Companies

• Delta Sees S&P 500 in Reach as Credit Ratings Rise http://stks.co/rEBE  I would b cautious here, airlines have destroyed a lot of capital $$
• Berkshire’s Weschler Holds Almost $150 Million of DaVita http://stks.co/pEIf  FD: + $BRK.B | The slow takeover of Davita continues $$
• The real Apple tax scandal http://stks.co/gWz1  Scrap the corporate income tax & raise taxes on realized capital gains & dividends $$
• Berkshire Hathaway Seeks Release of ResCap, Ally Financial Report http://stks.co/dVOD  Wants 2c if there was any fraudulent conveyance $$
• Oil Revolt Generates $35 Billion as Icahn-Singer Agitate http://stks.co/jWnd  Many activist investors trawling in energy stocks $$
• Inside Google’s Secret Lab http://stks.co/qE31  “Since its creation in 2010, Google has kept X largely hidden from view.” Long but good $$
• Explaining Apple’s Irish Tax Dodge http://stks.co/hXHa  A good transfer pricing accountant is worth his weight in gold $$
• Deal of the Week: Penney Holds Real Value http://stks.co/rDoO  $JCP needs to turn around its retailing much more than managing property $$
• After all, that’s how BK conservation is done in the insurance industry, taxpayer never gets on the hook (please ignore $AIG) $$
• Customer Service Is Next Job for IBM’s Watson http://stks.co/tDcy  Could Watson replace the grunts that take care of customer service? $$
• “…insurance giants such as ACE Ltd and Endurance Specialty Holdings Ltd” http://stks.co/qDeA  $ACE is a giant @ $31B , $ENH not @ $2B $$
• $VOD to Keep $VZ Payout Amid Europe Struggles http://stks.co/cV0K  Not surprising they stalemated on VZW, & no special div | FD: + $VOD $$
• Regulators Scrutinize Firms’ Ties to Insurers http://stks.co/sDXn  How much unsafe assets are held by life companies of $APO $HRG $GS ? $$

Market Dynamics

• Murray International’s Stout Says Stocks Too Expensive http://stks.co/aVhD  This means invest in cash, long Tsys or gold if correct $$
• Bargain-Hunting Buoys Treasurys [sic] http://stks.co/rEBC  Strength Returns as Bargain-Hunters Appear, but Prices Still Fall 4 the Week $$
• EVERGREEN VIRTUAL ADVISOR http://stks.co/eVjh  A very good publication this week. If u beg, u can get on the distribution list. $$
• Richard Band notes that the S&P 500’s prices-to-sales ratio is 1.5 to 1, almost 60% above its average since 1955 http://stks.co/gX6Z  $$
• Paul Tudor Jones: Macro trading, babies r a ‘killer’ 2a woman’s focus http://stks.co/gX54  Any significant outside activity harms focus $$
• Is This the Best Time for Investors? Don’t Bet On It http://stks.co/cVSF  Long term valuation measures r flashing red, play defense $$
• 3 articles on gold http://stks.co/pE4K  & http://stks.co/sDwa  & http://stks.co/rDwK  New hedging, record shorting, paper gold $$ $GLD
• Follow the Leader @mktanthropology http://stks.co/jWlB  Global economy feeling deflationary; stock markets poised to follow down $$
• Goldman raises S&P 500 targets through 2015 http://stks.co/gWYI  Not impossible historically, but not likely, profit margins would b2hi $$
• James Surowiecki: Is There a Stock-Market Bubble? http://stks.co/sDac  Argues profit margins sustainable: lower taxes, globalization $$
• Looking for Investments With Higher Yields in a Low Interest-Rate World http://stks.co/pDgr  Grab hi yields now= walk tightrope; no net $$
• Gold in Yen and SP500 and Bitcoin : Back to the Future http://stks.co/fWYb  Gold almost back to peak in yen terms & much more $$
• Gold Bear Bets Reach Record as Soros Cuts Holdings http://stks.co/jWKK  Market delivers pain to the gold longs: bears now overextended? $$
• Gold Rebounded After Moody’s Says U.S. May Face Downgrade http://stks.co/qDZq  People want certainty somewhere, whether in Govt or gold $$
• Junk Stocks Spur Broadest Equity Advance Since 1995 http://stks.co/qDZm  Highly indebted firms take the lead in the equity market $$

US Politics & Economic Policy

• Obama Bully Pulpit Bullied With Congress Probes Obscuring Agenda http://stks.co/jWz8  Maybe we should limit Presidents to one 4-yr term $$
• Fannie Mae Profiting as Market Middleman Angers Lenders http://stks.co/sEB4  If we really want 2wind down F&F, we should end purchases $$
• Goldman Sachs Research Disputes TBTF Subsidy http://stks.co/aVW5  In quiet times, advantage difficult to detect, easy during crisis $$
• Unaccountable Executive http://stks.co/rDwj  If President doesn’t run government, who does? Can delegate authority, not responsibility $$
• The Prisoner’s Dilemma of Central Banks [pdf] http://stks.co/rDwg  Everyone has an incentive 2 inflate, which leaves everyone worse off $$
• The Fed Is Squeezing the Shadow-Banking System http://stks.co/tDy5  As they should: repo market was a big part of the financial crisis $$
• The FED & F-35: Still no Rules of Engagement http://stks.co/pDwg  The Fed doesn’t know what they are doing; making it up, smiling a lot $$
• Sheila Bair: Dodd-Frank really did end taxpayer bailouts http://stks.co/jWPv  Will follow BK pecking order, after that charge industry $$
• Naming Names in the Dodd Frank Mess http://stks.co/jWPr  Mark Wetjen manages to stymie Dodd-Frank reforms; some of it is good, some bad $$
• What Strong Dollar? US Boom Provides Oil Hedge http://stks.co/tDcb  W/more energy produced in the US, $$ has less impact on oil prices
• White House urges Senate to cut crop insurance in farm bill http://stks.co/cV18  Difficult to beat the Ag lobby on crop insurance $$
• Health Law Costs: Employers Eye Bare-Bones Plans http://stks.co/tDXo  Obamacare messes up the health system; avg person less well-off $$
• Puerto Rico Statehood Bid Gets New Push http://stks.co/pDdM  Sensing future bankruptcy, Puerto Rico reconsiders a permanent liege-lord $$
• Does Rand Paul’s Rise Signal A Broader Libertarian Moment? http://stks.co/aV62  Somehow I think this one will end in disappointment too $$
• US Immigration Plan Encounters Business-Labor Rift http://stks.co/hWgM  Fascinating how seeming certainty of immigration bill has gone $$
• The end of QE? http://stks.co/rDKW  @izakaminska tells us why more QE won’t help, & why the process will have to end soon. $$ #becareful

Rest of the World

• Turkey Moves 2Curb Alcohol Sales http://stks.co/hXJT  This will b an interesting test of govt power; vodka is delivered quietly in Iran $$
• Foreign Fighters Enter Syria to Defend Shiites and Al-Assad Regime http://stks.co/tEAp  “Islam is a religion of peace” “Islam is a…” $$
• The Great Chinese Property Bubble: a Wall of Worry? http://stks.co/pEH3  2 much 2 occupy; prices 2 high; enough debt 2b troublesome $$
• BRICS risk ‘sudden stop’ as dollar rally builds http://stks.co/cVY1  EM blowups often preceded by rise in $$ | Good 4 EM exporters though
• Wrong:Avoid These 3 Stocks on Japan, Says Expert http://stks.co/dVX1  An expert that doesn’t understand insurance trashes $AFL | FD:+ $AFL
• Asia Goes on a Debt Binge as Much of World Sobers Up http://stks.co/sE8v  Over-indebted economies don’t grow rapidly; complexity chokes $$
• 2 articles on Japan http://stks.co/fWuS  & http://stks.co/hX67  Rising bond yields & trade deficit, monetary policy drives both $$
• Two articles on the Tokyo market rout http://stks.co/qE7K  & http://stks.co/rE2d  Abenomics is stretching the limits of the possible $$
• Nobel Laureate Phelps Warns Against EU as Iceland Abandons Talks http://stks.co/fWui  Iceland gets smart, doesn’t join the Eurozone $$
• Death in Parched Farm Field Reveals Growing India Water Tragedy http://stks.co/cVN6  Water shortages r big factor 4 India’s development $$
• The Abenomics Experiment: Major Risks for Banks http://stks.co/gWlx  If interest rates rise 2much, banks in Japan go to neg net worth $$
• Experts call for urgent measures to tackle debt http://stks.co/qDtR  One advantage of US over China; we resolve troubled debts better $$
• Stockholm Riots Continue for Third Night http://stks.co/gWlk  If this can happen in Stockholm, it can happen in a lot of other places 2 $$
• Hollande Bonds Without AAA Shine Brighter Than Gold http://stks.co/dUzy  Similar things worked 4 Japan 4a while, but now may b shifting $$
• World’s Biggest Volatility Jump Spurs Fund Outflow http://stks.co/gWTm  Investors invest outside Japan 2 escape perpetually falling yen $$
• China April housing inflation quickens to two year high http://stks.co/fWM5  Chinese inflation is the endgame for many globally $$ #theend

Wrong

• Wrong: Strategy To YieldBoost Phillips 66 To 6% http://www.forbes.com/sites/dividendchannel/2013/05/22/strategy-to-yieldboost-phillips-66-to-6/?partner=yahootix … Selling calls does not purely + yield b/c it limits your flexibility
• Wrong: Defining Moments in ‘Currency War’ http://stks.co/rDoJ  Monetary & Currency policies r joint @ the hip; Japan & China r similar $$
• Wrong: Investment That Protects You From Yourself: Bonds http://stks.co/jWPQ  Same argument can b applied to cash, more safe than bonds $$
• Unfair: The Rich Investor’s Secret to Buying Low http://stks.co/sDbz  Cherry-picks 2 winning trades 4 marketing purposes $NFLX $BP $$
• Wrong: Central banks saved world economy, now beware the fallout http://stks.co/iWYf  Would b growing rapidly now if we let banks fail $$

Other

• Soldiers Turn Entrepreneurs as One Million Exit Military http://stks.co/gX55  Military training has similarities w/entrepreneurship $$
• The Exercise Equivalent of a Cheeseburger? http://stks.co/cVY6  Exercise is good; too much exercise is worse than little exercise $$
• How Rail is Reshaping America’s Energy System http://stks.co/iWqJ  Summary piece on how tank cars r taking cheap fuel to the coasts $$
• Wined, Dined, Canned http://stks.co/tDq6  Inside the insiders game that is the Cannes film festival $$ Movie about the business of movies
•  Teen’s invention could charge cellphone in 20 seconds http://stks.co/eVD0  Wonder how stable supercapacitor will b? Might b an issue $$
•  “I’m going to be setting the world on fire,” she said. http://stks.co/jWPq  Having seen overpowered capacitors burn, could b literal $$
• The Tech Innovator Who Almost Killed Saddam Hussein http://stks.co/dV1x  Long interesting article; Sabra becomes rich computer maven $$
• Getting Along With the Original Other Woman—Your Mother-in-Law http://stks.co/iWbp  Husbands, support your wives. Mothers, bow out $$
• New Rival Emerging for Bloomberg Chat http://stks.co/bV4p  Bloomberg may learn the hard way: messaging security can’t be compromised $$

Comments, Replies, & Retweets

• @Sir_Strangelove Had not caught that, thanks for correcting me
• “There is one thing you neglected: Baa bond yields are 3% lower than in 1999. That roughly comports…” — D_Merkel http://disq.us/8d7ha9  $$
• @joshuademasi It’s like long-tail reinsurers in the mid-’80s, most were technically insolvent, but book capital was +; losses eaten slowly
• “Jeff Matthews is correct; Dealbook, though usually good, is wrong.” — David_Merkel http://disq.us/8d735b  $$
• “This is a failure of the regulators, that they let this happen at all. They have the power to top it” — D_Merkel http://disq.us/8d730h 
• @danielckoontz I know that dividend swaps exist, can imagine the possibility of leverage, don’t think it’s done much though, I hope
• @danielckoontz So long as there isn’t any leverage on the person holding the dividend paying stocks, generally it should self-limit

FWIW

• My week on twitter: 35 retweets received, 1 new listings, 66 new followers, 30 mentions. Via: http://20ft.net/p 

The trouble with VAR and other mathematical models of risk is that if it becomes the dominant paradigm, and everyone begins to use it, it creates distortions in the market, because institutions gravitate to asset classes that the model makes to appear artificially cheap.  Then after a self-reinforcing cycle that boosts that now favored asset class to an unsupportable level, the cashflows underlying the asset can no longer support it, the market goes into reverse, and the VAR models encourage an undershoot.  The same factors that lead to buying to an unfair level also cause selling to an unfair level.

