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On Current Credit Conditions

Friday, July 18th, 2014

This should be short.  Remember that credit and equity volatility are strongly related.

I am dubious about conditions in the bank loan market because Collateralized Loan Obligations [CLOs] are hot now and there are many that want to take the highest level of risk there.  I realize that I am usually early on credit issues, but there are many piling into CLOs, and willing to take the first loss in exchange for a high yield.  Intermediate-term, this is not a good sign.

Note that corporations take 0n more debt when rates are low.  They overestimate how much debt they can service, because if rates rise, they are not prepared for the effect on earnings per share, should the cost of the debt reprice.

It’s a different issue, but consider China with all of the bad loans its banks have made.  They are facing another significant default, and the Chinese Government looks like it will let the default happen.  That will not likely be true if the solvency of one of their banks is threatened, so keep aware as the risks unfold.

Finally, look at the peace and calm of low implied volatilities of the equity markets.  It feels like 2006, when parties were willing to sell volatility with abandon because the central banks of our world had everything under control.  Ah, remember that?  Maybe it is time to buy volatility when it is cheap.  Now here is my question to readers: aside from buying long Treasury bonds, what investments can you think of that benefit from rising implied volatility and credit spreads, aside from options and derivatives?  Leave you answers in the comments or email me.

This will sound weird, but I am not as much worried about government bond rates rising, as I am with credit spreads rising.  Again, remember, I am likely early here, so don’t go nuts applying my logic.

PS — weakly related, also consider the pervasiveness of BlackRock’s risk control model.  Dominant risk control models may not truly control risk, because who will they sell to?  Just another imbalance of which to be wary.

But They are not Actuaries, nor CFAs

Friday, June 27th, 2014

I am grateful that risk managers inside banks have more clout these days.  That said, I want it to persist, and the best way to do it is to have risk managers beholden to an ethics code, like actuaries or CFAs.

This is valuable, because the risk manager can point to a body of ethics that says to his manager, “I am sorry, but those of my discipline say that this action is unethical,” when line managers complain that the risk manager is killing business by insisting that certain risk standards should be maintained.

Actuarial risk models cover the life of the business, unlike Wall Street models that measured risk in terms of days.  Cash flows mater, and the ability to meet the demand for cash matters.  Long-term risk models tend to surface risks better than short-term models because an intelligent businessman can ask what are the odds that we will have a crisis over the duration of our existing business?

Once on a task force of the Society of Actuaries, when discussing non-traditional actuaries going to Wall Street, I said, “Great idea, but the line managers will eventually kill anyone that gets in their way.  They don’t want people who have an ethics code.  It inhibits business.”  After that, there were some nervous chuckles on the phone, and the conversation moved on.

Ethics codes are needed when the disparity of knowledge between the designers and ultimate consumers/investors/regulators is so great that there are many ways that the consumers/investors/regulators could be cheated.

My view is controversial but simple.  Every professional in investing and finance needs to have an ethics code, making them more sensitive to their clients.  The easy solution is that every investment/finance professional needs to hold a CFA charter.  The three exams are pretty minimal, and can be passed by most people with some study.  Give the actuaries a pass, their exams are far harder — far, far, far harder.

But set some boundary for ethics and examinations of competence, to clean up finance and send the flim-flam men to the edges of the market, where they belong.

 

 

Sorted Weekly Tweets

Saturday, May 10th, 2014

Market Dynamics

 

  • Yellen Comments Boost Demand for Treasury Bonds http://t.co/2lzFhL97br Carry trade rescued, grows larger 4a later day of reckoning $$ $TLT May 10, 2014
  • One of the Best Retirement Deals 9 of 10 People Ignore http://t.co/oYw4xRjEdc Contribute 2a Roth 401(k) & save big on future taxes $$ $TROW May 10, 2014
  • NYSE to Curtail Order Types Amid Debate Over Their Fairness http://t.co/JOlTvX7sie Will b interesting 2c what they curtail $$ Affects my biz May 10, 2014
  • What Baby Boomers’ Retirement Means For the US Economy http://t.co/GuECsqqWHA Cheer up, the US is in better shape than rest of the world $$ May 10, 2014
  • I’m worried about a crisis bigger than 2008: Faber http://t.co/JwpcvxA53o “For the next six months, maybe cash is the most attractive.” $$ May 10, 2014
  • When Stocks and Bonds Disagree http://t.co/BGbY9Y0C2L @reformedbroker points out anomaly. Bond mkt bigger than stock mkt, should b right $$ May 07, 2014
  • research puzzle pix by tom brakke http://t.co/xtPUCU7PDj Bloat, which I would measure by number of days to trade away the portfolio $$ $SPY May 07, 2014
  • Ten Surefire Trading Rules To Make You Rich http://t.co/fHqVJkaVuj @reformedbroker tongue-in-cheek way of telling you what not to do $$ $SPY May 06, 2014
  • Early Tap of 401(k) Replaces Homes as American Piggy Bank http://t.co/x16yXooOSx If you don’t have an “out” door 4 $$, less will go “in” May 06, 2014
  • The bond market is giving the stock market angst http://t.co/rfuGqyaPTK 2 many long bond shorts, economic weakness, low govt-measured inf $$ May 06, 2014
  • Free Life-Insurance Offer Scrutinized http://t.co/EZz4zbJsXS Nothing is free; this will come out of the life insurer dumb enough 2sell it $$ May 06, 2014
  • Bond Returns Post Global Records as Warnings Go Unheeded http://t.co/t0aXCtsu8T Long bond buyers need to fund long liabilities & momentum $$ May 06, 2014
  • Borrowing Cash to Buy Complex Assets Is In Vogue Again http://t.co/8urmZjge1i Borrowed $$ is mostly being used 2buy AAA CLOs; 10x lev ~ 8%yd May 06, 2014
  • Can’t Find Enough 30-Year Treasuries to Buy? Here’s Why http://t.co/tmFjBQ4emS Fed buying, also pensions, life insurers & speculators $$ May 05, 2014

 

Banks

 

  • Covered Bond Talks Intensify as Bank Liquidity Rules in Play http://t.co/aM7LuzeXIK Denmark needs bank capital concessions 4covered bonds $$ May 10, 2014
  • Bitcoin Breakthroughs Studied by Banks the Currency Is Out to Replace http://t.co/Frls6s04am May not be a currency, but a payment system $$ May 10, 2014
  • JPMorgan Joins Wells Fargo in Rolling Out Jumbo Offerings http://t.co/9mJFfYArs2 High end of residential housing market is hot $$ $JPM $WFC May 10, 2014
  • Fed 2 Bank Giants: Don’t Get Bigger Via Mergers http://t.co/fjw4dDAAIZ Have >10% of total financial system liabs can’t merge $$ $BAC $C $JPM May 10, 2014
  • The Real Reason Big Banks Stay Big http://t.co/GRvSHhDAUx The larger the bank, the larger the management pay packets $$ $C $BAC $WFC $JPM May 06, 2014

 

Rest of the World

 

  • Russian Aggression Prompts Finnish-Swedish Military Pact http://t.co/K9amWYRP0F It’s not an expansion of NATO yet, but reaction 2 Russia $$ May 10, 2014
  • China Property Slump Adds Danger to Local Finances http://t.co/WXdGmStbU5 Local govts rely on selling property 4 revenue; now what to do? $$ May 10, 2014
  • Ukraine’s Arms Industry Is Both Prize and Problem for Putin http://t.co/1RNJMzBvQ6 Has many arms joint ventures w/ Ukraine $$ #irony $MACRO May 10, 2014
  • Panama Can School US on Immigration http://t.co/2UYhldzlPJ “Panama is the kind of country the US once was: quick to embrace workers.” $$ May 10, 2014
  • Draghi’s Euro Angst Rising as Rally to $1.40 Pummels http://t.co/nLzHP74nYE What will he do? Sell Euros & buy Dollars? Has 2 many $$ now. May 10, 2014
  • Accident Leads to Scrutiny of Oil Sand Production http://t.co/DHVJukJNVR Little damage, but made regulators think of other bad scenarios $$ May 06, 2014
  • British Coins Pass Test in 800-Year-Old Ritual http://t.co/GKfA1KhXKO Trial of the Pyx, 1 of Britain’s oldest&strangest legal procedures $$ May 06, 2014

 

Global Economy

 

  • US Ready to Join 6-Nation Tax Alliance http://t.co/PVRpUJ1ShZ Members Will Share Information 2Fight Multinational Corporate Tax Avoidance $$ May 10, 2014
  • Ron Wyden: We Must Stop Driving Businesses Out of the Country http://t.co/ypwwGbrWlM Cutting corporate taxes to 24% would be a start $$ $SPY May 10, 2014
  • Corporate Tax Planners Vexed by New International Tax Guidelines http://t.co/LcCyHgfDc7 If elites agree, can limit tax leakages 2 havens $$ May 10, 2014
  • Decoding Dollar Turns Into Wall Street’s Parlor Game http://t.co/PeI1wrlq4v Bad speculation on strengthening $$ fails, trade gets reversed May 10, 2014
  • World Economy Stabilizes in Great Moderation 2.0 http://t.co/yCIRqXpF9h Really seems 2 early 2b trotting out an idea like this $$ $SPY $TLT May 10, 2014
  • How Russia Inc. Moves Billions Offshore & a Handful of Tax Havens May Hold Key to Sanctions http://t.co/ylIL6w66EF Expropriation risk $$ May 05, 2014
  • Tax Break ‘Blarney’: U.S. Companies Beat the System With Irish Addresses http://t.co/Ia2cM1brCS Maybe a “Value Added Tax” could fix this $$ May 05, 2014

 

Companies & Industries

 

  • Fat-Destroying Machine Doubted by Stock Traders http://t.co/2Klv4c4ozG $ELOS uses ultrasound 2 heat up & destroy fat cells. Does it work? $$ May 10, 2014
  • Son Makes $58B on Alibaba With Buffett-Type Return http://t.co/uywgbnCaxg Masayoshi Son had insight into Alibaba when invested $20M $$ May 10, 2014
  • US Shale Boom Keeps Global Oil Prices From Soaring http://t.co/ipDZdMke1o Oil Majors have 2 invest more 2 get less http://t.co/9u5lRnolmh $$ May 10, 2014
  • Lenovo Targets Mobile as Tech Empire Grows on Castoff Businesses http://t.co/sXSytLozjV Squeezing good $$ out of mature tech businesses May 10, 2014
  • Pitney Bowes changing stripes: Cramer http://t.co/QzDuxGLZjT Talks about their partnership w/ $EBAY to seamlessly estimate shipping $$ $PBI May 10, 2014
  • 5 quality stocks that are missing out on the bull run http://t.co/8GTmjMt46J Quality often misses out when credit spreads r tight $$ 2005-7? May 10, 2014
  • Alibaba Partners Keep Control After Shunning Hong Kong for US http://t.co/4XvRaqoUM5 A partnership will govern, limiting takeover efforts $$ May 10, 2014
  • Wal-Mart Notches Web Win Against Rival Amazon http://t.co/3f9chtgyME Still $AMZN is 6x larger than $WMT in online sales, long way to go $$ May 06, 2014
  • IBM’s Watson supercomputer can help settle your debates http://t.co/cFmXZXmEV6 Ask Watson a question, will give top 3 args for & against $$ May 06, 2014
  • Symantec Develops New Attack on Cyberhacking http://t.co/xbeAQgcnab Declaring Antivirus Dead, Firm Turns2Minimizing Damage From Breaches $$ May 06, 2014
  • Buffett Phase Two Means Seeking Deals More Enduring Than Stocks http://t.co/FyERjB7YO5 Trying to build the best long-term conglomerate $$ May 05, 2014

 

US Politics & Policies

 

  • Benghazi Isn’t Iran-Contra http://t.co/otSpoLR38P But the comparison reflects poorly on the Obama administration $$ May 10, 2014
  • SEC Finds Illegal or Bogus Fees Majority of Buyout Firms http://t.co/TwU954gwzm Who pays what expenses? How r fees & returns calculated? $$ May 10, 2014
  • What Timothy Geithner Really Thinks http://t.co/CxMmqJF18b Just don’t blame him, didn’t want the job & wanted 2 leave it sooner, Really? $$ May 10, 2014
  • Railroad: Federal order won’t affect oil shipments http://t.co/9nFXjxRTcP BNSF carries most of the oil coming from Bakken FD: + $BRK.B $$ May 10, 2014
  • Why Nonbank SIFI Designations Put the Cart Before the Horse http://t.co/oRQCv7r5jf FSOC & Fed don’t get systemic risk & designating SIFIs $$ May 10, 2014
  • Massachusetts Scraps Its Health Insurance Exchange http://t.co/nVB3C17iVg Fascinating how many states had to scrap their healthcare sites $$ May 06, 2014
  • Why Weather Could Determine Who Wins a Race To Measure Inflation http://t.co/2PTidHexu6 Billion Prices Project inflation measure 1%>CPI $$ May 06, 2014
  • The End of the Permissionless Web http://t.co/MWyAraGxUT Regulators want 2 become the gatekeepers for Internet innovation. It ain’t broke $$ May 06, 2014
  • Toilet Bowl Kills Fan in Violence at World Cup Host Brazil http://t.co/Qx0HSiv0dB Soccer hooliganism hits a new low, death by toilet $$ $EWZ May 05, 2014

