it is highly unlikely that any of these states flip sides.

States appear in order of electoral votes from least to most (electoral votes in parentheses).

10) New Hampshire (4)

The only state in New England that can be viewed as a toss-up, New Hampshire has been identified as critical to the hopes of both parties in 2012, according to The Wall Street Journal.

9) Nevada (6)

Nevada is an interesting case not only because it is the epitome of a tossup state, but also because it was worth five votes in the electoral college in 2008, but in 2012 it will be worth six. President Obama won Nevada in 2008, but Nevada is not loyal. In the three elections from 1980 to 1988, Nevada went Republican. Then Bill Clinton won it in 1992 and 1996. George W. Bush won it twice before Obama cleared it in 2008.

8) Colorado (9)

Once reliably red, demographic changes have altered Colorado’s political hue. And while nine electoral votes won’t have anyone confusing Colorado with California or Texas, in a close race, Colorado will matter, as The Wall Street Journal noted.

7) Wisconsin (10)

Wisconsin has been a blue state in presidential races for a while now. But in 2010, the state elected a Republican governor and senator, so the Democrats could face a dog fight here.

6) Indiana (11)

Obama pulled a big surprise here in 2008. Red Mass Group says the Republicans must win Indiana back in 2012 “in order to remain competitive and relevant.”

5) Virginia (13)

See above. That comment from Red Mass was made in reference to several states, including Virginia. Virginia was once an easy win for Republicans, but Obama dispelled that notion. A potentially competitive Senate race shines the spotlight even brighter on Virginia in 2012.

4) North Carolina (15)

Virginia’s neighbor to the south was also another former easy win for the GOP that went Democrat in 2008. Fifteen electoral votes is enough to get both parties spending plenty of money in the Tar Heel state.

3) Ohio (20)

Ohio elected a Republican governor and senator in 2010, but that hasn’t changed a very weak jobs picture. The big question is which party does Ohio blame its economic woes on, because the party that escapes Ohio’s wrath probably carries this critical state.

2) Pennsylvania (21)

Pennsylvania hasn’t gone Republican in a presidential race since 1998, but it usually appears competitive enough to get both parties spending money there. Losing Pennsylvania would arguably cripple Obama’s re-election hopes.

1) Florida (29)

It’s no surprise that at least one Florida politician acknowledges the fact that Florida is the most important state in presidential politics, according to Politico. President Obama won here in 2008, but Florida has had a tendency to bounce back and forth. The last time a candidate lost Florida and won the election? Bill Clinton in 1992.

by Todd Shriber

Market volatility increased last month, so say the fine folks at the Securities and Exchange Commission, and now the government agency is looking for answers why.

More specifically, the SEC is evaluating whether leveraged, inverse and leveraged-inverse exchange-traded funds were behind some of the gut-wrenching moves seen last month, according to The Wall Street Journal.

Leveraged ETFs come in both the double and triple variety, meaning traders can earn double or triple the daily percentage performance of a particular index. Obviously, the inverse funds deliver double or triple the daily inverse performance of those indexes.

Leveraged ETFs are frequently used by professional traders. But they have also become popular with the retail crowd, and that may be what has the SEC worried, the article said. For its part, the SEC has long warned investors about the risks of these juiced-up ETFs. In fact, there’s an entire section of the SEC’s website devoted to this sub-sector of the ETF universe.

Despite the warnings and the criticism, leveraged ETFs remain popular. At the end of August, ProShares and Direxion, the two largest U.S. issuers of inverse and leveraged ETFs, sponsored a combined 173 funds. The bulk of these funds are leveraged and/or inverse, and had about $33 billion in assets under management combined, according to data from the National Stock Exchange.

Whatever the issue, the SEC may just be looking to “open a dialogue” regarding exotic investments, the Journal reports. That’s nice. Dialogue regarding the fact that leveraged ETFs are daily instruments is provided by Direxion and ProShares.

by Todd Shriber

Add daily deals purveyor Groupon to the list of hot Internet start-ups that have delayed plans for an initial public offering.

Just a week after Zynga, the company behind the Facebook games FarmVille, CityVille and Mafia Wars, said it would delay its IPO, Groupon appears to have gotten a case of IPO cold feet as well.

No surprise here, at least in terms of the reason Chicago-based Groupon is giving. Market volatility appears to be the culprit, The Wall Street Journal reported, citing a source familiar with the matter. The delayed Groupon IPO is sure to sting a bit for bankers, Groupon insiders and early investors alike.

In early June, the Journal reported that a $1 billion IPO by Groupon could value the company at $20 billion. Around the same time, Bloomberg reported the company was potentially chasing a whopping $25 billion valuation.

Groupon’s publicly traded valuation will have to wait as a roadshow that was planned for next week has been canceled. While Groupon’s IPO plans have not been scrapped outright, the delay arguably underscores some thorny issues the company has had to deal with. Not only is Groupon not yet profitable like Zynga is, but the company found its way into hot water with the Securities and Exchange Commission for using a controversial accounting metric, The Wall Street Journal said.

Groupon has reportedly stopped using that accounting method, but the Journal said the SEC contacted Groupon last week about another matter. Insiders say the SEC’s concerns aren’t the reason for Groupon delaying its IPO, the article said. But even with that, there is no word yet on when the company plans to go public.

Chart: Zignals.com

by Paul Springer

Deer Consumer Products (DEER) got whipsawed this week as its wrestling match with Alfred Little continued.

On Tuesday, Deer shares lost 15% as the company announced significant developments in a lawsuit against Little. Around midday today, the shares had gained about 14% on considerably less volume than on the previous day.

