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The U.S. stock market has escaped the sell-off in the Japanese market—at least for now. When the Nikkei Stock Average dropped 7.3% on  Thursday, the Standard & Poor’s 500-stock index fell by as much as 1.1% during the day, only to finish down a hair. 

But the plunge in Japan, triggered partly by fears that interest rates might rise, is a wake-up call for U.S. investors. It is worth peering inside your portfolio to evaluate which assets could be most vulnerable once the Federal Reserve finally stops keeping interest rates unnaturally low. Many of the companies whose stocks have recently been wildly popular for their income and safety—and that have gorged on cheap debt—could suddenly turn into pariahs.

“Highly leveraged companies [those with high levels of debt] have done extremely well in the past three years,” says Harindra de Silva, a portfolio manager at Analytic Investors, an investment firm in Los Angeles that manages $8 billion. “But they have the potential to really hurt you going forward.”

A rotation already might be under way; suddenly, the “safety trade” is faltering. Real-estate investment trusts, utility stocks, high-dividend companies and “low-volatility” stocks (which move up and down less sharply than the market as a whole) all have been performing spectacularly well—until this month, when they started to fade. Many such companies, which investors have been buying for their perceived safety and income, have borrowed heavily.

The S&P 500, up 12.7% in the first four months, has added another 3.5% in May. Stocks with high dividends, as measured by the SPDR S&P Dividend exchange-traded fund, crushed the market with a 16.4% return through April; in May, however, they fell behind, adding less than 3%. Low-volatility stocks, up 15% and more until this month, stayed flat in May. REITs, with a 15.4% gain through April, have lost 1.2% so far this month. And utilities, which returned 19.9% in the first four months, have fallen 5.6% in May.

“The conservative stocks had done so well and gotten so expensive,” Mr. de Silva says, “that it’s almost like people have started saying, ‘Well, if everything’s going to go up, I might as well buy the cheaper, riskier stocks now.’”

Consider that at the end of April, utilities were trading at 22.9 times their earnings over the past year and low-volatility stocks at 24.9 times, versus 21.2 times for the S&P 500. High-dividend payers were trading at 17.2 times their projected earnings over the next year, with the S&P at 15.1 times next year’s estimates.

History shows that whatever is stretched tends to tear when interest rates rise.

On Feb. 4, 1994, the Fed jacked up rates in the first of what would turn out to be five increases that year. Then, as now, the backdrop was a period in which “money the Fed has been so generously creating has been flowing into securities…and may have been creating a securities market bubble,” as The Wall Street Journal wrote the day after the first rise in rates.

That day, the Dow Jones Industrial Average tanked 2.4%—“partly,” wrote the Journal, “because of uncertainty about how far the Fed will go.”

The biggest fear of investors then was that the Fed would tank the markets, which still were recovering from the recession of 1990-91. That didn’t quite happen; the U.S. stock market overall earned 1.3% for the full year in 1994.

But the damage was widespread, hitting supposedly safe and risky assets alike. For the full year, utility stocks lost 15.3%; municipal bonds, 5.2%; emerging markets, 8.7%; intermediate-term Treasurys, 5.7%; the U.S. bond market as a whole, 2.9%; gold, 2.2%. REITs eked out a gain of 0.8%; without their generous dividend yield of roughly 7%, they would have lost 6.4%. (The average yield on REITs today is a bit over 3%.)

There was no index of low-volatility stocks back in 1994, but Mr. de Silva’s research shows that in periods of rising interest rates, these stocks tend to underperform the market as a whole by an average of about 0.8 percentage point annually.

This past week’s tumble in Japan confirms the lessons of 1994. Just the thought of what will happen when a central bank tightens the faucet of easy money can spook investors.

REITs, dividend-paying companies, utilities and low-volatility stocks all have a place in a portfolio. But they aren’t worth paying a premium price for—and, as safe as they have seemed until recently, they won’t offer blanket protection once the fear of rising rates becomes reality. The many investors who have been overloading their portfolios with this kind of safety may soon be sorry.

Write to Jason Zweig at intelligentinvestor@wsj.com or follow him on Twitter:  @jasonzweigwsj

 

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We’ve spent plenty of time harping on how some of the most heavily shorted stocks have been outperforming the broad market recently. Names like Tesla Motors Inc Netflix Inc. and Green Mountain Coffee Roasters , which have been day traders’ favorite playthings of late, have soared as the shorts have been squeezed out of their positions.

That prompted the inevitable question: Who will get squeezed next?

Data securities-financing tracker Markit scoured the market for stocks that potentially could be the next short-squeeze candidates. The firm searched for the most shorted stocks that haven’t witnessed much volatility this year, making them ripe for sharp moves if major news impacts them one way or another.

Investors who short stocks sell borrowed shares in hopes of buying them back at lower prices and profiting from the difference. If declines fail to materialize, these investors are often forced to switch their positions in droves, a development known as a short squeeze that pushes prices higher.

Without further ado, here’s the list that Markit compiled:

Markit

Some names that jump out include Latin American telecom company Nii Holdings, which tops the list with about 30% of its shares out on loan Alliance Data Systems and Microchip. Home builder Lennar Corp. is another one that caught our attention. The stock is up 10% this year, underperforming the S&P 500.

