It was late 1993, and I knew that we could make a lot of money if I sold floating-rate Guaranteed Investment Contracts.  Let me quote an earlier piece:

My goal as an actuarial businessman was to make profits with modest risk for my ultimate owners, who were the mutual policyholders.  Once I faced a situation where there might be easy profits — writing floating rate GICs.  So, I went to my models and tried to figure out how we could make money safely while our interest rates would shift every three months.  I came to the conclusion that there was no safe way to do so, and so I walked into the office of my boss and told him so.  He surprised me by supporting my thesis, and in his usual back-of-the-envelope way, explained to me in a few minutes why it had to be so.

A few weeks later, he informed me that an actuary from Goldman Sachs (yes), would be dropping by to tell about one of their new derivative contracts that would enable us to write floating rate GICs profitably.  The meeting day came, and I validated the expectations of my boss.  The year was 1993.  I asked the actuary from Goldman what happens if the yield curve inverts.  He answered honestly, “This strategy blows up when the yield curve inverts.”  Score a small victory for me.  I gave myself points for avoiding trendy bad ideas.  Over the next twelve months, two major insurers and one investment bank would announce billion-dollar blowups from following that strategy.

After the blowups, I went back to the buyers of floating-rate GICs, and asked them if they would accept a lower spread over LIBOR.  The response was a firm “no.”  So much for that market.

Those few players in that market had mispriced the risk.  Is it any surprise that they got a lot of volume?

Here’s another example:

Two years after that, I was at the Society of Actuaries annual meeting, where I met a well-known actuary who had worked inside the corporate actuarial area of the Equitable during the critical years.  I.e., he watched and analyzed the assets and the liabilities as they arose.  The conversation went something like this:

David: What was it like working inside the Equitable during that period of fast growth?

Corporate Actuary: It was amazing.  It took everything we could do to stay on top of it, and still we fell behind.

D: Didn’t you think that perhaps you were offering guaranteed rates that were too attractive?

C: We wondered about it, but with money coming in, everyone felt great about the growth.  We simply had to find ways to productively deploy all of the cash flow.

D: But wait.  Didn’t the investment department have a difficult time investing all of the proceeds?  With that much money coming in, the likelihood of making severe errors would be high.

C: Were you a bug on the wall at our meetings?  Yes, that is exactly what happened.  The money came in faster than we could invest it prudently.

D: Wow.  I thought that was what happened, but it amazes me to hear it confirmed.

They offered free options, and surprise, investors took them up on them.  They couldn’t make enough to fund the promises, and undertook a risky strategy in the late 80s that I called “double or nothing.”  The strategy failed, and they almost went broke, except that AXA bought them, pumped in a little capital, and then the real estate market turned.

What’s my point here?  Twofold: one, rapid growth in financial institutions is rarely a good thing; it usually means that an error has been made.  Two, there is a barrier in many financial decisions, where responsible parties are loath to cry foul until it is way past obvious, because the cost of being wrong is high.

Long Term Capital Management became large relative to the markets that they “arbitraged.”  Anytime you can feel yourself moving the market, it is time to stop.

There was a correlation crisis in the CDO market in 2005.  For those with access to RealMoney, I wrote about it here.  Some quants with clever ideas, much like the current JPM fiasco, thought that they could hedge mezzanine against subordinated.  True when the trade is small, wrong when the trade is big.

Beyond that, we have the brain-dead example of AIG.  They dominated the market for AAA subprime mortgage insurance.  It was free money, until it wasn’t.  If you have a large share of a market where there are no barriers to entry, you should stop and ask why you are the only smart one.

The problem with becoming large relative to the market, is that you begin distorting the price signals of the market.  If you have a large long position and the price starts to fall, it is easy to justify purchases, because your internal model indicates that it is cheap.  But every model has weaknesses, consider the examples listed above.  Anytime you get a large fraction of the market’s volume, you should stop, and re-evaluate.  You’re probably doing something wrong.

Markets by their nature invite diversity, and do not admit anyone to dominate them except under abnormal circumstances.

So, if you find yourself growing large relative to your market, calm down, and re-evaluate your positions, before they get large enough to bite you.

May is a tough month for me, because I have to submit reports for the nonprofits that I work with, and this year is worse, because I have a moderate injury that I need  to see a doctor about, but can’t until next week, because of the schedule.

But I do want to say a few things about the JP Morgan news.  First, JP Morgan should be broken up, whether state by state, or by Federal reserve district, with an investment bank spun off as well.

Second, after we have been through 2008, why do we care about a piddling $2Billion+ loss?  JP Morgan’s balance sheet can handle far more than that, and come back kicking.

Third, there are a lot of people who are mindlessly asking for the reinstatement of Glass-Stegall, without realizing that the repeal had little to do with the crisis.  Most of the losses at banks sprang from bad lending on residential mortgages, not trading.  Also, if regulators had been more fastidious about asset quality and leverage, it also might not have happened, but who dares to oppose a boom?

My point of view is that states are better at regulating financials than the federal government.  It is far harder to co-opt 50 regulators than one.

Decentralized government, where power is limited, is far harder to corrupt than centralized governments like India, China, Russia, Greece, etc.

Fourth, when a bank engages in a complex trade, and is a large portion of the market, it is asking for trouble.  Companies have problems when they become the market for financial promises.  Markets work well when there are a large number of players, with no one dominating.  Financial markets with a dominant player have a problem because it becomes difficult for the dominant player to discern the right price.  They don’t want to set it too low, because it makes their own financials look bad.  That skewed incentive can harm economic truth, and the company as well.

Being a monopolist or an oligopolist is not as easy as the textbooks would say, at least for long-term transactions.  When there is no free market to validate your pricing against, how does an oligopolist come up with an economic price?  It can’t do so.

We get on shaky ground when anyone becomes dominant in a market of promises.  Initially the accounting is flexible enough that losses do not occur on bad lending, but eventually the bad/negative net cash flows crush the firm.  This is why I never invest in novel financial companies.

This stretches from August 2010 to October 2010:

The Education of a Corporate Bond Manager, Part VII

On the value of credit analysts.

The Education of a Corporate Bond Manager, Part VIII

On price discovery in dealer markets, and auctions gone wrong.  I never knew that I could haggle so well.

The Education of a Corporate Bond Manager, Part IX

On the vagaries of bulge-bracket brokers, and how a good reputation helps on Wall Street.

The Education of a Corporate Bond Manager, Part X

On how we almost did a CDO, and how it fell apart.  Also, how to make money in the bond market when you reach the risk limits.

The Education of a Corporate Bond Manager, Part XI

On my biggest mistakes in managing bonds.  Also, on aggressive life insurance managements.

The Education of a Corporate Bond Manager, Part XII (The End)

On bond technical analysis, and how to deal with a rapidly growing client.   Also, the end of my time as a bond manager, and the parties that came as a result.   Oh, and putting your subordinates first.

Queasing over Quantitative Easing

Queasing over Quantitative Easing, Redux

Queasing over Quantitative Easing, Part III

Queasing over Quantitative Easing, Part IV

Queasing over Quantitative Easing, Part V

Queasing over Quantitative Easing, Part VI

The problems with the Fed’s seemingly “free lunch”strategy.  Pushes up asset prices and commodity prices, benefiting the rich versus the poor.

The Economic Geography of Publicly-Traded Companies in the United States by Sector

The Economic Geography of Publicly-Traded Companies in the United States by Sector (II)

Shows what US states have diversified vs concentrated economies by sector, and what states dominate each sector.

Portfolio Rule One

Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.

Portfolio Rule Two

Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.

Portfolio Rule Three

Stick with higher quality companies for a given industry.

Portfolio Rule Four

Purchase companies appropriately sized to serve their market niches.

Portfolio Rule Five

Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.

Portfolio Rule Six

Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.

Portfolio Rule Seven

Of Investment Earnings Assumptions and Century Bonds

If we could turn back the clock 65 or so years and set up a more conservative method of accounting for pension liabilities, we would be much better off today.

Who Dares Oppose a Boom?

This piece won a small prize, and in turn, I received three speaking engagements.

Fairness Versus Economics

Fairness Versus Economics (2)

People care more about fairness than improving their own economic/social position.

Earnings Estimates as a Control Mechanism, Flawed as they are

Earnings Estimates as a Control Mechanism, Flawed as they are, Redux

Earnings estimates have their problems, but they exist to give us a flawed method of estimating the future performance of companies.

-==-=-=-=-=–=-=

That’s all for now.  Never thought I would do so many long series when I started blogging.

Buffett made a few comments over the weekend that I thought were significant.