Benchmarking and risk control through VAR only work when few market participants use them.  When most people use them, it becomes like the portfolio insurance debacle of 1987.  VAR becomes pro-cyclical at that point.

Sometimes I think the Society of Actuaries is really dumb.  The recent financial crisis demonstrated the superior power of long-term actuarial stress-testing versus short-term quant models for analyzing risk.  The actuarial profession has not taken advantage of this.  Now, maybe some investment bank could adopt an actuarial approach to risk, and they will be much safer.  But guess what?  They won’t do it because it will limit risk taking more than other investment banks.  Unless the short-term risk model is replaced industry-wide with a long-term risk model, in the short-run, the company with the short-term risk model will do better.

The reason why VAR does not effectively control risk is simple.  VAR is a short-term measure in most of its implementations.  It is a short-term measure of risk for short- and long-term assets.  Just as long-term assets should be financed with long-term liabilities, so should risk analyses be long-term for long-term assets.

This mirrors financing as well, because bubbles tend to occur when long-term assets are financed by short-term liabilities.  Risk gets ignored when long-term assets are evaluated by short-term price movements.

And, as noted above, these effects are exacerbated when a lot parties use them; a monocultural view of short-run risk will lead to booms and busts, much as portfolio insurance caused the crash in 1987.  If a lot of people trade in such a way as to minimize losses at a given level, that sets up a “tipping point” where the market will fall harder than anyone expects, should the market get near that point.

The idea that one can use a short-term measure of risk to measure long-term assets assumes that markets are infinitely deep, and that there are no games being played.  You have the capacity to dump/acquire the whole position at once with no frictional costs.  Ugh.  Today I set up a new client portfolio, and I was amazed at how much jumpiness there was, even on some mid-cap stocks.  Liquidity is always limited for idiosyncratic investments.

The upshot here is simple: with long term assets like stocks, bonds, housing, the risk analysis must be long term in nature or you will not measure risk properly, and you will exacerbate booms and busts.  It would be good to press for regulations on banks to make sure that all risk analyses are done to the greater length of the assets or the liabilities (and with any derivatives, on the underlying, not contract term).

There is probably money to be made in analyzing the foibles of money managers, to create new strategies by taking on the opposite of what they are doing.

What errors do most money managers make today?

• Chasing performance
• Over-diversification
• Benchmarking / Hugging the index
• Over-trading
• Relying too heavily on earnings growth
• Analyzing the income statement only
• Refusing to analyze industries
• Buy newsy companies
• Relying on the sell-side
• Trusting management too much

Let me handle these one-by-one:

Chasing performance

In writing this, I am not against using momentum.  I am against regret.  Don’t buy something after you have missed most of the move, as if future stock price movement is magically up.  Unless you can identify why the stock is underappreciated after a strong move up, don’t touch it.

Over-diversification

Most managers hold too many stocks.  There is no way that a team of individuals can follow so many stocks.  Indeed, I am tested with 36 holdings in my portfolio, which is mirrored for clients.  Leaving aside tax reasons, it would be far better to manage fewer companies with more concentrated positions.  You will make sharper judgments, and earn better returns.

Benchmarking / Hugging the index

It is far better to ignore the indexes and invest in what you think will yield the best returns over the next 3-5 years.  Aim for a large active share, differing from the benchmark index.  Make some real nonconsensus investments.     Show real moxie; don’t be like the crowd.

Yes, it may bring in more assets if you are never in the fourth quartile, but is that doing your best for clients?  More volatility in search of better overall returns is what investors need.  If they can’t bear short-term volatility, they should not be invested in stocks.

Over-trading

We don’t make money when we trade.  We make money while we wait.  Ideas take time to work out, and there are frequently disappointments that will recover.  If you are turning over your portfolio at faster than a 50% rate, you are not giving your companies adequate time to grow, turn around, etc.  For me, I have rules in place to keep from over-trading.

Relying too heavily on earnings growth

Earnings growth is far less predictable than most imagine.  Companies with high profit margins tend to attract competitors, substitutes, etc.

When growth companies miss estimates, the reaction is severe.  For value companies, far less so.  Disappointments happen; your portfolio strategy should reflect that.

Analyzing the income statement only

Every earnings report comes four, not just one, major accounting statements, and a bevy of footnotes.  In many regulated industries, there are other financial statements and metrics filed with the government that further flesh out the business.  Often an earnings figure is less than the highest quality because accrual entries are overstated.

Also, a business may be more or less valuable than the earnings indicate because of the relative ability to convert the resources of the company to higher and better uses, or the relative amount to reinvest in capex to maintain the earnings stream.

Finally, companies that employ a lot of leverage to achieve their earnings will not do well when financing is not available on favorable terms during a recession.

Refusing to analyze industries

There are two ways to ignore industry effects.  One is to be totally top-down, and let your view of macroeconomics guide portfolio management decisions.  Macroeconomics rarely translates into useful portfolio decisions in the short run.  Even when you are right, it may take years for it to play out, as in the global financial crisis – the firm I was with at the time was five years early on when they thought the crisis would happen, which was almost as good as being wrong, though they were able to see it through to the end and profit.

Then there is being purely “bottoms up,” and not gaining the broader context of the industry.  As a young investor that was a fault of mine.  As a result, I fell into a wide variety of “value traps” where I didn’t see that the company was “cheap for a reason.”

Buying newsy companies

Often managers think they have to have an investable opinion on companies that are in the news frequently.  I think most of those companies are overanalyzed, and as such, don’t offer a lot of investment potential unless one thinks the news coverage is wrong.  I actually like owning companies that don’t attract a lot of attention.  Management teams do better when they are not distracted by the spotlight.

Relying on the sell-side for analysis

Analysts and portfolio managers need to build up their own industry knowledge to the point where they are able to independently articulate how an industry makes money.  What are the key drivers to watch?  What management teams seem to be building value the best?  This is too important to outsource.

Trusting management too much

I think there is a healthy balance to be had in talking with management.  Once you have a decent understanding of how an industry works, talking with management teams can help reveal who are at the top of the game, and who aren’t.  Who is honest, and who bluffs?  This very long set of articles of mine goes through the details.

You can do a document-driven approach, read the relevant SEC filings and industry periodicals, and not talk with management ever – you might lose some advantage doing that, but you won’t be tricked by a slick-talking management team.  Trusting management implicitly is the big problem to avoid.  They are paid to speak favorably regarding their own firm.

Summary

This isn’t an exhaustive list.  I’m sure my readers can think of more foibles.  I can think of more, but I have to end somewhere.  My view is that one does best in investing when you can think like a businessman, and exclude many of the distractions that large money managers fall into.

The foolish do the best in a strong market

“The trend is your friend, until the bend at the end.”  So the saying goes for those that blindly follow momentum.  The same is true for some amateur investors that run concentrated portfolios, and happen to get it right for a while, until the cycle plays out and they didn’t have a second idea to jump to.

In a strong bull market, if you knew it was a strong bull market, you would want to take as much risk as you can, assuming you can escape the next bear market which is usually faster and more vicious.  (That post deserves updating.)

Here are four examples, two each from stocks and bonds:

1. In 1998-2000, tech and internet stocks were the only place to be.  Even my cousins invested in them and lost their shirts.  People looked at me as an idiot as I criticized the mania.  Buffett looked like a dope as well because he could not see how the enterprises could generate free cash reliably at any intermediate time span.
2. In 2003-2007, there were 3 places to be — owning homebuilders, owning depositary financials or shadow banks, and buying residential real estate directly.  This was not, “Buy what you know,” but “Buy what you assume.”
3. In 1994 many took Mexican credit risk through Cetes, Mexican short-term government debt.  A number of other clever investors thought they had “cracked the code” regarding residential mortgage prepayment, and using their models, invested in some of the most volatile mortgage securities, thinking that they had eliminated all risk, but gained a high yield.  Both trades went badly.  Mexico devalued the peso, and mortgage prepayments did not behave as expected, slowing down far more than anticipated, leading the most levered players to  blow up, and the least levered to suffer considerable losses.
4. 2008 was not the only year that CDOs [Collateralized Debt Obligations] blew up.  There were earlier shocks around 2002, and the late ’90s.  Those buying them in 2008 and crying foul neglected the lessons of history.  The underlying collateral possessed no significant diversification.  Put a bunch of junk debt in a trust, and guess what?  When the credit cycle turns, most of those bonds will be under stress, and an above average amount will default, because the originators tend to pick the worst bonds with a rating class to maximize the yield, which allows the originator to make more.  Yes, they had a nice yield in a bull market, when every yield hog was scrambling, but in the bear market, alas, no downside protection.

I could go on about:

• The go-go years of the ’60s or the ’20s
• The various times the REIT market has crashed
• The various times that technology stocks have wiped out
• And more, like railroads in the late 1800s, or the money lost on aviation stocks, if you leave out Southwest, but you get the point, I hope.

People get beguiled by hot sectors in the stock market, and seemingly safe high yields that aren’t truly safe.  But recently, there has been some discussion of a possible “safety bubble.”  The typical idea is that investors are paying up too much for:

• Dividend-paying stocks
• Low-volatility stocks
• Stable sectors as opposed to cyclical sectors.

A “safety bubble” sound like an oxymoron.  It is possible to have one?  Yes.  Is it likely?  No.  Are we in one now?  Gotta do more research; this would be a lot easier if I were back to being an institutional bond manager, and had a better sense of the bond market pulse.  But I’ll try to explain:

After 9/11/2001, institutional bond investors did a purge of many risky sectors of the bond market; there was a sense that the world had changed dramatically.  At my shop, we didn’t think there would be much change, and we had a monster of a life insurer sending us money, so we started the biggest down-in-credit trade that we ever did.  Within six months, yield starved investors were begging for bonds that we had picked up during the crisis.  They had overpaid for safety — they sold when yield spreads were wide, and bought when they were narrow.

But does this sort of thing translate to stocks?  Tenuously, but yes.  Almost any equity strategy can be overplayed, even the largest and most robust strategies like momentum, value, quality, and low volatility.  In August of 2007, we saw the wipeout of hedge funds playing with quantitative momentum and value strategies, particularly those that were levered.

