I thought Felix Salmon did an excellent job on this post regarding economics blogging. His correspondent proposes standards for and a reward to be handed out to the best bloggers. Felix declines. I decline as well, which I will detail later. There are already ways for financial bloggers to be distinguished against one another:

• What’s the Alexa, Technorati, and Quantcast rankings of your site?
• Do journalists call you to talk about financial issues? (Happens to me a lot.) Do you get mentioned in the paper? (Uh, not so much… the copy editors leave me on the cutting room floor…)
• If someone Googles a given term, where do you show up?
• How many hits do you get per day? How many subscribe to your RSS feed? E-mail feed? Seeking Alpha? Other?
• Do you get mentioned by Abnormal Returns? The Kirk Report? Other linkfests?

The thing is, the web is a very competitive environment, with a lot of bright people. Switching on the web is easier newspapers or magazines.

But why do I blog? Let me answer that with a different question, “Why did/do I write for RealMoney?” Well, it’s not for the money, though I would earn more if I submitted my articles to RealMoney rather than placing them at my blog. I like explaining concepts to people and seeing the light go on. I like hearing that someone made a better investment decision because of my educational writings. I also enjoy the challenge of trying to tease out conclusions from dirty data, using an approach that is eclectic.

Oh, and the money? Sorry, not much there. Though my blog costs me $200/year, it makes roughly $1000/year. The $800/year of profit is not enough to compensate me for my time; given the time required, I’m not sure what would be enough. I don’t do it for the money; I do it for the audience. (I would make more if I submitted it all to RealMoney, but then the audience would not be as wide, and I would not be building my brand.)

Now some bloggers are anonymous. I will mention Equity Private and Accrued Interest. Both know their stuff, and they aren’t pulling anyone’s chains. If someone writes anonymously, and does not know their stuff, their readership will not grow, because it will become known through the comments at the blog — it will not appeal to the intelligent commenters that help build an audience.

Blogging is in many ways tougher than being a young journalist. A blogger starts with no audience, whereas a young journalist has an audience from the publication. The young journalist will be guided in what to write about by his superiors, and will automatically get edited. The blogger has to figure out what he can adequately say, and whether anyone really wants to read him. The young journalist will have discipline imposed on him, whereas most successful bloggers have to develop their own discipline — one consistent with their posting style and frequency. Blog audiences decay rapidly with lack of attention, and there is a lot of competition to be heard. Journalists succeed or fail as a group, and the individual journalist does not have a lot of effect on that.

That last point should be changed to when journalistic organizations succeed or fail, the journalists inside tag along. Their competition does not primarily come from bloggers, but from Craigslist (classified ads), Google (targeted advertising), Ebay (targeted consumer to consumer sales), and Monster (Job ads and applicants), which dries up the real revenue streams. Plus, the younger demographic does not as easily pay for print subscriptions.

One other note — many popular bloggers realize that they could become a lot more popular if they head off in a sensationalistic direction, and a few do, with some cost to the truth. They do their readers little service. What I have stared down is that I could write only about stock investing ideas, and my site would be more popular. But those are far less certain than what I write about. I feel comfortable talking about my portfolio, which is over at Stockpickr.com, but individual ideas, particularly the controversial ones, have a lower probability of being correct.

Blogging is easier than being a journalist if you don’t care about being read. Anyone can go to Blogger or Typepad (among others), and start a blog in minutes. It is those bloggers who have something significant to say who will end up with an audience. I thank my audience that reads me regularly; I only hope that I can continue to be worthy of your time.

PS — I recently submitted my blog to Blogged.com, and the editor did not think that much of my blog. If you have a strong opinion about me, positive or negative, perhaps you could write a review. Again, thanks.

I just upgraded the blog and all of its software to WordPress 2.5.1. It should allow me to do more with the blog in terms of format flexibility and a few other things. It should improve the overall stability of the blog, as well as a few things that should make the blog harder to hack. Oh, I got my descriptive permalinks back. Yay!