 

 

Other

 

  • Woman With Printer Shows the Digital Ease of Bogus Cash http://t.co/kN4Ua9zZl0 Fascinating 2c how easy it is to convert $5s into $100s $$ May 10, 2014
  • Career Advice for Managers: Learn to Execute Strategy http://t.co/jI85DW4Itj Strategy should come b4 reaction to the problems of the day $$ May 10, 2014
  • Growing Number of Hispanics in US Leave Catholic Church http://t.co/0jXt2caYjl Most of those leaving go evangelical protestant $$ #readbible May 10, 2014
  • Economics students call for shakeup of the way their subject is taught http://t.co/vv8OL1xq9m Right diagnosis, wrong cure, need Austrian $$ May 07, 2014
  • Rethink The Word ‘Cancer,’ Panel Says http://t.co/jiuSNLF4JM Cancer comes in many different forms; with some, early treatment is needed $$ May 06, 2014
  • Virtual reality preps 4 impact in healthcare, manufacturing, finance http://t.co/taBVd2dFy1 Retirement planning, worker safety, training $$ May 06, 2014
  • MLB: The Year That No One Got Caught Stealing http://t.co/Pn3itlbi36 Catchers now spend more time practicing hitting than throwing $$ $SPY May 06, 2014
  • Elite Colleges Don’t Buy Happiness for Graduates http://t.co/H2S5hTml6g Happiness stems more from personal attitudes than college type $$ May 06, 2014

 

US Economy

 

  • Cancer Doctors Join Insurers in US Drug-Cost Revolt http://t.co/OrqflkeN32 Drug costs reflect price 4 successes but paying 4 failures $$ May 10, 2014
  • Later Easter Drives Retail Sales in April http://t.co/VAuXPhVGR7 Never thought Easter was that big of an economic factor $$ May 10, 2014
  • Record Meat Costs Mean Pricey Barbecues http://t.co/tNr7vcb11K Herds r smaller, as ranchers shake off past water & feed problems $$ $TSN May 10, 2014

 

Wrong

 

  • Wrong: Happy Hedge Fund Managers Earn Money for Nothing http://t.co/pOSYH3SSXO Wrong benchmark S&P 500 4 hedgie comparison s/b t-bills $$ May 10, 2014
  • Wrong: Blackstone’s Schwarzman Says Individuals Need More Alternatives http://t.co/Mnp0cjlXZ5 He’s just trolling 4 dumb $$ folks. Ignore him May 10, 2014

 

 

Comments, Replies & Retweets

 

  • If the treatment is cheap enough, & has no harmful side-effects, investors will benefit from fat returns ;) http://t.co/ROAQUU6Rpu $$ $ELOS May 07, 2014
  • “He might be comparing IRRs on PE to total returns on stocks. Trouble with that one is that capital…” — D. Merkel http://t.co/MhXU9vLCvG $$ May 07, 2014

 

Sorted Weekly Tweets

Saturday, May 3rd, 2014

US Politics & Policy

  • The Potential Bubble the Federal Reserve Cares Most About http://t.co/tp1Ug7YcaR Worrying about a bubble in the bond mkt $$ May 03, 2014
  • The Weekend Interview: The Investors at War With Political Power http://t.co/MuEvV0DQcC Courts protect our liberties from bureaucracies $$ May 03, 2014
  • Detroit Homeowners Gun Down Burglars as Police Wait for Cars http://t.co/Dkg7YEct4g This is the future of many US cities w/tight budgets $$ May 03, 2014
  • Railway exec: Keystone debate not about rail versus pipes http://t.co/bVKjkcvnq0 Aiming 4 safer tank cars & separating out natgas liquids $$ May 02, 2014
  • Xerox CIO Fixing Nevada Health Exchange, as Tough Decisions Loom http://t.co/brbP5LD0Ru Bad job by $XRX but at least they trying 2 fix it $$ May 02, 2014
  • For Now, Justice Ginsburg’s ‘Pathmarking’ Doesn’t Include Retirement http://t.co/xduXEt5OUV Interesting piece on liberal SCOTUS leader $$ May 02, 2014
  • The Supreme Court’s EPA Ruling Dims Lights on Coal Power Plants http://t.co/eAIlagHyqe This will eventually be reversed when shale fails $$ May 02, 2014
  • The Coming Two-Tier Health System http://t.co/xpIMjPnvhc The longer PPACA goes on the more people will c benefits limited & costs rise $$ May 02, 2014
  • California City of Torrance Grapples With Toyota Relocation to Texas http://t.co/OljCzROHlq Despite denials this happened b/c hi CA taxes $$ May 01, 2014
  • The Missing Benghazi Email http://t.co/amNnz6KAWT New evidence that Ben Rhodes told Susan Rice and Hillary Clinton to blame the video $$ May 01, 2014
  • Shifting Demographics Tilt Presidential Races in US Burbs $$ http://t.co/Ut6WAHwu91 Demographic effect politics will shift when OASDI chokes May 01, 2014
  • Half of people living in Illinois and Connecticut want to get out http://t.co/ewsu2wu8HT Maryland #3 b/c of high taxes $$ $SPY $TLT May 01, 2014
  • Yellen Concerned Fed Model Fails to Predict Price Moves http://t.co/P1NXGaHY6w Been true 4 a long time; Neoclassical Macroeconomics fails $$ May 01, 2014
  • U.S. on Highway to Flunking Out http://t.co/yvRybDP3Bp @Ritholtz Maybe US gasoline taxes could b dedicated to infrastructure & fix this $$ May 01, 2014
  • Property-Tax Collections Rising at Fastest Pace Since US Crash http://t.co/GoC12zZltE My, but that was a short respite from hi prop taxes $$ May 01, 2014
  • Student-Debt Forgiveness Plans Skyrocket, Raising Fears Over Higher Tuition http://t.co/ZaHVqZG6ft Forgiveness programs abused 2milk Govt $$ May 01, 2014
  • Lawyers Sue Stock Market for Being Rigged http://t.co/ntCxkptCw8 @matt_levine tells us about a plaintiff suing every broker & exchange $$ Apr 30, 2014
  • Will the Fed s Capital Rules Interfere with Monetary Policy? http://t.co/UpWnLNwIff Leverage affects banks short-run-> margins adjust up $$ Apr 30, 2014
  • The Economic and Environmental Costs of Wasted Food http://t.co/3YqsPbZzJv Difficult to avoid; need for inventories, transport costs high $$ Apr 23, 2014

 

Financials

  • Treasuries Irresistible to America’s Banks Awash in Cash http://t.co/wHjk3cRPn2 Clip a small interest margin, take little risk $$ May 03, 2014
  • Big US Banks Make Swaps a Foreign Affair http://t.co/5DD7en8pBG 5 banks intermediate 95% of derivatives $$ May 03, 2014
  • Fidelity Reaps Rewards as Banks Lose Bond Muscle http://t.co/mSTelgwh0d If the sell side does not provide liquidity, the buy side will $$ May 03, 2014
  • Bank of America Lost $2.7B in a Maze of Accounting http://t.co/K05aIQBhQE Acctg gets screwy when you mix fair value & book value elements $$ May 02, 2014
  • Traders Join Exodus as Forex Probes Add Pressure on Costs http://t.co/Aqlsb6vElW Difficult to dominate such a big mkt, but maybe they did $$ May 02, 2014
  • Warren Buffett Does Not Understand the J.P. Morgan Derivatives Positions http://t.co/poMfOnAhOS He acts to protect Berkshire vs bad debts $$ May 02, 2014
  • Fed Citing Wall Street Lapses Leads Drive on Bonds as Pay http://t.co/Ad2DOnjZYl Light version of the old “double liability” regime $$ $XLF May 02, 2014
  • Stress Tests Forecast $190B in Losses at $FNMA, $FMCC in Severe Downturn http://t.co/UA9S5Jj13a also this article http://t.co/Wh2QlFzqZh $$ May 02, 2014
  • Traders Denied M&A Payday as Firms Use Cash http://t.co/hSw2BGNjWh Global firms buy assets in native currency, thus don’t need FX traders $$ May 01, 2014
  • Fixed-income houses double down http://t.co/1rm6QHbjgc Less yield to fight over makes the fight all the tougher $$ $TLT May 01, 2014
  • Easier Homeowner Credit Compelling $WFC http://t.co/AzcGHepiJJ Cut min credit score 4borrowers of $FNMA & $FMCC loans 660->620 $$ FD: + $WFC May 01, 2014
  • Wall Street Bond Dealers Whipsawed on Bearish Treasuries Bet http://t.co/S6X2QhUgRV Caught leaning the wrong way as US economy weakens $$ Apr 30, 2014

 

China

  • Chinese Bad-Loan Ratio Rises ‘Significantly,’ Huarong Says http://t.co/Eu5AAeyGp5 Costs of prior malinvestment weigh on China $$ May 03, 2014
  • Xi’s Squeeze Leaves China’s Heartland Missing Boom http://t.co/Bt0L96guqH Efforts to constrain bad bank loans slows Chinese economy $$ $FXI May 03, 2014
  • Wealthy Chinese replace Russians as top apartment buyers http://t.co/zEWVg7dOOC Better to buy in NYC than Shanghai, Hong Kong, Singapore? $$ May 02, 2014
  • How Women Lost as Out China’s Property Market Boomed http://t.co/MXkG2udq0t China lacks law protecting married women’s property interests $$ May 02, 2014
  • Green Batteries’ Graphite Adds to China Pollution http://t.co/rxZufzpj9H Buy a $TSLA or a $HMC Prius, send polluted rain to China $$ $SPY May 01, 2014

 

Rest of the World

  • Poland’s Tusk Proposes Energy Union 2 Break Russian Hold on Gas http://t.co/CzDr3evIhe Wishful thinking as infrastructure 2 deliver lacks $$ May 03, 2014
  • More Italian Women Are Choosing to Have No Children http://t.co/fSghk0oKwP A nation that does not have children is irrelevant $$ May 03, 2014
  • Portugal Grabs Cheap Bond Deal With Eye on Bailout Exit http://t.co/9gEDWEIuYh Debt problems r not resolved, but mkts feel better 4 now $$ May 03, 2014
  • German Ship Captain Swamped in Debt Underscores Bank Risk http://t.co/eP7Xhvj67X Current EU economic policies hide bad debt risks $$ May 03, 2014
  • GoldenTree Goes Bold in Buying Russian Corporate Bonds http://t.co/d0nvYJ7Ah2 “Russia, it’s a strong credit in a difficult environment,” $$ May 03, 2014
  • One Missing Jet, One Sunken Ferry, Two Responses http://t.co/I1ZgkwQyLo @WilliamPesek compares Malaysia & S. Korea & responses 2 disaster $$ May 02, 2014
  • Turkey’s Erdogan: 1 of the World’s Most Determined Internet Censors http://t.co/12ALhoW2i3 #twitterisblockedinTurkey $$ #internetchangesall May 02, 2014
  • German Businesses Urge Halt on Sanctions Against Russia http://t.co/bJho1CvvIP Is business so global that major wars can’t be fought? $$ May 02, 2014
  • How Canada’s Flirtation w/a China Oil Market Soured http://t.co/h5HPS7pnM8 Why Canada will NEVER ship crude to China via a Pacific port $$ May 02, 2014
  • Georgia Pushes for Fast Path 2 NATO on Russian Threat http://t.co/bYY8LK1pla Is Georgia worth annoying Russia? Avoid entangling alliances $$ May 02, 2014
  • US sanctions raise concerns for foreign investors http://t.co/XWbwvPXyir Or, maybe not: http://t.co/rhsqIHCafl $$ May 02, 2014
  • Google Warning on Russia Prescient as Putin Squeezes Web http://t.co/pVedAtqcAx Social Media has its downsides if Govt uses it against u $$ May 02, 2014
  • Liquidity Trap Hitting AAA Bonds Has ATP CEO Sounding Alarm http://t.co/bhWlb1EjxQ Curbing speculation has led 2 decreased bond liquidity $$ May 02, 2014
  • Israelis Without ABCs Unready2Power Startup Nation’s Economy http://t.co/q2V1IwGrIZ He that doesn’t teach his son a trade teaches him2rob $$ May 01, 2014
  • Tokyo Inflation Quickens to Fastest Since 1992 http://t.co/khjhBvHgWT Worth watching, as inflation is not the friend of Japan ultimately $$ May 01, 2014

 