Lennar, which had a big run in 2012, has since struggled to break out despite the improving housing market. As the chart shows, Lennar’s short interest is at 13% of total shares. That’s down from 22% in December, but it’s still relatively elevated. The short interest in an average S&P 500 stock is 2.5%.

Markit

To MoneyBeat nation, which companies are the next potential short squeezes? What’s on your radars? Let us know your thoughts in the comments section below.

Friday brought new signs that things really are on the up for America’s laggardly airlines.

With the whole sector up 52% over the past year, many investors, and passengers, sense real change is in the air. For years, the industry had become synonymous with price wars, bankruptcies and creaking planes.

But Friday in New York saw a welcome development: two major airlines competing not merely on how cheaply they could sell their seats, but on actual customer service—you remember, that old luxury passengers used to get before airlines started charging for the privilege of stuffing bags in an overhead locker 16 rows from their seat.

Delta Air Lines opened its shiny new $1.4 billion Terminal 4 at John F. Kennedy International Airport, featuring such goodies as a streamlined baggage system and a fancy lounge with an outside terrace. Meanwhile, rival United Airlines said it was now offering flat-bed seats and on-demand entertainment in premium cabins on every one of its long-haul, international flights from airports in and around the Big Apple.

Passengers, especially well-heeled ones, will be pleased. But so will investors: having airlines compete on product quality, not just pushing excess capacity, really is a breath of fresh air.

By Kjetil Malkenes Hovland

OSLO–The leadership of Norway’s $740 billion oil fund voted to separate the roles of chairman and chief executive at JP Morgan , the head of the fund’s manager said Friday.

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After facing some criticism Norwegian national media for keeping his voting secret on whether Jamie Dimon should be both CEO and chairman of the company, Norges Bank Investment Management chief executive Yngve Slyngstad revealed the vote of the Government Pension Fund Global, which is managed by NBIM.

The fund’s stake was about 0.78% of J.P. Morgan as of the end of December, according to FactSet, a position worth about $1.6 billion.

“It’s no secret how we voted in this case,” Slyngstad told the NRK radio channel. “If you go to our webpage you can see there that already last year, we voted for separating the role as chief executive and chairman.”

Asked what the fund voted this year, he confirmed that the fund had not changed its view.

“We voted to separate these roles, of course. We think it’s very important in international banks, not the least those that are system-critical, that there is a balance between chief executive and chairman,” Slyngstad told the NRK.

Slyngstad rarely speaks to the media apart from the interviews he gives at the fund’s quarterly presentations.

On Friday, Slyngstad joined a debate on the radio station with chief executive Thomas Espedal of Skagenfondene, who had been critical to the fund’s lack of transparency. The NBIM makes its voting records public only once a year, in the annual report.

After Slyngstad revealed how NBIM voted on the JP Morgan leadership, Espedal said he hoped the fund management would continue to be transparent.

“It’s important to maintain the public trust in the fund,” Espedal told the NRK.

At end-2012, the fund held 0.71% of the shares in J.P. Morgan, at a market value of NOK6.644 billion.

The private-equity industry is taking its profits in this market rally.

Bloomin’ profits

Bloomberg News

As some top PE executives have made clear this year, it is time to sell off the fruits of their labor, including some of the biggest deals reached at the boom time.

“It’s almost biblical: there’s a time to reap and there’s a time to sow,” Apollo Global’s Leon Black said last month. “We are harvesting now.”

Many are finding the exit environment of the stock market quite receptive, particularly this month. This week, seven offerings were priced by private-equity-backed companies, including five on Wednesday, pushing the year’s total to 86, more than double the amount at this point last year, according to Dealogic.

The deals have sold a total of $34 billion in stock, triple the amount PE-backed companies had sold a year ago at this point, according to the data provider. (Not every deal involves the PE owners actually selling stock, some are the company or other investors selling shares.)

The sales are coming as the market continues to hit new highs, giving the PE firms their best chance to exit since the boom-times. The Dow Jones Industrial Average has steadily marched higher and many of this week’s sales were done within days of shares hitting high-water marks, maximizing returns for the investors. Meanwhile, the deals priced at slim, or no, discount to public prices, a sign the market has the appetite to take on more of the shares.

Wednesday’s deals included Bain Capital selling up to $310 million worth of restaurant operator Bloomin Brands, if an overallotment is fully exercised, and $424 million of industrial sensor and control maker Sensata Technologies .

Also priced Wednesday Carlyle Group sold a stake of aircraft-parts company Wesco Aircraft that could go up to $276 million if an overallotment is fully used.

Meanwhile, a sixth deal was priced Wednesday by Oaktree Capital Group , which sold its shares of itself in an effort to cash out its founders. Howard Marks and Bruce Karsh are among the executives who will benefit from an upsized deal that raised $374.5 million.

According to an earlier filing that had fewer shares being sold, Marks and Karsh both stood to receive some $80 million. They aren’t personally selling shares in the offering, but Oaktree is using the funds it raises to repurchase stakes from them and other insiders. That’s the same structure the asset-management firm used in its IPO last year, in which Marks and Karsh got more than $75 million each.

The follow-on offering comes only a week after Oaktree hit its all-time high, pricing at $53.50, 24% above last April’s IPO price.

Bain-backed Bloomin’ Brands priced its IPO last August at $11 and Wednesday’s secondary offering sold at $21.50, essentially flat with the market close that day and only slightly below the all-time high of $22.50 it hit two weeks ago.