If you notice anything going wrong, or if you have a suggestion for the blog, please let me know. I have tried to get clicking on the top banner to return to the front page, but I am afraid I can’t figure it out. On a positive note, I’ve never had a spam problem at my blog. Between Akismet and moderating all initial comments, I have been able to screen all spam. We’ll see how well that works in the future.

One more note: I get a lot of spammers that register for my blog from Russia and Poland. If you are based in Russia or Poland, and are a true reader of my blog, send me a note, because I am going to block certain domains from registering at my blog.

Apologies for no post last night.  It is rather disconcerting to find the database of my website corrupt, and wonder whether I will have anything of it left.  If anyone has any recommendations on good hosting providers, I am all ears.

In the “what is coming up” file, I have the following ideas that I am working on:

• Several book reviews.
• A piece on ETFs
• Monetary policy 101
• Fundamentals of Market Bottoms
• Intraday trading — does not seem to follow a random walk
• What of strategies that need continuous liquidity?
• Fixing the title of my blog, so that clicking it takes one to the home page

That’s all for now.  Thanks for reading my posts, and interacting with me, even though I find it difficult to keep up with the flow of e-mails.

A few notes before I begin this evening. I tried posting twice, but my system failed twice, and the auto-save did not do its job faithfully. So, one reduced post, if I can get it out. Next week, I should publish a small primer on how monetary policy works. Also coming up is my next portfolio reshaping.

Well, there is certainly no more stigma in borrowing directly from the Fed. Just look at the discount window:

That’s a new record since the beginning of my data (1980), and more than doubles the last peak in 2001.

The following graph (look at the lower green graph) is the ratio of my M3 proxy (Total Bank Liabilities) to high-powered money (Total Fed Credit, the Monetary Base).

This ratio measures the willingness of the Fed to allow the banking system to lever up their deposit base relative to the size of the Fed’s own balance sheet. The data only goes back to 1980, but we are knocking at the door of a new high. The recent move up began in earnest at the beginning of the last tightening cycle, but has persisted into the loosening cycle, as the FOMC has not let the monetary base grow, but has permitted the banks to continue to gather deposits (banking, savings, CDs, money market funds). Some capital requirements have been loosened, and I suspect the bank examiners are not playing hardball at present, at least compared to the attitude 18 months ago.

After all, the banks don’t have to pay much interest to those who deposit money with them with a curve this low and steep, and many people are afraid of the equity markets, and are letting balances at the banks grow. The banks get cheap funding, and they use it to buy short-duration agency RMBS yielding 3-4%, which is a winner, at least for now.

Personal notes before I get started: I’ve been busy studying for the Series 7 (and also reviewing the compliance manual for my new firm — wow it is big). The two of them fit together, as I get to see how the regulations get applied. I’ve made through the study guide (what do you do when it is wrong — not that I found a lot of errors, maybe half a dozen?), and I am 20% through my first practice test. Went and got fingerprinted for the fourth time in my life yesterday. (The other three times were for adoptions.)

My links are back but I had to give up my descriptive permalinks. Maybe I’ll get them back when I upgrade the blog to WordPress 2.5.1. Beyond that, I am working on a book review for Gene Marcial’s forthcoming book, “7 Commandments of Stock Investing.”

Catching up on the markets:

Our Unorthodox Federal Reserve, GSEs and Government

1) Repo rates may not be negative now, but they were so recently. Fails (failures to deliver securities) become common, because of the lack of a penalty. Today we should see whether the TSLF has any impact on the scarcity of Treasuries. We should learn more about the direct landing program as well after the close today. It got off to a big start last week. Watch for the H.4.1 report after the close. Given all that is going on, it is becoming the critical weekly Fed document.

2) Now, because of all these actions on the asset side of the Fed’s balance sheet, some are calling the actions of the Fed, including the Bear Stearns bailout, revolutionary. Well, maybe. It’s certainly different than before, but there is a cost to doing business this way. Bit by bit the Fed loses flexibility as more and more of its highest quality assets become encumbered for a time.  The more that they do, also, the harder it will be to unwind, in my opinion.

