Nobody has been more critical of the regulators (SEC, FINRA) than I have, so when it seems they are for once out ahead of a problem I must give them their due.There is a looming problem coming in the credit markets. Bond funds have become huge as more investors are looking for some kind of interest based return. Meanwhile through a combination of regulatory oversight and business decisions Wall Street has become smaller. This is not a problem as long as the market is quiet and interest rates stay in a narrow band. The problem will arise when interest rates go up and bond funds are facing redemptions and need to sell bonds. Wall Street's main function is to provide liquidity between buyers and sellers, so when a fund needs to sell bonds the street will usually give the account a bid and later resell the bonds to another investor. Since 2009 the money flow has been into bond funds and investment banks have been happy to sell bonds to these investors. At the same time the investment banks have been cutting back on their trading positions and are no longer willing or able to provide the level of liquidity should the funds need to sell bonds in a hurry. There is nothing magic about the bond fund industry, they pretty much buy at the same time and sell at the same time, totally dependent on the appetite of the public for their product. Should interest rates go up (and some day they will) and should the bond fund industry need to sell bonds to meet redemptions (and they will) the market could easily be overwhelmed. This will be a problem. A sneak peek at this phenomenon was evident last summer (2013) during the "taper tantrum". Forewarned is forearmed, caveat emptor.

Thoughts at the beginning of summer;

The European monetary authorities need to continue to stimulate their economies with low interest rates. The news on the growth and employment front is still dismal.

Anyone who trust any economic statistic about the Chinese economy does so at their own risk. The Chinese government seems perfectly capable of producing any stat that is needed on demand.

Wall Street  likes to come up with new products. Most of these products start out as wonderful ideas like credit default swaps or CMO's. The problems occur when the demand grows and Wall Street keeps expanding the product until it becomes highly speculative and risky. The flavor of the month in this area are  Exchange Traded Funds or ETFs. ETFs are an innovative investment product with very interesting features to help average investors manage risk in their portfolio. Investors need to be careful as more of these products are built on the less liquid or obscure parts of the market, nobody can predict what will happen in times of market stress.

The soap opera that is PIMCO is making me nuts. Between the principal participants (Bill Gross and Mohammad El-Erian) acting like high school kids about their breakup and the financial press acting like 7th graders I am ready to scream. Who cares? If I see one more breathless host of a financial news show ask one more "expert" "What do you think about what he said about the other guy?" I might ban all TV's in the office. Why don't we just cut to the chase and schedule both men on Dr. Phil and let them drool all over themselves with endless talk about their feelings. Stop the madness and act like grown-ups. If I had any money with either of these guys I would seriously rethink it.

On another note; the municipal market has just undergone a brush with the law of unintended consequences thanks to the underwriters (Barclay's) who decided to restrict the recent 3.5 billion Puerto Rico financing to denominations of 100,000 or more. Combine this with a hot deal and you will find that most of the orders were from hedge funds and other short term investors looking for a quick buck, not a permanent investment. The bonds rose in price the next day but quickly fell to below issue because there were so many sellers. Currently the price for the bonds is about 4 points lower than a month ago and the larger buyers have no marketability. Individual investors have been the main stay of the Puerto Rico market for decades because of the state tax exemption but they will usually buy less than 100,000 at a time. Now the secondary market in Puerto Rico debt is frozen because of the overhang of the recent deal which large investors would sell but can't. Lesson to be learned is to be very careful when someone tries to dictate conditions which should be set by market forces rather than a well meaning idiot.

The current debate about High Frequency Trading (HFT) is Wall Street in a nutshell. A little history that I have observed during my career is in order. When I entered the business in 1972 commissions were fixed meaning Wall Street had a monopoly that forced every investor to pay the same commission to every firm when they executed an order. In 1975 this legal monopoly came to an end with the advent of negotiated rates for stock trades (May 1, 1975). Lost in all the hue & cry in re this new system was that orders were still routed through the fixed exchanges, mostly the New York Stock Exchange (NYSE), and the American Stock Exchange (AMEX or "the curb"). This was the most rigged system in the world, because a handful of "specialists" had a monopoly right to trade certain stocks and they were allowed to trade for their own account while they were executing orders for buyers and sellers. In any other business this would be criminal. Once electronic markets were developed, the monopoly power of the NYSE was broken and investors were matched up through computers without the specialist being able to cherry pick the market.