US Economy 

  • Colleges, Employers Rethink Internship Policies http://t.co/RMievOB82U Unpaid internships often don’t lead to jobs, just use your time $$ May 03, 2014
  • Apprenticeships Help Close the Skills Gap. So Why Are They in Decline? http://t.co/pCnZCgXqAr If they weren’t tied 2 labor unions… $$ May 03, 2014
  • Calculated Risk: Ranking Economic Data http://t.co/l4X9wcjrEw) Bill McBride gives his opinions on what economic data is most important $$ May 03, 2014
  • Union Blasts Staples-Run Postal Outlets http://t.co/qmmc4iXhIS Of course, they don’t want the competition $$ May 03, 2014

 

Energy

  • Energy Future Junior Creditors Test Bid for Fast Bankruptcy Deal http://t.co/ZFgWCteuh0 A warning to those doing big LBO deals in a boom $$ May 03, 2014
  • Shale Drillers Feast on Junk Debt to Stay on Treadmill http://t.co/qG9WwN63V0 Fascinating look many junk-rated E&P companies paying 5.4% $$ May 02, 2014
  • Valero to Suncor Shun Overseas Imports in Eastern Canada http://t.co/dco5QQdox4 Oil imports falling in Eastern N.America, Brent spd eases $$ May 02, 2014
  • Berkshire Hathaway Energy Buys AltaLink Power-Transmission Company http://t.co/K95RDCbYM8 Buffett wants long-lived infrastructure assets $$ May 02, 2014
  • Shale Revolution Lures Trading Houses 2US Energy Assets http://t.co/6WTGDZNLzl If u can understand physical flows, there’s a value chain $$ May 01, 2014
  • Drones Are Becoming Energy’s New Roustabouts http://t.co/e2OBYmeV48 Can cover more area and c things that a person could not c & record $$ May 01, 2014
  • Challenges Lie Ahead for North American Oil Production http://t.co/m7vvemlw6m We’re running out of cheap crude oil $$ Apr 22, 2014


Market Impact

  • Defensive Value ETF Races to New Highs http://t.co/KOKo14nkDk This isn’t defense; many people throw $$ at stocks that offer dividends May 03, 2014
  • Chile CEF’s Premium a Case of Yield Lover’s Mirage http://t.co/blhZjCHLzN Be wary: not all distributions indicate recurring yield $$ May 03, 2014
  • Hedge Funds Short Small Caps Most Since ’04 http://t.co/2hLYbzM521 Dangerous trade, b/c mkt can b insane longer than u remain solvent $$ May 03, 2014
  • Howard Marks’ Brilliant Observation On What It Takes To Be A Great Investor http://t.co/yeJnpION8s Be different, & right often enough $$ May 02, 2014
  • Junk Loans Pulled as Buyers Say No After Fed Voices Worry http://t.co/lCDRdfFvV6 Junk-loan MFs had their 1st outflow in week ended 4/16 $$ May 02, 2014
  • Why This Bull Market Feels Familiar http://t.co/8JXl7JGwMe Low earnings in tech IPOs, momentum & loose monetary policy $$ $SPY May 01, 2014
  • Why Investors Love Hedge Funds http://t.co/uFjN76R9KT @Ritholtz teaches us about high fees, & decrasing effectiveness as they grow large $$ Apr 30, 2014

 

Companies

  • Ballmer Becomes Largest Individual Microsoft Shareholder http://t.co/DvWSRZAb1Z Bill Gates always had an exit strategy from $MSFT $$ May 03, 2014
  • Apple Sells $12B of Bonds to Keep Cash Overseas http://t.co/FiSK8eJS5C Avoiding the tax hit is more important leverage across borders $$ May 03, 2014
  • Berkshire Meeting, Now ‘Woodstock for Capitalists,’ Had Humble Start http://t.co/wbYCcKc8yr Nobody goes there anymore; it’s too crowded $$ May 02, 2014
  • Buffett Wants Tough Questions? How About These? http://t.co/m36vBV6VIe Ask him about the Harney Investment Trust, his shadowy creation $$ May 02, 2014
  • Verizon Loses Cellphone Customers for First Time http://t.co/6DbXOm993W Interesting, wonder if it is a trend… $$ $VZ May 01, 2014
  • IBM End to Buyback Splurge Pressures CEO to Boost Revenue http://t.co/D657Dc27mX Buybacks can only do so much; organic growth needed $$ $IBM May 01, 2014
  • FM Global CFO: Know Your Supply Chain http://t.co/dBTc6MYXXY Real disasters happen when multiple things go wrong at the same time $$ $SPY May 01, 2014
  • ‘I Think Google’s Pretty Dangerous and Thuggish. I’ve Always Said That.’ http://t.co/jYZBaewNjZ Trying 2 defend yourself; not saying much $$ Apr 28, 2014

 

Personal Finance

  • Does Anyone Play It Straight in Markets? http://t.co/MRZY1ro2as @ritholtz warns u that many in the mkts r trying to separate u & your $$ May 03, 2014
  • Feeling Cool About A Hot Personal Finance Book http://t.co/hwFULepE8v When someone tries to sell u insurance 4 a savings need, go away $$ May 03, 2014
  • 4 Alternatives to Reverse Mortgages http://t.co/6Wmd2kYQmz Refinance, Home Equity Loan, Sell the Home (maybe to your kids) $$ #sell May 02, 2014
  • Work and Live, Retire and Die @Ritholtz http://t.co/t1YWHoG6NO People plan to retire later than they actually do & life interferes $$ $SPY May 02, 2014
  • How to Choose the Right Mutual Fund http://t.co/4kvyh8rZZK Omits active share, good mutual funds typically look un-indexlike $$ May 01, 2014
  • If You’re Not Saving, You’re Losing Out http://t.co/QtG87rNHPF It’s not the money u make, it’s the money u keep that counts $$ $SPY $TLT May 01, 2014

 

Other

  • The Questionable Link Between Saturated Fat and Heart Disease http://t.co/32pwYj4Z6i There has never been more disagreement over food $$ May 03, 2014
  • Will That Golfer Choke? New Field of Mental Analytics Tees Up Answer http://t.co/B8dxIYL1Jf Can analytics make u think better in sports $$ May 03, 2014
  • Cyber security: business is in the front line http://t.co/RXkfEDaPu0 This isn’t a soft cost anymore; the need to secure IT is vital $$ May 03, 2014
  • Remember Life Before Antibiotics? No? Wait, It’ll Come to You http://t.co/g9uQajBJJL Antibiotic resistance grows, obsoleting some drugs $$ May 02, 2014
  • How the ‘Jesus’ Wife’ Hoax Fell Apart http://t.co/Kdswi39oZr Hoaxes & apochrypha have circulated since the Apostles. They always crumble $$ May 02, 2014
  • Why Some MBAs Are Reading Plato http://t.co/ltj9Y8QYyV Schools Try Philosophy to Get B-School Students Thinking Beyond the Bottom Line $$ May 01, 2014
  • Does Baseball Have to Be So Slow? http://t.co/8PRcoei9Ua Dawdling by batters & pitchers, & an increase in strikeouts makes games drag $$ May 01, 2014
  • The world’s smallest magazine cover is 2,000 times smaller than a grain of salt http://t.co/o4H7mfHCDE Nanotech: we do it because we can $$ May 01, 2014
  • Why Militaries Mess Up So Often http://t.co/39NKx6YPUn Officers trained during peacetime tend not to take the risks necessary in wartime $$ May 01, 2014

 

Wrong 

  • Wrong:Nontraded REIT returns: Where to put cash now? http://t.co/EPykRK8e7S Avoid illiquidity unless u r paid 4 it. Avoid big commissions $$ May 03, 2014
  • Wrong: China’s Century Starts Now @BloombergView http://t.co/UUziinXlqJ Wait until after the banking crash & recovery, then write this $$ May 01, 2014
  • Wrong: Money-Market Funds As Safe as Banks, Except When They’re Not http://t.co/7S2TEDpk7Q Banks fail more often & losses r more severe $$ May 01, 2014

 

Retweets, Replies, and Comments 

  • “Ask Buffett about the Harney Investment Trust:http://t.co/KUHnslWBFv…” — David_Merkel http://t.co/bLVAj6OY7O $$ May 02, 2014
  • Commented on StockTwits: Whoops, and I should have gotten that one right http://t.co/nB9lRK14kb May 01, 2014
  • “Paul, try valuing BRK off of increase in book value per share, and the metric comes out to a more…” — DavidMerkel http://t.co/cm2Rdhkzfn $$ May 01, 2014
  • “Now try to explain how long yields fell the last time the Fed tightened.” — David_Merkel http://t.co/MwJL3d6KQX $$ FD: + $TLT May 01, 2014
  • “If citizens are not created/educated by 18, you won’t have good citizens.” — David_Merkel http://t.co/TzfQsJULED $$ http://t.co/eiOLPqNuub Apr 29, 2014
  • “This may be a game of “Who has the stronger balance sheet?” $HLF or Ackman?” — David_Merkel http://t.co/2QCjheaJjd $$ Apr 29, 2014
  • @Peter_Atwater @Minyanville @Socionomics Thanks, Peter. Means a lot coming from you. Apr 28, 2014
  • @ReformedBroker @ritholtz feel free to repost it (w/credit to me) if you like Apr 28, 2014
  • RT @felixsalmon: For the record, I never said, nor do I believe, that text is over. I’m still going to be writing lots of text! Apr 28, 2014
  • RT @victorricciardi: @researchpuzzler @AlephBlog @jciesielski @tobyshute Tom Great meeting you Thanks for your ideas for promoting my new b… Apr 25, 2014
  • RT @researchpuzzler: thanks to CFA Society Baltimore @AlephBlog @victorricciardi @jciesielski @tobyshute for the great exchange of ideas Apr 25, 2014
  • RT @ppearlman: summer must read – “@reformedbroker: CLASH OF THE FINANCIAL PUNDITS: COUNTDOWN BEGINS NOW! http://t.co/iZqYTs8OFt” Apr 25, 2014
  • RT @abnormalreturns: Had to Google ‘cable network Fusion’…RT @felixsalmon: It’s out: I’m going to Fusion http://t.co/B1EK0eJmc8 Apr 24, 2014
  • RT @ChemistryVines: Mercury(II) thiocyanate (Hg(SCN)2) https://t.co/Ar2yhIlOwo Apr 23, 2014
  • @Calvinn_Hobbes I don’t know. We all want to grow up, until we do grow up. Only the foolish regret growing up. Apr 22, 2014

An Idea for When the Market is High

Tuesday, April 22nd, 2014

Last night I was at the Towson University International Markets Summit.  I’m grateful to the students for inviting me, as it is an honor.  During the presentation, I mentioned the book “Accounting for Value” by Stephen Penman.  I reviewed the book two years ago.  A great book, and one that should lead readers to modify their views on value investing.

But one aspect of the book was easy to implement, he cited his paper that you can read here, Returns to Buying Earnings and Book Value: Accounting for Growth and Risk.  Buy the stocks that are the cheapest as measured by the highest quintiles of book value to price, and trailing twelve month earnings per share to price.

I ran this analysis for all US-traded stocks with over $100 million of market capitalization.  Here are the results:

CompanyTickerIndustryCountryB/PE/P
Petrobras Argentina SA ADRPZE0606 – Oil & Gas – IntegratedArgentina

1.26

7.95

Pampa Energia S.A. (ADR)PAM1203 – Electric UtilitiesArgentina

0.83

11.41

OMV AG (ADR)OMVKY0609 – Oil & Gas OperationsAustria

1.13

11.33

Validus Holdings, Ltd.VR0709 – Insurance (Life)Bermuda

1

13.3

Everest Re Group LtdRE0715 – Insurance (Property & Casualty)Bermuda

0.88

15.35

Maiden Holdings, Ltd.MHLD0715 – Insurance (Property & Casualty)Bermuda

0.93

10.11

Montpelier Re Holdings Ltd.MRH0715 – Insurance (Property & Casualty)Bermuda

0.99

11.83

Axis Capital Holdings LimitedAXS0715 – Insurance (Property & Casualty)Bermuda

1.01

13.2

Platinum Underwriters HoldingsPTP0715 – Insurance (Property & Casualty)Bermuda

1.02

11.25

White Mountains Insurance GrouWTM0715 – Insurance (Property & Casualty)Bermuda

1.07

8.49

Aspen Insurance Holdings LimitAHL0715 – Insurance (Property & Casualty)Bermuda

1.12

9.61

Assured Guaranty Ltd.AGO0715 – Insurance (Property & Casualty)Bermuda

1.18

18.59

Partnerre LtdPRE0715 – Insurance (Property & Casualty)Bermuda

1.23

10.75

Argo Group International HoldiAGII0715 – Insurance (Property & Casualty)Bermuda

1.27

11.55

Endurance Specialty Holdings LENH0715 – Insurance (Property & Casualty)Bermuda

1.31

12.55

Gerdau SA (ADR)GGB0121 – Iron & SteelBrazil

1.32

6.84

Gafisa SA (ADR)GFA0215 – Construction ServicesBrazil

2.04

15.52

Petroleo Brasileiro PetrobrasPBR0606 – Oil & Gas – IntegratedBrazil

1.67

13.2

Telefonica Brasil SA (ADR)VIV0915 – Communications ServicesBrazil

0.85

7.58

Companhia de Saneamento BasicoSBS1209 – Water UtilitiesBrazil

0.89

8.57

Endeavour Silver CorpEXK0118 – Gold & SilverCanada

0.89

9.9

Teck Resources Ltd (USA)TCK0124 – Metal MiningCanada

1.33

6.84

TransGlobe Energy CorporationTGA0609 – Oil & Gas OperationsCanada

0.85

10.03

Granite Real Estate InvestmentGRP.U0933 – Real Estate OperationsCanada

0.87

7.53

Brookfield Office Properties IBPO0933 – Real Estate OperationsCanada

1.08

10.08

Boardwalk REIT (USA)BOWFF0933 – Real Estate OperationsCanada

1.14

11.54

Greenlight Capital Re, Ltd.GLRE0715 – Insurance (Property & Casualty)Cayman Islands