3)  Greenspan…  If we turn off the spotlight, will he go away?  (Then again, he has enough money to buy his own spotlight.)  It is tough for anyone to defend a legacy, and I don’t blame him for trying, but the Fed became too integrated with the political establishment under his tenure, which made it too activist in avoiding short-term pain.  It made him look like a hero at the time, but now we are paying the price.  Overly loose monetary policy and financial supervision led to gluts of borrowing to finance assets that appreciated dramatically, until the ability to service the debt began to decrease.  I don’t think history will treat him kindly.  He said too much in the past that he is contradicting today.

4) Will the Fed buy agency MBS outright?  I think the answer to that one is yes, if the crisis persists. If housing prices drop enough further, like say 15%, the actions of the Treasury, Fed, FHLB, Fannie, Freddie, FHA, and whatever new lending monstrosity our imaginative Government comes up with will have to be closely coordinated.  At some level, if the Fed can’t trust the implicit guarantee of Fannie and Freddie, why should the rest of us?  That guarantee is as sound as a dollar!

5)  It’s interesting to see the tide shift with respect to GSE involvement in the mortgage market:

• Higher limits for conforming loans.
• Fannie and Freddie being pushed to do more, but facing a shortage of capital, even after the recent required capital reduction from their regulator.  They are likely to buy $200 billion of residential mortgage bonds.  No capital added, just a loosening of a restriction.
• The FHLB is allowed to buy an additional $150 billion of mortgage bonds.  No capital added, just a loosening of a restriction.
• And, as I write, the WSJ puts out a front page summary piece on the topic.

6)  On a consolidated basis, our government, with its enterprises, are levering up.  This is a substitution of public debt for private, and more, just a lowering of capital standards for the GSEs.  (I wonder how comfortable the rating agencies are with this?)  This works while Treasury yields are low.  I wonder, though, how much impact this will have on the willingness of foreign buyers of Treasuries to continue their funding of our government?  One thing for sure, this will all get funded by the US taxpayers, together with those who lend to the US (dollar depreciation).

7) Now, it’s not as if the US is the only place in the world with central banking problems.  Consider the Eurozone, where there is still no lender of last resort.  How would they deal with a financial crisis?  I’m not sure; the ECB has quietly helped out some Spanish banks, but it is not really in their jurisdiction.  Under conditions of deflationary stress, it would not be impossible to see a nation whose financial system was in trouble either directly bail out the dud institutions, or even, exit the euro (last resort, but not impossible).

Or consider China, where inflation is getting a nice head of steam.  Their neomercantilism, with their crawling peg against the dollar is forcing them to import loose monetary policy from the US.  As the article cited points out, they need to significantly revalue their currency upward, which would would whack their exports, at least for a time.

8 )  For those that remember the files that I created for my piece, A Social View of the FOMC, it looks like I will have to update the file soon.  We have a successor to Bill Poole nominated, James Bullard.  When he is approved, I will update the file.  (I will miss Poole.  Though he was occasionally out of step with the rest of the FOMC, he always spoke his mind, which was usually more hawkish than the rest of the FOMC.)

9)  Now, Bullard is an Economics Ph. D.  (Surprise!)   In my earlier piece, Jeff Miller took note of a few of the things that I said, and perhaps attributed to me an anti-Academic bias.  I don’t have a bias against academics, per se.  (Hey, can we put Steve Hanke on the Fed?!  One of my professors…)  I do have concerns about not having enough real debate.  If the neoclassical view of monetary policy is correct, then we don’t have problems, because everyone on the FOMC is either a neoclassical economist, or a monetarist.