Those with some knowledge of market  history may remember in the ’60s and ’70s, there was an affinity for dividends, with many companies borrowing to pay the dividend, and others neglecting necessary capital expenditure to pay the dividend.  When some of those companies ran out of tricks, they would cut or eliminate the dividend, and the stock would fall.  Now, earnings coverage of dividends and buybacks seems pretty good today, but watch out if one of the companies you own has a particularly high dividend.  You might even want to look at some of their revenue recognition and other accounting policies to see if the earnings are perhaps somewhat liberal.  You also compare the dividend to what the cash flow from operations is, less cash needed for maintenance capital expenditure.

I don’t know whether we are in a “safety bubble” now for stocks.  I do think there is a “yield craze” in bonds, and I think it will end badly when the credit cycle turns.  But with stocks, I would simply say look forward.  Analyze:

• Margin of safety
• Valuation, absolute & relative
• Return on equity
• Likely and worst case earnings growth

And then balance margin of safety versus where you have the best opportunities for compounding capital.  If relative valuations have tipped favorably to less common areas for stock investing that considers safety, then you might have to consider investing in industries that are not typically on the “safe list.”  Just don’t  compromise margin of safety in the process.

I have not been a fan of this rally, and I have been selling into it.  I do have a rule for equity clients — cash never goes above 20%.  I have been close to that recently, and after rebalancing some companies that have hit the top of the weighting band, I have bought those companies with the lowest weights in the portfolio.  I have also added some stable companies in the recent past — Berkshire Hathaway, Ingram Micro, Validus Holdings, AFLAC, and CST Brands.

My next quarterly reshaping comes up next week, and again, I will be looking at neglected industries in the market for areas to purchase.  When the momentum runs this hard, I have to be content to trail (though I haven’t been trailing).  I have to ask where things will be three or more years from now, rather than ponder the next quarter.  The answer to that is more murky than I would want, because of abnormal economic policy.  It makes us all more skittish, and obscures price signals.

I have suggested in the past that a good solution in the face of uncertainty is to do half of what you would like to do. Doing half breaks the psychological stranglehold of fear and greed, because regardless of what happens, part of your decision was a success.

You could also start to make a “shopping list.”  Start looking for names that you would like to buy 10, 20, 30% lower, and set alerts.  Who knows how rapidly things will move when the correction or bear market comes.

You could keep a close eye on the 200-day moving average for the S&P 500, waiting for the index to cross under that as a sell signal, but if you want to be ahead of the crowd, maybe you want to use the 190-day moving average.

I tend to use industry selection and other factors, like balance sheet strength and reliability of cash flows as my main risk reduction tools rather than outright reduction of equities owned.  In general, I have been a good picker of stocks over the last 13 years, and I want to continue using that advantage.

With bonds, I am playing it safe with short and intermediate corporates, and taking reasoned chances with emerging markets debt.  Beyond that, I am thinking of buying long Treasuries as a deflation hedge.

The equity market is well above where long-term valuation measures like the Q-ratio, and CAPE10 would value it.  Most of that is due to low interest rates and high levels of QE.  How certain are you that both will persist, and for how long?  Personally, I think both will persist for some time, but not forever.  Profits attract competitors, and low rates discourage savers.

Though we don’t know when change is coming, we have to be ready for change.  Whatever you do for defense, make preparations now to be defensive; this era and valuation levels will not persist.

Aside from that, remember that when a system is so artificially supported, it relies on peace & continued support from governments.  Either could vary.  Peace is not certain, and neither is the current set of economic policies.  Be ready, because there can be all manner of surprises.

Full disclosure: long BRK/B, IM, VR, AFL, CST

US Economics

• For all the debt, there’s a shortage of bonds stks.co/cUj1 There isn’t a shortage of bonds, but of yield w/reasonable safety $$
• FED Very Low Inflation Panic Button: Soon DEFCON 2 stks.co/sDIg Argues that Fed will give up confident talk &continue easing $$
• Wake up! Neither political party cares about the rest of us. #deadlyduopoly
• Fiscal Policy. Oy! stks.co/dUhl Dick Fisher gives us nuanced view of economic policy; if u aren’t confused u aren’t thinking $$
• US Budget Deficit Shrinks Far Faster Than Expected stks.co/sD6D Still high, and now the Fed is absorbing almost all of deficit $$
• The Question the Fed Should Be Askingstks.co/eUhV The Fed is trapped in the imagination that they can resist debt deflation $$
• Wrong:Easy Money: Too Much of a Good Thing? stks.co/pD3E No matter how slowly they remove policy accommodation it will backfire $$
• Washington & Wall Street: Ben Bernanke’s Global Inflation Strategystks.co/fVol Japan imitates US: inflationary race 2 the bottom
• Fed Maps Exit From Stimulusstks.co/rChx Much wishful thinking on Bernanke’s part, will b really tough 2 remove accommodation $$
• Beware Volatile Bond-Market Moodstks.co/tCj8 Bond market will b very sensitive to every nuance of comments by Fed Governors $$
• Red Jahncke: The Federal Revenue Surge Won’t Last stks.co/fVZ7 People took gains taking advantage of low rates, easy huh? $$
• Daily Treasury Real Yield Curve Ratesstks.co/qCVk Interested in getting the real yield rates on TIPS? U can that & more here $$
• US High-Yield Bond Conundrum: First Warning from Bernanke? stks.co/aUGJCorporations can borrow, buy back stock, improve EPS $$
• Are US Lumber Prices Giving us a Warning? stks.co/aUGE Falling pretty rapidly; is this a sign of an economic slowdown coming? $$
• Bernanke: Big Banks May Face Higher Capital Requirements stks.co/hVVNModestly optimistic: Fed to reform margining 4 repos $$
• Wrong: Fed Maps Exit From Stimulusstks.co/eU99 At present, this is formless & void, w/the doves controlling monetary policy $$

US Politics

• Greg Lukianoff: Feds to Students: You Can’t Say That stks.co/iWK2 The first amendment should deal w/this $$
• Puerto Rico’s New Governor: We’re ‘Back on Track’ stks.co/iWK1 We’ve heard this before; ask how big unfunded accruals are $$
• White House Releases Benghazi Emailsstks.co/fW4S How many scandals can the Obama Administration bear at once? $$
• CBO Sees Deficit Narrowing to $642 Billion stks.co/fVoK Good as far as it goes, but nowhere near balanced, keep cutting please $$
• Republicans Risk Razing Arizona Edge by Losing Hispanics stks.co/eUHi US political landscape shifting; Red party lost West US $$
• Crop insurance expands, costs grow in latest US farm bills stks.co/cU8h Ag subsidies decline, but crop insurance costs rise $$
• Rating Firms Steer Clear of an Overhaulstks.co/eUHL There’s no other choice; this has worked out as I predicted $$
• In La-La Land, America’s Silliest Electionstks.co/iVOz In the dictionary, next to the word “hopeless” in a picture of LA $$
• How Many More ‘Red Lines’ Must Syria Cross? stks.co/sCKR Not so fast: how have results turned out in Iraq, Afghanistan & Libya? $$

Financial Markets

• Regulators Target Exchanges As They Ready Record Fine stks.co/iWJu Another type of trading on material nonpublic information $$
• “Give the Market the Benefit of the Doubt” and Invest in Stocks: @ritholtzstks.co/gWEh When do we reduce exposure then? $$
• Wrong: Kovacevich Says Only About 20 Institutions Caused Credit Crisisstks.co/dUfn Overlending on Resid RE caused the crisis $$
• The market isn’t merely crawling a wall of worry but we’re rapidly approaching the crown molding of disbelief.
• Rise of the Zombies: Fannie, Freddie preferred shares hit post-bailout highs yesterday on.wsj.com/12tcX6r Fool me once…
• Wrong: Warren pushes SEC, regulators on ‘too-big-for-trial’ banks stks.co/hW7fSounds good in concept; very hard to execute $$
• S&P Cuts Rating on Berkshire Hathawaystks.co/dUW6 | FD: + $BRK.B Maybe Buffett should own some McGraw Hill for protection $$
• Investors Flood Into Loan Fundsstks.co/jVtV People imagine that they can earn high yield off of levered junk w/little risk $$
• “The lower the gold price, the more nervous investors holding these positions will become.” stks.co/gW22Kinda perverse market $$
• Rethink your bond strategy for retirementstks.co/cU8r What if interest rates don’t rise, amid economic weakness? What then? $$
• Brokers Go Gray as Youth Unsustainable Without Cold Calls stks.co/pCogHappened w/life agents 2, eventually sorts itself out $$
• Stock Buybacks: We Separate Smart from Dumb stks.co/iVXm Check free cash flow & relative valuation; check soundness of buybacks $$
• Mortgages are investment du jour for hedge funds stks.co/bUB7 Hedge funds r weak holders & r buying in the eighth inning $$
• Farmland: The market ‘bubble’ you’ve never heard of stks.co/gVSL Watch debt financing levels; high levels would indicate bubble $$
• Fitch:US Corporate Cash Part I: Growth at an Inflection Point? stks.co/jVJkCorporations hoard cash b/c cost of doing so is low $$
• Does the Sohn Conference Make Hedge-Fund Geniuses Stupid? stks.co/jVBvMany investment “geniuses” were one-trick ponies $$

Europe

• EC ready to hit Chinese companies with sanctions over illegal subsidiesstks.co/rCo3 Currency wars may give way 2 trade wars $$
• Europeans must face up to prospect of massive debt restructuring stks.co/iVrN If Euro survives there will b bail-ins >Cyprus $$
• Greek Bonds Soar After Fitch Upgradestks.co/sCoB Fear gives way to greed as austerity solutions begin to ebb & recovery starts $$

China

• China’s outstanding corporate debt to surpass US stks.co/tD62 When China govt steps away, corporate defaults will surpass US 2 $$
• Grade A office rents under pressure after years of rises stks.co/rChi W/all of the overbuilding, what should you expect? $$
• @AlephBlog That last tweet was about office space in China.

Japan

• Japan Posts Surge in Economic Growthstks.co/bUaO Too soon; we need to see the effect on inflation, which will lag $$
• World’s Worst Bonds Brace for Losses on Abe Growth stks.co/pCtF Japanese bonds deliver significant losses in USD term 2 holders $$
• Yen at Four-Year Low Prompts Fujitsu to Raise PC Prices stks.co/fVjU Could it be that policy is finally creating reflation? $$

Rest of the World

• Euro-Style Bail-In Plan Means Bondholder Wipe-Out stks.co/hW7gCorrect; wipe common, preferred, bonds, deposits protected2limit $$
• Canadian Housing Bubble Review: Overpriced and Overbuilt stks.co/pCuPBubbles never deflate slowly; incentives lead to panic $$
• Commented on StockTwits: Yes, the US has shifted more to temporary workers & it will get worse under Obamacare, bu…stks.co/cUG9
• Canada’s shift to a nation of temporary workers stks.co/tCjD Puts pressure on lower-skilled workers to move among a few jobs $$
• @agnestcrane Feels like the Brazilian Govt is driving $PBR into the ground. Income is anemic, debt is rising, would b reluctant 2buy

Other

• The New Science Behind Philanthropystks.co/qDJX This isn’t science, but gambling; putting $$ on longshots w/big payoffs
• Dodging companies before disaster strikes stks.co/rDGz The simple aspects of ethical investing r doable; don’t make it complex $$
• Secret Rocks and Gem Huntersstks.co/dUVz The $10B jewels industry is shrouded in beauty—and mystery. Is change about to come? $$
• In U.S., Apostrophes in Place Names Are Practically Against the Law stks.co/tD6VJust another sign of cultural stupidity $$
• @The_Analyst It varies a great deal, but mostly I go to bed late; today I am up early.
• Harvard-for-Free Meets Resistance as US Professors See Threat stks.co/fVoQOvercapacity in colleges coming 2a crisis state $$ #bye
• Why More Young Kids Cheat at Schoolstks.co/fVoP We r basically evil, not good, we should b surprised when children don’t cheat $$
• North Jersey Data Center Industry Blurs Utility-Real Estate Boundariesstks.co/aUKZ Data centers r about energy costs & space $$
• Martin, CEO of ING U.S. on Growth Outlook $VOYA stks.co/sCXN CEO seems flustered, did not answer the questions he was asked.
• Bloomberg Isn’t The Only Company Able To Spy On Users stks.co/eUHm Wise 2 ask 3rd party vendors 4 how they keep ur data private $$

FWIW

• My week on twitter: 32 retweets received, 25 new followers, 37 mentions. Via:20ft.net/p

I have a saying that when there is no news, the market reveals its true direction.  That applies to individual securities as well as the market as a whole.  Why?