0.9

19.45

Sinopec Shanghai PetrochemicalSHI0103 – Chemical ManufacturingChina

1.52

11

Yongye International, IncYONG0103 – Chemical ManufacturingChina

1.65

43.36

China XD Plastics Co LtdCXDC0109 – Containters & PackagingChina

1.13

22.71

Lihua International IncLIWA0127 – Misc. Fabricated ProductsChina

2.31

41.21

Xinyuan Real Estate Co., Ltd.XIN0215 – Construction ServicesChina

5.22

42.83

China Automotive Systems, Inc.CAAS0415 – Auto & Truck PartsChina

0.99

11.04

China Petroleum & Chemical CorSNP0609 – Oil & Gas OperationsChina

0.87

10.11

Concord Medical Services HldgCCM0806 – Healthcare FacilitiesChina

3.06

12.45

China Telecom Corporation LimiCHA0915 – Communications ServicesChina

1.17

7.03

Xueda Education Group (ADR)XUE0969 – SchoolsChina

0.84

6.63

Changyou.Com Ltd (ADR)CYOU1018 – Computer ServicesChina

1.23

20.92

Nam Tai Electronics, Inc.NTE1024 – Electronic Instruments & ControlsChina

1.11

21.58

Jinpan International LimitedJST1024 – Electronic Instruments & ControlsChina

1.7

13.36

Semiconductor Manufacturing InSMI1033 – SemiconductorsChina

0.96

8.06

China Eastern Airlines Corp. LCEA1106 – AirlineChina

1.05

12.11

China Southern Airlines Co LtdZNH1106 – AirlineChina

1.7

13.19

Guangshen Railway Co. Ltd (ADRGSH1112 – RailroadsChina

1.34

6.64

Axa SA (ADR)AXAHY0709 – Insurance (Life)France

1.19

9.46

Volkswagen AG (ADR)VLKAY0412 – Auto & Truck ManufacturersGermany

0.94

9.73

Allianz SE (ADR)AZSEY0715 – Insurance (Property & Casualty)Germany

0.92

11.08

E.ON SE (ADR)EONGY1203 – Electric UtilitiesGermany

1.28

8.17

National Bank of Greece (ADR)NBG0727 – Regional BanksGreece

2

131.03

Capital Product Partners L.P.CPLP1118 – Water TransportationGreece

0.83

10.36

Safe Bulkers, Inc.SB1118 – Water TransportationGreece

0.83

11.99

StealthGas Inc.GASS1118 – Water TransportationGreece

1.32

9.08

Navios Maritime Holdings Inc.NM1118 – Water TransportationGreece

1.32

13.4

Sun Hung Kai Properties LimiteSUHJY0215 – Construction ServicesHong Kong

1.44

15.22

Hysan Development Company LimiHYSNY0215 – Construction ServicesHong Kong

1.66

20.18

Tai Cheung Holdings Ltd (ADR)TAICY0215 – Construction ServicesHong Kong

2.11

34.38

Le Gaga Holdings Ltd ADRGAGA0509 – CropsHong Kong

1.55

14.63

Bank of East Asia Ltd. (ADR),BKEAY0727 – Regional BanksHong Kong

0.85

8.78

Iao Kun Group Holding Co LtdIKGH0912 – Casinos & GamingHong Kong

1.36

12.89

Cheung Kong (Holdings) LimitedCHEUY0933 – Real Estate OperationsHong Kong

1.16

11.07

Seaspan CorporationSSW1118 – Water TransportationHong Kong

1.05

15.2

Magyar Telekom Tavkozlesi NyrtMYTAY0915 – Communications ServicesHungary

1.34

6.66

XL Group plcXL0715 – Insurance (Property & Casualty)Ireland

1.12

11.72

Fly Leasing Ltd(ADR)FLY0939 – Rental & LeasingIreland

1.3

17.39

Ellomay Capital Ltd.ELLO1033 – SemiconductorsIsrael

0.93

10.95

FUJIFILM Holdings Corp. (ADR)FUJIY0112 – Fabricated Plastic & RubberJapan

1.55

6.64

Kobe Steel, Ltd. (ADR)KBSTY0121 – Iron & SteelJapan

1.47

14.7

Mitsui & Co Ltd (ADR)MITSY0218 – Misc. Capital GoodsJapan

1.33

13.26

Wacoal Holdings Corporation (AWACLY0403 – Apparel/AccessoriesJapan

1.45

7.14

Toyota Motor Corp (ADR)TM0412 – Auto & Truck ManufacturersJapan

0.82

10.5

Honda Motor Co Ltd (ADR)HMC0412 – Auto & Truck ManufacturersJapan

0.92

7.61

Nissan Motor Co., Ltd. (ADR)NSANY0412 – Auto & Truck ManufacturersJapan

1.11

10.04

Nomura Holdings, Inc. (ADR)NMR0718 – Investment ServicesJapan

1.09

10.18

Mizuho Financial Group Inc. (AMFG0727 – Regional BanksJapan

1.13

14.9

Sumitomo Mitsui Financial Grp,SMFG0727 – Regional BanksJapan

1.28

16.67

Mitsubishi UFJ Financial GroupMTU0727 – Regional BanksJapan

1.53

13.67

Nippon Telegraph & Telephone CNTT0915 – Communications ServicesJapan

1.39

8.93

ORIX Corporation (ADR)IX0939 – Rental & LeasingJapan

0.98

7.59

Ternium S.A. (ADR)TX0121 – Iron & SteelLuxembourg

0.89

7.61

ING Groep NV (ADR)ING0709 – Insurance (Life)Netherlands

1.14

9.46

VimpelCom Ltd (ADR)VIP0915 – Communications ServicesNetherlands

0.93

13.67

ASM International NV (ADR)ASMI1033 – SemiconductorsNetherlands

1.01

74.95

Petroleum Geo-Services ASA (ADPGSVY0612 – Oil Well Services & EquipmentNorway

0.81

9.85

Banco Latinoamericano Comerc EBLX0727 – Regional BanksPanama

0.85

8.39

Compania de Minas BuenaventuraBVN0118 – Gold & SilverPeru

1.18

10.05

OFG BancorpOFG0727 – Regional BanksPuerto Rico

0.93

11.04

Popular IncBPOP0727 – Regional BanksPuerto Rico

1.52

19.77

Triple-S Management Corp.GTS0806 – Healthcare FacilitiesPuerto Rico

1.79

12.52

LUKOIL (ADR)LUKOY0606 – Oil & Gas – IntegratedRussian Federation

1.91

19.08

China Yuchai International LimCYD0218 – Misc. Capital GoodsSingapore

1.2

15.34

Net 1 UEPS Technologies IncUEPS0703 – Consumer Financial ServicesSouth Africa

0.91

6.79

POSCO (ADR)PKX0121 – Iron & SteelSouth Korea

1.72

6.97

Shinhan Financial Group Co., LSHG0727 – Regional BanksSouth Korea

1.24

8.42

Woori Finance Holdings Co., LtWF0727 – Regional BanksSouth Korea

1.91

9.86

SK Telecom Co., Ltd. (ADR)SKM0915 – Communications ServicesSouth Korea

0.89

11.87

Repsol SA (ADR)REPYY0606 – Oil & Gas – IntegratedSpain

1.06

7.93

Transocean LTDRIG0612 – Oil Well Services & EquipmentSwitzerland

1.14

9.54

ACE LimitedACE0715 – Insurance (Property & Casualty)Switzerland

0.84

10.92

Allied World Assurance Co HoldAWH0715 – Insurance (Property & Casualty)Switzerland

1

11.73

United Microelectronics Corp (UMC1033 – SemiconductorsTaiwan

1.3

8.02

Silicon Motion Technology CorpSIMO1033 – SemiconductorsTaiwan

1.96

19.74

BP plc (ADR)BP0606 – Oil & Gas – IntegratedUnited Kingdom

0.85

15.1

Noble Corporation PLCNE0612 – Oil Well Services & EquipmentUnited Kingdom

1.08

10.05

Subsea 7 SA (ADR)SUBCY0612 – Oil Well Services & EquipmentUnited Kingdom

1.09

7.02

ENSCO PLCESV0612 – Oil Well Services & EquipmentUnited Kingdom

1.11

12.2

Rowan Companies PLCRDC0612 – Oil Well Services & EquipmentUnited Kingdom

1.3

6.71

HSBC Holdings plc (ADR)HSBC0727 – Regional BanksUnited Kingdom

0.94

8.09

Vodafone Group Plc (ADR)VOD0915 – Communications ServicesUnited Kingdom

1.47

31.68

J Sainsbury plc (ADR)JSAIY0957 – Retail (Grocery)United Kingdom

0.96

10.57

Global Ship Lease, Inc.GSL1118 – Water TransportationUnited Kingdom

2.11

16.62

Cliffs Natural Resources IncCLF0124 – Metal MiningUnited States

1.87

12.76

M.D.C. Holdings, Inc.MDC0215 – Construction ServicesUnited States

0.91

23.28

M/I Homes IncMHO0215 – Construction ServicesUnited States

0.92

27.21

URS CorpURS0215 – Construction ServicesUnited States

1.16

7.02

Mestek, Inc.MCCK0218 – Misc. Capital GoodsUnited States

0.98

11.53

General Motors CompanyGM0412 – Auto & Truck ManufacturersUnited States

0.83

7.98

Rocky Brands IncRCKY0418 – FootwearUnited States

1.21

6.82

Johnson Outdoors Inc.JOUT0430 – Recreational ProductsUnited States

0.87

7.83

LeapFrog Enterprises, Inc.LF0430 – Recreational ProductsUnited States

0.89

17.58

Yasheng GroupHERB0509 – CropsUnited States

11.77

70.4

Seaboard CorporationSEB0515 – Food ProcessingUnited States

0.82

6.77

John B. Sanfilippo & Son, Inc.JBSS0515 – Food ProcessingUnited States

0.84

8.55

Omega Protein CorporationOME0515 – Food ProcessingUnited States

1.01

12.24

Ennis, Inc.EBF0518 – Office SuppliesUnited States

0.92

8.43

ACCO Brands CorporationACCO0518 – Office SuppliesUnited States

1.01

11.07

Universal CorpUVV0524 – TobaccoUnited States

0.93

10.8

Hess Corp.HES0609 – Oil & Gas OperationsUnited States

0.86

12.86

Approach Resources Inc.AREX0609 – Oil & Gas OperationsUnited States

0.93

9.48

Equal Energy Ltd. (USA)EQU0609 – Oil & Gas OperationsUnited States

0.96

9.38

Sandridge Mississippian TrustSDT0609 – Oil & Gas OperationsUnited States

1.49

63.59

PHI Inc.PHII0612 – Oil Well Services & EquipmentUnited States

0.85

8.96

Medallion Financial CorpTAXI0703 – Consumer Financial ServicesUnited States

0.94

9.13

CIT Group Inc.CIT0703 – Consumer Financial ServicesUnited States

0.96

7.26

Goldman Sachs Group IncGS0703 – Consumer Financial ServicesUnited States

0.97

10.16

Ellington Financial LLCEFC0703 – Consumer Financial ServicesUnited States

1.04

13.7

Walter Investment Management CWAC0703 – Consumer Financial ServicesUnited States

1.11

23.94

Chimera Investment CorporationCIM0703 – Consumer Financial ServicesUnited States

1.12

11.58

PHH CorporationPHH0703 – Consumer Financial ServicesUnited States

1.19

9.68

EZCORP IncEZPW0703 – Consumer Financial ServicesUnited States

1.58

7.55

WellPoint IncWLP0706 – Insurance (Accident & Health)United States

0.89

9.52

Employers Holdings, Inc.EIG0706 – Insurance (Accident & Health)United States

0.93

10.46

Reinsurance Group of America IRGA0706 – Insurance (Accident & Health)United States