Now, I do know the difference between politics and policy formation, and if I hadn’t been trying to keep the number of pages down, I might have had two columns.  (Getting it down to 15 pages was hard.)  But most of the FOMC members had either one or the other, but not both, so I left it as one column.  Next time I change the column heading.  That said, even if one is in a policymaking capacity in the executive branch, there is typically some political affiliation that helps get that person the job.  Those are relevant bits of experience, just as I noted everyone that had foreign experience, or military experience.  But what worries me is a lack of real diversity in views of how economics works.  (Perhaps we could get someone from the Santa Fe Institute?)

10) Finally, there will be a lot of pressure in the future to re-regulate our financial system.  Personally, I don’t think it is possible to create a regulatory scheme that eliminates crises.  The regulator shapes the type of crisis that will come, and when it will come, but it is impossible to wipe out the boom-bust cycle.  (We put off this bust for a long time, and now we are getting it with compound interest for time delay.)  If a regulatory regime is too tight, the financial companies complain because their ROEs are too low.  To the extent that it can, capital begins to exit the industry, or, the stock prices languish, and financials trade at low multiples on book, because they can’t earn much off their net worth.

Financial companies find the weak spots in any risk-based capital formula.  They also lobby the executive branch and Congress effectively.  Unless we slide into Great Depression II, I don’t think things will change remarkably from here.

I  agree that we need to re-regulate, but perhaps after this crisis is done, we can consider systemic reforms, and not the piecemeal stuff we have been dished up in the name of crisis management.  My re-regulation would be to reduce the Federal Government’s role in the credit markets, but then, I am walking out of step, and realize that is not what is going to happen.

Hello.  Sorry to anyone who is not able to read old posts in my blog.  Only the front page is working at present.  For those that have been following the small changes that I have been making, you might note that I have made some changes to my permanent pages to reflect my new employer.  Also, I have made my book reviews more prominent, because people have told me they like them.

I may be looking for a new hosting provider.  Ideas are welcome.

(with apologies to Tennessee Ernie Ford on the title… my Grandpa met him when “Eighteen Wheels” was hot.)

One thing I never thought I’d have to do in life is become a broker. (My mom, my first teacher in investments, always gave me negative impressions of brokers, calling them “order-takers.”) Yes, I am studying for the Series 7 exam. Today a 14-pound box showed up at my door, with six books inside it — study materials for the series 7 exam. Four inches thick in all. Ouch.

Then again, I have passed the actuarial (in 5 years) and CFA exams (in 3 years). Funny story: when I was taking the first CFA exam, for some reason, I was 10 years older than everyone else in the room. During a break, one of the young guys with an attitude said to me, “Hey old-timer, what are you doing here?”

I blinked and said that as an actuary, I was trying to round out my skills. He said, “But what advantage does that give you in taking these exams; you’re out of your field.”

I was a little annoyed, so I said, “I guess you’re right. I am relatively old here. But I have passed a battery of exams far tougher than these, and have expertise in test-taking, compound interest math, statistics, economics, investments, accounting, and we have our own ethics code. If you think you can run rings around me because of your youth, go ahead and try.” Now he blinked, and turned away.

As I look at the pile of books, there is a summary book and a book of practice tests, in addition to more comprehensive volumes. I’m 10% through the summary book, and once I am done there, I will take a practice test. If I score better than 85% (pass rate is 70%), I will just go and take the exam. On practice tests on the web, without study, I am at the 70% level now. But if I can’t do the 85%, I will sit down and study, learning obscure bits of the securities markets. Being the nerd that I am, that could be fun, but it wouldn’t be the best use of my time if I can avoid it.

I’ll keep you posted on how I do.

As WordPress counts, every 100 articles, I take a step back, and think about blogging.  I wasn’t sure what I was getting myself into when I started the blog.  I was unsatisfied with my work and my other writing outlets when I decided to start Alephblog up.  I wanted more creative control, and an ability to build a brand of my own.  That’s why I started the site.

So far, so good. The support from other blogs has been significant (in order): Abnormal Returns, Alea, The Big Picture, FT Alphaville, Seeking Alpha, the Kirk Report, and Naked Capitalism.  I also appreciate the overall blogging community on finance issues; it is fascinating to see the relatively high quality of opinions that get expressed on the web.  It is more than competitive with the print media (and we get paid peanuts, if anything…).