Combined with the IPO, Bain has pulled in some $337 million from its sales of of Bloomin’ stock, if the whole amount is sold this time.

Bain and Catterton Partners bought the operator of Outback Steakhouse, and its Bloomin’ onion, for $3.2 billion in 2006. Catterton also sold in both deals, cashing out about $70 million in stock in total.

Bain would still hold at least 42.3% stake and Catterton would hold 8.8%, if the overallotments are sold.

In Sensata, Bain has racked up more than $2.7 billion from five secondary sales and the IPO in early 2010, including about $970 million this year. This week Sensata shares hit their highest point since July 2011, within 2% of their all-time high, and Bain will still own a stake worth about $1.7 billion.

Carlyle, meanwhile, has now sold some $542 million of the aircraft-parts maker, including the July 2011 IPO. Wesco’s shares were also at all-time highs this month and Carlyle still holds more than half its shares. If the entire overallotment was sold, the firm would own 36.2 million shares, worth nearly $580 million.

Among the other offerings this month included the sale of $1.3 billion of Nielsen Holdings shar es by backers including Carlyle and Blackstone Group , the second billion dollar sale by the PE firms in that company this year.

UPDATE: An earlier version of this post incorrectly said Catterton sold $100 million of stock. It has sold about $70 million in total.

Everett Collection

The volatility that swept global markets this week of course has something to do with the Fed. But it also is a result of a market that’s decided it can finally drink safely and deeply from the Fed’s proverbial punch bowl, at the same time as the Fed’s making noises about taking that punch bowl away.

Maybe. It seems the bank itself isn’t clear on that last point. Talk about timing.

“A side effect of aggressive easing is that it becomes eventually counterproductive,” Sebastian Galy, senior FX strategist at Societe Generale , wrote in a Friday note. With all the world’s central banks moving in the same direction, toward zero-percent interest rates and maximum quantitative easing, the “cross-asset correlations” are high – in other words, across the capital markets, everything’s moving along the same lines, if not in the same direction.

But once one of those central banks, decides to change course, it will throw off the correlations, Galy wrote in his 2013 outlook report, back in November.

Once the correlations break down, markets will start trading on their fundamentals again, he said in November. This should see the U.S. dollar strengthen, which it has recently, as the U.S. economy is relatively speaking better off than the economies of Europe and Japan. The side effect of all this, though, is volatility.

We got a whiff of that this week, with Ben Bernanke‘s testimony, and the big selloff in Japanese stocks.

Adding to the volatility is the fact that this is happening at a time when the Fed seems to have finally chased out virtually all of the bears from the marketplace. Michael Hartnett, the Merrill Lynch strategist who write a weekly report called “The Thundering Word,” noted this week that after meeting with clients in London, he didn’t find a bear anywhere.

“Investors have flipped from ‘fighting the Fed’ to ‘daring the Fed,’ ” he wrote. “Investors have now decided the right strategy is to be max long risk until the Fed dares to take the punch bowl away.” This is, more or less, what the Fed’s wanted, to chase people into the market, to rekindle the proverbial animal spirits.

The timing is poor. All of this is building pressure in the markets, pressure that blew up most spectacularly in Japan. Adding on even another dollop of volatility is the fact that the Fed itself, in its attempts to provide the marketplace with clarity, is instead causing confusion as it seeks to figure out its next move: how and more importantly when to start easing off its easing programs.

“As far as we can tell,” Capital Economics economist Paul Ashworth wrote, “the problem is that officials simply don’t agree on what would constitute the substantial  improvement in the labor market outlook that the statement issued after the last FOMC meeting suggests they are looking for.”

It got buried under this week’s Bernanke Congressional testimony on Wednesday, but the speech from New York Fed president William Dudley illustrated the problems facing the Fed as it gropes forward.

“Most importantly, managing expectations is critical in the execution of monetary policy at the zero bound,” he said in a speech Tuesday at the Japan Society (the “zero bound” means when interest rates are sitting at or near zero). The next day, the importance of this point would be italicized and underscored by Bernanke’s testimony.

There was a time, long before Twitter and IM and Max Headroom, when the Federal Reserve didn’t talk much, at least not to the public. The Federal Open Market Committee – the rate-setting committee within the central bank – would hold their regularly scheduled meetings, debate the economy, make a decision on where rates should go, set their plans in action…and not tell anybody what they’d decided.

As opposed to the modern Fed, where the results of the FOMC meeting are declared that day, up through the 1970′s the Fed didn’t tell anybody what the decision at one meeting was until after the next meeting. Bankers had to guess what the Fed’s decision was, had to try and divine it from the clues left in the bond markets. Was the Fed a buyer, or a seller? And how aggressively?

Being a tea-leaf reader back then was a much harder job. The current corps has its work cut out for it, though.

The inability of Japanese government debt to stop gyrating wildly poses a significant threat to the country’s climb out of its two-decade economic mire.

In the past six months, Japanese 10-year bond yields have swung like a pendulum. The huge swings were never more prescient than Thursday, when the yield jumped over 1.0% for the first time in over a year.

That volatility poses a significant threat to Japan, specifically through the balance sheets of its banks. In a statement clearly acknowledging those risks, Bank of Japan Governor Haruhiko Kuroda said Friday that it is “extremely desirable” for the nation’s debt market to be stable.