1.08

7.49

American Equity Investment LifAEL0709 – Insurance (Life)United States

0.86

16.77

Protective Life Corp.PL0709 – Insurance (Life)United States

0.92

9.76

FBL Financial GroupFFG0709 – Insurance (Life)United States

0.96

9.73

Unum GroupUNM0709 – Insurance (Life)United States

0.98

9.55

Assurant, Inc.AIZ0709 – Insurance (Life)United States

1

9.67

Lincoln National CorporationLNC0709 – Insurance (Life)United States

1.07

9.76

Symetra Financial CorporationSYA0709 – Insurance (Life)United States

1.23

8.64

CNO Financial Group IncCNO0709 – Insurance (Life)United States

1.29

12.39

Imperial Holdings, Inc.IFT0709 – Insurance (Life)United States

1.38

37.03

National Western Life InsurancNWLI0709 – Insurance (Life)United States

1.63

10.85

Genworth Financial IncGNW0709 – Insurance (Life)United States

1.72

6.87

Fortegra Financial CorpFRF0712 – Insurance (Miscellaneous)United States

1.28

8.18

Allstate Corporation, TheALL0715 – Insurance (Property & Casualty)United States

0.82

8.75

HCC Insurance Holdings, Inc.HCC0715 – Insurance (Property & Casualty)United States

0.82

8.92

State Auto Financial CorpSTFC0715 – Insurance (Property & Casualty)United States

0.83

6.92

Stewart Information Services CSTC0715 – Insurance (Property & Casualty)United States

0.83

7.96

Safety Insurance Group, Inc.SAFT0715 – Insurance (Property & Casualty)United States

0.84

7.39

Investors Title CompanyITIC0715 – Insurance (Property & Casualty)United States

0.86

9.85

First American Financial CorpFAF0715 – Insurance (Property & Casualty)United States

0.87

6.75

American Financial Group IncAFG0715 – Insurance (Property & Casualty)United States

0.87

9.15

ProAssurance CorporationPRA0715 – Insurance (Property & Casualty)United States

0.87

10.86

Old Republic International CorORI0715 – Insurance (Property & Casualty)United States

0.88

10.53

Selective Insurance GroupSIGI0715 – Insurance (Property & Casualty)United States

0.9

8.51

Horace Mann Educators CorporatHMN0715 – Insurance (Property & Casualty)United States

0.91

9.6

Kemper CorpKMPR0715 – Insurance (Property & Casualty)United States

0.95

9.64

Baldwin & Lyons IncBWINB0715 – Insurance (Property & Casualty)United States

0.98

9.42

Hanover Insurance Group, Inc.,THG0715 – Insurance (Property & Casualty)United States

0.99

9.44

Alleghany CorporationY0715 – Insurance (Property & Casualty)United States

1.01

9.15

EMC Insurance Group Inc.EMCI0715 – Insurance (Property & Casualty)United States

1.02

9.88

United Fire Group, Inc.UFCS0715 – Insurance (Property & Casualty)United States

1.05

10.3

Navigators Group, Inc, TheNAVG0715 – Insurance (Property & Casualty)United States

1.09

7.68

Cna Financial CorpCNA0715 – Insurance (Property & Casualty)United States

1.1

8.15

American International Group IAIG0715 – Insurance (Property & Casualty)United States

1.34

12

American National Insurance CoANAT0715 – Insurance (Property & Casualty)United States

1.4

8.99

MBIA Inc.MBI0715 – Insurance (Property & Casualty)United States

1.45

10.86

FBR & CoFBRC0718 – Investment ServicesUnited States

1.03

29.21

KKR Financial Holdings LLCKFN0718 – Investment ServicesUnited States

1.05

11.24

NASDAQ OMX Group, Inc.NDAQ0718 – Investment ServicesUnited States

1.13

6.66

Piper Jaffray CompaniesPJC0718 – Investment ServicesUnited States

1.17

7.42

Primus Guaranty, Ltd.PRSG0718 – Investment ServicesUnited States

1.25

50.12

Arlington Asset Investment CorAI0718 – Investment ServicesUnited States

1.28

11.6

Oppenheimer Holdings Inc. (USAOPY0718 – Investment ServicesUnited States

1.34

6.71

CIFC CorpCIFC0718 – Investment ServicesUnited States

1.73

9.51

JPMorgan Chase & Co.JPM0724 – Money Center BanksUnited States

0.98

7.39

First National Bank AlaskaFBAK0727 – Regional BanksUnited States

0.81

6.61

Old National BancorpONB0727 – Regional BanksUnited States

0.81

7

Sandy Spring Bancorp Inc.SASR0727 – Regional BanksUnited States

0.81

7.28

TowneBankTOWN0727 – Regional BanksUnited States

0.81

7.52

Fidelity Southern CorporationLION0727 – Regional BanksUnited States

0.81

10.35

Central Pacific Financial CorpCPF0727 – Regional BanksUnited States

0.81

21.18

Cascade BancorpCACB0727 – Regional BanksUnited States

0.81

22.18

LCNB Corp.LCNB0727 – Regional BanksUnited States

0.82

6.69

S & T Bancorp IncSTBA0727 – Regional BanksUnited States

0.83

7.38

Great Southern Bancorp, Inc.GSBC0727 – Regional BanksUnited States

0.83

8.55

ESB Financial CorporationESBF0727 – Regional BanksUnited States

0.84

6.88

WesBanco, Inc.WSBC0727 – Regional BanksUnited States

0.84

7.15

Trustmark CorpTRMK0727 – Regional BanksUnited States

0.84

7.28

KeyCorpKEY0727 – Regional BanksUnited States

0.84

7.3

MidWestOne Financial Group, InMOFG0727 – Regional BanksUnited States

0.84

8.77

Bar Harbor BanksharesBHB0727 – Regional BanksUnited States

0.84

9.1

Seacoast Banking Corporation oSBCF0727 – Regional BanksUnited States

0.84

21.31

First Bancorp IncFNLC0727 – Regional BanksUnited States

0.85

7.39

Mercantile Bank Corp.MBWM0727 – Regional BanksUnited States

0.85

9.45

Heritage Financial Group IncHBOS0727 – Regional BanksUnited States

0.86

7.23

MainSource Financial Group IncMSFG0727 – Regional BanksUnited States

0.86

7.33

Norwood Financial CorporationNWFL0727 – Regional BanksUnited States

0.86

7.9

Fulton Financial CorpFULT0727 – Regional BanksUnited States

0.87

6.82

Pulaski Financial CorpPULB0727 – Regional BanksUnited States

0.88

6.85

Washington Federal Inc.WAFD0727 – Regional BanksUnited States

0.88

6.87

International Bancshares CorpIBOC0727 – Regional BanksUnited States

0.89

7.93

Lakeland Bancorp, Inc.LBAI0727 – Regional BanksUnited States

0.9

6.84

Northrim BanCorp, Inc.NRIM0727 – Regional BanksUnited States

0.9

7.67

BCB Bancorp, Inc.BCBP0727 – Regional BanksUnited States

0.9

7.91

ACNB CorporationACNB0727 – Regional BanksUnited States

0.9

8.14

Intermountain Community BancorIMCB0727 – Regional BanksUnited States

0.9

9.74

First Financial CorpTHFF0727 – Regional BanksUnited States

0.91

7.44

Farmers & Merchants Bancorp InFMAO0727 – Regional BanksUnited States

0.91

7.8

Southeastern Bank Financial CoSBFC0727 – Regional BanksUnited States

0.91

11.29

Isabella Bank CorpISBA0727 – Regional BanksUnited States

0.92

6.95

First Merchants CorporationFRME0727 – Regional BanksUnited States

0.93

6.76

Wintrust Financial CorpWTFC0727 – Regional BanksUnited States

0.93

7.12

First Citizens BancShares Inc.FCNCA0727 – Regional BanksUnited States

0.94

7.57

Firstbank CorporationFBMI0727 – Regional BanksUnited States

0.94

8.03

Century Bancorp, Inc.CNBKA0727 – Regional BanksUnited States

0.95

10.72

Central Valley Community BancoCVCY0727 – Regional BanksUnited States

0.96

6.62

PNC Financial Services Group IPNC0727 – Regional BanksUnited States

0.96

8.94

American National BankShares IAMNB0727 – Regional BanksUnited States

0.96

9.01

Capital One Financial Corp.COF0727 – Regional BanksUnited States

0.97

9.95

Provident Financial Services,PFS0727 – Regional BanksUnited States

0.99

6.92

NASB Financial, Inc.NASB0727 – Regional BanksUnited States

0.99

11

Flagstar Bancorp IncFBC0727 – Regional BanksUnited States

1.01

21.87

First Defiance FinancialFDEF0727 – Regional BanksUnited States

1.02

8.35

MidSouth Bancorp, Inc.MSL0727 – Regional BanksUnited States

1.03

6.96

C&F Financial CorpCFFI0727 – Regional BanksUnited States

1.04

13.4

First Community Bancshares IncFCBC0727 – Regional BanksUnited States

1.05

7.25

Provident Financial Holdings,PROV0727 – Regional BanksUnited States

1.05

8.78

Chemung Financial Corp.CHMG0727 – Regional BanksUnited States

1.06

6.7

Territorial Bancorp IncTBNK0727 – Regional BanksUnited States

1.08

7.23

Berkshire Hills Bancorp, Inc.BHLB0727 – Regional BanksUnited States

1.09

6.61

Regions Financial CorporationRF0727 – Regional BanksUnited States

1.09

7.73

Old Second Bancorp Inc.OSBC0727 – Regional BanksUnited States

1.1

113.32

Farmers Capital Bank CorpFFKT0727 – Regional BanksUnited States

1.14

7.7

Premier Financial Bancorp, IncPFBI0727 – Regional BanksUnited States

1.18

10.46

FIRST FINANCIAL NORTHWEST, INCFFNW0727 – Regional BanksUnited States

1.18

14.46

Intervest Bancshares CorpIBCA0727 – Regional BanksUnited States

1.19

8.37

MBT Financial Corp.MBTF0727 – Regional BanksUnited States

1.23

28.89

New Hampshire Thrift BancshareNHTB0727 – Regional BanksUnited States

1.26

7.66

MVB Financial CorpMVBF0727 – Regional BanksUnited States

1.29

10.03

Citigroup IncC0727 – Regional BanksUnited States

1.3

8.73

Susquehanna Bancshares IncSUSQ0727 – Regional BanksUnited States

1.31

8.42

QCR Holdings, Inc.QCRH0727 – Regional BanksUnited States

1.44

12.41

First Niagara Financial GroupFNFG0727 – Regional BanksUnited States

1.45

8.28

First Citizens Bancorporation,FCBN0727 – Regional BanksUnited States

1.5

9.95

Farmers & Merchants Bank (LongFMBL0909 – Business ServicesUnited States

0.98

8.05

Kelly Services, Inc.KELYA0909 – Business ServicesUnited States

1.02

7.21

Lakes Entertainment, Inc.LACO0912 – Casinos & GamingUnited States

1.01

14.29

Black Box CorporationBBOX0915 – Communications ServicesUnited States

1.38

7.36

Iridium Communications Inc.IRDM0915 – Communications ServicesUnited States

1.72

10.16

Courier CorporationCRRC0927 – Printing & PublishingUnited States

0.86

6.72

CSS Industries IncCSS0927 – Printing & PublishingUnited States

1.08

7.53

Blackstone Mortgage Trust IncBXMT0933 – Real Estate OperationsUnited States

0.87

145.18

New York Mortgage Trust IncNYMT0933 – Real Estate OperationsUnited States

0.88

14.44

PennyMac Mortgage Investment TPMT0933 – Real Estate OperationsUnited States

0.89

13.15

Starwood Property Trust, Inc.STWD0933 – Real Estate OperationsUnited States

0.94

7.84

Capstead Mortgage CorporationCMO0933 – Real Estate OperationsUnited States

0.99

7.31

Dynex Capital IncDX0933 – Real Estate OperationsUnited States

1.02

12.82

Two Harbors Investment CorpTWO0933 – Real Estate OperationsUnited States

1.04

16.24

American Capital Agency Corp.AGNC0933 – Real Estate OperationsUnited States

1.05

14.81

Apollo Commercial Real Est. FiARI0933 – Real Estate OperationsUnited States

1.09

7.4

MFA Financial, Inc.MFA0933 – Real Estate OperationsUnited States

1.09

9.89

Anworth Mortgage Asset CorporaANH0933 – Real Estate OperationsUnited States

1.1

9.07

Resource Capital Corp.RSO0933 – Real Estate OperationsUnited States

1.16

9.91

Rent-A-Center IncRCII0939 – Rental & LeasingUnited States

0.97

8.84

Willis Lease Finance CorporatiWLFC0939 – Rental & LeasingUnited States

1.31

9.51

Biglari Holdings IncBH0942 – RestaurantsUnited States

0.83

23.81

Rick’s Cabaret Int’l, IncRICK0942 – RestaurantsUnited States

0.92

8.66

PCM IncPCMI0948 – Retail (Catalog & Mail Order)United States

1.09

7.11

Trans World Entertainment CorpTWMC0963 – Retail (Specialty Non-Apparel)United States

1.68

7.37

TravelCenters of America LLCTA0963 – Retail (Specialty Non-Apparel)United States

1.76

7.55

Tech Data CorpTECD0966 – Retail (Technology)United States

0.87

7.43

hhgregg, Inc.HGG0966 – Retail (Technology)United States

1.32

6.67

Ingram Micro Inc.IM1015 – Computer PeripheralsUnited States

0.84

6.68

Key Tronic CorporationKTCC1015 – Computer PeripheralsUnited States

0.93

9.42

Xerox CorpXRX1018 – Computer ServicesUnited States

0.89

8.31

VOXX International CorpVOXX1024 – Electronic Instruments & ControlsUnited States

1.57

10.96

OmniVision Technologies, Inc.OVTI1033 – SemiconductorsUnited States

0.91

8.46

Benchmark Electronics, Inc.BHE1033 – SemiconductorsUnited States

1

9

JetBlue Airways CorporationJBLU1106 – AirlineUnited States

0.85

6.84

Republic Airways Holdings Inc.RJET1106 – AirlineUnited States

1.42

12.1

SkyWest, Inc.SKYW1106 – AirlineUnited States

2.19

8.93

Atlas Air Worldwide Holdings,AAWW1109 – Misc. TransportationUnited States

1.49

10.44

International Shipholding CorpISH1118 – Water TransportationUnited States

1.67

7.41

Gas Natural IncEGAS1206 – Natural Gas UtilitiesUnited States

0.89

6.75

What are my surprises here?