In the near term, I will be updating my blogroll.  I want it to reflect what is on my RSS reader.  I updated my “leftbar” recently.  I  did it because I wanted to highlight the books that I have reviewed, and I wanted to push the Google ads further down the page.  I don’t make that much from them; at some point I may discontinue them.

Along with that, I will be doing some blog maintenance to make the top of my blog clickable to return to the homepage, update a few of my old static pages, and turn off comments on posts older that a month.

It’s been interesting to meet new people through the blog.  I appreciate those that e-mail me, and those that comment here, though my time to reply is limited.

Finally, I haven’t run out of things to write about, and given what I wrote here and at RealMoney, this economic environment was made for me.  Volatility — what will break next?  Reminds me of 2002, and owning too many BBB bonds.  But future topics may include:

•  Academic Finance Lies (okay, assumptions that aren’t true)
• Rescuing Capitaism from Capitalists (half-written)
• Fundamentals of Market Bottoms
• CP-T2 as a panic gauge
• Risk Management vs VAR vs ERM
• Can Central Banks Lose Money?
• The Main Ignored Problem in Taxation (by both political parties)

Finally, I thank my family, I thank God, and I thank my new employer, Finacorp Securities, for their support.  Let’s keep this up; I enjoy the writing and the feedback.

Apologies.  I should have put this out earlier, but I will be on Bloomberg Radio Wednesday between 8:15AM and 8:45AM Eastern.  I will see if I can’t get a transcript or a recording.  For those that can listen live, here is the link.  One thing I enjoy about my present employer is that they like my blog, getting quoted in magazines, and being on radio and television.  It builds the business.

I’ll be talking about current economic conditions.  I hope to give a nuanced view that doesn’t jump around with every monthly data point.

1) The blog was out of commission most of Saturday and Sunday, for anyone who was wondering what happened. From my hosting provider:

We experienced a service interruption affecting the Netfirms corporate websites and some of our customer hosted websites and e-mail services.

During scheduled power maintenance at our Data Centre on Saturday Feb. 23 at approximately 10:30 AM ET, the building’s backup generator system unexpectedly failed, impacting network connectivity. This affected several Internet and Hosting Providers, including Netfirms.

Ouch. Reliability is down to two nines at best for 2008. What a freak mishap.

2) Thanks to Bill Rempel for his comments on my PEG ratio piece. I did not have access to backtesting software, but now I do. I didn’t realize how much was available for free out on the web. He comes up with an interesting result, worthy of further investigation. My main result was that PEG ratio hurdles are consistent with a DDM framework within certain moderate values of P/E and discount rates. Thanks also to Josh Stern for his comments.

3) I posted a set of questions on Technical Analysis over at RealMoney, and invited the technicians to comment.

		David Merkel
		Professionals are Overrated on Fundamental Analysis
		2/21/2008 5:19 PM EST

I’m not here to spit at technicians. I have used my own version of technical analysis in bond trading; it can work if done right. But the same thing is true of fundamental investors, including professionals. There are very few professional investors that are capable of delivering above average returns over a long period of time. Part of it is that there are a lot of clever people in the game, and that raises the bar.

But I have known many good amateur investors that do nothing but fundamental analysis, and beat the pros. Why? 1) They can take positions in companies that are too small for the big guys to consider. 2) They can buy and hold. There is no pressure to kick out a position that is temporarily underperforming. With so many quantitative investors managing money to short time horizons, it is a real advantage to be able to invest to longer horizons amid the short-term volatility. 3) They can buy shares in companies that have been trashed, without the “looks that colleagues give you” when you propose a name that is down over 50% in the past year, even though the fundamentals haven’t deteriorated that much. 4) Individual investors avoid the “groupthink” of many professionals. 5) Individual investors can incorporate momentum into their investing without “getting funny looks from colleagues.” (A bow in the direction of technical analysis.)