Think of institutional traders, who drive much of the market.  They are so big that they have to spread out their orders over time, or they would move the market against their positions.  On days when there is no news, volume tends to be light, displaying the actions of the big traders.

Valero recently spun off CST Brands, which was their retailing arm, selling gasoline, and things you find at convenience stores.  Seems cheap to me.  Over the last few days it has been rising on no news.  To me that means some institutional investors are buying.

I’ve seen the same thing happen when a stock falls on no news.  That’s usually a bad sign if you are long, because it means someone is selling for a reason you are not aware of.  Now, if you have done your homework, and know more than the seller, a lower price is to you advantage if you want to buy more.  The trouble is, you don’t know how much the seller has to unload.  To use CST Brands as an example again, I received some shares as a result of holding Valero for clients (and me, I get what my clients get), but I estimated how much index related selling had to happen as a result.  I bought a full stake for my clients at the point where the total volume from the prior “when issued” trading, plus actual trading on the first day hit my estimates.  It was close to the low for the day, though someone more enterprising could have picked up shares cheaper during the “when issued” trading, if he was clever.

But sometimes when there is news, you need to try to gauge whether something is an over- or under-reaction.  My favorite example here is RGA, the prominent well-run life reinsurer.  Once every eight quarters or so, they report a lousy quarter.  Why?  Because of the law of small numbers.  The large claims inside a life reinsurer are few, but make a considerable difference to the earnings when a bunch of large policy deaths happen at the same time.  The general public does not get this, so when RGA has a bad quarter, it is usually a good time to be a buyer.

The same applies to P&C reinsurers during crises.  I added to my reinsurance holdings post-Sandy, because I knew that the reinsurers would take relatively few claims because they don’t cover flood for residential, though they might have commercial-related claims.  As it was, none of my insurance holdings had any significant claims from Sandy, and the portfolio did well.

Toss out another example, but Endurance Specialty is one of the leading underwriters of crop insurance.  Crop insurance was a horrible place to be last year, and that put pressure on ENH as a stock.  But that neglected all of the other lines of business of Endurance that were performing well, as well as the risk controls that Endurance placed on its crop insurance business.

Perhaps the broad message here is to know your stocks well, so well that you can gauge whether a  market reaction to news is overdone, underdone, or meh, normal.

Analyzing the reaction to news (or no news) bonds and other assets as well.  When I was an institutional bond manager, I would watch the results of trading on the slow days, because it would give a clue to what the “big guys” were doing.  Also, when an event that has been anticipated occurs, like a ratings downgrade on the bonds of a troubled company, the market reaction says a lot, because often there are many who were waiting to buy once the downgrade happened, so price rises a lot at the downgrade.  (Think of the USA downgrade by S&P.)  The reverse is true for downgrades that are more of a surprise.

In summary, all news is not equal.  The reactions to news, and the lack thereof, can tell us a lot about the intentions of large market actors.  Do your homework well, and prosper off of the knowledge that it gives you regarding reactions, over-reactions, and under-reactions.

Full disclosure: long VLO CST RGA ENH

China

• Pettis: I would argue that until Beijing has cleaned up its debt problems and its very unstable balance sheets, it cannot move quickly. $$
• Pettis: Reducing the [interest] subsidy by raising rates would cause them all to bleed money. (DM: thus fin’l liberalization difficult) $$
• Pettis: Far more than 100% of total SOE profits come from the interest rate subsidy (not to mention other subsidies…) $$
• Target loopholes in pension system firststks.co/fVB7 China pensions exceeds the stupidity of US but not Greece: ret ages 2 low $$
• Chinese steel association seeks to tackle ‘vicious competition’ stks.co/pBzz A lot of words trying to explain away 2 much steel $$
• China Slowing Reserves – A reverse QE?stks.co/hUjH Hu Jintao ate sour grapes & Xi Jinping’s teeth r set on edge $$#dealtabadhand
• Policy battle rages in China as slowdown feeds ‘sense of crisis’ stks.co/qBXa Hard to overcome bureaucracy stifling the economy $$

Europe

• Germans Splurge on Italian Homes Locals Can’t Afford stks.co/iUpP Pushes $$ into Italian economy, don’t kvetch
• German euro founder calls for ‘catastrophic’ currency 2b broken upstks.co/tBWC The political experiment should end; harm>good $$
• Eurozone crisis deepens as German ‘sado-monetarists’ refuse to back QEstks.co/gUXD Either centralize or dissolve the Eurozone $$
• Southern Europeans Flock to Germanystks.co/cTEw Cheaper labor emigrates to Germany to benefit from their capital invested $$
• Sweden a Crisis Casualty No More Shows How to Get Haven Glowstks.co/bTBH Which inflates asset values in their economy, great $$

Rest of the World

• Egypt’s Wheat Farmers Hobbled by Fuel Shortages as Silos Run Lowstks.co/pCGK Who would have the courage 2free Egypt’s economy? $$
• Dollar Buying Continues Apace After ¥100 Break stks.co/iVEm & stks.co/jV1m& stks.co/fVAg Three on #Japan $$
• Iran Cracks Down Ahead of Electionstks.co/gV0Q The Ghanoon newspaper says. “Only in Iran: Election comes and Internet goes.” $$
• SAT Scandal Shines Harsh Light on South Korean Academics stks.co/qC0LSAT exams cancelled in S. Korea, a first for any country $$
• Egypt Investment Collapsing as Citizens Turn Into Vigilantes stks.co/eTds It was smart 2 topple Hosni Mubarak & Saddam Hussein $$
• In India, a Quixotic Fight Against Car Honks stks.co/sBQj Makes me want 2 create a bumper sticker, “Honk if you love India!” $$

Companies & Industries

• Blackstone Targets Bulging Corporate Coffers Via New Unit stks.co/sC9w W/ MMFs under threat, alternative S-T income funds arise $$
• Temporary Workers Near US Record Makes Kelly a Winner stks.co/rC9qStaffing firms benefit from need 4 fewer full-time workers $$
• And, as an aside, once PPACA [Obamacare] really kicks in, part-time work may become even bigger; very ill-thought out law, unforced error $$
• Delta Capital-Return Plan Puts Focus on Cash Flow stks.co/cThy Airlines r2 capital intensive 2b run 4 free cash flow; dubious $$
• Scor lead bidder for Generali USA in $800m deal stks.co/qC1o Not surprising 2c Scor overpay; $RGA is conservative $$ | FD: + $RGA
• Some Insurers Turn Away Variable-Annuity Money stks.co/eTaG When a life company does this, fund it, & don’t surrender; you won $$
• Merged Bonds May Spur Fannie, Freddie Revamp stks.co/dT4a Offer the equity interests a kiss goodbye & merge them into GNMA $$
• Cheapest Way to Rob Bank Seen in Cyber Attack Like Hustle stks.co/tBQ6Start Denial of Service attack, raid $$ during distraction
• New technology propels ‘old energy’ boom stks.co/rBPp Alternative energy will make sense when conventional energy gets scarce $$
• Amazon’s growing threat 2 H-P, Dell and Oracle stks.co/qBQR It’s amazing how you can beat your competitors w/no profit FD: + $ORCL
• Some Verizon Investors OK With Paying Premium 4 Vodafone Stake stks.co/bTAjSome large $VZ shareholders ok paying $130B FD: + $VOD

US Politics & Economics

• Deficit Reduction Is Seen by Economists as Impeding Recovery stks.co/eTyxEconomists have not been right, y listen 2 them? $$
•  “Big banks get a great deal when they borrow from the Fed,” Warren said on the Senate floor. “In effect, the American taxpayer… (1/2)
• …is investing in those banks. We should make the same kind of investment in our young people who are trying to get an education.” (2/2) $$
• Private Student Debt Refinancing Could Help Economy, CFPB Says stks.co/fV03Elizabeth Warren is a dangerous loony in this case $$
• @AllenSammey When a politician lobbies to use the borrowing power of the Fed for narrow political ends, that is dangerous, no?
• @AllenSammey Also, read the two prior tweets. They were meant as a group. I like a lot about Warren, but there is a lot 2 worry about also
• @AllenSammey That’s y I lend to my own children @ 0% in place of student loans; that they r not dischargeable in BK is another neg feature
• Blacks Surpass Whites in Voter Turnout, Census Data Show stks.co/hVAA Helps explain the last election’s results $$
• Colleges Soak Poor US Students While Funneling Aid to Rich stks.co/bTURColleges r funded by donations. Poor people can’t donate.
• What was Gallagher thinking?stks.co/dTHw Difficult 2harm muni bonds w/strong economic purpose/pledges behind them $$ by @munilass
• Time for Americans to Rethink Retirement? stks.co/rBX4 If u have not concluded that u won’t retire, u r not paying attention $$
• Federal Reserve Blows More Bubblesstks.co/eTLo Ron Paul minces no words about the foolishness of current Fed policy $$
• If this was a pill, you’d do anything to get it stks.co/jUPk Simple: have a nurse check on sick elderly at home once a week $$
• Gore Is Romney-Rich With $200 Million After Bush Defeat stks.co/pBWE An utter hypocrite, pursuing his politics 4 financial gain $$
• US Non-Farm Payrolls – The Hidden Weaknesses – not +165k but -376k?stks.co/rBPu A pessimistic alternative view of jobs report $$
• Too Much Asset Inflation stks.co/eTGDTakes on Paul Krugman’s blather about there not being enough inflation, given asset bubble $$
• Everything You Think You Know About the Fed’s Exit Plan May Be Wrongstks.co/rBOX Fed may try 2 tighten &hold down long yields $$
• Reverse Revolving Door: How Corporate Insiders r Rewarded, Leaving Firms For Congress stks.co/gUMN Y the Purple Party rules DC $$

Market Dynamics

• Seth Klarman Warns of False Calm in the US stks.co/jUu8 It is far easier 2b lax in $$ policy than it is to remove laxity#klarman
• Investor Demand Propels Cheap Corporate Debt stks.co/dTcm Note that borrowing is not going on to fund organic growth, generally $$
• Yields on Junk Bonds Reach New Lowonline.wsj.com/article/SB1000… When the average yield on junk bonds drops below 5%, we should run away $$
• Listening to Harry Markowitz drone on about MPT, while I have 2 questions pending. stks.co/aTco Webinar:Arizona CFA socieities $$
• As Sohn gears up, is it open season on Paulson and other hedge funds?stks.co/qBls Hedge funds have a weak liability structure $$
• This graph is 1 of many reasons y I follow the credit cycle: stks.co/iUiM Not perfect, but credit is the heartbeat of commerce $$
• “Putting Dow 15,000 in Perspective” by@ReformedBroker stks.co/qBe9 Round numbers fascinate us; processes behind them r unclear $$
• Spinning single-family home investments into mortgage-backed securities stks.co/iUe9 Better idea than securitizing rents $$
• Current Account: Cheap Junk Leads to Expensive Mistakes stks.co/aTNl A lower coupon on a junk bond means more refinancing risk $$
• Wall Street’s trading businesses turn to survival of the least dead stks.co/gUR6You want 2b the last man standing: monopoly $$
• Rush for gold coins, jewels peters outstks.co/hUcf Looks like the drive to own physical precious metals has finished 4 now $$
• Speedy Robots Still a Wall Street Perilstks.co/gUQe Anytime a strategy gets too large, the non-linearities kick in, w/crisis $$
• Chart of the Day: NYSE Margin Debt Raises Eyebrows stks.co/hUcAAsset/Liability mismatch invites trouble; margin debt goes up $$