  • My but there are a lot of foreign companies in this list, far more as a percentage than the 3575 total companies I started with.  It seems that foreign companies are cheap.
  • Now, that said, accounting standards are tighter in the US than elsewhere, and particularly, be careful on Chinese companies.  Many of them are scams.
  • There are a lot of financial companies listed.  I would note that earnings quality for financial companies is often poor, so don’t go “hog wild” buying financial companies.

All that said, this could be a good list for starting due diligence, and I will use at least some of this in my next selection of companies for my clients.

What’s that, you say?  Do I and my clients own any of these firms?  Yes we do.  Of the 38 stocks in my portfolio, 11 of them pass this screen, and here is the summary:

Full Disclosure: Long ENH, SNP, GTS, LUKOY, BP, ESV, RGA, AIZ, NWLI, IM, XRX

Sorted Weekly Tweets

Friday, April 18th, 2014

Stocks & Industries

  • Invest In Stubs, Spin-Offs And Liquidations For Alternative Returns http://t.co/ccezep0K9Y Cites a Gabelli article http://t.co/xTrqEfmQeq $$ Apr 19, 2014
  • Real Estate Management Better Than Owning Real Estate? http://t.co/IFaDLiwTRa Sometimes yes, sometimes no. Definitely adds more leverage $$ Apr 19, 2014
  • Wells Fargo Securities Lending Lawsuit Ends in Settlement http://t.co/w3lSY4Cw8D Low margin business that can go badly wrong in a crisis $$ Apr 19, 2014
  • Makani, a $GOOG subsidiary makes an airborne wind turbine that dramaticlly increases power generation efficiency http://t.co/0Fug49o7gC $$ Apr 18, 2014
  • Google to Buy Titan Aerospace as Web Giants Battle for Air Superiority http://t.co/HjJ8wKtnjM Makes me think $GOOG has 2much $$ 2spend Apr 18, 2014
  • Profit Tastes Like Chicken in Hunt for Cheaper US Meat http://t.co/drgQbwEiKR With recent rise in beef & pork prices people substitute $$ Apr 18, 2014
  • Roads Versus Rail:The Big Battle Over Public Transportation http://t.co/ydBxEglexC Makes case that American will own fewer cars in future $$ Apr 18, 2014
  • Barclays Ups $LNC To Buy, Says $MET , $PRU Are Undervalued – Stocks To Watch http://t.co/c7yNaVZqdp Stock Market sensitive insurance cos $$ Apr 18, 2014
  • Bidding War Looming for Aspen? Analysts Say Don’t Count On It http://t.co/iMotqyAgHv Offer 4 $AHL looks pretty full 2me, dont look4more $$ Apr 18, 2014
  • Biggest LBO Demise Poised to Put Oncor in Play http://t.co/d30djwOa5M Buffett is unlikely 2 enter into bidding in a competitive sale $$ Apr 18, 2014
  • Target of Naked Short Sellers Is Angry, Confused http://t.co/I3ZZDn5JNp @matt_lavine takes on imaginary naked shorting in $LPHI $$ Apr 18, 2014
  • Radioactive Waste Is North Dakota’s New Shale Problem http://t.co/BiMkO0ZdgK Significant amounts of low level radiation from radium $$ Apr 18, 2014
  • The death of mortgage lending http://t.co/u8uQBvZCuS Loan yields must rise in order to compensate for higher required capital at banks $$ Apr 19, 2014
  • Kochs’ Flood Insurance Opposition Becomes Campaign Issue http://t.co/b1iuvoVhZK 1 of the few businesses the Kochs’ aren’t in is insurance $$ Apr 18, 2014
  • Office Markets Strengthen Where Tech, Energy Jobs Are http://t.co/sESuHUeAVr Helps explain the spottiness of commercial RE prices $$ $CMBS Apr 18, 2014
  • Labor Shortage Threatens to Bust the Shale Boom http://t.co/R1TctaTelD Can’t find a job? Consider learning to weld; monotonous but pays $$ Apr 18, 2014
  • Koch Brothers Net Worth Tops $100B as TV Warfare Escalates http://t.co/XgH0M6CNIR Almost as wealthy as extended Walton family $$ $WMT $SPY Apr 18, 2014
  • Big Banks Ramp Up Business Lending http://t.co/83dMAPIQia Signs of life spotted in big corporations, but r they just buying back stock? $$ Apr 18, 2014
  • How Can Yahoo Be Worth Less Than Zero? http://t.co/sr3owwkyNE @matt_levine argues a breakup of $YHOO makes sense even if core biz loses $$ Apr 18, 2014
  • Wal-Mart Undercuts Rivals With New U.S. Money Transfer Service http://t.co/a4vq0HYALi Useful if u need 2 transfer $$ inside the US $WMT $SPY Apr 18, 2014
  • How Chick-fil-A Spent $50M to Change Its Grilled Chicken http://t.co/Q9kpXoSIbF The marinade matters, but the grill design was the key $$ Apr 15, 2014
  • Small US Colleges Battle Death Spiral as Enrollment Drops http://t.co/nHRhO4Gc1R Too much capacity & affordability is a problem $$ $APOL Apr 14, 2014

Outside the US

  • China GDP Gauge Seen Showing Deeper Slowdown http://t.co/ntIxxdXcpO If China increases consumption GDP growth will fall faster still $$ $FXI Apr 18, 2014
  • Housing Trouble Grows in China http://t.co/Z4tKUuqLFd Overbuilding by Real-Estate Developers Leaves Smaller Cities W/Glut of Apartments $$ Apr 18, 2014
  • Suddenly, Europe Is Taking a Harder Line on Russia Sanctions http://t.co/MnzxvMP3pe Nations can solidify when they face a common threat $$ Apr 18, 2014
  • Las Bambas Copper Mine Purchase Shows China’s Still in the Hunt for Commodities http://t.co/h1cqGERGCu China may not b changing much $$ Apr 18, 2014
  • Forgetting How to Speak Russian http://t.co/D0UwT6unki Among former Soviet republics knowing Russian is less important for business $$ Apr 18, 2014
  • The Middle East War on Christians http://t.co/BW1NwCAXuH Israeli Ambassador 2 UN argues Israel is tolerant of Christians, not like some $$ Apr 18, 2014
  • Britons Struggle to Save for Home Down Payments as Prices Surge http://t.co/M6vH0vDlDs Space is constrained in London & foreigners buy $$ Apr 18, 2014
  • US Said to Warn Money Managers of More Russia Sanctions http://t.co/rB8AUQTsnc Putin knows Iran survived worse sanctions; Russia tougher $$ Apr 18, 2014
  • China Sentences Four Activists on Disturbing Public Order Charge http://t.co/Tx95rrhWsb Mostly, US has rule of law, China has rule by law $$ Apr 18, 2014
  • US govt isn’t perfect, but in principle the govt is subject to the Constitution & laws, & not merely able 2 use law 2 enforce its will $$ Apr 18, 2014
  • Frontier Fund Buyers Find It Pays To Look Under The Hood http://t.co/JQ6khwYllJ 2much $$ is being thrown @ frontier mkts; crowded trade $FM Apr 18, 2014
  • Why iShares’ ‘FM’ Is About To Get Better http://t.co/4FiqlfW0YS Diversifies out of Middle East, but frontier market vals r stretched $$ $FM Apr 18, 2014
  • Putin’s 21-Year Quest to Be Russian Guardian Began in Estonia http://t.co/5oelLBHCmN Father was betrayed by Estonians in WWI, almost died $$ Apr 15, 2014

Market Dynamics & Fundamentals

  • Bridgewater Founder Says 85 Percent Of Pensions will Go Bankrupt http://t.co/YknEmyGgfJ 9% pension returns required, 4% is most likely $$ Apr 19, 2014
  • The Fitch Fundamentals Index Dashboard http://t.co/OzI6KWUFfs Interesting little utility 4 understanding where we are in the credit cycle $$ Apr 19, 2014
  • Rich Start-Ups Go Back for Another Helping http://t.co/ZbFbpLVgmM When capital is plentiful, bad decisions get made. expected returns low $$ Apr 18, 2014
  • Stumbling S&P 500 Reaches Worst Stretch of Election Cycle http://t.co/zgJTynu2od Interesting timing, wonder whether past is prologue? $$ Apr 18, 2014
  • How a 56-Year-Old Engineer’s $45K Loss Spurred SEC Probe http://t.co/3HfdH2aqxK Always read the risk factors in the prospectus or 10K $$ Apr 18, 2014
  • High-Speed Traders Said to Be Subpoenaed in NY Probe http://t.co/2qxmrxeVd7 What level of technology is legitimate 2 gain an advantage? $$ Apr 18, 2014
  • Nuggets of Corporate Governance Wisdom From Charlie Munger http://t.co/gMFIE9jlRM Also c this paper: http://t.co/033v0bgdYr $$ $BRK.B $SPY Apr 18, 2014
  • Global stock rally: World market cap reached record high in March, &is $2.4T above pre-recession, pre-crisis level http://t.co/iMq0IoBhch $$ Apr 18, 2014
  • Speed—the only HFT advantage? Not so fast—Flash Boyshttp://www.cnbc.com/id/101586488 Algorithms may also be an advantage w/price patterns $$ Apr 18, 2014
  • Investor Alert – Exchange-Traded Notes—Avoid Unpleasant Surprises http://t.co/NqhUr2whsJ A helpful reminder 2b wary of exotic ETNs $$ $SPY Apr 18, 2014
  • Americans Sold on Real Estate as Best Long-Term Investment http://t.co/La4UROU0ie Helps explain y retail investors lose on average $$ $GLD Apr 18, 2014
  • Destroying Smart Beta 2: Ground Rules http://t.co/uecYqZLCEe Smart beta is a trendy but vapid concept, factors should be part of alpha $$ Apr 18, 2014
  • Gross Loses to Goldman in Hot Bond Strategy as Pimco Lags http://t.co/VWv7UC72bS Series of bad bets makes Pimco a laggard as AUM flees $$ Apr 15, 2014
  • Trillion-Dollar Firms Dominating Bonds Prompting Probes http://t.co/RXZNkNwtFs Concentrated markets can lead to bond pricing distortions $$ Apr 15, 2014

US Politics & Policy

  • What’s the Matter With Illinois? http://t.co/wmDiyWDN1e They r the exemplary state for shortsightedness & corruption $$ Apr 19, 2014
  • Heartbleed Hackers Steal Encryption Keys in Threat Test http://t.co/dYfezfXe8A >6 people were able to extract private key of a website $$ Apr 19, 2014
  • Elijah Cummings, W/IRS, Targeted Tea Party Group True The Vote http://t.co/TE5A1zTM0y I live in his gerrymandered district; kick him out $$ Apr 18, 2014
  • Yellen Lays Groundwork for Rules on Short-Term Credit Markets http://t.co/z03MWlpsqI Fed doesn’t regulate the banks well, y try 4 more? $$ Apr 18, 2014
  • Schooling on a ‘Debit Card’ http://t.co/wwixbB0pqy Arizona created a program so that special needs kids can get specialized schooling $$ Apr 18, 2014
  • IRS Among Agencies Using License Plate-Tracking Vendor http://t.co/HTs5aEMNtK Howard County Police use it & catch people 4 old crimes $$ Apr 18, 2014
  • Wealth Effect Failing to Move Wealthy to Spend http://t.co/R3vfD5i94J Wealth effect, if it exists, is small, FOMC is pursuing illusions $$ Apr 18, 2014
  • NSA Said 2 Exploit Heartbleed Bug for Intelligence for Years http://t.co/9XvcLX9ZTE NSA quietly knows security vulnerabilities; uses them $$ Apr 15, 2014
  • The Wall Street second-chances rule: scandal makes the rich grow stronger http://t.co/8HhscWJjMN What does not kill us makes us stronger? $$ Apr 14, 2014