The “new developments” described in Deer’s news statement didn’t seem all that new. But the account highlights a trenchant “he said, she said” situation that characterizes the chaos surrounding many stocks issued by companies based in China.

Earlier in the year, when parties with interests in some of these companies started writing about issuer misrepresentation, the critics blazed out of the gate wearing white hats. Much genuine devilry was revealed, and it looked like a lot of the issuers were wearing the black hats.

Now, in some cases, it seems like both sides are wearing ski masks.

Deer’s release has some pointed questions about Little’s identity:

On March 28, 2011, Deer filed suit against short sellers and certain bloggers including “Alfred Little,” a now-admitted fictitious figure, alleging an orchestrated scheme to manipulate and depress Deer’s stock. Since then, “Alfred Little” has failed to answer the complaint, changed his identity from a real person to a web-site, and attempted to extort the company by threatening to publish more false defamatory reports until the company dropped its claims against these defendants.

The release goes on to attribute its stock woes to naked short selling. Maybe there is some naked shorting going on. Then again, many a microcap has blamed its own management and operational problems on non-existent short selling boogie men.

Complicating the issue here is the conflict inherent in using the Internet to disseminate journalistic – or perhaps quasi- or pseudo-journalistic – publications about companies the writer has a long or short position in.

A further complication arises from anonymity. Who is Alfred Little? That seems to be a tough question to answer. Alfred Little is an anonymous blogger on Seeking Alpha, which has an anonymous blogger policy.

Alfred Little’s website was not online this morning. But ZeroHedge provides a copy of the latest report on Deer and Harbin Electric (HRBN).

The report takes issue with what it calls Deer’s “Disappearing $21 million Land-Use Rights Rebate.” Here yet another complication arises: The Chinese governmental subsidy agencies have some transaction reporting conventions that seem peculiar compared to U.S. customs. Considerable information in the report argues for an accounting error, and the report alludes to conversations with Chinese officials to get more information on sale conventions.

However, Deer’s statement says it reported everything correctly to the SEC: “Despite recent claims of certain bloggers, who Deer believes to represent the interests of short sellers, Deer confirms that its disclosures in such filings were accurate, complete and reflect the commitment of management to provide the public with full and fair disclosure.”

It’s still a “he said, she said” situation unless you have the time and language skills to check up on every shred of Alfred Little’s claims. The volatile market around Deer suggests that investors are not delving into the details —they’re just selling in a market for a stock that’s oddly volatile even when there is no news.

The mere mention of Alfred Little in a statement intended to relate positive developments was followed by a decline in price.

The influence of anonymous market-moving bloggers suggests the need for a new term: naked short reporting. If somebody’s publicly disseminated words can influence trading in a big way, he or she needs a real byline.

At this point, just about anybody could pick a Chinese reverse merger company and release a huge, negative report that no one will read fully. It’s pretty clear what the initial market reaction would be, regardless of what hat the issuer is wearing.

by Paul Springer

The breathtaking speed of high-frequency trading may hit a speed bump in the form of securities regulation, a process known for moving at a much slower pace.

While the markets have remained orderly despite extreme volatility in August, people are wondering if HFT is really the boon to liquidity that it’s adherents claim.

In the U.S., the Finanical Industry Regulatory Authority is taking a granular look at some trading strategies, and not just the general nature of the trading. The regulator wants to look at specific algorithms.

Reuters says that both FINRA and the Securities and Exchange Commission are looking at HFT:

According to interviews with attorneys, traders, industry executives and regulators, the unusual requests for algo code and other computerized trading strategies really ramped up this year and have targeted stock-trading firms such as broker dealers and hedge funds.

Proprietary codes are at the heart of HFT – as is keeping them secret. In the last year, at least two people were sued for taking code with them to new employers. And now traders are not pleased with the idea that regulators could latch on to valuable algos.

One source told Reuters that the SEC’s revolving-door policy could allow secret codes to fall into the wrong hands:

“I’d be disappointed and upset” if they asked for code, said a high-frequency trading firm executive who declined to be named. “I mean, are these people all going to work at the SEC forever?”

It’s not clear who is being examined at this point. The Financial Times reports a somewhat hazy account from FINRA:

Tom Gira, executive vice-president of Finra’s market regulation unit, told FT Trading Room that requests for information were usually in response to complaints from market participants. “We’re doing it because there is a reason,” he said. “We run a lot of surveillance platforms and we get complaints too. We have some active investigations right now.”

Bloomberg got hold of a document that indicates the European Union is also contemplating enhanced scrutiny:

The requirements will include safeguards to prevent high-frequency trades from “overloading the systems of trading venues,” generating “erroneous orders” or “otherwise malfunctioning” in a way that may create a disorderly market, according to the document.

In the U.K., the Financial Services Authority has frozen one trading group’s assets as part of an investigation of spoofing, or placing fake orders to manipulate markets, The Independent says. While spoof orders are pulled before they can execute, placement of the orders distorts pricing to the advantage of unscrupulous traders.

That particular enforcement may not have involved HFT – anybody can spoof – but the FSA did censure another firm the day before. This time there were a lot of trades, and the regulator alleges that Swift Trade improperly layered (spoofed) trades and changed its trading activities to avoid detection.

Swift also allegedly used Direct Market Access to manipulate markets. Swift, however, was not swift enough to avoid a £8 million ($13 million) fine for the trades, which took place in 2007 and the first few days of 2008.

Swift is challenging the FSA’s decision.