Other

• Better Than Buffett, This Investor Made Me Rich for Life stks.co/bTj3@davidweidner ’s tribute to his late mother $$ Love > Money
• If Spending Is the Goal, Try Use-It-Or-Lose-It Gift Cards stks.co/iUpXSeiniorage should b distributed to the people per capita $$
• The Internet Kills More Jobs Than It Creates stks.co/fUm6 It is shrinking the cash/taxable economy, but not the economy. $$
• Today’s CEOs Are Too Timid for the Times stks.co/aTbG The marginal productivity of capital is falling b/c of debt deflation. $$
• David Ferrucci: Life After Watsonstks.co/dTER Creator of IBM’s Watson goes 2Bridgewater 2apply Big Data & AI 2forecasting econ $$

Berkshire Hathaway

• $BRK.A CEOs Spend Quietly, Match Buffett on Heinz Deal stks.co/dTmE FD: +$BRK.B | Clever subsidiary CEOs grow BRK organically $$
• New book teaches children ABCs of Buffett’s Company stks.co/iUpW There would b a Hebrew version, but the Gecko isn’t kosher $$
• I think reinsuring Long Term Care is stupid almost always. Insureds know more than insurer, who know more than reinsurer cc @retheauditors
• BRK knew *far* less than SwissRe about the policies they were reinsuring. On life re, meh, but 2 reinsure LTC takes real knowledge $$ + $BRK
• Buffett’s Ribbing About Swiss Re Dispute Is Fibbing stks.co/bTGH SwissRe took BRK 2 the cleaners FD: + $BRK/B cc@retheauditors $$
• Warren Buffett worries about Fed’s ‘huge experiment’ stks.co/eTFv Reliable: removing accommodation is harder than providing it $$
• Munger: It’s time to break up the banksstks.co/hUcC Munger knows that you should mix deposit insurance w/investment banking $$
• A Lesson From Warren Buffett: Doubt Yourself stks.co/sBPW Many great investment teams encourage disagreement 2 test theses hard $$
• “We Want to Win”:Berkshire Hathaway Ann’l Meeting, 2013 Edition stks.co/gUPpBuffett could help $VZ buy VZ Wireless FD: +$BRK $VOD

Wrong

• @creditplumber My article is about insurance companies; u r taking my words out of context
• Wrong: Fed in 2008 Showed Panic of 1907 Was Excessive stks.co/jV1r If/when the tightening cycle ends & things r fine, then crow $$
• Wrong: Earnings Seen Lifting S&P 500 to Real Record stks.co/bTjd Profit margins would have 2 rise from record highs 2 do this $$
• Wrong: Y I Have Never Said 2Invest With Warren Buffett stks.co/qC02 U don’t tug on Superman’s cape, u don’t spit in the wind… $$
• Unsure: Chanos sees downturn in hard disk drive industry stks.co/iV3L Will b hard to fight all of the free cash flow $$
• Wrong: Larry Fink’s radical retirement recommendation stks.co/fUaf Please do *not* constrain people 2save; failure is an option $$
• @AllenSammey I mean that people should be free 2 take care of current needs rather than being forced to save, even if it means poor when old
• Wrong: House Democrats Seeking Control Eye 17 Split-Ticket Seatsstks.co/gURH This article asserts, it does not prove $$
• Wrong: Bond Buyers See No 1994 Rout Helped by Bernanke Clarity stks.co/qBQsNo one saw 1994 coming either; we r flying blind $$
• Wrong: Crises Before and After the Creation of the Fed (2013-13, 5/6/2013)stks.co/gULU Very premature 2 run a victory lap $$

Replies, Retweets & Comments

• @SarcasticBull I agree.
• That is funny & weird. Very, very weird $$ RT @izakaminska: Meme time:Hitler finds out about negative interest ratesstks.co/fUfN
• @munilass The danger 4 those that seek notable media coverage: media likes bold predictions, b/c they are “newsy.” Kind of a trap $$
• @ScrollnKey 6x prior premium? Thanks. Post-Cyprus I think many people are analyzing how they can preserve their wealth.
• Building a bigger, badder, bubble RT@kmac: RBA statement herebit.ly/12cL7Kk
• @ScrollnKey How is it compared to six months ago?
• +1 Houses r expenses RT@cullenroche: Rarely do I disagree with Rick Ferri, but I do here.rickferri.com/blog/investmen…
• @OffRoadFinance I will accept the premise of the paper once we get through the ultimate tightening cycle, which may not b 4 decades
• Van Hoisington, Lacy Hunt & Gary Shilling would agree RT @carney: …a lot of people making bets on rates rising could get burned badly …
• @ReformedBroker thanks
• @The_Analyst @ReformedBroker There are levels of trust; this one ain’t so high, but it’s a straw blowing in the wind
• @ReformedBroker What was the forward PE on the cyclicals?
• @gmacd18 Too early to say. Japan has been given a temporary free pass from the G20. When more nations try2 weaken their currencies, we’ll c
• RT @volatilitysmile: “The tax deductibility of interest played its part in creating this mess, both in the corporate and mortgage markets.”

FYI

• My week on twitter: 51 retweets received, 1 new listings, 87 new followers, 61 mentions. Via: 20ft.net/p

My view is that there is no such thing as a free lunch, not even for governments or central banks.  Any action taken may have benefits, but also imposes costs, even if those costs are imposed upon others.  So it is for the Fed.  At the beginning of 2008, they had a small, clean, low duration (less than three years) balance sheet on assets.  Today the asset side of their balance sheet is much larger, long duration (over 6 years), negatively convex, and modestly dirty as a result.  Let me give you a few graphs created from the H.4.1 data, obtained via the poorly designed and touchy Data Download Program at the Fed’s H.4.1 portion of their website.

The first graph gives the liabilities of the Fed over the last 5+ years.  The data is taken from table 1 in the H.4.1 release.  You can see the massive expansion of the liabilities, and the way the crisis unfolded.  Currency, and “Other Liabilities & Capital” build “slowly,” i.e. 6.9%/yr and 10.2%/yr, respectively.  The US Treasury steps in with the Supplementary Financing Account at a few points where the Fed could use money deposited there for further expansion of quantitative easing, and leaves when they are no longer needed.

But the real growth comes in the “Everything else” which grew at 37%/yr, and reserve balances with Federal Reserve Banks, which you can calculate an annualized rate of growth for (112%/yr), but a rate doesn’t do justice to the process, because it grew due to the three events — QE1, QE2, and QE3.  The Fed bought assets from various parties, who now deposit at banks inside the Federal Reserve System.

The next two graphs come from Table 2 of the H.4.1 report.  These describe the assets that have a maturity, which comprise over 80% of the Fed’s assets over the time of the graph, and over 90% at present.  First, you can see the growth of the assets bought through QE, Treasuries, Agencies, and MBS.  Second, you see the crisis responses: 1) the loan programs in the US, which explode and trail away and 2) the Central Bank Liquidity Swaps, which explode, trail away, and have come back in a muted form in late 2011 to early 2012.

Perhaps the bigger change is that the Fed’s balance sheet has a lot more long-maturity assets than it used to.  This stems from the quantitative easing they have done, as well as their efforts to play God flatten the Treasury yield curve.

Now, almost all of the assets underlying everything 10 years and shorter pay out their principal all at the end, with no right of prepayment.  For 10 years and longer, at present 70% are Mortgage Backed Securities [MBS].  Those have average lives (weighted average time for payment of principal) considerably shorter than a bond that pays all of its principal at the end for three reasons:

• Principal gets paid down slowly due to normal amortization.
• Prepayments get made when it is advantageous to the borrower, which not only pays off principal today, but shortens the term of the loan, which accelerates the normal repayment of principal.
• The final maturity of the longest loan in the pool is the final maturity of the pool.

So, in terms of actual interest rate sensitivity, the over 10 years bucket is probably only a little more sensitive to change in rates than the 5-10 year bucket.

In normal times, central banks buy only government debt, and keeps the assets relatively short, at longest attempting to mimic the existing supply of government debt.  Think of it this way, purchases/sales of longer debt injects/removes liquidity for longer periods of time.  Staying short maintains flexibility.

Yes, the Fed does not mark its securities or gold to market.  Under most scenarios, it is impossible for a central bank which can issue its own currency to go broke.  Rare exceptions — home soil wars that fail, or political repudiation of the bank, where the government might create a new monetary standard, or closes the bank because of inflation.  (Hey, the central bank has been eliminated twice before.  It could happen again.)

The only real effect is on how much seigniorage the Fed remits to the Treasury, or, if things go bad, how much the Treasury would have to lend/send to the central bank in order to avoid the bad optics of negative capital, perhaps via the Supplemental Financing Account.  This isn’t trivial; when people hear the central bank is “broke,” they will do weird things.  To avoid that, the Fed’s gold will be revalued to market at minimum; hey maybe the Fed at that time will be the vanguard of market value accounting, and revalue everything.  Can you imagine what the replacement cost of the NY Fed building is?  The temple in DC?

Or, maybe the bank would be recapitalized by its member banks, if they are capable of doing so, with the reward being the preferred dividend they receive.

Back to the main point.  What effect will this abnormal monetary policy have in the future?

Scenarios

1) Growth strengthens and inflation remains low.  In this unusual combo, it will be easy for the Fed to collapse its balance sheet, and raise rates.  This is the dream scenario; and I don’t think it is likely.  Look at the global economy; there is a lot of slack capacity.

2) Growth strengthens and inflation rises.  The Fed will likely raise the interest on reserves rate, but not sell bonds.  If they do sell bonds, the market will back up, and their losses will be horrible.  If don’t take the losses, seigniorage could be considerably reduced, or even vanish, as the Fed funds rate rises, but because of the long duration asset portfolio, asset income rises slowly.  This is where the asset-liability mismatch bites.

If the Fed doesn’t raise the interest on reserves rate, I suspect banks would be willing to lend more, leaving fewer excess reserves at the Fed, which could stimulate more inflation. Now, there are some aspects of inflation that remain a mystery — because sometimes inflationary conditions affect assets, rather than goods, I think depending on demographics.

3) Growth weakens and inflation remains low.  This would be the main scenario for QE4, QE5, etc.  We don’t care much about the Fed’s balance sheet until the Fed wants to raise rates, which is mainly a problem in Scenario 2.

4) Growth weakens and inflation rises, i.e. stagflation.  There’s no good set of policy options here. The Fed could engage in further financial repression, keeping short rates low, and let inflation reduce the nominal value of debts.  If it doesn’t run wild, it could play a role in reducing the indebtedness of the whole economy, though again, it will favor debtors over savers.  (As I’ve said before, in a situation like this, or like the Eurozone, all creditors want to be paid back at par on the bad loans that they have made, and it can’t be done.  The pains of bad debt have to go somewhere, where it goes is the argument.)