Warren Buffett, who built Berkshire Hathaway Inc. (BRK/A) with stock picks before focusing on takeovers, said he recently opted against a $22 billion acquisition because he didn’t want to sell investments in marketable securities. (Article here)

and

Berkshire Hathaway Inc is adding to its shareholdings of two U.S. companies amid a market dip, billionaire investor Warren Buffett said on Monday. (Article here)

and

Mr. Buffett said he and Mr. Munger “have nothing against” commercial insurance and pointed out that they’ve expanded in the medical malpractice field. “If we could find a quality company in commercial lines… we would buy it in an instant,” he said.

…

Another analyst question prompted Buffett to discuss how he values Berkshire’s non-insurance operations. Rubalcava was excited by the answer, in which Buffett said he’d look to buy similar businesses for nine to 10 times earnings. (Article here)

1) On the first point, he does not want to sell marketable securities is quite a statement.  It means he expects more return off of public securities than whatever the target might have been.   Given that he would only be liquidating $5 billion of securities to maintain the $20 billion buffer, it either could not have been that good of a deal, or Buffett has a high view of his current public securities portfolio.

But I sat down and thought about what Buffett might have wanted to acquire.  It could have been a private company; I have no data on that.  What if it were a public company and one with a low P/E and decent prospects, what could it be?

Well, the current market cap would have to be between $15-20 Billion, and so I came up with the following tickers:

PPG APD NOC RTN VFC BRFS PSX DFS AON ALL CME TMO BDX RCI TU PSO RUK WM ETN AEP

There are some with large moats: PPG, APD, NOC, RTN (Chemcials and Defense) AON, CME unique businesses, hard to challenge.  Other moats: VFC, TMO, BDX, RCI, TU, PSO, RUK, WM, ETN

Pipelines, which fit into other BRK subs: PSX

Free cash flow generators: PSX and DFS

Cheap providers of float: ALL  (Of course there would be issues merging Allstate and GEICO, if you merge them at all.  You could keep both systems whole, you could sell off Allstate’s Life companies, or you could merge them into existing BRK insurance subs.  Me?  I would sell the life subs,  and analyze whether having an agency force had value.  My guess would be no, and I would spread the Allstate inforce block onto the current GEICO support system after a year or two.)

Adds to the utility portfolio: AEP

I’m not saying BRK should buy any of these companies, but they seem to be reasonable possibilities for BRK to buy.

2) So BRK is buying two companies that they already own.  What could they be?  My two best guesses are General Dynamics [GD] and DirectTV [DTV].   BRK bought them in the last reported quarter and the price hasn’t moved much.  Other possibilities include: WFC, SNY BK, INTC, USB, CVS, IBM, DVA, V, VRSK, and LMCA.

3) If BRK really wants to get into commercial insurance at a cheap price there is an easy choice — ACE.  Low P/E, P/B, reasonable reserving.  Yes, it is in Bermuda, but that offers BRK other ways to lower its tax bill, which Warren Buffett aggressively pursues.  He never pays a dime more than he has to!

-=-=-=-==-=-=-=-=-=-=-=–=-==-=-=-

These are just my musings, don’t give them more emphasis than that.  Buffett offers a few crumbs at his buffet, and I make an effort to offer ideas consistent with what little he said.  I am very likely to be wrong, but I like a lot of the ideas here.

Full disclosure: long AEP, PSX & INTC for myself and clients

I’m going to do something different to start this post.  I’m going to highlight those that disagreed with the last post.  Thanks for disagreeing, because it makes this post better.

Response 1:

It’s all well meaning but it’s likely to fail in practice, with unintended consequences and nasty corner cases where you have to reintroduce complexity.

For example imagine a taxpayer with one, liquid but volatile asset, which is essentially long term flat. It goes up +X in one year, -X the next, etc. So the taxpayer has essentially zero income (amortised) but must pay on the +X on the positive years. The no deferral rule prevents creating an offsetting tax credit on -X years, so he’s either paying tax on non-existing income, no good (>100% tax rate), or requires a refund on the down years, which creates a new class of enforcement problems that didn’t exist before (people creating fake losses to get actual cash, when they could only get tax credits before).

Another example is a taxpayer with a single illiquid asset, say a small business owner who owns nothing else, and the business is with tight cash flow, or a disabled/elderly person who owns their house outright but nothing else and who lives on welfare. If the business/house valuation goes up, these guys have a tax bill. So now they must raise money out of an illiquid asset just to pay tax, and as it’s illiquid and they don’t have cash flow they might have to either pay distressed credit rates on their tax borrowing, or just sell the business/house which is a bit of a harsh punishment for a tax-cashflow issue.

Income is intrinsically a tricky problem. You can clean up the crud from time to time, indeed you must as some nonsensical rules will inevitably accumulate, but a simple tax idyll is unfortunately not realistic I believe.

Response 2:

I respectfully don’t think so. The example of the taxpayer with the volatile asset could also be compared with a person who pays income taxes on a salary. If they lose their job next year (volatility) they would have paid too much this year by your model. The issue is that it seems less fair to tax work (salaries) at a higher rate than wealth (dividend income). Perhaps it could be separated from capital gains – which isn’t real income until it is sold at a profit. It could also be argued that salaried people contribute more to the economy than dividend income does. I’m not a job creator if I go sell a $100K of stock on the NY Stock Exchange – what have I added to the economy?

Response 3:

This does not strike me as a good idea. It isn’t practical to tax appreciation of illiquid untraded assets, and the overhead and intrusion involved in doing something like this fairly would be tremendous.

I don’t see why we should be so reliant on taxing income anyway. Pigovian taxes would be better for the economy, and consumption taxes would be easier to levy. Even a Henry George style single-tax would seem preferable to trying to impute income to people as a result of asset fluctuations.

I like my readers.  Why do I like my readers? One, they are bright people, even if I might disagree with them.  Second, they are relatively polite.  I was walking through Times Square with another prominent blogger, and he said to me, “When I see the comments at your blog, David, you have nice commenters, whereas those at my blog are not.”  I said to him that there were three factors in play:

• He has more readers than I do.
• His format did not allow for filtering.  I filter, but rarely.    Also, it’s harder to comment on my site, and that’s a feature, not a bug, because I want people who are determined to comment, not something that is off the top of the head.
• I pointed out to him that his rhetoric had bomb-thrower tendencies, and what kind of crowd would that attract?

So, I like my readers, and commenters.  In general, if you comment here, and I don’t delete it, I respect you.  (Deletion rate is less than 0.1%.)

But now to my main point.  Much as I like Buffett, I disagree with him on tax policy, because he is a hypocrite.  Let him argue that stock holdings should be taxed annually on the unrealized increase, and I would agree with him.  He doesn’t pay as much taxes as he should because:

• Berkshire Hathaway doesn’t pay a dividend.
• He never sells shares of his company.
• He engages inside his company to avoid taxes in every legal way.  He is not interested in paying taxes in the slightest.

My tax proposals would make Buffett and those like him pay, and others who game the system as well.  The critiques above miss the point in a major sense.  Much avoidance of taxation comes from having companies that are heavily indebted.  I don’t believe that having heavily indebted companies is a good thing.  If they faced taxation on the presumed increase in their value annually they would be forced to have more liquidity, and that is a good thing.

My proposal would lead to companies not being so heavily indebted.  That’s a feature, not a bug.  We need to discourage debt in the financial sector, because it tends to create booms and busts.  If you want to do a big capital investment, save for it, or borrow on a very short term basis.

My proposal on taxation should be phased in gradually.  Mr Buffett should not be presented with a bill for $12 billion, but rather a request for $1.2  billion for 10 years, reflecting the value he has obtained untaxed.  With respect to taxation, he is the ultimate hypocrite.  If he did not speak on such matters, I would respect him, because he is generally such a wise man, but he has prostituted his position to the current political scene.  Thus I don’t respect him here.

(As an aside, we could drop the estate tax after instituting this, because appreciation would be taxed annually.  As such, the cost basis at death would be very near market.  One thing that was little noted in the one year elimination of estate taxes in 2010 was that if you inherited something in that year, your tax basis did not step up to market, but remained at the cost basis of the decedent.  The taxes may be delayed, but they weren’t eliminated.  That’s still quite an advantage.)

I believe that a less levered system is better for the economy as a whole.  It is far better to disallow interest as a deduction for corporations. and allow corporations to dividend to shareholders without taxation.  Or, eliminate corporate taxation, and tax dividend receivers directly, combined with a tax that taxed profitable companies that did not pay dividends.

The economy is better off when it is less levered.  Debt obligations make the economy less flexible, demanding fixed payments, regardless of how likely they are.  For modeling, it is best to think of the unlevered economy. What is the native demand, leaving aside the  speculative demand?  Borrowing to create speculative demand should not be encouraged by the tax code.  After a phase-in, interest should not be tax-deductible, but would add to the cost basis of assets.

