Detroit Pension Denied Bank Redress | Chief Investment Officer

(September 20, 2013) — One of the largest public pensions in Detroit has failed in its attempt to bring fraud charges against several bulge-bracket banks.

On September 18, an arbitration panel from the Financial Industry Regulatory Authority, an independent regulator of US securities firms, dismissed claims brought by Detroit’s Police and Fire Retirement System, Reuters reported.

The system had brought claims against Citigroup, Morgan Stanley, and several other smaller institutions in 2010. It claimed the banks had defrauded and breached both contracts and their fiduciary duty when recommending the system invest in various collateralized debt obligation funds.

The system was seeking $39.9 million in damages from the institutions cited in its claims. The panel denied all of the system’s claims.

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The ruling is the latest in which US public pensions have failed to win compensation from financial institutions embroiled in the financial crisis, and the selling of asset-backed securities.

In August, a New York judge dismissed a pension fund-led case brought against Moody’s, which claimed the rating agency misrepresented the creditworthiness of securities, and thereby harmed investments.

Some investors have had more luck, however. Dutch giant ABP has won back tens of millions of euros in legal settlements with banks over asset-backed securities claims as defendants—including Deutsche Bank and JP Morgan—settled before trial.

The state of Detroit filed for bankruptcy this summer, leaving creditors, including the Police and Fire Retirement System facing a battle for any free cash. The system, along with the general public fund, attempted to sue Governor Rick Snyder to block him from authorizing the bankruptcy that would potentially cut pensions to members.

(September 20, 2013) – Good news for diversification: the recent relationship between the returns of bonds and equities is about to end, according to fund manager Nomura.

During periods of low yields, stock and bond prices returns should be expected to be correlated, the fund manager said.

This means that as global bond yields begin to rise, the change in environment should also be good for equities.

“With yields rising, term premiums increasing, and starting levels of risk aversion measures being elevated, historical relationships would lead us to conclude that equity-bond correlation should be negative over the next year, and that this should be equity positive,” the report said.

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The full Nomura report can be read here.

Investors who want to spot the unwinding of correlation before it starts are being advised by one strategist to look to the junk bond market.

Chad Karnes, chief market strategist at the ETF Guide, wrote that junk bonds have historically always been highly correlated with equities, which means you can use that relationship to compare high yield debt price movements with equity price movements to find warning signs, red flags, and trade setups.

“Looking at the junk bond market’s signals more recently, there were some telling signs warning of the recent short-term equity peaks,” Karnes wrote.

“During the equity markets’ May topping process, junk had already peaked and turned down two weeks earlier. Again in July, the junk debt market peaked two weeks before the equity markets. These two peaks in the junk market warned of weakness to come in the equity markets.”

Junk is currently on a downward trend at the same time as equities are returning to new highs. Karnes predicted that if junk returns move higher, it will confirm the breakout in equities, but if it stays below its July peak, it will again warn that the equity market rally will likely be short lived.

Karnes’ report can be read here.