I’ve kept this deliberately simple, partially because with all of the flows going back and forth, and trying to think of the whole system, rather than effects on just one part, I know that I have glossed over a lot.  I accept that, and I could be dead wrong, as I sometimes am.  Comment as you like, with grace and dignity, and let us grow together in our knowledge.  I’ve been spending some time reading documents at the Fed, trying to understand their mechanisms, but I could always learn more.

Summary

During older times, the end of a Fed loosening cycle would end with the Fed funds rate rising.  In this cycle, it will end with interest of reserves rising, and/or, the sale of bonds, which I find less likely (they will probably be held to maturity, absent some crisis that we can’t imagine, or non-inflationary growth).  But when the tightening cycle comes, the Fed will find that its actions will be far harder to take than when they made the “policy accommodation.”  That has always been true, which is why the Fed during its better times limited the amount of stimulus that it would deliver, and would tighten sooner than it needed to.

Far better to be like McChesney Martin or Volcker, and be tough, letting recessions do their necessary work of eliminating bad debt.  Under Greenspan, and Bernanke to a lesser extent (though he persists in pushing the canard that the Fed was not too loose 2003-2004, ask John Taylor for more), there were many missed opportunities to stop the buildup of bad debts, but the promise of the “Great Moderation” beguiled so many.

Removing policy accommodation is always tougher than imagined, and carries new risks, particularly when new tools have been used.  Bernanke can go to his carefully chosen venues and speak to his carefully chosen audiences, and try to exonerate the Fed from well-deserved blame for their looseness in the late 80s, 90s, and 2000s.  Please, Mr. Bernanke, take some blame there on behalf of the Fed — the credit boom could never have happened without the Fed.  Painting the Fed as blameless is wrong; the “Greenspan put” landed us in an overleveraged bust.

I’m not primarily blaming the Fed for its current conduct; we are still in the aftermath of a lending bust — too much bad mortgage debt, with a government whose budget is out of balance.  (In the bust, there are no good solutions.)  I am blaming the Fed for loose policies 1984-2007, monetary policy should have been a lot tighter on average.  But now we live with the results of prior bad policy, and may the current Fed not compound it.

Postscript

The main difference between this time and the last time I wrote on this is QE3.  What has been the practical impact since then?  The Fed owns more MBS and long maturity Treasuries, financed by more reserve balances at the Fed.

Banks use this cheap funding to finance other assets.  But if they want to make money, the banks have to take credit risk (something the Fed is trying to stimulate), and/or interest rate rate risk (borrow short, lend long, negative convexity, etc).  The longer low rates go on through interest on reserves, the greater the tendency to build up imbalances in the banking system through credit and interest rate risks. 1992-1993 where Fed funds rates were held at 3%, was followed by the residential mortgage backed security market melting down in 1994, not to mention Mexico.  Sub-2% Fed funds rates from 2002 through mid-2004 led to massive overinvestment in residential housing, leading to the present crisis.

Fed tightening cycles often start with a small explosion where short-dated financing for thinly capitalized speculators evaporates, because of the anticipation of higher financing rates.  Fed tightening cycles often end with a large explosion, where a large levered asset class that was better financed, was not financed well-enough.  Think of commercial property in 1989, the stock market in 2000 (particularly the NASDAQ), or housing/banks in 2008.  And yet, that is part of what Fed policy is supposed to do: reveal parts of the economy that are running too hot, so that capital can flow from misallocated areas to areas that are more sound.  At present, my suspicion is that we still have more trouble to come in banking sector.  Here’s why:

We’ve just been through 4.5 years of Fed funds / Interest on reserves being below 0.5% — this is a far greater period of loose policy than that of 1992-1993 and 2002 to mid-2004 together, and there is no apparent end in sight.  This is why I believe that any removal of policy accommodation will prove very difficult.  The greater the amount of policy accommodation, the greater the difficulties of removal.  Watch the fireworks, if/when they try to remove it.  And while you have the opportunity now, take some risk off the table.

Market Dynamics

• Gold, backwardation and the ‘time cost of money’ http://t.co/AauT82dWoE Many players want 2 make $$ off gold financing but conditions shift May 04, 2013
• The sultans of swing http://t.co/rItrBNwPej Short vol pays income & loses in bad times, long vol loses income & wins in bad times $$ May 04, 2013
• Public Pensions Underreporting Liabilities?​ http://t.co/IdEnrkdcXc Milliman is incented 2 make things look good, or they would lose biz $$ May 03, 2013
• It’s Time to Fight the Fed http://t.co/rAnFWIwctu Makes the case that stock market has decoupled from economic reality $$ cc @MicroFundy May 03, 2013
• JPMorgan Caught in Swirl of Regulatory Woes http://t.co/RFuywRTw0s When finance gets complex there r many opportunities 4 mischief $$ $JPM May 03, 2013
• Why is Doug Kass bearish on Buffett’s Berkshire? http://t.co/aCQVRoxEzv My challenge is2ask original questions that have never been asked $$ May 02, 2013
• High-Speed Traders Exploit Loophole http://t.co/aMdRBW72x3 Y can’t the same data feed be provided to all participants? $$ May 02, 2013
• Treasury Is Readying Floating-Rate Debt http://t.co/d2ybajZWWO First new Treasury debt product in years. Wonder what the index will be… $$ May 02, 2013
• Don’t get me wrong, QE is bad policy. Rather than having a short sharp recession that clears the way 4 growth, Fed traps us in malaise $$ May 02, 2013
• When Defensive Stocks Plays Offense http://t.co/aF6MIrTzyQ @ReformedBroker describes effect of $$ flowing in2 low vol stocks, erasing safety May 01, 2013
• Gold Rush From Dubai2Turkey Saps Supply as Premiums Jump http://t.co/2I3a2B5npH True in the US too: http://t.co/AmkUqn639p $$ #takedelivery May 01, 2013
• Canadian banks r largely shielded from effects of housing downturn b/c government-owned Canada Mtge & Housing insures 64% Canadian mtges $$ May 01, 2013
• Meet the man who’s selling Canada short http://t.co/HqStfr9CCe Shorting bank common stocks, & the Loonie. Market prices / rent – high $$ May 01, 2013
• My Edge and the Crossroads http://t.co/KfcVQUCCjc @ReformedBroker gives us a glimpse of how he synthesizes disparate market data $$ May 01, 2013
• The Great Gold Debate Continues, And It’s Serious http://t.co/Xwtar2rlWE As central banks debase fiat $$ ,gold standard gets more attention Apr 29, 2013
• Big Number: Revenues Missing a ‘Beat’ http://t.co/IwTCtzSUZS Only 44% of companies have beaten revenue estimates, rally could slow down $$ Apr 29, 2013
• Gold Climbs as Higher Physical Demand Counters Decline From ETPs http://t.co/2c6WAxC5Yn Negative real cost of carry favors gold here $$ $GLD Apr 29, 2013
• Gold Bears Defy Rally as Goldman Closes Short Wager http://t.co/WRNWV4MayC Demand 4 physical gold continues while ETPs c outflows $$ $GLD Apr 29, 2013
• Market’s $20T Yielding 1% Shows Austerity Mistaken http://t.co/NnEbi5SshB Monetary policy papering over budget deficits aids stagnation $$ Apr 29, 2013
• Stock Analysts Tell All! http://t.co/I4ixQlTBeU Follow the $$ | C how analyst comp affects their actions; hedge funds matter, retail doesn’t Apr 29, 2013
• The Mind of Jeffrey Gundlach http://t.co/aLmhR5gEuB @eddyelfenbein takes us on a brief tour of how Gundlach came 2b a clever contrarian $$ Apr 29, 2013
• Oil demand at lowest level since Oct http://t.co/X6qhQnYOS8 More signs of global sogginess $$ Apr 29, 2013
• When Safe Havens Become Bubbles In Disguise http://t.co/XTPtp4jgGa Good article if you view the investing alternatives @ end skeptically $$ Apr 29, 2013
• Gold Rout for Central Banks Buying Most Since 1964 http://t.co/Zzkd0slUS8 Gold overshot, but negative real cost of carry favors a rise $$ Apr 28, 2013
• Bank-Loan Funds Pose New Risks http://t.co/V0F6rX4TSV This is a minor mania — expected future returns are low to negative. Avoid. Avoid $$ Apr 27, 2013

Other

• Cicadas, the Wedding Crashers Who Can Jitterbug http://t.co/jcnOqeJeY0 Will b going2an outdoor wedding in late May, should be a scream $$ May 03, 2013
• Note, Shodan can be used positively 2 identify security flaws in your own systems $$ http://t.co/PmMo1IWcrp May 03, 2013
• SHODAN – Computer Search Engine http://t.co/5stvEHa6Js Why be the last person on your block w/o ability to unprotected computer networks? $$ May 03, 2013
• NO PIZZA FOR YOU!!! http://t.co/6BxRJtamn2 Mayor Bloomberg runs into his “Personal Slice Limit,” & has to go to another pizza purveyor $$ May 03, 2013
• 5 Twitter tools to Unfollow Inactive Users http://t.co/o467OjGtgA Interesting utilities cc: @carney @reformedbroker $$ May 02, 2013
• Billionaires Flee Havens as Trillions Pursued Offshore http://t.co/Lbmk1sofQC Politicians interested protecting tax havens 4 their owners $$ Apr 29, 2013
• Run or walk: Why science hasn’t determined which exercise is best http://t.co/nFB6BgCPzf Equal expending of calories -> similar results $$ Apr 29, 2013
• Texas Town’s Blast Crater Shows Risk From Patchwork Zoning Laws http://t.co/LHYMiBq3l7 Necessary dirty industry has 2 go somewhere $$ Apr 28, 2013
• Can You Get a Refund From a Bad Hedge Fund? http://t.co/VO3AsaooVO If your hedge fund has lost $$, u may be able 2 rescind your purchase Apr 28, 2013
• Are Bachelor’s Degrees Worth It? http://t.co/AxAWgZmWge Bachelor’s degrees may not b worth it, but community college can bring a return $$ Apr 28, 2013

Rest of the World

• Too-Big-to-Fail Danish Banks Seek Bailout Text in Sifi Law http://t.co/jRJigpfsW1 Overleveraged housing sector & banks challenge Denmark $$ May 03, 2013
• Chinese Way of Doing Business – In Cash We Trust http://t.co/pGEcUDgMTa More corrupt ur nation is, the more u want 2do cash transactions $$ May 02, 2013
• Denmark Exhausts Stimulus Avenues as Housing Losses Persist http://t.co/MjtLztxIeg Denmark is the poster child 4 mtge excess, then Canada $$ May 02, 2013
• Japan household spending surges as Abenomics gains momentum http://t.co/9wehqDMxde Inflation genie comes out of the bottle, what next? $$ May 01, 2013
• Where the Chinese credit is going… http://t.co/lYHxHMCNeZ “financial distress is another reason why credit expansion has not worked well” $$ May 01, 2013
• Why the China Dream Might Be a Mirage http://t.co/hO4YupHbJl Economic change w/o political change will not work much longer in China $$ Apr 30, 2013
• Factories to face headwinds from enlarged TPP http://t.co/dbPXgxlqzr Chinese businesses build factories elsewhere 4 cheap labor $$ #surprise Apr 29, 2013
• European Leaders’ Softening on Austerity May Accelerate http://t.co/VnLL4Npykr Ending austerity is one thing; sharing losses is another $$ Apr 29, 2013
• Silvercrest’s Patrick Chovanec http://t.co/H2RgxU16Kq Excellent interview w/ @prchovanec on the difficulties w/old Chinese growth model $$ Apr 29, 2013
• Japan’s ‘wall of money’ proves elusive for global markets http://t.co/l9d8RVnqks So far, most of the credit inflation recycled in Japan $$ Apr 29, 2013
• The hole the mutual fund industry has dug for itself http://t.co/MEYDxqJgy5 Huge mutual fund fees in Canada shortchange investors $$ #Wow Apr 29, 2013
• Europe: Aging deepens debt-laden region’s economic woes http://t.co/jWqDYPaDSO Economic growth relies on a population not shrinking $$ Apr 29, 2013
• Danes as Most-Indebted in World Resist Credit http://t.co/PPfvdn12tT Denmark is the poster child 4 what happens w/2 much mortgage debt $$ Apr 29, 2013
• Japan’s Abenomics New Export By-Product: Deflation! http://t.co/0YMovyM2Br Growth does not come as more reserves build up in the banks $$ Apr 29, 2013
• Japan’s Yen Unintended Consequences – Fukushima and the Yen – Hara-Kiri http://t.co/TRqa9gjIUs Higher fuel costs begin 2 bite in Japan $$ Apr 29, 2013
• Europeans Are Thinking the Unthinkable: That Debt Defaults Might Make Sense http://t.co/BQdfWoGknw Only if u can stiff foreign creditors $$ Apr 29, 2013