My views are relatively simple:

• Taxes should be moderate, and levied on the approximate increase in value annually.
• Corporations and individuals should avoid borrowing to finance investment/consumption, at least, it should not be tax-favored to borrow in the short run.
• Everyone should be taxed; there is no way to avoid it.  This ensures fairness.
• All classes of income should be taxed at the same flat rate.
• There are no non-income deductions/credits, and no use of the tax code for social engineering.
• This should be phased in over ten years to avoid a shock.
• For illiquid situations, businessmen would have to plan in advance for taxation, which would impose a cost on illiquidity in the economy.
• We would not favor savings over consumption — goodbye to the complexities of IRAs, life insurance, pensions, and all other deferral vehicles.

The overarching idea is to create a flat taxation system, where the increase in value is taxed annually, and where there is little incentive to engage in any sort of action to convert one sort of income into another.  This would level out many of the advantages that the wealthy have, while leaving in place a relatively transparent taxation system with few preferences which would be stable, and create predictability in taxation.

Those are my views.  I am trying to create something more stable, fair, and transparent (can’t hide income).  Those are desirable goals.  Why shouldn’t everyone love this, aside from the rich that use the overly generous tax code?  Feel free to comment below…

PS — this would have implications for US entities owning foreign assets, but I haven’t figured out how to make this work globally without making people/firms flee the US.  Ideas are welcome.  Thanks to all readers/commenters, I appreciate all of you.

Miscellaneous

• “When women stay home and they raise their kids & maintain the household, it is a job. It’s a job of love.” http://t.co/NV1JddlL #wellsaid Apr 13, 2012
• @historysquared Have not seen anything definitive on that, but production from fracking decays faster than conventional production. $$ Apr 13, 2012
• 10 Things I Hate About Tax Day http://t.co/SvezPoPV “There is absolutely no defense for it – none – & yet it persists, year after year.” Apr 11, 2012
• @TimABRussell It varies. Most of the books I review are within a year of (re)publication. Some are as old as the 1960s. >95% last 10 yrs $$ Apr 09, 2012
• So, you did an article ghostwritten by Robert Berman, Cinium’s CEO? Lovely. He gets around. But what does Smartmo… http://t.co/usg0buic Apr 09, 2012
• Voices: Phil Cioppa, On Hiring Advisers http://t.co/zNN92rP4 Most sales positions have high turnover, particularly w/intangible products Apr 11, 2012
• McDonald’s Pursuit of Perfect Fries Risks Overpromising http://t.co/DWDuesyG Harder 2 assure consistent quality if $MCD locally sources $$ Apr 09, 2012

China

• Agree that America declines, but China also RT @historysquared: Historian warns of sudden collapse of American ‘empire’ http://t.co/Z4hVtKkk Apr 13, 2012
• Shadow Banks on Trial as China’s Rich Sister Faces Death http://t.co/dJfEanEw It is morally wrong to put someone 2 death 4a property crime Apr 11, 2012
• Is China slowing down? http://t.co/IJA8jobS From the AEI, very clueless piece: China should raise its exchange rate & lower the central rate Apr 11, 2012
• Hong Kong’s Tsang ‘Highly Concerned’ About Property Price Bubble http://t.co/XHRBLgY5 Devel Nations monetary policy fuels many bubbles $$ Apr 10, 2012
• ‘Jackie Kennedy of China’ at Center of Political Drama http://t.co/MvIPw1oy The politics of China r dirtier than the US & more secretive Apr 10, 2012
• China Inflation Exceeds Forecast http://t.co/Z9hnKj1Y Too little attention paid here; too much confidence in Chinese central bankers $$ Apr 09, 2012
• @valuewalk Yes, saw it and the followup bet. I owe a decent amount of my intl economics thinking to Pettis, but not my errors $$ Apr 09, 2012
• The ways China can rebalance http://t.co/2ZtRG4F2 Michael Pettis on the constraints the China faces as it tries 2 rebalance its economy $$ Apr 09, 2012

Newspapers

• +1 RT @The_Analyst: I feel like unless its a special situation, everyone who “gets” newspapers would never make a LT investment in them Apr 12, 2012
• Buffett “didn’t get tech.” I don’t get newspapers. $$ RT @WSJDealJournal: Warren Buffett Building Newspaper Empire? http://t.co/jDx5goqw Apr 12, 2012
• I don’t get the economics of the newspaper biz $$ RT @WSJDealJournal: Warren Buffett Building Newspaper Empire? http://t.co/jDx5goqw Apr 12, 2012

Electronic Bond Markets

• BlackRock’s Street Shortcut http://t.co/JO4Wm5sY Would work better 4 stocks than bonds. Most bonds r held a long time & do not trade $$ Apr 12, 2012
• If the buyside created their own internal stock exchange, they could reduce the effect of the HFTs on the market & make life harder 4 retail Apr 12, 2012
• But an internal bond exchange as proposed by $BLK won’t do that much, institutional transaction costs aren’t that hi 4 commonly traded bonds Apr 12, 2012
• When I was a bond mgr 1998-2003, aside from obscure & illiquid bonds my commissions were $1/32nd or $1/64th per $100 — 1-3 basis points $$ Apr 12, 2012
• @TFMkts So I would ask you, have comm rates 4 bonds gone up since 2002? My normal trade size back then was $5-20Mil, comms 1-3 bps then $$ Apr 12, 2012
• @TFMkts Most bonds don’t trade, though. When I was a bond mgr, I needed guys who could find bonds. Always paid them; never let them cross2me Apr 12, 2012

Delta Airlines

• It is usually a bad sign when a company can’t manage its current business well, & it tries to enter a difficult unrelated business. $DAL $$ Apr 11, 2012
• Best quote: “Edward Hirs…says he can think of one reason why Delta would try to get into the refining business: ‘because they’re stupid.’” Apr 11, 2012
• Why Buying A Refinery Could Be A Disaster For Delta Air Lines (Even With JPMorgan’s Help) http://t.co/MDvs9D26 & http://t.co/gJ0G44Uo $$ Apr 11, 2012

Rest of the World

• Qatari Bright Lights Prompt EU’s Hedegaard to Urge Climate Plan http://t.co/0zjAmGit Another reason why multilateralism doesn’t work. $$ Apr 12, 2012
• Kenyans Almost Dead on Worst Roads Getting New Highways http://t.co/Szcs1Tcy Next time u r stuck in traffic b thankful u r not in Kenya $$ Apr 11, 2012
• These Charts Point to Trouble for Australia http://t.co/F00FtbpW Housing bubble, co-dependent relationship w/China, & large pool of hot $$ Apr 10, 2012
• It’s rich 2c Dilma Rousseff criticizing Obama. But Brazil is further down the line in the devel nations game of monetary crack-the-whip $$ Apr 10, 2012
• Rousseff Tells Obama Rich Nations’ Policies Harm Growth http://t.co/Akm14Ifs Devel nations force emerg nations 2 swallow loose $$ policy Apr 10, 2012
• Bank of Canada stressed about housing http://t.co/4kC0JW3D Nothing like a debt financed housing bubble 2 make a central banker flinch $$ Apr 09, 2012

Economics

• Good Jobs News: More People Are Quitting http://t.co/1BlIvqOj The job market is more healthy if people are quitting to take other jobs. Apr 12, 2012
• Obama’s Fantasy Budget Suggests Tax Hike Surprise http://t.co/03tkRMjZ Obama would likely b more radical in a 2nd term #nothing2lose $$ Apr 11, 2012
• Tax Breaks for Wealthy Should Be Cut, Paul Ryan Says http://t.co/QppnNGQz “focus our poverty-eradication policies on treating root causes” Apr 11, 2012
• @DavidSchawel I don’t think the paper changes my main point, it will be very difficult for the Fed to remove “stimulus.” Apr 11, 2012
• Bernanke Gives College Lecture Series High Marks http://t.co/hu0WNLXq H/L overstates: “I was very happy with the lectures,” he said. $$ Apr 10, 2012
• The Fed sold half its short-term notes via Operation Twist http://t.co/Lag2CYWs Will have no short assets if the pace continues 4 6 mos $$ Apr 10, 2012
• Job Gains in US Trail Most-Pessimistic Forecasts http://t.co/ELesokyT People asked me y I was more pessimistic than most, well… $$ Apr 08, 2012