Practical

  • How well do you know your insurance policy? http://t.co/szp3G8H4kN Know what is covered & what isn’t, how much is covered & options $$ Apr 19, 2014
  • Attention Shoppers: Fruit and Vegetable Prices Are Rising http://t.co/MMdPOLry9A As are meat prices & most food prices $$ #agflation Apr 18, 2014
  • How to start investing http://t.co/yGyziE8Tac Good advice from a credible source $$ Apr 18, 2014

Other

  • El Nino Signs Detected, Presaging Global Weather Change http://t.co/D1uDLS9aJ0 El Nino exists 2 give us something 2 blame when frustrated $$ Apr 18, 2014
  • More People Pick Elimination Diets to Discover Food Sensitivities http://t.co/ftQkzs3PxP Fad and Science of Not Eating Entire Food Groups $$ Apr 18, 2014
  • SAT Adopts Real-World Questions and Jettisons Obscure Words http://t.co/Mspw9EG3OV In 2016, changes from intelligence to achievement test $$ Apr 18, 2014
  • Scientists Make First Embryo Clones From Adults http://t.co/e5qlwyiWwj Cloned cells 2create early-stage embryos, matching DNA tissue $$ Apr 18, 2014

Comments, Replies & Retweets

  • RT @howardlindzon: Funds still paying up (I say silly overpay) for private over public, this is spooking IPO ‘s for sure http://t.co/mclSd9… Apr 15, 2014

Sorted Weekly Tweets

Saturday, April 12th, 2014

US Policy & Politics 

  • Nearly Half of Dodd-Frank Rules Still Unwritten http://t.co/TwzSawT298 Experiment of regulation by study committees continues albeit slow $$ Apr 12, 2014
  • Banks Given Two Extra Years to Fully Comply With Volcker Rule http://t.co/XVfO9CKMm7 Banks prefer abolition; Fed offers a delay $$ #more? Apr 12, 2014
  • How Big Banks Created a Fed to Serve Their Own Interests http://t.co/tUlNYE3px5 Fed almost always ends up being a shill 4 the banks $$ $XLF Apr 12, 2014
  • Angry students snap photos of lunches, tell Michelle Obama: ‘You call this a [expletive] lunch?’ http://t.co/PY4gfa90oI Food Nazis r mean $$ Apr 12, 2014
  • On equal pay for women, Obama challenges GOP to ‘join us in this the 21st century’ http://t.co/wthQJKwsOO White House has own disparities $$ Apr 12, 2014
  • When the Messenger Is Worth Shooting http://t.co/GGuAxpkizc Fewer & fewer people think teaching financial literacy 2 avg ppl works $$ $SPY Apr 12, 2014
  • Republicans should be friendly to markets, not to business http://t.co/YXEWNr9MEh Big business excellent at co-opt laws 4 their own good $$ Apr 12, 2014
  • Maybe a Gender Pay Gap Is OK http://t.co/2rtYIZ6MFo This argumentation isn’t new; economists have been making this argument since the 70s $$ Apr 12, 2014
  • The Best SEC Money Can Buy http://t.co/wbwBB0CYd4 @ritholtz on Jim Kidney’s excellent retirement speech on the SEC which is worth reading $$ Apr 12, 2014
  • Food Price Shock, 2014 Edition http://t.co/u79xlrwK1I Note that the last time this happened, wars & other pains hit developing world $$ Apr 12, 2014

Market Impact

  • Hedge Fund Industry Growing With Pensions To Thank http://t.co/RF2FTh3YsD Probably a mistake as hedge funds tend not 2b good w/volatility $$ Apr 12, 2014
  • Hedge Funds Unwind As Growth To Value Rotation Intensifies http://t.co/XoK1RFKiAg As growth stocks correct, hedge funds chase performance $$ Apr 12, 2014
  • How Money Managers Fight Their Emotions and Sometimes Lose http://t.co/J0KH06m12P Too Bold? Not bold enough? Tough 2strike right balance $$ Apr 12, 2014
  • The Buys You Can’t Make Yourself http://t.co/0swRNG0Eyo @reformedbroker points out the value of @MebFaber ‘s global value ETF $GVAL $$ Apr 12, 2014
  • Humble Student of the Markets: A quant lesson from a technician http://t.co/svQilIRW4m Useful way to understand indicators & mkt regimes $$ Apr 12, 2014
  • 2014 crash will be worse than 1987′s: Marc Faber http://t.co/Guil41sSvP Bold w/respect to timing &severity of the next crisis, prob wrong $$ Apr 12, 2014
  • Do ‘rising rate’ ETFs really protect investors? http://t.co/tcx2p4qtuc I would b wary here; additional yield often carries hidden risks $$ Apr 12, 2014

Rest of the World

  • Kuroda Seen Brewing Yen-Weakening Surprise Action http://t.co/fVpFvwEiJz Don’t b shocked if the BOJ does yet more to weaken the yen $FXY $$ Apr 12, 2014
  • This is the bank to watch for a Chinese credit implosion http://t.co/sKL9NPruZz Minsheng is an aggressive lender 2the most dodgy credits $$ Apr 12, 2014
  • China’s steelmakers have branched out into shadow banking—which is funny since they owe $484B http://t.co/Z1IzHBJJ7G Brief stmt of prob $$ Apr 12, 2014
  • China Pizza Passion Has Fonterra Riding Mozzarella Wave http://t.co/J4605GnGK4 Pizza is so different than traditional Chinese food $$ $YUM Apr 12, 2014
  • Ukraine’s Rust Belt Faces Ruin as Putin Threatens Imports http://t.co/7BYk6ULy3t Russia has more ec influence on Ukraine thn US on Russia $$ Apr 12, 2014
  • Saudi Banks Reject Algosaibi Meeting on $5.9B Default http://t.co/6eZwowBlZW Islamic finance struggles w/debt that isn’t debt but is debt $$ Apr 12, 2014
  • Lavender-Filled Teddy Bears From Tasmania Are a Big Hit in China http://t.co/ubhWoUSnQz Bobbie Bear touches the hearts of Chinese ladies $$ Apr 12, 2014
  • Top economists warn Germany that EMU crisis as dangerous as ever http://t.co/gsqrbZ5ox0 Overall & banking leverage still higher than safe $$ Apr 12, 2014
  • Fracking’s hottest year in China http://t.co/5xVoKK6K0d China finds gas & tight oil in their shale formations. Who knew? $$ $FXI $XLE Apr 12, 2014

Companies & Industries

  • Time Inc. to Raise $1.4B in Debt for Spinoff http://t.co/8QUGvyKhrv I would b careful here; levering up old media not a recipe 4 success $$ Apr 12, 2014
  • Vox Takes Melding of Journalism and Technology to a New Level http://t.co/YdMuuu0ZQC Vox Media creates a content mgmt system 4 journalism $$ Apr 12, 2014
  • Trailer Parks Lure Wall Street Investors Looking for Double-Wide Returns http://t.co/zym4OmSDP5 Poor people have a hard time moving $$ Apr 12, 2014

Other

  • Stay-at-Home Moms Rise in Reversal of Modern Family Trend http://t.co/sCBErpTIhk Children deserve attention to help them grow up $$ $SPY Apr 12, 2014
  • More Moms Staying Home, Reversing Decadeslong Decline http://t.co/w7bnhw8tQd Value in efforts 2 produce better children w/more parenting $$ Apr 12, 2014
  • Font War: Inside the Design World’s $20M Divorce http://t.co/4YpYf1x5UN Not clearly spelling out a partnership agreement: font of trouble $$ Apr 12, 2014
  • Windows XP Goes Dark; Will Hackers Be Lurking? http://t.co/GPBJKpzdhf XP has been debugged; odds of significant holes are low $$ Apr 12, 2014
  • After Heartbleed Bug, A Race to Plug Internet Hole http://t.co/HCBfcHBl5O A significant part of internet affecting privacy had a hole $$ Apr 12, 2014
  • Global solar dominance in sight as science trumps fossil fuels http://t.co/BZOdAVwYbA Can capture 31% of sun’s energy with a 111V Solar Cell Apr 12, 2014
  • At Gross’s Pimco, El-Erian Says ‘Different Styles’ Stopped Working Well Together http://t.co/vRqPfRA67m Oil & water eventually separated $$ Apr 12, 2014

Wrong

  • Unsafe: Greece Plans to Issue Long-Term Bond on Wednesday http://t.co/X4gnld481q Lust 4 yield guides the behavior of debt investors $$ Apr 12, 2014
  • Misleading: Oklahoma Swamped by Surge in Earthquakes Near Fracking http://t.co/nHfPIWys3q All quakes r little which avoids big quakes $$ Apr 12, 2014
  • Wrong: Are Safer Cars Worth the Money? http://t.co/1N0Y9aklJb Misapplies benefit-cost analysis; may b cheaper ways 2 save more lives $$ $F Apr 12, 2014

Retweets, Replies & Comments

  • ‘ @foxjust Nice going; EEBS is breaktakingly honest with respect to earnings manipulation. cc: @jciesielski $$ Apr 12, 2014
  • RT @ReformedBroker: Reminder: The Fed’s own economic forecasts are basically worse than your dog’s. http://t.co/uLYirMA5zB Apr 09, 2014

Book Review: Treasure Islands

Tuesday, April 1st, 2014

9780230341722

Tax havens exist to lower taxes and regulations on corporations and wealthy individuals.  But doing this involves significant complicated legal and accounting work.  The average person could not benefit because the fixed costs are high.  You need to have a lot of assets to benefit from tax havens.

So why do the wealthy governments of the world tolerate tax havens?  Why don’t they “use NATO to blockade these places, and tell them to end their tax-avoidance-facilitation policies, or else.”  Sadly, the wealthy have disproportionate power over politicians, and the majority of politicians are wealthy.  They like the system as it is.  You can make the tax code as progressive as you like; you will not end up taxing the intelligent wealthy much more.

This book confronts transfer pricing, where profits get shifted to low-tax countries by clever accountants.  Very difficult to police.

The is an amusing section in the middle of the book about the City of London Corporation, which has unique rights in the UK.  It is the home of most financial activity n London, and is mostly unaccountable to the UK.

In general, I believe that taxation should be the same regardless of the structure of the entity being taxed, its location, etc.  To that end, I think that corporations should be taxed on their global income as expressed to its owners.  Or, don’t tax corporations, but make all taxation like limited partnerships, and tax the individuals that own them.

There are other possible solutions.  There can be limits on corporate structure.  Israel limits subsidiaries such that the depth from the holding company cannot exceed two.  There could be consolidation and/or non-recognition of  subsidiaries in tax havens.

Additional Resources

Longreads article

Book website (those reading at Amazon, come to Aleph Blog to get links)

Quibbles

The book makes its last chapter about how tax havens helped cause the financial crisis, but it makes a very weak case.  Individuals and Banks overlevered themselves as asset prices rose, creating a bubble — not much different than the 1920s.  Tax havens played little role, even if they aided securitization in a few ways.

The book argues for capital controls, but those controls often create incentives for greater corruption.

My main problem with the book is that it does not offer any workable solutions to the problems.  My secondary problem is that the problem is not so much with the tax havens, which we could easily marginalize, but with the politicians, who do not do the hard work of seeing that taxation takes place, regardless of the corporate form or location.

Who would benefit from this book: You have to be willing to endure complex arguments to benefit from this book.  If you want to, you can buy it here: Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.