When it comes to government debt, Japan’s biggest banks are all in. Consolidated financial statements of Mizuho Financial Group and Mitsubishi Financial Group show they each hold 23% of total assets in Japanese national government and a variety of government agency bonds.

As that debt vacillates in price so do the banks’ Tier 1 capital asset ratios and presumably their ability to lend and create loans. Japanese banks would face 6.6 trillion yen in losses should interest rates rise broadly by one percentage point, according to the Bank of Japan.

One week into 2013, 10-year government bonds climbed in yield to nearly 0.85% from early December lows of 0.69%. They then fell dramatically to 0.44% in early April only to climb again violently to the 12-month high on Thursday. All that interest rate volatility and so far, no inflation in sight.

Recent gross domestic product figures from Japan showed growth of 3.5% on an annual basis but the GDP deflator, a measure of inflation printed at a decline of 1.2% from a year earlier. That is 14 consecutive negative quarters.

If these government bond yields continue to gyrate beyond the central bank’s control and no inflation comes, the government stands to lose credibility domestically.

That credibility is already somewhat in question given during his first term as prime minister, Shinzo Abe lacked the political power to follow central bank action with his own government reform. Without that reform, Abe’s goal of 2% inflation within two years is in grave peril.

If he has any doubts about the need for government action, look no further than U.S. Personal Consumption Expenditures, the Federal Reserve’s favorite indicator for inflation, was 2.5% in 2008 before the global financial crisis took hold. Now almost five years later and massive quantitative easing from the Fed, the PCE is just 1.1% because there has been no help from fiscal policy.

The importance of credibility is even greater in Japan, where local investors finance outstanding government debt to the tune of 90% of the total outstanding. And given the government’s call for higher interest rates, foreign investors are not likely to pick up the slack of domestic savers dumping debt.

The challenge the Prime Minister faces is that he must raise rates to levels that will create inflationary expectations but at a pace slow enough to allow banks to minimize the impact on their balance sheets, while also stimulating growth; a lot of balls to keep in the air.

The potential fallout, a sharp drop in Japanese bonds prices, would impair banks balance sheets, reduce the wealth of Japanese savers and hit the wealth effect. The very thing the government must foster to stimulate growth and increase inflationary expectations.

(Vincent Cignarella is a currency strategist/columnist for DJ FX Trader and co-inventor of The Wall Street Journal Dollar Index, with 30 years experience in currency markets including as a bank dealer at major money-center commercial banks. He can be reached at vincent.cignarella@dowjones.com.)

Dish Network ’s campaign to paint  Softbank’s acquisition of Sprint Nextel as a national security issue is gaining some traction in its target: Washington politicians. But it may be too late.

Associated Press

Friday, Sen. Charles Schumer (D.,N.Y.) became the latest big-wig from the Capitol to raise concerns about the deal, sending a letter to Treasury Secretary Jack Lew and FCC acting chairwoman Mignon Clyburn.

“There are several reasons this deal requires careful scrutiny,” Schumer wrote. “SoftBank, which proposes to acquire Sprint as well as its spectrum, is a Japanese company with alleged ties to China, the country that is currently the leading source of cyber breaches.”

It was Schumer who helped stir the controversy in 2006 over the planned purchase of the Port of New York and New Jersey by Dubai Ports World. That deal had received permission from the government’s foreign-investment review. But the senator called a press conference where he invited the families of victims of 9/11 to stand with him and fight the sale to the Dubai-based company.

“In a post 9-11 world we can never be too careful,” Schumer said at the time.

That very scandal, which dominated national coverage and went all the way to the president, is being pointed to by Dish Network.

Softbank is working through the foreign-investment review that Dubai Ports had gotten before seeing its deal scuttled, and Schumer and other politicians are urging a careful review this time around.

In an advertising campaign, Dish is attempting to connect the two deals. The company has started a website, nationalsecuritymatters.com, and run ads in the Washington Post, Politico and National Journal, all news sites that target the Washington crowd. The campaign compares the shipping ports to Internet-cable ports on a computer, but it doesn’t make specific reference to Dish’s own offer for Sprint, which is attempting to top SoftBank in the board room.

A U.S. spokesman for SoftBank called to Dish’s moves “desperate xenophobic measures” adding they “cannot confuse the important strategic and economic relationship the United States has with Japan.”

Meanwhile, SoftBank and the government have seemingly already crossed some major hurdles, with SoftBank reaching a deal that would allow the government to appoint a board member to oversee the concerns. The government is also seeking approval of the companies suppliers, after earlier raising concerns about ties to China’s Huawei Technologies Co. SoftBank has said it would remove any equipment the government was worried about, which could cost it $1 billion.

The agreement signals the sides are moving past the biggest concerns, which may mean Schumer and Dish are too late to the game to block regulatory approval. (Shareholder approval may be another matter.) Negotiations remain ongoing between the sides.

Schumer isn’t the only politician to add onto Dish’s campaign, Sen. John McCain (R. Ariz) and Sen. Orrin Hatch (R. Utah.) have also cautioned about selling spectrum to a foreign company. McCain also sent the FCC a letter like Schumer’s, urging a careful review of the deal.