Asset Markets

• Does “Sell in May” Really Work? http://t.co/kBNPaslt Reality is more complex than adages. The rule should be sell September, buy November $$ Apr 12, 2012
• Gunning for yield and “quality” leaves little room for error http://t.co/HW90vwkj High quality junk does not offer enough yield 4 risks $$ Apr 12, 2012
• High-Yield Bond ETF Breaks March Low http://t.co/lLB2qX19 I sold a lot of my credit-sensitive bond investments today. Market feels weak $$ Apr 11, 2012
• @munilass @carney High earned & discount rate assumptions did lower contributions by assuming investment earnings would carry the load $$ + Apr 10, 2012
• @munilass @carney & many municipalities substituted benefit increases 4 salary increases, b/c no immed $$ effect; many factors in play here Apr 10, 2012
• Flouting Risks, Investors Gorge on Fat Yields of Emerging Market Debt http://t.co/5zZV03Jb Will eventually end badly; Russia 1998 $$ Apr 10, 2012
• Retweet after me. I HATE HFT TRADING BOTS RT @merrillmatter: Repeat after me. I HATE HFT TRADING BOTS $$ Apr 09, 2012
• How to Improve the Potential of Less Volatile Stocks http://t.co/90gHiISj Adding a quality screen further improves returns & risk/vol $$ Apr 09, 2012
• A Laugh http://t.co/IcFMDnbb @brucekrasting suggests that clearinghouses will concentrate risk rather than dissipating it. $$ #nomagic Apr 08, 2012
• The Dividend-Fund Dilemma http://t.co/MYdoxPJh I buy dividend-paying stocks because they generate good cash flows, not for the dividend. Apr 08, 2012

M&A

• Much $$ stuck overseas MT @ThemisSal: Just 5 companies, $AAPL, $MSFT, $CSCO, $GOOG and $PFE now hold nearly 25% of all corporate cash, $250B Apr 09, 2012
• Yeh, like dat. 2 much $$ chasing 2 little value RT @The_Analyst: @AlephBlog another brilliant cerberus deal like chrysler, gmac? Apr 09, 2012
• AT&T to Sell Majority of Yellow Pages Business to Cerberus http://t.co/RIAX6dwb Cigar butt industry; internet changes everything published Apr 09, 2012
• Both MT @ktbenner: who’s overpaying now: The Zuck or Steve Feinberg… @Pfro: $T sells Yellow Pages 4 ~$1bn 2 Cerberus http://t.co/IGLXXUrp Apr 09, 2012
• $AOL to Sell Patents to $MSFT 4 $1.1B http://t.co/upBaZBRo Too much $$ chases a legal arms race in Infotech Intellectual property #waste Apr 09, 2012
• @ReformedBroker I didn’t know Instagram that well, but they don’t seem to have a revenue model. What could $FB do with it? $$ Apr 09, 2012

Insurance

• RE: @marketfolly He compares AIG to P&C companies,  but the life companies are a valuation drag here.  Not a fair com… http://t.co/J4aCu4tf Apr 12, 2012
• Property insurance rates rising worldwide – Marsh http://t.co/CZOHLGfG When surplus is reduced at (re)insurers, premium rates rise $$ Apr 11, 2012
• Statutory Statements under Affiliated party transactions. Regulators would b annoyed if terms indicate transaction that’s not “arm’s-length” Apr 10, 2012
• A Costly Toy Subsidized by Others http://t.co/iJea3rTt If Guggenheim is using its insurers 2 fund Dodgers purchase, will show up in + $$ Apr 10, 2012

Eurozone

• Spain’s spreads breaking away from other risk indicators http://t.co/SulecZWv “we r in an uncharted territory with respect to this widening” Apr 11, 2012
• Has bad implications for EZ sustainability $$ RT @pdacosta: Who’s peripheral now? French economy grinds to a halt http://t.co/VSsZtaWI Apr 10, 2012
• Currency disunion http://t.co/ApXlpMXK Why Europe’s leaders should think the unthinkable; EZ can breakup on own terms, or unfavorable terms Apr 09, 2012
• Eurozone’s banks cutting dollar businesses http://t.co/wX1kHu8G European banks will never again rely hard on US MMFs to finance their $$ ops Apr 09, 2012
• Euro Was Flawed at Birth and Should Break Apart Now http://t.co/ZxPy0vId All the things that I predicted have come true & more. Bye, Euro. Apr 08, 2012

Politics

• Wind Power Seen Surging as Custom Barges Cut Set-up Costs http://t.co/XA96RbEj Don’t see how this makes the cost of wind power economic $$ Apr 10, 2012
• For Feds, ‘Lying’ Is a Handy Charge http://t.co/2tLcdyKQ Law in the US becomes more arbitrary; crimes can b dreamed up by bureaucrats $$ Apr 10, 2012
• Complexity Is Bad for Your Health http://t.co/v9pLQi1V Antonin Scalia & Stephen Breyer agree (!): Obama’s health care law unreadable $$ Apr 09, 2012
• High-Speed Rail Takes Californians 4 a Ride http://t.co/fZlC3MQx Rail makes sense in densely populated areas, won’t work in California $$ Apr 09, 2012

Valuations

• High Yield Closed End Funds 68% over NAV, 3% avg premium. Loan Participation CEFs 40% over NAV, -1% avg discount. Conditions r medium hot $$ Apr 07, 2012
• Why Stocks Look Too Pricey http://t.co/TWqZzGg3 Various Indicators Suggest the Market Is No Longer a Bargain, at best fairly valued $$ Apr 07, 2012
• Contra: The alarming fall in syndicated lending http://t.co/hiGK9UoK With the high yield mkt running hot why not avoid restrictive banks $$ Apr 06, 2012
• Not so new… Eddy Elfenbein said something similar 4 months ago: http://www.crossingwallstreet… http://t.co/mhIxGGwt Apr 04, 2012 (on inflation expectations driving stock prices in the short run)
• Time to take some risk off the table http://t.co/sCuYxc6u Trends breaking globally, US looks okay. Humble Student has made good calls lately Apr 04, 2012
• The Dangers of an Interventionist Fed http://t.co/thKsHa8J QE Removal: what happens to banks if Fed does & 2 inflation if Fed doesn’t $$ Apr 03, 2012
• Junk Bonds – Getting Risky for a New Reason? http://t.co/7bJ08JxT Record pace of junk issuance bodes ill 4 performance… 3 yrs from now. $$ Apr 03, 2012
• Two Pros Weigh In on U.S. Stocks: Ben Inker’s Bearish View http://t.co/iJ7742P5 Katie Nixon’s Bull View http://t.co/Zn9jj503 $$ Apr 02, 2012
• Eichengreen on Credit Bubbles http://t.co/bSs0MHPA Leading indicator of finl stress in em mkts: loan growth > 2x GDP growth 2 yrs earlier $$ Apr 01, 2012
• Taking the High Out of High Yield http://t.co/WYIvHb0n Nonprofessionals are the ones buying junk at the margin. This won’t end well. $$ Apr 01, 2012

Central Banking

• The ECB has completely lost control over the monetary policy for Greece http://t.co/MHNTXLHo Massive liquidity drain; total credit failure Apr 07, 2012
• Post-war financial repression is back http://t.co/JGLo9Aic If the post-war experience is any guide, savers face many years of suffering. Apr 06, 2012
• Bernanke – I’m Slowing Down the Ship http://t.co/TJcJl20n Stocks don’t like less inflation coming and so they fall. But bonds rally. $$ Apr 06, 2012
• Draghi Scotches ECB Exit Talk as Spain Keeps Crisis Alive http://t.co/rREDdqrW LTRO can only go so far; can solve liquidity, not solvency Apr 06, 2012
• The Market’s Obsessive Fixation on The Fed & QE http://t.co/W6kg1n7k Runs through a Fed tightening scenario, thinks Fed won’t sell bonds $$ Apr 04, 2012
• Oest.. Nationalbank follows Bundesbank in refusing some periphery collateral http://t.co/96xx0xg7 Not so big in itself; Tear in EZ fabric Apr 04, 2012
• Draghi Tested as German Pay Deals Add to Euro Divergence http://t.co/glKumOZx Inflation rising @ core? May even labor productivity some $$ Apr 04, 2012
• @federalreserve Tried using your Data Download Program today http://t.co/vRroRPMt I managed 2get the data I needed, but it was tough 2use Apr 03, 2012
• Bernanke – ‘The Fed never makes mistakes’ http://t.co/JBgRHqx2 He goes, speaks to soft audiences, argues that no one could have known #dope Apr 01, 2012