Companies & Industries

• Buffett Bets on Business Insurance ‘Big Time’ http://t.co/tlcMeszcWJ Rounding out underwriting book; more conservative version of $AIG $$ May 03, 2013
• Quite a first day of trading for CST Brands, Inc. Common Stock Finance http://t.co/nFzrkovLWN Spun off from Valero | FD: + $CST & $VLO $$ May 02, 2013

·  Endurance Reports First Quarter 2013 Financial Results http://t.co/VC4x9cUQBh I have never seen an earnings beat this big b4 | FD: long $ENH May 01, 2013

• How Wall Street Defanged Dodd-Frank http://t.co/FzgwKpOvBh Long, worth a read, describes financial industry’s strategy 2 kill Dodd-Frank $$ May 01, 2013
• I don’t like D-F b/c it’s weak in areas that matter, & strong in areas that don’t matter. &, study committees shouldn’t have lotsa power $$ May 01, 2013
• I was serious on that last comment. Actuaries serve as honest, semi-neutral advisors to the regulators, & have a significant ethics code $$ May 01, 2013
• That makes insurance regulation significantly more brainy than banking regulation. Also tougher, b/c harder 2 co-opt 50 state regulators $$ May 01, 2013
• New Ajit Jain Signals in the Berkshire Hathaway Tea Leaves http://t.co/k5sikoCKGM Is Ajit preparing 2b CEO or retire? FD: long $BRK/B $$ Apr 29, 2013
• Apple doesn’t deserve top credit rating: Fitch http://t.co/ardXsKVuoB Problem is that the $$ is overseas & the debts r in the US $AAPL Apr 29, 2013
• Tech Stocks Are Cheapest in Seven Years http://t.co/InmrCkKmVw Question should b how sustainable revenue streams r in a soggy economy $$ Apr 29, 2013
• States Object to ‘Payday’ Lawsuit Lending http://t.co/ZL7vvCz3GQ This looks like a good market 2 avoid; 2 much risk from legal changes $$ Apr 29, 2013

US Economic Policy

• Deflation, not inflation, could bedevil markets http://t.co/seyOKKmSZV Watch global weakness weigh on the US, also inventory drawdowns $$ May 03, 2013
• US Economy : 6 Critical Indicators of Potential Recession Flashing RED http://t.co/32jNZ3SNrC A stroll through the bearish economic view $$ May 03, 2013
• A possible step towards numerical guidance for QE? http://t.co/fjNXmEMPPk Volume/Clarity of Fed communications doesn’t matter $$ #deadend May 03, 2013
• Fed weighs tighter cap on bank leverage http://t.co/oLiw2XZdqf Maybe adapt well-designed RBC formula life insurance industry uses $$ #noway May 01, 2013
• Obama to Name Congressman Mel Watt to Housing-Finance Post http://t.co/LClhqyLnij This seems like a mistake; Zandi would have been better $$ May 01, 2013
• There Will Be Haircuts http://t.co/uGuDijhW7d @pimco gives 4 ways govt will fleece us: negative real rates, inflation, default, cap ctrls $$ May 01, 2013
• Roubini: Money supplies holding back economy, but run could last 2 years http://t.co/kaoOK1Nd41 Monetary policy is weak in a liquidity trap Apr 30, 2013
• Powerful Union, Upstart Battle Over Shrinking Pie http://t.co/z5N7DME5sT Another sign that unions are a thing of the past. Good riddance $$ Apr 30, 2013
• Ebbing Inflation Means More Easy Money http://t.co/32RIuQeX1f Fed’s new job is 2 push the marginal productivity of capital to zero $$ Apr 29, 2013
• Wall Street is full of ‘crooks,’ Jeffrey Sachs told Philadelphia Fed audience http://t.co/V8LhcyX8qg Evidence would help, many assertions $$ Apr 29, 2013
• US Growth comes Mostly from Inventories http://t.co/WJnRbUGfiJ The current expansion is not robust, IMO will not persist at rates >1.5% $$ Apr 29, 2013
• The Federal Financial Triangle http://t.co/tc8vEvK7QP The Fed, the Treasury, & GSEs have mispriced financial risk -> deeper US deficits $$ Apr 29, 2013
• Are You Ready for the New Investment Tax? http://t.co/yDSIkClF5H Make a lot of many from investments? This tax could surprise u in 2014 $$ Apr 28, 2013

Fixed Income

• DoubleLine’s Gundlach seeks more risk in new closed-end fund http://t.co/EaBoKhCGCv I like the strategy, wonder when will get 2 crowded $$ Apr 29, 2013
• Fitch US High Yield Default Insight — March 2013 http://t.co/8KnB3v1uN7 Lots of good data on the stretched junk bond market $$ $HYG $JNK Apr 29, 2013
• Junk Bond Daily Yield Snapshot: 5.289% (Yes, Another Record) http://t.co/1GiDYWac74 Further price gains should b incremental due 2 calls $$ Apr 29, 2013