The senators didn’t make much noise when Deutsche Telekom's T-Mobile unit purchased MetroPCS earlier this year. The German company has relationships with Huawei, the same Chinese supplier raising eyebrows over its ties to SoftBank.

Investors ramped up their borrowing against brokerage accounts in April, taking margin debt to its highest-ever level.

Investors borrowed $384.4 billion against their investments in April, a 1.3% gain from the previous month, and a 29% rise from the same month last year, according to the New York Stock Exchange.

That exceeds the record high of $381.4 billion in debt held against investments, known as margin debt, from June 2007. New York Stock Exchange member brokerage firms report the levels of margin debt held against client accounts monthly.

The rising level of debt is seen as a measure of investor confidence, as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against. The latest rise has been fueled by low interest rates and a 15% year-to-date stock-market rally.

Some see the increase as a sign of speculation, particularly if the borrowed money is reinvested in stocks.

But advisers say that margin debt can be a cheaper and easier way to borrow than a traditional loan, so they are recommending margin borrowing for uses like home renovation and business expansion.

Sean Sebold, president of Sebold Capital Management in Naperville, Ill., said that his clients aren’t betting on markets with margin debt.

“There are too many other tools that you can use with better leverage characteristics,” Sebold said. “Why leverage up an equity account when you can buy futures [contracts]? It’s not terribly challenging to get leverage.”

Sebold has recommended that a client use margin debt to help finance flipping houses, since the client could borrow money more quickly on margin than he could by taking out a different type of loan.

Hulu all of sudden has a full dance card, and there are reasons to think the video website may soon find itself new owners. Heard on the Street’s Miriam Gottfried stopped by the MoneyBeat set to talk about it.

There’s no guarantee, of course, that a deal gets done, but the momentum is building, as Gottfried pointed out in her Heard piece:

 After years of being a dance-floor rival, Hulu may soon be the belle of the pay-TV ball.

Time Warner Cable  and DirecTV are both considering buying or investing in the online-video site, The Wall Street Journal has reported. Hulu’s owners abandoned initial attempts to sell it in 2011, but have recently renewed those efforts amid disagreements over its future strategy.

Buying Hulu would provide greater access to the growing number of viewers watching video over the Internet.

A fresh indication of the impact of Japan’s sell-off emerged today, as Credit Suisse ’s Global Risk Appetite Index fell back from near “euphoric” levels that have not been seen since long before the crisis.

The index measures risk appetite across the globe, tracking changes in the relative performance of ‘safe’ assets such as government bonds, versus more volatile asserts such as equities.

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In recent weeks the index has soared, reaching 4.71 on Tuesday (see chart, which looks at activity up to Thursday), putting it close to the all-important level of five that Credit Suisse deems to be “euphoric”. Thursday it plunged to 4.15. The fall came after comments from US Federal Reserve Chairman Ben Bernanke and minutes from the Fed’s recent policy meeting that implied the Fed might curtail its bond buying, coupled with a weak manufacturing report out of China, which revived fears that the one of the main motors of global economic growth is slowing.

Japan’s stock index, the Nikkei, subsequently tumbled 7.3% to close at 14483.98.

The Nikkei Stock Average closed 0.9% higher Friday at 14612.45, recovering from a fall of more than 500 points in a fast-moving market. In all, the key index moved in a 1,000-point range during the day in active trading.

Market participants have attributed the recent rise in risk appetite in part to Japan’s economic reawakening Bank of America  Merrill Lynch’s fund manager survey, published last week, revealed that managers with a bullish outlook on Japan outnumbered those that are bullish on emerging markets by the widest margin since December 2005.

Japan has embarked on an ambitious new program to turn around its stagnant economy, dubbed Abenomics after the country’s prime minister Shinzō Abe. The Bank of Japan  has said it will pump ¥270 trillion ($2.6 trillion) into the economy by the end of 2014 in order to try to hit its 2% inflation target in two years.

The last time Credit Suisse’s Global Risk Appetite index was at the level five ‘euphoria’ mark was in May 2006. The index was at 5.02 on May 16, 2006 amid a rally of emerging market assets, but in recent years the index has remained subdued and any extreme movements have veered towards panic levels rather than euphoria.

Credit Suisse’s Global Risk Appetite index has been published since 1998.

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Tabb Group’s Andy Nybo weighed in Thursday and on a proposed tax change that could “decimate trading volumes” in the options industry.

Congressman Dave Camp’s proposal to create a more unified tax policy for all derivatives has been under fire for weeks, with the options industry—which has had its own functional tax policy for decades—uniting against the proposal. Rep. Camp (R., Mich.) is the Chairman of the House Ways and Means Committee.

According to Nybo, if the proposed tax were implemented in its current form, industry trading volumes could fall by as much as 40%. Based on last year’s numbers, that would bring annual volume back to its 2006 level, according to data from industry clearing firm OCC. That was before the crisis sent investors scurrying to options for the protection they offer.

Rep. Camp’s proposal would “effectively impose a tax penalty on individuals and other taxpayers who use exchange-traded options to reduce the risks of owning stocks or to generate additional income from their stock holdings,” according comments last month from the U.S. Securities Markets Coalition to the House Ways and Means Committee. The coalition includes options exchanges and the industry clearinghouse.

The proposed tax policy would “replace the well-established and relatively simple tax rules for options with a harsh, burdensome and overly complicated regime.”