Today's markets are much more efficient and cheaper than anything that existed since the exchange moved indoors from under the buttonwood tree.Yet, it seems that Wall Street has not met a system they didn't want to game and somehow give themselves an unfair advantage. What is occurring today is a group of traders intercepting orders from investors and running ahead to scoop up the available stock to resell at a higher price to the original investor. It borders on the criminal... it is wrong... it needs to be stopped. If you come across anyone defending this type of activity steer clear. What they are defending is Wall Streets right to rig the game and deny the investor a fair and open market.

It is no wonder that "Wall Street" is reviled on "Main Street". Every day brings a new revelation of cheating on the part of banks. First we had investments tied to the LIBOR rate and then we find out that the banks who set the rate were conspiring with each other to maximize their profit at the expense of their clients. We are currently wading through the same scenario with FOREX or foreign exchange rates. Add to this the manipulation of the commodity markets and the energy grid plus the recent allegations that high frequency traders have an unfair advantage and we see that nothing has changed much after the 2008 meltdown. The only thing that could make it worse is if AIG started running TV ads telling America how wonderful they are. OH wait......

I believe in Wall Street; the US capital markets are a national treasure. At best it is the engine which propels economic growth and advances all segments of society. It enables us to build infrastructure, including  schools, roads, bridges and highways. It helps companies secure the financing for expansion thereby creating jobs and opportunities for the whole country. We have always dreamed big dreams and Wall Street can make that happen. It is time for all of us in the industry insist on kicking out the manipulators and demand that the regulators do their jobs properly.

There is a saying on Wall Street that "Nobody rings a bell at the top or the bottom of the market". So when you hear someone talking about "ringing a bell" it means they think the market is too high or too low and will soon reverse itself. This occurred to me as I read an article about a bond issue backed by auto loans. This is a perfectly acceptable structure in the asset-backed bond world. The part that made me sit up and take notice is a recent issue of 500 million bonds. Because the demand for the bonds is so strong, the underwriters could raise 500 million from investors but had only managed to buy 400 million of loans because there are not enough car loans to go around ....so the investors are buying a security with only 80% of the assets in the pool and a promise from the underwriters to buy the remaining 100 million as the loans become available. If this isn't the first act of "Mortgage Backed Securities Meltdown Part II", I will be very surprised. What got Wall Street over its skis in 2005-2007 was too much demand from investors for product and not enough mortgages to package and sell. Here we go again. As more of these deals are sold to generate underwriting fees the loans created to fill the demand will deteriorate in quality and the investors will eventually be holding worthless paper. There is a vision in my head of Quasimodo (played by Charles Laughton) jumping on a bell called Big Marie in the 1939 remake of the Hunchback of Notre Dame and ringing out a warning: Buyer Beware! of ABS (asset backed securities) backed by incomplete car loan portfolios.

On another note, as critical as I am about Congress they deserve some small measure of applause for passing the debt ceiling without all kinds of crazy conditions. The debate about the level of spending is one the country desperately needs but by tying it to a bill that funds the money already spent is the worst kind of political theater. Hopefully going forward we can have a real discussion about entitlements, defense spending, size of government, farm policy etc. Hope springs eternal.

We seem to be missing the larger picture somewhere in the middle of the debate about income inequality and minimum wage. Chief Executive Officers,  whose pay has traditionally been measured by the truckload, have forgotten who their clients are. Henry Ford knew. Henry was in favor of higher wages for his workers and a shorter work week - both of which would be considered heresy by today's standards. Why, because Henry was selling cars and he wanted his workers to not only be able to buy his product but have the time to use it thereby increasing the demand. Is this rocket science? No. Why is this too complicated a concept for Walmart or McDonalds? For the record I am not in favor of a government mandated minimum wage however; I think paying the workers the absolute lowest possible amount is short sighted and bad business in the long run.

One of the lingering hangovers from the financial meltdown is the litigation concerning interest rate swaps. Wall Street sold these complicated instruments to everybody they could find and the havoc these swaps have caused is enormous. The story of this is still under the radar but countless school districts, colleges, towns, states etc. have experienced real monetary pain because of this product. What the banks did borders on the criminal. Somebody once said that if a banker ever comes to you to sell you a product it is time to lock up your wallet and hide the livestock. Good advice. Take it.