Full disclosure: I borrowed it at my library.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Sorted Weekly Tweets

Saturday, March 29th, 2014

Rest of the World

 

  • Malaysia Plane Traced in Inmarsat Engineer London Huddle http://t.co/roKtJSY9WY How they managed to figure out the area of the crash $$ $SPY Mar 30, 2014
  • UK Pension Revolution Putting Long-Term Bonds at Risk http://t.co/o8TNO4lgAn Need 2 match liabs drives demand 4 long bonds, lowers yields $$ Mar 30, 2014
  • Putin Has Exposed NATO’s Weakness http://t.co/xDs2X10AKg US & NATO Europe willing to agree upon? What r they willing 2 risk? Be careful $$ Mar 30, 2014
  • China Said to Expand Property Survey Amid Oversupply Concern http://t.co/m0VAkijXmi Will b difficult 2 end overinvestment by fiat $$ Mar 30, 2014
  • Chinese Pigs Eating Soybeans Cut US Supply to 1965 Low http://t.co/hLfrB2MXM1 Chinese demand 4 pork drives demand 4 US Soybeans $$ Mar 30, 2014
  • Lira Fate Tied to Real Assets as Hot Money Flees http://t.co/GpdoGuymdO In countries where inflation is a threat, invest in property $$ Mar 30, 2014
  • Business not ipso facto criminal: Tendency of presuming it guilty without proof is damaging India’s economy http://t.co/HgpdxdNrbu $$ Mar 30, 2014
  • Mr. Putin’s Revealing Speech http://t.co/BTQ2IDbny5 Defender of Orthodox civilization as he sees it pushes back against encroahing NATO $$ Mar 30, 2014
  • Russian Forces on Border Stir Concern as Crimea Annexed http://t.co/b7SLK8wTTH Threats of more economic sanctions will not deter Putin $$ Mar 23, 2014
  • What the West Can Learn From Putin’s Other Neighbors http://t.co/NB4aeGih9D Don’t make promises that u won’t keep; Putin is not scared $$ Mar 22, 2014

 

Financial Sector

 

  • So what is today’s nonbank business model? http://t.co/awllKHMHK1 Legalized extortion done to “protect consumers,” objective is political $$ Mar 30, 2014
  • Wall Street Banks Cut Out of Prized Commercial Mortgages http://t.co/xImkJXAwC7 $MET $PRU originate commercial mortgages 2 fund own liabs $$ Mar 30, 2014
  • SEC Is Probing Dealings by Banks and Companies in Loan Securities http://t.co/yseFiyZvFJ Current CLO issuance drives loan issuance $$ $BKLN Mar 30, 2014
  • Pimco Chases BlackRock in ETFs as Money Returns to Bonds http://t.co/rL9Bm40rHm Amazing how people follow anything w/positive momentum $$ Mar 30, 2014
  • And if banks start lending aggressively, it will b time to radically shrink asset maturities in bond portfolios, velocity will b rising $$ Mar 30, 2014
  • Banks Lending Like It’s 2007 Belied by $10T Hoard http://t.co/Ef6yHiVNSu But they aren’t lending heavy yet, if they do FOMC has 2tighten $$ Mar 30, 2014
  • Scandal-Hit British Banks Turn to ‘Weirdy Beardy’ http://t.co/XGv1Bt9af1 “Why do you exist?” “Who r u?” Pondering existence bugs bankers $$ Mar 30, 2014
  • Josh Rosner: The Wrong Remedy for Fannie and Freddie http://t.co/ExIuZxRlyM Better to wind them up & get Govt out of the Mtge mkts $$ Mar 30, 2014
  • Iowa’s Friendlier Watchdogs Lead Insurer Pack to Des Moines http://t.co/UPug7MJA7I Iowa DOI will regret embracing complexity, gtee funds2 $$ Mar 30, 2014

 

Market Impact

 

  • Which will win? $BRK.B or $IWM ? 3views: http://t.co/P4rWOG283S & http://t.co/c20Fbqh2b6 & http://t.co/QMIWqojPnB BRK will beat smallcaps $$ Mar 30, 2014
  • Americans Can’t Retire When Bill Gross Sees Repression http://t.co/4hNi5jAH2U Investments eventually reflect the underlying cash flows $$ Mar 30, 2014
  • Financial scars linger: 1/3 of investors wary of stocks http://t.co/xbFcGeOykX Have 2 wait 4 these people 2 come & put in the top $$ $SPY Mar 30, 2014
  • 1999 Buffett: stocks can’t possibly meet public’s expectations. Internet? Notes how few got rich in auto &aviation http://t.co/2FsC9vuvKe $$ Mar 30, 2014
  • Declining Pension Benefits Leave Workers Uneasy http://t.co/A5RmBueODe Difficult 2 fund high benefits when interest rates r so low $$ $TLT Mar 30, 2014
  • Google Traders See Opportunity in Confusion on New Shares http://t.co/2bTfXy75ol New nonvoting shares may allow 4 some arbitrage plays $$ Mar 30, 2014
  • Attention Suckers: Please Send Us Your Money http://t.co/Mibp1EXWh3 @Ritholtz comments how the JOBS Act weakened investor protections $$ Mar 30, 2014

 

US Housing

 

  • High Prices Partly to Blame for Slow New Home Sales http://t.co/rSHWH4Uzra When markets near their peak, frequently volumes drop off $$ $LEN Mar 30, 2014
  • Time might be ripe for boomers to sell their homes and move on http://t.co/hzL9mMImDS Sell them 2whom & @ what price? Lack move-up buyers $$ Mar 30, 2014
  • Finding a House That Won’t Destroy You http://t.co/kJNQf3upos Buy a house u can afford even under stressed conditions, reduce risk $$ Mar 30, 2014

 

US Politics, Policy & Economics

 

  • Florida’s Scott Travels on Corporate Tab as Lobbyists Tag Along http://t.co/qhDVzIgXO1 Governors increasingly use corporate $$ 2fund trips Mar 30, 2014
  • IRS Takes a Position on Bitcoin: It’s Property http://t.co/aCbGKvWGRT Thus any trading of bitcoins involves capital gains &losses $$ $BTCUSD Mar 30, 2014
  • Google, EBay and the Roots of Collusion http://t.co/Vc2SMUU5T5 Some don’t want to annoy companies that r complementary 2their biz goals $$ Mar 30, 2014
  • The Individual Mandate Goes Poof http://t.co/PvjexmswaF Barack Obama undoes what House GOP would like 2undo, just not permanently totally $$ Mar 30, 2014
  • Global Warming Will Not Cost the Earth, Leaked IPCC Report Admits http://t.co/hziljg2Npp Will b interesting 2c how gets spun by bothsides $$ Mar 30, 2014
  • Economists: Rising interest rates are the biggest threat to recovery http://t.co/gPQ1c2ZHAQ More evidence that rates will stay low $TLT $$ Mar 24, 2014
  • Kocherlakota: Don’t raise rates to head off possible crisis http://t.co/yxAGSWGmGQ There may come a time when you will have no choice $$ Mar 22, 2014

Other

 

  • Advice for a Happy Life by Charles Murray http://t.co/7y51RDeGy3 Marry young & someone similar 2u, don’t try2get rich, Groundhog Day $$ $SPY Mar 30, 2014
  • Why Runners Can’t Eat Whatever They Want http://t.co/FLMOWE8sC1 Studies Show Heart Risks to Devil-May-Care Diets—No Matter How Much U Run $$ Mar 30, 2014
  • Speed Reading Returns http://t.co/EwxEFe6Paz Apps and Classes Help People Adapt 2Reading on Their Phones | More content 2 read everywhere $$ Mar 30, 2014
  • The book Scientology tried to ban http://t.co/g4GeTda7bS Read about the *real* L. Ron Hubbard, from a book Church of Scientology hates $$ Mar 30, 2014

 

Wrong

  • Wrong: Not Voting Should Not Be a Choice http://t.co/UlBFwMe6fi Seems fundamental that no one should b forced to vote; it’s a protest $$ Mar 30, 2014
  • Wrong: Japan Is Doomed Unless It Learns to Love Inflation http://t.co/AFD8QA1d8Z More “hair of the dog that bit you solutions” $$ $JPY $JOF Mar 30, 2014
  • Wrong: Digital v human: the new debate http://t.co/PiUgvNHm6x We’ve seen transformational technologies b4, takes a while 4 new jobs 2show $$ Mar 30, 2014
  • Wrong: Fed’s Bullard: Yellen’s ‘6 Months’ Comment Doesn’t Represent Change in Policy Stance http://t.co/v7gzHBobVw Could have fooled me $$ Mar 22, 2014

 

Notes, Comments, Reples & Retweets

  • RT @ReformedBroker: In November 1999, Buffett wrote this op-ed for Fortune on why he doesn’t bet on innovation. @pmarca @hblodget http://t… Mar 27, 2014
  • RT @felixsalmon: “This means Bitcoins are not fungible, and that makes it unworkable as a currency.” http://t.co/JjFOO8Z2Xq cc @pmarca @bar… Mar 27, 2014
  • RT @journalistjosh: Crowdfunding emptor: Attention Suckers: Please Send Us Your Money http://t.co/gvxeT4SyOW via @BloombergView Mar 27, 2014
  • We enjoyed having @susanweiner speak to us at the #CFA Institute – Baltimore; we can all benefit from learning to write more engagingly $$ Mar 26, 2014
  • ‘ @PlanMaestro Yes, I remember that piece http://t.co/YDhQTnNopk and the series that followed it http://t.co/OC2PfnWc1z $$ Capital efficient Mar 26, 2014

 

Classic: Know Your Debt Crises: This Too Shall Pass

Thursday, March 27th, 2014

The following was published at RealMoney on August 6th, 2007:

Editor’s Summary

The illiquid debt instruments at the heart of the current crisis are subject to regime shifts.

  •  We’re in a periodic repricing of illiquid debt instruments.
  • Look for the time when the bulk of the losses will be reconciled.
  • Stick with the companies that have strong balance sheets.

I appreciated Cramer’s piece Friday morning, which picks up on many themes that I have articulated for the last four years here on RealMoney.  Here are a few:

  • Hedge fund-of-funds demand smooth returns that are higher than that which a moderate quality short-term fixed-income fund can deliver.
  • This leads to the creation of hedge funds that seek yield through arbitrage strategies.
  • And the creation of hedge funds that seek yield through buying risky debts, unlevered.
  • And the creation of hedge funds that seek yield through buying less risky debts, levered.
  • And the creation of hedge funds that seek yield through buying risky debts, levered.

In the short run, yield-seeking strategies work.  If a lot of players pursue them, they work extra-well for a time, as late entrants to the trade push up the returns for early entrants, with greater demand for scarce, illiquid securities with extra yield.  Pricing grids are a necessity for such securities, because the individual securities don’t have liquid secondary markets.  The pressure of demand raises the value not only of the securities being bought, but also of those securities that are like them.  (Smart managers begin to exit then.)

I’ve been through regime shifts in the markets for collateralized debt obligations (CDOs), asset-backed securities (ABS), residential-backed securities (RMBS) and commercial mortgage-backed securities (CMBS).  Something shifts at the back of the chain that forces everything to reprice.  For example:

1989-1994: After the real estate boom of the mid-1980s, many banks, savings & loans and insurance companies get loose in their lending standards and real estate investment, leading to a crisis when rent growth can’t keep up with financing terms; defaults ensue, killing off a great number of S&Ls, some major insurance companies and a passel of medium and small banks.

Late 1991-early 1993: The adjustable-rate mortgage market, fueled by demand from ARM funds, overbids for ARMs in an effort to provide a high floating rate yield.  As the FOMC loosens monetary policy, higher than expected prepayments force losses onto the ARM funds

Late 1993-late 1994: The FOMC threatens to, and does, start raising interest rates, which throws the residential mortgage-backed market into crisis.

Mid-1998-mid-1999: Long Term Capital Management blows up, forcing all manner of exotic ABS, CMBS and RMBS into the market for bids.  The bids back up, until the entire market reprices and then tightens in the space of one year.

1998-1999: Home equity ABS blow up, as defaults threaten to, and then do, emerge at levels far higher than anticipated.  Almost no originators survive.

1999-2001: Cruddy high-yield bonds reveal their true value as defaults threaten to, and then do, emerge.

2002-2003: The manufactured-housing ABS market blows up, as originators don’t take initial losses but roll borrowers over into new loans that reduce payments and extend payment terms, technically keeping the loans current.  The system collapses when the buildup of bad debts and repossessed homes becomes too great to roll over.

(Of the existing large securitization markets, only the CMBS market so far has not faced a real crisis, partly due to the influence of the B-piece buyers cartel: six or so firms that buy the junk-rated debt of deals and enforce credit quality standards on the individual loans by kicking out poorly underwritten loans.  But who knows?  Even that could be overwhelmed under the right circumstances.)

In each of these situations, there was a boom-bust cycle.  The markets did not adjust slowly and evenly to changing conditions; the transitions between “boom” pricing, and “bust” pricing were swift.  This is the nature of markets, particularly when enough debt is employed to amplify the process.

There is no conspiracy necessary to make the shift happen (though often the media will make it seem like there was one); the bubble pops when the financing proves insufficient to carry the assets.  After the bubble pops, it becomes a question of what the underlying assets can be liquidated for, allocating losses mercilessly according to the loan documents and bankruptcy priority.

Today the crises are nonprime lending, leveraged buyouts and other high-yield debt and over-leverage in the CDO market.  These will get worked out, as all other crises do, handing losses to those who speculated unwisely and allowing those who financed properly to prosper on the other side of the crisis.

As you invest, look for the time when more than half of the losses will be reconciled.  That will be near the bottom for homebuilders and housing finance.

That time may not come for another two years or so, but there will be money to be made once the crisis is mostly reconciled.  Just stick with the companies that have strong balance sheets.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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