As Tabb’s Nybo noted, “the biggest impact will be felt by asset managers and Mom and Pop investors that are increasingly using options to earn premium income and manage price risk in their equity holdings.”

Small, individual investors accounted for 14% of options trading volume in 2012, according to Tabb Group estimates. Trading by asset managers and hedge funds–which would also be impacted by the proposed change–accounted for another 38% of volume, according to Tabb.

The options industry, including the OCC, exchanges and large retail brokerage firms, has been sending representatives to DC to lobby against the proposal for weeks.

The options market’s “very existence is being threatened by misguided tax policy contained in Representative Camp’s proposal,” Nybo wrote.

“It seems that Washington wants to have its cake and eat it too,” he said.

Skyscrapers built from sand flank a statue of Goethe at Frankfurt’s annual Wolkenkratzer Festival.

Nicky Redl

As many wonder how solid the foundations of the euro zone and its banks are, the city of Frankfurt, Germany’s financial center and home to the European Central Bank, is — in one way — putting that question to the test.

Once a year, Frankfurt celebrates the banks that form its skyline with the Skyscraper Festival, or, in German, “Wolkenkratzer Festival.”

In the center of the city, truckloads of sand are being shaped into miniature versions of imposing downtown high-rises, posh bankers’ villas and other characteristic Frankfurt buildings.

From an aesthetic point of view, Frankfurt, nicknamed “Mainhattan,” has always had an ambiguous relationship with its banks and their towers. Banks bring jobs and money to the city, but the towers are empty and mostly dark at night, and residents complain of the urban canyons dominated by lifeless entrance foyers.

The Wolkenkratzer Festival is essentially a big party with free open-air concerts, visitor tours of bank towers that are usually closed to the public, base jumping, and other events. Among the buildings being recreated will be Deutsche Bank's twin towers, dubbed “debit and credit,” Commerzbank , Helaba’s Main Tower, DZ Bank, the ECB Eurotower, and the pencil-shaped Messeturm. Although rain is predicted through the weekend, the artists claim the damp weather makes the structures stronger.

 

Bloomberg

Sears Holdings Corp. is taking a beating in the stock market, and from Wall Street analysts.

Shares recently fell 15% to $49.54 on more than eight times its average daily volume shortly after noon Eastern Time. Friday’s declines wiped out the stock’s gains over the past 12 months.

The decline came after Sears’ disappointing quarterly report, in which Credit Suisse analyst Gary Balter compared the struggling retailer’s strategy to playing a losing game of Jenga. From Balter:

“Most investors conceive of and monitor Sears as a single unified entity. However, in reality Sears is an accumulation of many pieces, including 1,211 Kmart stores, 851 Sears stores, Lands’ End Sears Canada , Sears Service, and brands like Kenmore, Craftsman and DieHard. Over the last few years Mr. Lampert has been slowly dismembering the corporation, taking pieces out much as players pull out pieces of a Jenga game, hoping the overall structure does not collapse. We believe what we saw this quarter, and what we are likely to see in the future, is that too many pieces have been removed, which in turn is reducing the strength of the core, and suggesting that further actions will weaken it even more. At one point, unfortunately, the volumes and productivity of the remaining stores point to margins staying weak or weakening.”

Balter, who has an underperform rating and a $20 price target on Sears, didn’t mince words about what he thinks about Sears’ future.

“The underlying problem, in our opinion, is that operations are already cash flow negative, but by dismembering the company to fund liquidity, that further reduces long-term cash flow,” he said. “That is what we saw this quarter and our concern is that the trajectory will get worse.”

Sears swung to a fiscal first-quarter loss from a year ago, revenue weakened and margins slumped. The company has been looking to draw in customers with more appealing stores, a loyalty program and investing significantly in its online ecommerce platforms.

The problem is that shifting toward a prominent online player is a strategy that hasn’t yielded immediate benefits, a development that Lampert himself acknowledged on last night’s conference call with analysts.

“I do not subscribe to the view that the macro factors are the sole reason for our poor performance. They have an impact. But even with that impact, we should have been doing a lot better than we are,” said Lampert, a billionaire hedge-fund investor who took control of Sears earlier this year after Louis D’Ambrosio left the company due to family reasons.

He also said his company’s performance “has not been acceptable” and that “A company of our size and with our assets should be generating significant profits.”

Balter wasn’t the only analyst who took Sears out to the woodshed. From ISI Group analyst Greg Melich:

Bottom line: SHLD equity remains a melting ice cube, with asset sales and spinoffs the clearest path to justifying the share price. Cash flow or earnings based valuations make little sense in a business with EBITDA margins of just 1%. Our theoretical SOP could fetch$30-50, with plenty of risk to the downside as long as operational FCF is negative. Plans to monetize assets have credibility given last year’s actions in real estate, SHOS, and Canada. Yet without some stabilization in sales and positive FCF, we think the risk/reward remains negative.

Kazakhstan is the latest East European sovereign to be tempted to borrow from the international bond market, with the country mulling its first debt sale for over 13 years, according to analysts, reiterating plans unveiled by the finance minister Bolat Zhamishev this month.

The deal could surface in September and would establish a reference benchmark for Kazakh corporate bond issuance, particularly for state-owned entities such as oil company KazMunaiGas, said Timothy Ash, an emerging market analyst at Standard Bank.