China

• Coup Rumors in China Have Deeper Meaning http://t.co/QaoDxKFF Small fissures appearing in the Communist Party’s hold on power $$ Apr 07, 2012
• Australia’s Export Slump Intensifies Rate-Cut Pressure http://t.co/sIDzeteW China sneezes, Australia catches a cold, mate. $$ Apr 06, 2012
• China doomsayer sees crash coming http://t.co/2QatU1ps Hardly a crash, but GDP shrinking. Wait, that *is* a crash for China? $$ Apr 06, 2012
• The Revenge of Wen Jiabao http://t.co/nw5qvCNa Long read. Eye-opening. Formal system of Comm Party eclipsed by family coalitions that war $$ Apr 04, 2012
• The informal aspects of how China is governed relies on rival coalitions of elite families over the long run. Short-run, Comm party rules $$ Apr 04, 2012
• China Accelerates Markets Opening as QFII Quota Doubles http://t.co/yrXVDcdR May prove 2b significant due to unintended consequences $$ Apr 04, 2012
• China Manufacturing Gain Masks Exporters’ Woes http://t.co/VyeN9AWF Goods unneeded by the rest of the World build up in China $$ #glut Apr 03, 2012

United States

• When safe assets return http://t.co/QLUPuj1j Long piece on the status of money-like instruments, public and private. Many questions. $$ Apr 07, 2012
• Income Inequality Is Killing the Economy, Obama Says—Is He Wrong? http://t.co/xrA4pGu2 Going up in developed world, going down globally $$ Apr 07, 2012
• And I don’t get it as well, Josh.  I’m as Libertarian as they come, but with financial services, I know that trickery… http://t.co/lIJDCr1Y Apr 05, 2012
• More woes in Fedl subsidized solar power: http://t.co/83ch2YUM & http://t.co/6XaEjl10 ht: @zerohedge | Send bureaucrats 2study physics? $$ Apr 04, 2012
• The return of the US manufacturer http://t.co/75WCMyPi Manufactured goods represented 61 per cent of all US exports during 2010 $$ Apr 04, 2012
• +1 RT @ReformedBroker: ADP is the Diet Arizona Iced Tea of Employment gauges. Like, we’ll take it if it’s there but no one’s looking for it Apr 04, 2012
• When does the US Treasury bubble burst? http://t.co/8agHomQH “Pomboy pointed out that Treasury yields are less than current CPI rates” $$ Apr 03, 2012
• Why Are the Fed and SEC Keeping Wall Street’s Secrets? http://t.co/bZYF3LgV Fed & SEC view those they regulate as their clientele $$ Apr 02, 2012
• US consumers dipping into savings http://t.co/757XDPuW Implies that the recovery is weaker than presently posited, demand comes from savings Apr 01, 2012
• Obama Campus Fervor Losing 2 Apathy as Students Sour on 2012 http://t.co/kcyQbWKI Students thought they were getting change, got Bush-plus Apr 01, 2012
• How Stockton, California Went Broke in Plain Sight http://t.co/ggOzSOmV If you hand out benefit increases like they are candy… $$ Apr 01, 2012

Finance

• Quants: The Alchemists of Wall Street http://t.co/L0CzLQVN Recommend this video, features Paul Wilmott, Matthew Goldstein, & more $$ Apr 07, 2012
• The 401(k): Americans ‘just not prepared’ 2 manage their own retirement funds http://t.co/8Tr0wggt Conclusions similar http://t.co/etCEp8BT Apr 06, 2012
• Hedge Funds Accomplishing Very Little in the Aggregate… http://t.co/pxqjw2kk HFs tend 2b volatility-averse, weaker funding than long-only $$ Apr 04, 2012
• Ackman SPAC a nice touch, no? RT @ReformedBroker: Private Equity-held Burger King coming public again. “Hooray!” said no one to no one else Apr 04, 2012
• Performance persistence in hedge funds http://t.co/zORfjAts How do hedge funds differ v unlevered value investors? $$ gets pulled vals drop Apr 04, 2012
• ETN Double Dipping With GAZ? http://t.co/Uo9y1T5p Interesting piece. An ETN issuer can make more $$ stopping creation & lending shares Apr 04, 2012
• Loan classes “season” over 10-30% of the life of loan… defaults/prepays stabilize. Large cohorts 4 bond issuance go bad in the 3rd yr $$ Apr 03, 2012
• Merrill, Morgan Stanley seen losing grip on rich http://t.co/44mW7ki0 Top 4 brokers mkt share 56% in 2007, 45% in 2011 & still falling $$ Apr 03, 2012
• Low Vol Underperforming http://t.co/NYqjw2Fp Every valid strategy has times when it doesn’t work, to shake out the weak hands $$ Apr 03, 2012
• Corporate pension funds break away from equities http://t.co/EMPaDGea Yes, when yields r low, DB plans move 2 bonds. Brilliant. $$ Apr 03, 2012
• Does Danger Loom for Multiemployer Pension Plans? http://t.co/VpfDZ04m Plans that are <80% funded must take steps 2 nurse plans 2 health $$ Apr 01, 2012
• Credit Suisse Opened Volatility Bets to Small Investors http://t.co/ZLMGANXh Wall Street produces products 2 benefit itself, not retail $$ Apr 01, 2012
• Keynes: One Mean Money Manager http://t.co/WJ2jESFE “The board of King’s College gave him uncontested authority to invest as he wished.” Apr 01, 2012

Japan

• Just a guess, but after Japan’s Current Account goes into deficit for ~2 years, the big adjustment down in the Yen will happen. $$ #ouch Apr 06, 2012
• @valuewalk Probably because so many have lost money shorting the yen, & some have made $$ long the yen, that many just trust the momentum $$ Apr 06, 2012
• @valuewalk long-dated yen currency puts have fairly low vol Not doing that either, but… someone will. Apr 06, 2012
• Yen Forecast: Xie Sees 40% Drop, Japan Bubble Bursting http://t.co/EjI7hytt Wow. Thinks Japan near tipping point 4 internal financing fail Apr 06, 2012
• Japan’s Strongest Storm Since 1959 Slams Into Tokyo Region http://t.co/CCOVz7C6 Very unusual 4 Tokyo 2 have such strong winds w/no typhoon Apr 03, 2012
• Yen Losing Most Since ’95 Not Enough for Toyota http://t.co/IT0g84s8 Japanese Industry cheerleaders 4 “penny parity” $$ #race2thebottom Apr 02, 2012

Insurance

• Advisers, B-Ds retreat from Hartford http://t.co/garB6Bwn Not offering new annuities means can’t roll to $HIG products when surr chg ends $$ Apr 03, 2012
• Agents will try to get holders of $HIG annuities to roll elsewhere when surr charge ends (new commission $$ ), but be careful if you own an+ Apr 03, 2012
• annuity from $HIG, b/c one reason they are getting out of the biz, I think, is that some of the secondary gtees were 2 generous + Apr 03, 2012
• there is probably a business in analyzing secondary gtees, b/c some r quite valuable, &u wouldn’t want 2get tricked into rolling it by agent Apr 03, 2012
• Contra: Rising equity markets to drive US life insurers-Barclays http://t.co/S6JtPun7 Catch my comment at the end, didn’t get new DAC issue Apr 02, 2012
• Insurance Fees, Revealed http://t.co/mLzhpT6V NY State says agents must disclose how compensated & offer to provide full details #woohoo Apr 01, 2012

Personal

• Sinkhole at the bottom of my street after a water main break. The water is more than 5′ deep & and hollowing out the road beneath. Apr 07, 2012
• Street is one way, so I took my son who is a Police Explorer 2 talk to the policeman there. They knew each other. It’s a one-way street so + Apr 07, 2012
• I asked the policeman (who was short handed) if he would like us 2 block street 2 traffic. Gratefully “yes.” We set up the safety gear. Apr 07, 2012
• This is the opposite of last summer where we didn’t have power 4 6+ days, but we had water. We have power but no water. Hope it won’t b long Apr 07, 2012
• Three Year Anniversary http://t.co/0HDD3iyD Congratulations, Hunter! @DDInvesting is our internet guide to all distressed debt $$ Apr 04, 2012
• LinkedIn Events: Towson University Investment Group – Markets Summit http://t.co/kpgkDTto I’ll b participating on a panel. See you there! $$ Apr 04, 2012
• @Frank_McG @volatilitysmile As I said to my wife today, “Take care of your wife, and she will take care of you.” Worked for the last 25 yrs Apr 02, 2012