When I first came to RM 4.4 years ago, I asked a question of the technicians, and, I received no response. I do have two questions for the technicians on the site, not meant to provoke a fundy/technician argument, but just to get opinions on how they view technical analysis. If one of the technicians wants to take me up on this, I’ll post the questions — hey, maybe RM would want to do a 360 on them if we get enough participation. Let me know.

Position: none

		David Merkel
		The Two Questions on Technical Analysis
		2/22/2008 12:15 AM EST

I received some e-mails from readers asking me to post the questions that I mentioned in the CC after the close of business yesterday. Again, I’m not trying to start an argument between fundies and techies. I just want to hear the opinions of the technicians. Anyway, here goes: 1) Is there one overarching theory of technical analysis that all of the popular methods are applications of, or are there many differing forms of technical analysis that compete against each other for validity (and hopefully, profits)? If there is one overarching method, who has expressed it best? (What book do I buy to learn the theory?)

2) In quantitative investing circles, it is well known (and Eddy has written about it recently for us) that momentum works in the short run, and is often one of the most powerful return anomalies in the market. Is being a good technician just another way of trying to decide when to jump onto assets with positive price momentum for short periods of time? Can I equate technical analysis with buying momentum?

To any of you that answer, I thank you. If we get enough answers, maybe the editors will want to do a 360.

Position: none

I kinda thought this might happen, but I received zero public responses. I did receive one thoughtful private response, but I was asked to keep it private. Suffice it to say that some in TA think there is a difference between TA and chart-reading.

As for me, though I have sometimes been critical of TA, and sometimes less than cautious in my words, my guesses at the two questions are: 1) There is no common underlying theory to all TA, there are a variety of competing theories. 2) Most chart-readers are momentum players, as are most growth investors. Some TA practitioners do try to profit from turning points, but they seem to be a minority.

I’m not saying TA doesn’t work, because I have my own variations on it that I have applied mainly to bond investing. But I’m not sure how one would test if TA in general does or doesn’t work, because there may not be a commonly accepted definition of what TA would say on any specific situation.

4) One more note from RM today:

		David Merkel
		Just in Case
		2/25/2008 4:20 PM EST

Um, after reading this article at the Financial Times, I thought it would be a good idea for me to point readers to my article that explained the 2005 Correlation Crisis. Odds are getting higher that we get a repeat. What would trigger the crisis? A rapid decline in creditworthiness for a minority of companies whose debts are referenced in the relevant credit indexes, while the rest of the companies have little decline in creditworthiness. One or two surprise defaults would really be gruesome.

Just something to watch out for, as if we don’t have enough going wrong in our debt markets now. I bumped into some my old RM articles and CC comments from 2005, and the problems that I described then are happening now.

Position: none, and there are times when I would prefer not being right. This is one of them. Few win in a bust.

There are situations that are micro-stable and macro-unstable, and await some force to come along and give it a push, knocking it out of its zone of micro-stability, and into a new regime of instability. When you write about situations like that before the fact, it is quite possible that you can end up wrong for a long time. I wrote for several years as RM about overleveraging credit, mis-hedging, yield-seeking, over-investment in residential real estate (May 2005), subprime lending (November 2006), quantitative strategies gone awry, etc. The important thing is not to put a time on the prediction because it gives a false message to readers. One can see the bubble forming, but figuring out when cash flow will be insufficient to keep the bubble financed is desperately hard.

5) This brings up another point. It’s not enough to know that an investment will eventually yield a certain outcome, for example, that a distressed tranche of an ABS deal will eventually pay off at par. One also has to understand whether an investor can handle the financing risks before receiving the eventual payoff. Will your prime broker continue to finance you on favorable terms? Will your regulator force you to put up more capital against the position? Will your investors hang around for the eventual payoff, or will they desert you, and turn you into a forced seller? Can your performance survive an asset that might be a dud for some time?