“For years the Kazakh [government] has been talking about this, but I guess [they] could not stomach paying interest when they are still flush with oil-related cash,” Mr Ash said. The country’s national bank has $26 billion in foreign exchange reserves and the National Oil Fund has $62.4 billion in reserves.

Kazakhstan is rated investment grade, albeit one notch above junk, by Standard & Poor’s and Fitch Ratings. According to Fitch, its economy, buoyed by oil, commodities and natural resources, is expected to grow 5% in 2013 and 5.5% in 2014 with low government debt of just 12% of GDP.

But the country has had its fair share of banking woes. Its once-vibrant banking sector developed at breakneck speed with easy foreign credit in the decade up to 2008, before collapsing when credit dried up. Following protracted negotiations, BTA, Kazakhstan’s third-largest bank by assets, completed a $11.2 billion debt restructuring late last year. paving the way for a potential sovereign bond.

“The banking system is a continuing weakness for the sovereign credit profile, although the contingent liability it represents has shrunk as the sector’s external debt has been restructured,” Fitch said in a recent note.

The potential for Kazakhstan to issue a bond has been mooted since last Autumn although the likelihood of a deal surfacing appears to be gathering momentum.

The last time the sovereign sold debt internationally was in April 2000 with a $350 million seven-year bond, Dealogic data shows.

Kazakhstan could come to market with a yield of around 3%, Mr Ash noted – pretty close to Russia. The yield on Russia’s 10-year bond is currently just over 3%, according to Tradeweb.

And Kazakhstan is not alone in considering an offering. Romania and Ukraine, are also likely to tap into the cheap funding and borrow from the international bond market by year-end, analysts say.

The Kazakhstan Finance Ministry wasn’t available for comment.

 

When start-up financing is scarce, entrepreneurs should look to bootstrapping. Dale Murray, an angel investor in the tech sector and a non-executive director for the Department for Business, Innovation and Skills and U.K. Trade and Investment, explains what it is and how to use it.

 

 

 

What Europe needs most isn’t monetary and fiscal stimulus, but rather structural change and better demographics.

Kenneth Rogoff, the Harvard University economist, makes a broad outline of the argument in a Project Syndicate article.

The euro zone’s crisis boils down to the fact that monetary integration wasn’t accompanied by “actual political, fiscal and banking union,” he argued. These structural deficiencies in the European project prevent the sort of necessary debt restructuring and fiscal transfer necessary to get struggling economies growing again.

Yes, monetary policy could alleviate conditions by pumping up more inflation in Germany and other core euro-zone countries. This would work by eroding trade imbalances within the single-currency region–inflation in the core would make these countries less competitive and more inclined to consume exports from the others. And it would erode some of the real value of debt owed by struggling countries.

Fiscal policy can support demand where private-sector consumption has collapsed, but this is at best a short-term palliative. The fiscal policy that’s really needed is transfers from rich countries, or for the center to make good on its banking-sector losses when highly indebted economies default on outstanding debt (ultimately held by the core).

And this ultimately boils down to a political and fiscal restructuring of the single currency.

But that’s not quite all.

The euro zone has another fundamental problem: the lack of growth. By and large, euro-zone countries are not far from where Japan is in terms of aging populations, and although there’s more immigration into Europe than there is into Japan, population in much of the region is hardly growing.

Indeed, according to Stephen King, the HSBC economist, expectations of how well people can live in the euro zone–including welfare, pensions and healthcare–fly above what economies can afford. The trend economic growth rate has slowed as gains from technology no longer produce step changes but rather modest incremental improvements, populations have stopped growing, labor productivity is slowing and leverage can no longer be relied on to bring forward consumption from an ever distant future.

Europe’s richer countries will need to give more support to its poorer ones and everybody will need to scale down their expectations.

 

Lloyds Banking Group said it can comply with a directive from the U.K. regulator to improve its capital position.

Bloomberg News

Lloyds Banking Group is having better luck lately as a macro trader than as a bank.

The weak U.K. economy and low interest rates have made it hard for Lloyds to earn its way back to health after acquiring HBOS and taking a £20 billion ($30.2 billion) government bail-out in the financial crisis. Fortunately, it has plenty of assets to sell into buoyant markets.

The bank’s decision this week to unload $8.7 billion in bonds backed by U.S. home loans is the latest in a string of savvy bets aimed at raising cash and freeing up capital. Prices for such bonds–once considered toxic and a major contributor to banks’ losses in the financial crisis–have risen by around 40% in the past 18 months. Lloyds is carrying the bonds on its balance sheet at around a 43% discount to face value, while Interactive Data estimates the bulk of the securities will fetch at least 70% of par.

The potential gain, and release of capital held against the securities, follows Lloyds’ £2.7 billion profit on selling U.K. gilts between October and March. Analysts said those sales gave a boost to Lloyds’ 2012 and first-quarter 2013 results, and helped to offset declines in bread-and-butter lending revenue.

The bank also showed its skill in timing the market when it sold shares in wealth manager St. James’s Place. It first placed a 20% stake as the stock hit a high in March, raising £520 million. On Wednesday, it sold another 77 million shares after the share price rose further, for £450 million in gross proceeds.

The timing couldn’t be better for Lloyds to get good prices for its assets: U.K. regulators confirmed this week that the bank must come up more capital this year. Lloyds said it can fill the hole, whose size it won’t disclose, through earnings and by continuing to sell assets.