Miscellaneous

• Reprise: The Elfenbein Gold Model http://t.co/r3rHvZw3 @eddyelfenbein at his best, I fully subscribe to his model, reflecting cost of carry Apr 06, 2012
• Matzo Ball Soup, Check. iPad, Check. For Passover, Jews Try Techie Seders http://t.co/xUW3izZl I dislike technology in religion. Yuck $$ Apr 06, 2012
• Flying Auto Reviving Dreams of Chitty Chitty Bang Bang http://t.co/WixQb8AV Cheap @ $279K, this one might actually work $$ Apr 06, 2012
• This discussion has problems because there is no agreed upon definition of what “free will” means.  As with all quest… http://t.co/NoMpZf0U Apr 04, 2012
• Here Come Tablets. Here Come Problems. http://t.co/ezFK4Wfu Five common mistakes: a slow rollout is better to get the bugs out. $$ Apr 03, 2012
• Gene Maps Are No Cure-All http://t.co/JOLTtWTK Study Warns That DNA Scanning to Predict Disease Can Mislead; ‘Not a Crystal Ball’ $$ Apr 03, 2012
• Ten Claims in Support of IFRS Adoption by the SEC – & Why They are False http://t.co/nj2PZ1pd & http://t.co/4YrMSvaH & http://t.co/7lLtioGo Apr 03, 2012
• The Mighty Mathematician You’ve Never Heard Of http://t.co/9Qp1NqOB Never heard of her & her impact on physics was as great as that of math Apr 01, 2012
• Mangled Horses, Maimed Jockeys http://t.co/6Dl1gEmJ Maybe there is a public policy reason to close down racetracks, & after that boxing $$ Apr 01, 2012

Energy

• Australia LNG Boom Threatened by US Shale Exporters http://t.co/qleN6sVd Cheap US Hydrocarbons invert prior economic certainties $$ #shale Apr 04, 2012
• Shale oil: from curse to cure for East Coast refiners? http://t.co/MdlXvjIb US Shale oil is high quality; challenge is delivery2refineries Apr 04, 2012
• Repsol Worst Debt Swaps on YPF Seize Threat http://t.co/BewpJA4p Argentina not 2b trusted; would buy $REP bonds on weakness, stock a ?? $$ Apr 04, 2012
• Encana in Play as Petronas Seeks Natural Gas http://t.co/SEx832F1 Petronas looking long-term, b/c prospects for natgas pricing r poor $$ Apr 04, 2012
• Why high gas prices at the pump? The answer is BICS http://t.co/LopjaesG Brazil, India, China, & Saudi Arabia have increased gasoline demand Apr 03, 2012
• The rapidly shifting supply fundamentals in US natural gas http://t.co/myofZrQD Injection cycle starting early w/supplies high already $$ Apr 03, 2012

Rest of the World

• Contra: The Buck Stops Here: A BRIC Wall http://t.co/RYykjXXr The BRIC nations r2 statist 2 link 2 gold. Good idea, doesn’t fit the politics Apr 06, 2012
• Germany Asked to Forgo $1.3 Billion Deutsche Telekom Payout http://t.co/b8cvOOlB Interesting how Capex constrains euro-telcos, not US $$ Apr 04, 2012
• Europe’s Ratings Revenge Founders on Market Reality http://t.co/D3dNu7sF Eurocrats stumble in dark; will return 2 old system; it worked $$ Apr 04, 2012
• How A Baby Bust Will Turn Asia’s Tigers Toothless http://t.co/VE78u9tu Economic growth is partially population growth; sterile societies $$ Apr 01, 2012
• Swedish High Street Rebound Ends Bets for Riksbank Cuts http://t.co/jYioq0NN A relative bright spot in Europe; having the Knonor helps $$ Apr 01, 2012

Company News

• RE: @emergingmoney Never been crazy about firms that perpetually run w/neg working capital. Interesting idea, though. http://t.co/Xx6yFf8v Apr 04, 2012
• Optical Delusion? Fiber Booms Again, Despite Bust http://t.co/9QiAmZOH Whouda thunk it? I knew this was getting close, demand 4new fiber Apr 04, 2012
• Scarred Avon Is Takeover Target http://t.co/f2T9E7V7 Don’t think $AVP is a good takeover target: toss dist syst or incompatible syst $$ Apr 03, 2012
• Technology obsoletes too easily, particularly in hot sectors. Very difficult to get to $1T of Market Cap. Bit-by-bit… http://t.co/XjGU9ouG Apr 03, 2012
• $AAPL ‘s War on Android http://t.co/ILGQVAZD Long, fascinating article; perversely, attempts to enforce patent can invalidate patents $$ Apr 02, 2012
• Dude, is There any Value Left in $DELL ? http://t.co/iG5q5iea U know your marketing is stale when people reference advertising >10yrs ago $$ Apr 02, 2012

Housing

• The rebound is now http://t.co/l4coNvgt Worth watching, but I would wait until the foreclosures have been mostly cleared, b4 saying bottom Apr 07, 2012
• Home Prices Seen Dropping 10% in US on Foreclosures http://t.co/BBjzxKiU Once f/cs clear out, the market will normalize maybe even rise $$ Apr 03, 2012
• McClellan on Lumber’s tendency to leading housing stocks http://t.co/cevWyVTs If past is prologue, housing prices are set for another dip $$ Apr 01, 2012

Funds

• I’ve owned this in the past, but not now.  It’s been around for 19 years as a CEF — just have to watch the premium/d… http://t.co/XMVs6RBS Apr 06, 2012
• Why I Won’t Be Buying TAGS http://t.co/2S8bqcQJ Expense ratio does not include the expenses paid on underlying ETFs owned by $TAGS $$ Apr 04, 2012

Financial Distress

• Reddy Ice Considers Filing for Bankruptcy http://t.co/IgpYjHue Is it just me, or are we seeing an uptick in insolvencies? $$ Apr 04, 2012
• Hostess Serves Up New Batch of Cuts http://t.co/fHBXwHes Future failure as people don’t buy so many of the “sugar fat bombs” 4 kids $$ Apr 02, 2012
• Failures: Pinnacle Airlines http://t.co/BXkJ8v9j AFA Foods http://t.co/xs4wsFEE Airlines & Meat renderers r born 2 fail $$ Apr 02, 2012

I debated briefly (between my ears) how to present this data.  I settled on this method, because if you want to play with it you can do so without too much trouble.

Here are the earnings yields, dividend yields, and payout ratios (what percentage of trailing 12-month earnings have been paid out as dividends) by industry and sector:

Now, remember that the earnings yields here are backward-looking.  To give you an example, property-casualty insurers and reinsurers lost a lot over the last 12 months, but still managed to have P/E ratios of around 18 (5.5% earnings yield).  When you look at these tables, ask yourself how good current prospects might be relative to the last 12 months.

Also remember that cyclical companies tend to have low valuations before their sales slump.  As sectors go, I think Energy has a lot to commend it in this environment.  Could have a lot of upside, and not much downside.

The tables above cover the whole market, 8800+ companies weighted by their market capitalizations.  I could do a second version to these tables for a subset of the markets, forward-looking, which used the earnings estimates of the sell-side.  I suspect that would cover the larger half of the companies, and roughly 99% of the total market cap.  Let me know if you would like that, it wouldn’t be that hard to do.

PS — Note that everything here is in line with the terms of my data license, because every number here is one that I calculated.  I try to follow that rule in things that I publish, aside from well-known and limited bits of data.

China

• China’s first bond default could be good market medicine http://t.co/8ShFniYM Bond trader: “We don’t really have a credit risk culture.” $$ Mar 31, 2012
• Is China’s slowdown worse than previously estimated? http://t.co/CkZw8tLK Could b business conditions that are worst since 2009. $$ Mar 31, 2012
• China Banks Said to Underestimate Local Government Risks http://t.co/qpPicyEe China has a clever bureaucracy; always has; big CYA $$ Mar 25, 2012
• Chinese capitalism is just another knockoff http://t.co/w2hSozQL China is not Capitalist; it rewards Party members, not citizens. $$ Mar 25, 2012
• Debating a “Hard Landing” http://t.co/NMnYk2XX friendly debate – Andrew Batson & Patrick Chovanec over China facing a “hard landing” in 2012 Mar 25, 2012
• I Am Jordan’s Complete Lack of Surprise: Chinese Co’s Forced to Falsify Data http://t.co/BMj7ux0T Command & control economy, not free $$ Mar 25, 2012