This is why the price path to the eventual payoff matters. It shakes out the weak holders, and moves assets that should be financed by equity onto strong balance sheets. It’s also a reason to be careful with your own balance sheet during boom times, and in the beginning and middle of financial crises — don’t overextend your positions, because you can’t tell how long or deep the crisis might be.

6) I agree with Caroline Baum; I don’t think that the FOMC is pushing on a string. The monetary aggregates are moving up, and nominal GDP will as well… it just takes time. The yield curve has enough slope to benefit banks that don’t face a lot of credit problems… and the yield curve will steepen further from here, particularly if the expected nadir of Fed funds drops below 2%. Now, will real GDP begin to pick up steam? Not sure, the real question is how much inflation the Fed is willing to accept in the short run as they try to reflate.

7) Now, inflation seems to be rising globally. At this point in the cycle, the FOMC is ahead of almost all major central banks in loosening policy. I think that is baked into the US dollar at present, so unless the FOMC gets even more ahead, the US Dollar should tread water here. Eventually inflation elsewhere will get imported into the US. It’s just a matter of time. That’s why I like TIPS here; eventually the level of inflation passing through the CPI will be reflected in implied inflation rates.

8 ) Okay, MBIA will split in 5 years? That is probably enough time to strike deals with most everyone that they wrote coverage for structured products, assuming the losses are not so severe that the entire holding company is imperiled. If it’s five years away, splitting is a possibility, but then are the rating agencies willing to wait that long? S&P showed that they are willing to wait today. Moody’s will probably go along, but for how long?

9) I found it interesting that AQR Capital has not been doing well in 2008. When quant funds did badly in the latter half of 2007, I suffered along with them. At present, I am certainly not suffering, but it seems that the quants are. I wonder what is different now? I suspect that there is too much money chasing the anomalies that the quant funds target, and we reached the end of the positive self-reinforcing cycle around mid-year 2007; since then, we have been in a negative self-reinforcing cycle, with clients pulling money, and the ability to carry positions shrinking.

10) Now some graphs tell a story. Sometimes the story is distorted. This graph of the spread on Fannie Mae MBS is an example. Not all of the spread is due to the creditworthiness of Fannie Mae. Those spreads have widened 30 basis points or so over the past six months for Fannie’s on-the-run 5-year corporate bond, versus 50 basis points on the graph that I referenced. So what’s the difference? Increased market volatility makes residential MBS buyers more skittish, and they demand a higher yield for bearing the negative optionality inherent in RMBS. Fannie and Freddie are facing harder times from the guarantees that they have written, and the credit difficulties at the mortgage insurers, but it would be difficult to imagine the US Government allowing Fannie or Freddie to default on senior obligations.

That’s another reason why I like agency-backed RMBS here. You’re getting paid a decent spread to bear the risks involved.

11) I would be cautious about using prics from CMBX, ABX, etc., to make judgments about the cash bonds that they reference. It is relatively difficult to borrow and short small ABS and CMBS tranches. It is comparatively easy to buy protection on the indexes, the only question is what level does it take to induce another market participant to sell protection to you. When there is a lot of pressure to short, prices overshoot on the downside, and stay well below where the cash bonds would trade.

12) One last point, this one coming via one of our dedicated readers passing on this blurb from David Rosenberg at Merrill Lynch:

A client sent this to us last week

It was a New York Times article by Louis Uchitelle in December 1990 on the housing and credit crunch. In the article, there is a quote that goes like this – “This is different from the experience of the Great Depression, but something related to the 1930’s is beginning to happen”. Guess who it was that said that (answer is at the bottom of the Tidbits).

Answer to question above

“Ben Bernanke, a Princeton University Economist” (and future Fed chairman, but who knew that then?).

My take: it is a very unusual time to have a man as Fed Chairman who is a wonk about the Great Depression. That makes him far more likely to ease. The real question is what the FOMC will do if economic weakness persists, and inflation continues to creep up. I know that they want to save the day, and then remove all policy accomodation, but that’s a pretty difficult trick to achieve. In this scenario, I don’t think the gambit will work; we will likely end up with a higher rate of price inflation.