Analysts reckon Lloyds needs to get its capital ratio up to around 10% equity to risk-adjusted assets before it can start paying dividends and shed state support, from 8.1% now. The bank on Wednesday said it is aiming to be above 9% by the end of the year and above 10% by the end of 2014.

Ian Gordon, a banks analyst at Investec, said Lloyds did well to book the capital gain from St. James’s Place this week. “The U.K. government should be similarly opportunistic in relation to its 39% stake in Lloyds,” he said, after Lloyds’ shares this week went above the government’s break-even price.

Lloyds declined to comment.

 

Margot Patrick tweets at twitter.com/margotpatrick

 

Procter & Gamble ’s abrupt switch of the helm has Wall Street excited Friday morning, including earning the consumer-products giant an upgrade to buy from UBS analysts.

Bloomberg News

UBS, in a note titled “Spin cycle on!”, explained their upgrade is based on the expectation that new/old CEO A.G. Lafley will reinvigorate sales at the company.

The analysts had previously written about what they expect to be a “spin-cycle” at P&G, whereby they expect the company to aggressively cut costs and pour the savings back  into the business, building sales and boosting margins.

“Today, we view A.G. Lafley’s appointment as a catalyst,” UBS wrote, raising their price target to $95 a share from $75.

The market wasn’t quite that bullish, but shares opened up 4.4% to $82.13.

UBS added that now-ousted Chairman and CEO Bob McDonald had lost the confidence of his employees and that Lafley should be able to “re-align and rebuild trust across the organization.”

Several analysts joined UBS in urging the company to increase its spending on brands while also cutting costs, in order to protect market share.

Stifel Nicolaus said the situation is similar to the first time Lafley took over, with management distracted. The analysts said P&G shares rose 63% during his past tenure while the S&P fell 37%. (Lafley was somewhat blessed to come in near the high and leave in June 2009, soon after the bottom.)

Still, Wall Street was also clear Lafley’s return mission wouldn’t be easy.

Oppenheimer said it was “encouraged” by the move but not ready to boost its rating from “perform” because they “expect the company’s portfolio of largely premium-priced brands to continue to struggle to regain market share from lower priced competitors, while valuation remains fair.”

Reuters

Evidence of the short-lived plunges in shares of American Electric Power Co. Inc. and NextEra Energy Inc. were wiped off the tape, but not from investors’ portfolios.

Late on Thursday, the New York Stock Exchange published the official daily high and low prices for the two stocks. For American Electric Power, Thursday’s intraday low is $46.07. For NextEra Energy, it is $76.50.

But those prices don’t reflect sharp drops sustained by both stocks in the first minute of trading. American Electric Power fell by more than 50% to $22.28 before bouncing back, while NextEra dropped by more than 60% to $35.50.

NYSE said it investigated trades in both utility companies that took place between 9:30 a.m. and 9:31 a.m. EDT, and ultimately cancelled none.

American Electric Power’s shares closed down 31 cents, or 0.6%, to $48.28. NextEra ended lower by 94 cents, or 1.2%, to $78.22.

Instead, the exchange said all trades in American Electric Power at or below $46.03, and in NextEra Energy at or below $76.19, will be marked with an ”aberrant report indicator.”

While those trades are still valid, NYSE said they “will be excluded from the high and low data” disseminated by the Consolidated Tape Association, which oversees the dissemination of real-time trade and quote information in
NYSE-listed securities.

FactSet data show that hundreds of trades in both stocks were priced below those prices.

“We are continuing to try to understand exactly what happened in the first few minutes of trading in our stock this morning,” NextEra Energy Vice Chairman and Chief Financial Officer Moray Dewhurst said in a statement.

“This is naturally a concern for all our shareholders and potential shareholders. This type of market behavior is not what we would expect from a well-functioning and well-regulated exchange,” he said.

A spokeswoman for American Electric Power said the incident “appears to demonstrate that circuit breakers not being in place for the full trading session is a concern. None of the trading was based on any news out of the company.”

The sharp drops marked the second time in the past week that new single-stock volatility curbs weren’t able to spring to action to cushion the stocks because of when they took place. The new rules, called limit-up/limit-down, started to take effect April 8, but will not apply during the first 15 or final 30 minutes of trading until Aug. 1. The new limit-up/limit-down rules did away with NYSE’s own program to curb swings on its own exchange.

“They’ve created a new circuit-breaker system that has holes in it, at least for the first few months,” said Joe Saluzzi, co-manager of trading at Themis Trading.

Last Friday, shares of Anadarko Petroleum Corp. plunged from over $90 a share to one penny and back in less than one second. NYSE cancelled hundreds of trades Friday.

“The only one getting hurt is the somebody who had stop-orders in, a little old lady in Iowa who owns maybe 300 shares,” said Paul Asmar, former NYSE floor specialist at Spear, Leeds, & Kellogg LP, now a unit of Goldman Sachs Group Inc.  (GS). Mr. Asmar, 52, of Basking Ridge, N.J., said he used to make markets in Florida Power & Light. The company changed its name to NextEra in 2009.

“People with sell-stop orders are going to go home, see they sold stock for around $45, and then check the range of the day” only to find that the official numbers don’t display prices that low, he said. “They’re going to call their broker because they have no idea what’s going on.”