Market Dynamics

• The Nature of a Crowded Trade http://t.co/sf1phJjP A July 2008 article of mine where I reflected on the high correlations of the prior 3 yrs Mar 31, 2012
• A Market Lacking Diversification http://t.co/khXUVjaL Correlation conditions similar to 2006-2008, only diversifier hi-qual long bonds $$ Mar 31, 2012
• Pension Deficit for 100 US Company Plans Increased 41% in 2011 http://t.co/FdIZTltW Low long hi-qual rates & cruddy returns on risk assets Mar 31, 2012
• 2277 Stocks and Still Not Diversified? http://t.co/iu0Pw8Ty Recommended solution is similar 2a levered version of the Permanent Portfolio $$ Mar 31, 2012
• New from Aleph Blog The Rules, Part XXXI: The offering of liquidity through limit orders is a real service to th… http://t.co/ZiuzWIo5 Mar 30, 2012
• Passive Aggressive: Index-Linked Securities and Individual Investors http://t.co/ZrjMCKCz Curbs stock picking, encourages factor timing $$ Mar 29, 2012
• Bankers are telling corporate clients this is their chance to refinance http://t.co/Eh9tHEX6 The window of cheap junk financing is open $$ Mar 28, 2012
• New from Aleph Blog Replacing Defined Contributions: I think that it is pretty certain that defined contribution… http://t.co/Dis34ql2 Mar 27, 2012
• What Will Replace the 401(k)? http://t.co/miLAuoYc How about DB pensions where it depends on how much the employee kicks in plus match? $$ Mar 27, 2012
• US Stocks Advance Following Bernanke’s Comments http://t.co/D7sORuIU Stox react 2 increases in inflation expectations. TIPS & Bonds fall $$ Mar 26, 2012
• Hedge Funds Capitulating Buy Most Stocks Since 2010 http://t.co/XHwxzxNO Short-term money alert! Will propel mkt 4 a while, then… $$ Mar 26, 2012
• If Bloomberg Business Week is a better magazine than old Businessweek (I think so), what magazine should we use now 4 a dumb $$ indicator? Mar 26, 2012

Asset Management

• Nontraded REITS should be a nonstarter for clients http://t.co/O1ZuMvX8 And here’s one that just announced a 72% loss: http://t.co/la8d29my Mar 31, 2012
• Oaktree IPO Could Pay 2 Founders $117.2M Each http://t.co/Yufla6Jk The Most Important Thing is getting rewarded 4 building AUM $$ Mar 31, 2012
• The Trouble With Exchange Traded Notes http://t.co/ZL7dVpjO Unsecured credit, total return swaps, low level of regulatory protection $$ Mar 31, 2012
• Good 4 all of us RT @frankvoisin: My interview Research Magazine’s April issue: http://t.co/zioono6R Also features @VitaliyK @alephblog $$ Mar 30, 2012
• Bain Gave Staff Way to Swell IRAs by Investing in Deals http://t.co/4LlAExBt Letting employees in on the fun shares the wealth. Good $$ Mar 30, 2012
• Lying By Omission: Mutual Funds, Track Records & Departing Managers http://t.co/4MUyNRYs Track recrds shuld b suspended when critical ppl go Mar 29, 2012
• New from Aleph Blog A Pox on Promoted Stocks (2): By this time, I would think that it would be worth the the tim… http://t.co/DJkH6E4W Mar 28, 2012
• The Measured Approach to Value http://t.co/XiZOUMOn Features investors Vitaliy Katzenelson & Croft-Leominster, & smaller Frank Voisin & me Mar 28, 2012
• GoodHaven Realizes Its Vision http://t.co/zJVmCFMa The CIO of Markel, Tom Gayner showed them favor and invested with them. Good for them. $$ Mar 27, 2012
• What This Industry Needs is a Good Disruption http://t.co/imKDcElR There r a few areas of the financial industry that justify their fees $$ Mar 27, 2012
• Found PDF slide presentation: http://t.co/0GfhME7m The Market for Financial Advice: An Audit Study $$ Worth a read, paper not free @ SSRN Mar 26, 2012
• Treasuries Rise for Fourth Day on Global Growth Concern http://t.co/JYpanHTu Funny how the sentiment has reversed; who is surprised? $$ Mar 25, 2012

Monetary Policy

• @kyles09 No, not a believer in MMT, MMR, or neoclassical macro. 2 much aggregation, not everything happens at once, goods/services central + Mar 30, 2012
• @kyles09 and $$ only facilitates goods/services. Debt is important, but not central, some goods owned outright, w/no liabs. Money is a + Mar 30, 2012
• @kyles09 creation of a culture, not the government, because @ the edges, FX & commodities will crowd out bad currencies. MMT -> inflation $$ Mar 30, 2012
• What Does Bernanke Know? http://t.co/LydpOqk1 Introduces “The Guy Rate” http://t.co/zNVeUYmP Unemployment of older guys has hi costs Mar 29, 2012
• Demand for U.S. Debt Is Not Limitless http://t.co/NWKHcpCD In 2011, the Fed purchased 61% of Treasury issuance. That can’t last. $$ Mar 29, 2012
• Bitter Money Fights Shaped U.S History http://t.co/36jWnkQq Abandoning Gold Helped Dollar Gain Preeminence http://t.co/QbYMkTNL $$ Mar 28, 2012
• For the last tweet, those r2 good articles by Simon Johnson & James Kwak, authors of “13 Bankers” & co-founders of The Baseline Scenario $$ Mar 28, 2012
• Housing bubbles and interest rates http://t.co/9TfzMpt2 Makes my point that asset price levels should be part of monetary policy $$ Mar 31, 2012

Banking & Finance

• FiveBooks Interviews > @Ritholtz on Causes of the Financial Crisis http://t.co/RQQZfHTz Many good perspectives from 6 authors on the crisis Mar 31, 2012
• Geithner’s Math Puzzle Beyond Numbers for DeMarco http://t.co/Eg9BjcgE Principal forgiveness would have moral hazard impacts. $$ Mar 30, 2012
• Why not make LIBOR off of binding offers of the banks to borrow/lend to any of their group $10M short-term unsecured? Avg — LIBOR/LIBID $$ Mar 30, 2012
• Libor Links Deleted as UK Bank Group Backs Away From Rate http://t.co/HOy8TOof British Bankers’ Association distances itself from LIBOR $$ Mar 30, 2012
• Branson’s Virgin Money Seen Disrupting U.K. Retail Banks http://t.co/bPcD8im7 Always been a Branson skeptic; he have audited financials? Mar 30, 2012
• Why not make LIBOR off of binding bids/offers of the banks to borrow/lend to any of their group 10 million dollars sh… http://t.co/wK3HyopV Mar 29, 2012
• Is Hartford Financial’s market exit a death knell for the annuity crowd or just more Hartford haplessness? http://t.co/AUEVqxWQ Both. $$ Mar 29, 2012
• The Birth (and Death) of the Moral Age of Wall Street http://t.co/eStszd7i At one point the moral code of $GS had some meaning, not much now Mar 29, 2012
• @BarbarianCap More subtle than that; for insurance accounting &the concept of release from risk, it is the conservative side of realistic $$ Mar 27, 2012
• A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market http://t.co/WYQGAVVx +1 $$ Mar 26, 2012
• But, disagree. Would b simpler and more effective to disallow repo financiers unrestricted access to collateral even in counterparty default Mar 26, 2012
• Obama Relies on Debt Collectors Profiting From Student Loan Woe http://t.co/pYWwgLq2 How independent debt collectors get people 2 pay $$ Mar 26, 2012
• A Bailout by Another Name http://nyti.ms/GRTNMM GSE writedowns would constitute a direct & sizable gift from taxpayers 2 the largest banks Mar 26, 2012
• Banks’ preemptive strike against Dodd-Frank http://t.co/wjHW0nyv Banks adjusting strategies in order to keep doing as much biz as possible Mar 26, 2012
• MF’s Corzine Ordered Funds Moved to JP Morgan, Memo Says http://t.co/cYaT9sHy The most likely cause may prove to b correct $$ #corzine Mar 26, 2012
• BOE’s Tucker: Rehypothecation Consequences ‘Under the Radar’ http://t.co/0X8ZQMMH Good. Rehypothecation should b reviewed, perhaps limited Mar 26, 2012
• @EpicureanDeal @dsquareddigest I would still lay the blame @ the door of $GS mgmt. Could have grown via retained earnings &stayed private $$ Mar 26, 2012
• @EpicureanDeal @dsquareddigest Also, there r real advantages 2 partnership culture in an investment bank; risk control works a lot better $$ Mar 26, 2012
• The Age of the Shadow Bank Run http://t.co/deJRQGgy Borrow short, lend long; clip a spread. Surprise! During the crisis you lose big! $$ Mar 25, 2012
• The Interest Rate Swaps that Are Bankrupting Local Governments http://t.co/yHQZ1r3u Not true. Gov’ts tried to minimize taxes w/swaps, failed Mar 25, 2012
• Three’s a Crowd http://t.co/KHtbrqpe Disagree w/the conclusion, because $GS did not have to go public; problem is mgmt, not shareholders $$ Mar 25, 2012

Pensions

• Brazil’s pension system http://t.co/90O97tQ4 They allow people to retire too early & offer too much. More unsustainable than Medicare $$ Mar 30, 2012
• @AlexRubalcava Perhaps a cash balance plan would do that. DB plans are not expensive because of explicit costs. They r expensive b/c + Mar 28, 2012
• @AlexRubalcava during boom times benefits look free and get set too high, leading to high costs in the bust phase & plan terminations. $$ Mar 28, 2012