At the Bloomberg Washington Summit

• Bloomberg Washington Summit http://t.co/t1pgPaRBRg The videos from the event can be found here. 5.5 hours of video #BBwash $$ May 03, 2013
• At the Bloomberg Washington Summit, Part 5 http://t.co/k3a3maTPST Alan Krueger (Chmn Council of Economic Advisers) & Other Stuff #BBwash $$ May 03, 2013
• At the Bloomberg Washington Summit, Part 4 http://t.co/lQVo1drGbc Economics, US Postal Service, Lunch & China #BBwash $$ May 03, 2013
• At the Bloomberg Washington Summit, Part 3 http://t.co/i3KmSxbKmz Infrastructure, Corp Tax Reform, Dodd-Frank, & Garry Gensler $$ #BBwash May 03, 2013
• At the Bloomberg Washington Summit, Part 2 http://t.co/6m43ZgCm8X Unemployment, Healthcare Spending, & the State of the states $$ #BBwash May 03, 2013
• At the Bloomberg Washington Summit, Part 1 http://t.co/Rjgb8zY60u US Budget, Sequester, dysfunctional politics & economics #BBwash $$ May 03, 2013
• Back home from #BBwash, watch for a summary post later tonight at http://t.co/HQR2bRfS06 Thanks 2 @bgov, @BoozAllen, @Visa, @Bloomberg Apr 30, 2013
• Final panel optimistic about tax reform over the next 2 years Prob over 50%. Can’t say I’m that optimistic #BBwash Apr 30, 2013
• John Rogers of the CFA institute asks Q on differential taxation of dividends/interest, of course panel goes 4 ending dbl taxation #BBwash Apr 30, 2013
• Take back my last tweet. Panel agrees on every corporate tax cut, but shies away from anything that might affect their interest #BBwash Apr 30, 2013
• Final Panel at #BBWash on corporate tax reform, the significant disagreements of panelists indicate y reform will b tough Apr 30, 2013
• Last tweet made 2 counter what the VA Governor said about his budget being balanced, along with the rest of the states #BBwash Apr 30, 2013
• States only balance on a cash basis. Various pension, healthcare and other liabilities r not fully funded all states in the Union #BBWash Apr 30, 2013
• VA Gov McDonnell speaking of the US “Don’t you know we are broke?” Then goes on 2 talk about our unfunded public benefit liabilities #BBwash Apr 30, 2013
• VA Governor makes case that sequestration cuts r unfair b/c they disproportionately affect VA. But VA benefited when spending rose #BBwash Apr 30, 2013
• #hello still waiting on sequestration’s effect on Virginia #BBWash Apr 30, 2013
• Waiting 2 get 2 the main topic w/the VA governor on sequestration, interviewer still grilling on perceived conflict of interest #BBwash Apr 30, 2013
• @cate_long Cool, if you were here, I would say “hi.” Instead, I type “hi.” Apr 30, 2013
• Gov McDonnell of VA speaking @ #BBWash about sequestration, Instead, gets grilled by interviewer on perceived conflicts of interest Apr 30, 2013
• @cate_long Are you here at BBWash or watching on television? Apr 30, 2013
• Ravitch says the threat of BK can make all of the parties focus; biggest state risk is confiscatory tax levels, not reduced benefits #BBwash Apr 30, 2013
• Rendell makes case 4 telling truth & shared sacrifice. Ravitch: Muni Bankruptcy is an admission that democracy has failed #BBWash Apr 30, 2013
• RT @cate_long: Rendell “If city goes bankrupt cant borrow again” BBG’s Glasgall “Orange County went bankrupt and can still borrow” #bbwash Apr 30, 2013
• Moderator makes point about the frenzy in the junk muni market, Ravitch says cities & states have no choice but 2 have access 2 mkts #BBWash Apr 30, 2013
• Ed Rendell makes case 4 a single payer health system. Same point can be made for no health insurance, which would lower costs more #BBWash Apr 30, 2013
• Pension & OPEB panel @ #BBwash is making the case that we are in deep trouble, w/little way out Apr 30, 2013
• @cate_long Thanks, useful… Apr 30, 2013
• @cate_long Thanks, just puzzled by the moderators comments on OPEB at this panel at #BBwash Apr 30, 2013
• @cate_long Cate, most corporations don’t reserve OPEB, b/c they can walk away from it, Governments can’t do the same? Apr 30, 2013
• @CescaAntonelli Could be, I think she is the leading candidate as well, but I don’t like her seemingly reflexive dovishness Apr 30, 2013
• Never happened b4 2 VC RT @CescaAntonelli: Yellen has right of first refusal at Fed, Meyer says at @BBGlink #bbwash http://t.co/Qwn6MvlmVP Apr 30, 2013
• Krueger suggests that people have to adjust their definition of fairness. Trouble is there is no fairness, it is all based on trade #BBwash Apr 30, 2013
• @tomkeene brings up corporate tax code given $AAPL bond deal, Krueger says a deal can be done if the base can b broadened #BBWash #notlikely Apr 30, 2013
• Krueger goes on talking about inequality, has few solutions; education is slow if it works, throwing $$ @ it hasn’t worked recently #BBWash Apr 30, 2013
• Krueger spending a lot of time criticizing the sequester, suggests there is a way to do smart cuts. When have we ever done that? #BBWash Apr 30, 2013
• Krueger suggests that fixing infrastructure has the highest payoff. Problem: haven’t *ever* done it, & the budget 2 deep in deficit #BBwash Apr 30, 2013
• Kreuger implies Stockman’s opinions r not worthy of consideration #BBWash Apr 30, 2013
• Delicious food & good conversation @ #BBwash lunch. Sat w/ @tomkeene & @steve_hanke Apr 30, 2013
• @pattersonscott In my opinion, that comes down to misregulation of inv banks & AIG , they should have regulated derivs as if on B/S #bbwash Apr 30, 2013
• @pattersonscott & I argued 4 ring-fencing the derivative counterparties, & let the holding companies fail, but had 2 have mtges fail 1st Apr 30, 2013
• @pattersonscott derivatives did crater some companies taking one side of the mortgage trade, but mortgages had to go bad first Apr 30, 2013
• @pattersonscott for every winner on a derivative, there is a loser. nets to zero — on the original loan there are real loan losses #BBwash Apr 30, 2013
• Appreciate CFTC Chairman Gensler’s sense of humor, even if it burns time… #BBwash Apr 30, 2013
• #BBwash Gensler says that we will move away from Libor. Me: Any benchmark not based on trades will b gamed, as well as those based on trades Apr 30, 2013
• @pattersonscott Some were tied to the mortgages, but the real losses came from the mortgage underwriting, which came first #bbwash Apr 30, 2013
• Utterly mistaken RT @cedwaddell: #BBwash Gary Gensler, chair of CFTC, says 8 million jobs lost since 2008 due to unregulated swaps market Apr 30, 2013
• Gensler traces the crisis to the derivatives markets when it was really due to bad mortgage lending #BBwash #FTL Apr 30, 2013
• @PeterCCook Ask him why derivatives are not regulated like insurance, and require insurable interest #BBwash Apr 30, 2013
• @PeterCCook Ask him why derivatives are not regulated like insurance, and require insurable interest Apr 30, 2013
• RT @cate_long: “I believe that the role of the Post Office is universal service and overnight delivery is part of that” Sen Cardin #bbwash Apr 30, 2013
• USPS CFO thinks there is a long-term solution, needs regulatory changes, allowing delivery of alcohol, etc. wants more independence #BBwash Apr 30, 2013
• CFO of $UPS talks about two scenarios for rises in interest rates: good: improvement in productivity, bad: stagflation #BBwash #duh Apr 30, 2013
• If business were already agreed on tax policy, tax policy would have changed already #BBwash Apr 30, 2013
• Mistaken concept that the business community has 1 clear goal in tax policy, one man’s tax expenditure is more valuable than others #BBwash Apr 30, 2013
• Eclectic panel Sen. Ben Cardin (D-Maryland), Kurt Kuehn, CFO UPS & Joseph Corbett, CFO & EVP, USPS — don’t think this goes far #BBwash Apr 30, 2013
• PA gov Corbett leaves benefits/fees of fracking to local governments where it is needed #BBwash Apr 30, 2013
• Corbett wants to be the “Texas” of Natgas, TX ain’t what it used 2b #BBwash Apr 30, 2013
• 1 in 6 people in PA on Medicaid would b 1 in 4 under Obamacare, according2 Tom Corbett, PA 2nd highest in Medicaid b/c optional covs #BBWash Apr 30, 2013
• @fbonacci @incakolanews @felixsalmon Easy come, easy go, little high, little low… nothing really matters, anyone can see… Apr 30, 2013
• At #BBwash , Tom Corbett talks about selling the state liquor stores, when it barely moves the needle in terms of the NPV of the liabs Apr 30, 2013
• John Rogers of the CFA Institute asks Engle why we should invest in a new bubble created by the Federal Reserve? Engle waffles. #BBWash Apr 30, 2013
• @incakolanews Galileo, Galileo, will you let me go? Apr 30, 2013
• Engle correct in noting that the tea party has made washington a 3-party game, which creates a complex blocked situation #BBWash Apr 30, 2013
• Gotta give Scaramucci credit for getting on this #BBWash panel, he has said some notably odd things Apr 30, 2013
• Federal Reserve less independent since Dodd-Frank, & not in a good way, it supports the US financial sector & government #BBwash Apr 30, 2013
• Pitt: if I were a college professor, I would give Congress an “F” 4 Dodd-Frank #BBWash Apr 30, 2013
• Humorous panel w/Harvey Pitt, Robert Engle, and Anthony Scaramucci — Engle is clueless, thinking Fed policy can b easily removed #BBwash Apr 30, 2013
• Wargaming in economics is impossible; there is no way to predict next economic crisis, writ small. Overlevered systems r risky #BBwash $$ Apr 30, 2013
• Too much discussion over bailing out the system. Too little discussion over how to limit overall debt and debt complexity #BBWash $$ Apr 30, 2013
• Good discussion @ #BBwash where they describe how more complex laws & regulations make markets more complex rather than clear $$ #worse Apr 30, 2013
• Panel on Dodd-Frank arguing about bank capital, arguing that higher capital isn’t so bad. #BBwash $$ That said, liquidity is more important Apr 30, 2013
• Panel on Dodd-Frank arguing about bank capital, arguing that higher capital isn’t so bad. #BBwah $$ That said, liquidity is more important Apr 30, 2013
• Really disappointed in the lack of reasoning from Larry Meyer, not disappointed in Chris van Hollen, nothing to expect there $$ #BBwash Apr 30, 2013
• At the Bloomberg Washington Summit: definitely a liberal bias to first two panels, saying that the current deficits must continue #BBWash $$ Apr 30, 2013

Wrong

• Wrong: Fed Seen Slowing Stimulus With QE Cut by End of This Year http://t.co/h2ckgPDc3e Sorry, but the Fed will increase its QE in 2013 $$ May 02, 2013
• Wrong: Europe’s New Path: Austerity with a Human Face http://t.co/HXzbWFx2v9 Real austerity hasn’t been tried yet, only debt monetization $$ Apr 29, 2013
• Wrong: ‘Peak Fossil Fuels’ Is Closer Than You Think: BNEF – Bloomberg http://t.co/XoKYF1qoEW No way; governments of world won’t cooperate $$ Apr 28, 2013
• New York Times Moves Toward Netflix Model as Ads Tumble http://t.co/rHrbxxAe8e I think $NYT is eventually a zero as the internet eats it $$ Apr 28, 2013

Replies, Retweets & Comments

• 5.5% annualized growth $$ RT @EddyElfenbein: Nominal S&P 500 earnings are expected to be roughly double this year compared with 2000 May 03, 2013
• @EddyElfenbein http://t.co/FvBzLDzuGI On the IBM Industrial Average, where I propose the News Corp Industrial Average May 03, 2013
• @H_X_S Thanks, Janetter looks interesting. May 03, 2013
• Liked the old Tweetdeck better $$ RT @danprimack: Does Twitter know that some of us probably would have paid to keep tweetdeck alive? May 03, 2013
• @AndreCimini It’s all a part of the current “race to the bottom” monetary policy game. Trying to figure out how this one blows up May 03, 2013
• @fsmontenegro Thanks, missed that, relied on a friend May 03, 2013
• ‘ @JayLeonard No doubt, & realize these are marginal rates, which few pay because of the Swiss cheese nature of the corp tax code $$ May 03, 2013
• @alestuma I get that — that’s y some investors co-locate servers at the exchanges. But not getting the same feed initially is different May 02, 2013
• ‘ @WarrenBuffett Good 4u, Mr. Buffett. We all await your wise counsel, especially me, a student of yours & a shareholder. $$ FD: + $BRK.B May 02, 2013
• @TheStalwart I don’t think much happened overnight, but I did publish a five piece set of articles on the Bloomberg Washington Summit May 02, 2013
• @notgunnamatta Yes May 02, 2013
• @dpinsen There r no good solutions in the bust. The only sane thing is to try to prevent booms from getting out of control, a la Martin $$ May 02, 2013
• @CardiffGarcia If I had the data, would be interesting to try a parabolic fit, & look at the coefficients, looks like it would flop May 01, 2013
• @rubicon59 @PlanMaestro @SajKarsan I think I was the only one that did public analyses of the 3 Maiden Lane trusts, but I was wrong there 2 May 01, 2013
• @rubicon59 @PlanMaestro @SajKarsan Yes, I did; I presumed that the really junky assets that they had would default far more than they did May 01, 2013
• Cool $$ RT @jasonzweigwsj: our great Fed-speak comparison machine: see how the FOMC’s statements change over time http://t.co/CubyVqQ6KL May 01, 2013
• @Matthew_C_Klein Next in line r colonialists who exploited Belgium/Congo, Germany/SW Africa, Spanish in the new World, Black Slavery $$ May 01, 2013
• @Matthew_C_Klein Historically, it is fascinating how many attempts at forced collectivization led to massive deaths, Ukraine, Cambodia $$ May 01, 2013
• His rhetoric usually leaves me cold $$ RT @TheStalwart: Some folks asking who, exactly, Krugman has persuaded. Fair question. May 01, 2013
• @Matthew_C_Klein I’ve seen higher estimates on the deaths c book “Hungry Ghosts;” the statistics r hard 2 come by; most don’t want 2 talk $$ May 01, 2013
• “Any anomaly can be overfished. The low volatility anomaly was one of the more durable ones, but…” — David_Merkel http://t.co/syjdr5nHDU May 01, 2013
• @CFAevents Honored that you would mention me. Thanks. Osband’s book was one of the best I have read on the topic. May 01, 2013
• @djoalpha11 @tomkeene What flash crash? Apr 30, 2013
• @csissoko But most of the issuance of bad mtges were prime, not subprime — the issuance of Fannie & Freddie were more responsible 4 crisis Apr 30, 2013
• @csissoko Yes, the lust for yield drove willingness to enter into CDS, taking risk, receiving premium, which led some issuance of bad mtges Apr 30, 2013
• @Nonrelatedsense I read otherwise in an article yesterday… but thanks for the correction Apr 30, 2013
• Apologies, you are right RT @Nonrelatedsense: @AlephBlog DSL is absolutely a Closed End Fund. Prospectus: http://t.co/vXcUpTEZi9 Apr 30, 2013
• @Nonrelatedsense It’s an ETF, not a CEF Apr 30, 2013
• Also leads 2 creation of more shares, grows the fund $$ RT @vzban123: Per doubline website, IPO price is almost 5% premium to NAV. Apr 29, 2013
• Yeh, saw that. Just another symptom of yield lust. $$ RT @vzban123: @AlephBlog Per doubline website, IPO price is almost 5% premium to NAV Apr 29, 2013
• It’s a great job if you have the skills to get it; it’s even better if you have business skills as well… http://t.co/ji5jgSLPA9 Apr 29, 2013
• @aneiro Any stats on what %age of the market is trading to call, rather than maturity? Apr 29, 2013
• @codywillard I suspect there r a lot of games going on w/ETPs, certainly in Europe, regulation is tighter here, collateral issues & arb Apr 29, 2013
• @codywillard I was against the bailouts dear friend; what I puzzle over is how many games r *presently* being played on Wall Street Apr 29, 2013
• @EddyElfenbein model 2 minimizes the sum of squared ratios between actual & modeled prices. Model 2 more reliable, IMO, though fits worse Apr 29, 2013
• @EddyElfenbein model 1 minimizes the sum of squared differences between actual & modeled prices. Apr 29, 2013
• @Jesse_Livermore Emerging Market Government Bonds, maybe Long Treasuries — it is a deflationary environment, kinda, maybe, sorta, meh $$ Apr 27, 2013

FWIW

• My week on twitter: 47 retweets received, 48 new followers, 89 mentions. Via: http://t.co/cPSEMLXpb8 May 02, 2013