Politics

• Obama Is a Loser Who Wins, Like FDR in 1936 http://t.co/K0x9go0T Don’t assume a bad economy insures the defeat of Obama. FDR won in ’36 $$ Mar 31, 2012
• The Rejection of Austerity Begins http://t.co/CgWKa9x6 Until failure, ppl vote 4 politicians who promise magic prosperity thru govt fiat $$ Mar 30, 2012
• Germany: The Final Frontier… Whose True Debt/GDP Is Now 140% http://t.co/KgW2d76E When you add up the guarantees, doesn’t look so good. $$ Mar 29, 2012
• Justices Suggest Parts of Health-Care Law May Be Thrown Out http://t.co/cMvKHR20 B best 2 throw the whole law out; let Congress start over Mar 29, 2012
• Contra: Court Can’t Let Broccoli Get in Way of Health Care Law http://t.co/5Yp2o8tB Sup Ct is moving 2 define interstate commerce better Mar 26, 2012
• Death Tax Defying http://t.co/FrkL5yLB Eliminate the estate tax; Tax everyone on unrealized capital gains. $$ Same result. Mar 25, 2012
• Intelligence community can keep data on Americans with no ties to terrorism for up to 5 years http://t.co/PCM7ldiG Stinks; call the ACLU $$ Mar 25, 2012

US Economy

• Why Natural-Gas Prices Could Fade to Red http://t.co/GApb0xie When everyone tries 2 frack @ once, there is too much natgas, price falls Mar 30, 2012
• US coal production declines as industry faces further stress http://t.co/l3WpZtDC Fracking has unpredictable consequences; affects energy $$ Mar 29, 2012
• Bidding Wars Erupt as U.S. Supply of Homes for Sale Falls http://t.co/JsgIdewr In certain locales, & on the low end, there r bidding wars Mar 29, 2012
• The Biggest Bellwether In The World Is Giving Some Ominous Comments About Growth http://t.co/vHWs9lwB $FDX says things r slowing down $$ Mar 29, 2012
• Planned Pipelines to Rival Keystone XL http://t.co/qQZ1Dsj2 Enterprise Products Partners & Enbridge may build competing pipelines $$ Mar 28, 2012
• ‘Pink slime’ producer suspends operations http://t.co/CvptYPhU Goes from 4 factories to 1. 600 people will probably lose their jobs $$ Mar 28, 2012
• @valuewalk @The_Analyst It is better for students to start small businesses. Forget economics, it is a waste. Profit/loss best teacher $$ Mar 27, 2012
• The Economic Surprise Index is now trending down http://t.co/eJCEEdvy @soberlook reminds us that not everything is going well $$ Mar 27, 2012

Miscellaneous

• Like it? I’ve actually bought cars that way! RT @mprobertson: http://t.co/UHdFL0Eu How to buy a car using game theory. very interesting. $$ Mar 31, 2012
• Eating Chocolate Regularly May Make You Leaner, Survey Suggests http://t.co/l8c6MMpA This means one dark chocolate Dove promise/day $$ Mar 27, 2012
• The second most dangerous people in the world are smart people with wrong postulates. Mar 25, 2012
• The most dangerous people in the world are politicians who peddle the views of the smart people with wrong postulates. $$ Mar 25, 2012
• Madoff FBI Files Reveal How He Fooled His Own Employees http://t.co/lmq2AoZG Gives hope to those accused; Madoff controlled data tightly. Mar 25, 2012

There is a proposal afoot to mandate auditor rotation every fiver years or so.  Some don’t like it.  I think it is a great idea, with large benefits relative to the costs.

My insights, or lack thereof come from working in life insurance financial reporting in a number of different ways for around 15 years.  Only on time in 15 years, in what is arguably one of the most complex industries as accounting goes, did I ever find serious questioning going on.  Should I tell this story?

Yeah, I should, because it involves the “piece of work” that I reported to at AIG who told me, “Dealing with auditors is bloodsport.”  He also said, “Dealing with reinsurers is bloodsport.”  Delicious that this came to bite him in both ways.

A certain life reinsurer who was large then (call them Geta Life), but is out of the business now (unimaginable then, but given what happened here, no surprise), reinsured a large portion of the immediate annuities and structured settlements, including rated structured settlements that the AIG domestic life companies had written.

Did the treaties pass risk?  With a vengeance they did; not only did they pass mortality risk, but all investment risks were passed as well.  For this fine service, Geta Life earned 1% per year on the surplus relief, i.e., the difference between the book value of liabilities and assets reinsured.

It was not so well understood then, but mortality risk for structured settlements did not tend to work out well.  After an injury giving rise to a court case which would structure a settlement for the plaintiff, the defendant would ask insurance companies to bid on the settlement, which was a stream of certain and life contingent payments.  When the injury impaired the life of the plaintiff, bidding would get stiffer, because it is cheaper to fund life-contingent payments to those who aren’t likely to live so long.

Or so you would think… there was one case where a two-year old boy was injured, to the point of being in a coma, and the underwriter who bid the case rated him as having the lifespan of one who was age 73.  But the money transferred to the parents in the judgement was more than enough to care for the boy, and have a lot left over for the parents.  Ding!  The kid would live a lot longer than 15 years as a result of the settlement.

Rated settlements, where one bid on impaired lives, carried the “Winner’s Curse.” If you won, you overpaid.

But this was not on the radar screen of the somewhat oblivious Geta Life, until they found that the treaties were passing large losses to them, and they decided to audit the treaty.  Sadly, the actuaries above me, who had signed the treaties before I was employed by AIG, forgot to inform the investment department that the treaty limited the trading of around 20% of the bonds of the company in ways that would be mimicked 10 years later in CDOs.

• Trades may not lower credit quality
• Trades may not lower yield
• The cashflow profile of the assets can’t be materially changed.
• And a few more things…

This problem got dumped in my lap as a young actuary, as I found we were way out of compliance with the treaty terms, selling had gone on with abandon, on assets the reinsurer relied on, reducing the investment income the reinsurer would receive in a falling interest rate environment.

So, I proposed to the reinsurer that I go back in treaty history, and select assets purchased to replace those sold that would have kept the treaty in compliance, and put those into the segregated portfolio, and inform the investment department of the rules.  Once Geta Life understood that, they agreed to my “solution.”  That solution took me several months to work out, but I got it done.

In the meantime, the reinsurance treaties with Geta Life had become so valuable to AIG’s domestic life subsidiaries that if they came into question, the subsidiaries would fail.  The accountants of the auditors, realizing that there was something big to analyze, but not knowing how to do it, called in one of their best actuarial auditors.  My ever-confident boss knew he could beat him.

I still remember critical parts of the meeting as the actuarial auditor slowly checkmated my boss, and forced him to reduce the reserve credit for GAAP accounting, resulting in a sizable loss.

Closing off the story, Geta Life was satisfied on the changes in the asset portfolios, but was still annoyed at the losses.  The changes in assets did not avail much; bad underwriting was pinching.  They came to us saying that “Reinsurance is a good faith venture. You’re not supposed to take advantage of us.  Refund our losses, or we will take you to court for not having having managed the treaty properly from inception.”

I said, “You wrote the treaty.  You accepted my asset changes.  You are supposed to absorb mortality risk, such as there is.  I am not an officer of the company, so if you aren’t happy with this, talk to my boss.”

Shortly after that, I left AIG; it was not a great place to work.  Geta Life sued AIG for damages and won (far more than they should have).  Should have produced a blip in terms of earnings, and didn’t.

Mmmmm…. back to the original point.  Should auditors be rotated?

In all my years of financial reporting, I got wind of things in other areas of the company that I served that auditors should have questioned.  Auditors have often been “lap dogs.”  Only once did I ever see a significant challenge.  More often, I saw the auditors try to help the company explain an “accounting oddity.”  (AIG had a nonstandard way of reporting deferred annuity reserves that was very liberal, and it was proposed by their auditors.)

If auditors know that they are only going to be on the job for five years, they will realize a few things:

• If this is going to die in a few years, it doesn’t matter as much if it dies next year.  Maybe firm reputation is worth more than two more years of a contract.
• My work will be reviewed by someone unsympathetic to me in a few years.  He will have little incentive not to tear my work up, and call for restatements.
• Having a fresh set of eyes on corporate finances will lead to questioning of assumptions that get ignored because they are boilerplate to the continuing auditor.
• If auditing ceases to be an annuity to auditors, they will be less complacent, and might even act like auditors on occasion.

My experience with auditors was that they spent a lot of time on the data, and rarely asked the tough questions on assumptions and methods.  They were bean-counters, not actuaries, and certainly not businessmen.

If auditors are rotated, the incentives for just letting things slide will diminish.  That’s why auditors should be rotated.