Why I’m not Jumping at the Investment Banks at Present

Why I’m not Jumping at the Investment Banks at Present

Posted on by David Merkel

Three reasons:

  • There are still significant areas of concern that have not unwound yet — residential housing exposure will increase as housing prices fall further, including lawsuits which will eventually prove not meritorious, and CDO exposure.
  • It is my firm belief that their hedges hold in minor moves, but not major moves.? VAR modeling is fine for when the winds are calm, but not when they are gale force.? At gale force the Extreme Value Theory models kick in, and they are untested at present.? Berkshire Hathaway’s experience in unwinding GenRe’s swap book was telling; few things were marked conservatively.? That is probably true industrywide, partly because auditors are incapable of audit the swap books in all of their complexity, or they’d be working for the investment banks themselves.
  • New accounting regulations make earnings quality more opaque, and less comparable across time periods and companies.? This should result in lower multiples, akin to big commercial insurers.

That’s all.? Personally I think the investment banks will be a buy sometime in 2008, but I am waiting to see how the current leverage unwind affects them.

Advertising Notes

Advertising Notes

Posted on by David Merkel

I’m about to add advertising to my blog, and I’d like to ask a small favor from my readers.? If you happen to see an advertisement that is morally objectionable, please send me an e-mail.? Include the URL of the ad.? Examples would include:

 

  • Payday lenders
  • Gambling
  • Tarot Reading
  • Known Investment Scams

 

There are likely more, but that’s a start.? Google on ads is not “don’t be evil,” but rather, is amoral in their ad filtering, not allowing even for rudimentary category blocking.? One has to block ads URL by URL.? Klunky, if you ask me.

 

Again, thanks to all my readers for their help in making this a better site.

A Current Read on Monetary Policy

A Current Read on Monetary Policy

Posted on by David Merkel

Yesterday over at RealMoney, I made the following post on monetary policy:


 David Merkel
Monetary Policy at Present
9/25/2007 11:29 AM EDT

Though I don’t agree with all of his theories, John Hussman did an excellent job describing how little the recent Fed loosening has done for monetary policy. There still has not been a permanent injection of liquidity since May 3rd. The monetary base is flat. The real changes in monetary policy have come through additional leverage at the banks. That comes through explicit policy waivers, policy changes (e.g., permitted collateral at the discount window, removal of stigma), and the “wink, wink, naughty boy” returning to bank exams.

That reflects in the monetary aggregates. M2 and MZM both have moved up smartly since the beginning of the temporary loosening, as have total bank liabilities, which is a good proxy for M3. That said, because LIBOR is high relative to Fed funds, it is less good of a proxy, because banks are less willing to lend unsecured to each other in the Eurodollar markets.

Think of it this way, US Dollar LIBOR has only incorporated 16 basis points of the 50 basis point rate cut, measured from the equilibrium level that existed previous to the latest crisis in 2007. During the rate rise, they moved pretty much in lock-step.

So, things are a little better on the liquidity front in the short-run, but not much better. If the banks begin to become more conservative, just for survival reasons (i.e., more leverage is permitted, but they don’t want to use it), the small effects of regulatory easing will be erased.

Position: none, but while I wrote this, my youngest boy (10) came up to me, and asked me to explain what the stock market was like during 9/11, and during the Great Depression. It is very rewarding to be with my family during the day.

After this, Dr. Jeff Miller of A Dash of Insight pinged me asking me to clarify a little.? My response went like this:

You’re right, I need to be plainer about where I agree with him, and disagree with him, and I’ll probably put that into a post tonight at my blog.? Oddly, his models, from what I can gather, work off of some sort of cash flow yield for valuation, and even have a “don’t fight the Fed” component to them, in addition to momentum.? The reason this is weird, is that from those simple measures, he should be far more bullish, but he is not.? My suspicion is that he assumes that profit margins will mean revert, which they will, but maybe that will happen a lot more slowly than many anticipate.

As for his theory on the Fed, he is off.? The Fed has real impact on the economy through its effect on short term rates, admittedly with a lag, and they can’t fix inverted situations, no matter how low rates go (like Japan).? They affect bank leverage quite a bit, and though not cost-less, it has a real impact on the economy, with less of a lag, unless they go too far.

In essence, Hussman got the data right, and part of the interpretation, but missed increased leverage at the banks, which so long as it is sustainable, will stimulate economic activity.? He also missed that “Don’t fight the Fed” generally works.? I understand his valuation arguments, but he needs to get more sophisticated, and look at relative valuations of stocks to bonds.? Stocks are quite attractive on a relative basis, at least for now.

Monetary policy and its effects are complex, and non-nuanced explanations do a disservice to readers, particularly when the investment prescription is too simplistic.? At present, the Fed has done little to increase the money supply directly, but has encouraged the banks to lend more.? If the banks can tolerate that, then good.? If not, then watch out, because the banks are integral to our credit-based economy.

No tickers mentioned

A Note on Contrarianism and Bubbles

A Note on Contrarianism and Bubbles

Posted on by David Merkel

There is a misunderstanding about contrarianism, that somehow if a lot of people think something, it must be wrong, so take the other side of the trade.? We can make an exception here for some financial journalists, because they are often late to catch onto a story, and thus, the magazine cover indicator often works.

My point here is that intelligent contrarianism does not work off of what market players think, but how much they have invested relative to their investment policy limits, and the capital that they have available to carry the trade.? When there are many investors that have gone maximum long on a given company, that is a situation to either avoid or short, because unless new longs show up, the current longs have no more buying power — it is a crowded trade.

I saw this with housing in 2005, as I wrote a piece on residential real estate that proved prescient.? It drew a lot of controversy, but my point was plain.? Where would additional buying power come from?? In September of 2005, I concluded that we were at the inflection point.? One of my theories about inflection points is that there is no good numerical signal of an inflection point, but qualitative chatter undergoes a shift at the inflection points.? In that case, I had a series of googlebots trawling the web for real estate related chatter.? The tone shifted in September/October of 2005, but it was largely missed by the media and the markets.

Though I have nothing written on the web on the Internet Bubble, the qualitative chatter change that happened in March of 2000 was commentary from a variety of companies that had relied on vendor financing were turned down by their vendors.? That was new, and it indicated a scarcity of cash.? My rule of thumb on bubbles is that they are primarily financing phenomena; bubbles pop when cash flow proves insufficient to finance them.

Now, with both the residential real estate and internet bubbles, there were a bunch of naysayers prior to the bubbles.? Most were way too early.? Keynes observed something to the effect that markets can remain irrational longer than an investor can remain solvent.? Risk control is a key here, as well as cash flow analysis. When does the financing fall apart?? What will the inflection point, with all of its fog, look like?? Where is the weak spot in the financing chain?

Those naysayers were an inadequate reason to take a contrarian position; many of them didn’t have a dog in the fight, aside from intellectual bragging rights.? Rather, the contrarian position was to ask what side had overcommitted relative to their ability to carry the positions, and the ability of others to get financing to buy them out.

Where I differ with many permabears is that I am usually unwilling to extend my logic to second order effects.? Just because one area of the economy is falling apart, doesn’t mean that a related area will of necessity get blasted.? There are dampening effects to almost any economic phenomena, such that you don’t get cascading effects where failure in one area leads to failure in others, leading to a failure of the system as a whole.? The exception is of course the great depression, and that was a situation where the whole economy was overlevered.? We’re not there today, yet…

Okay, one semi-practical application, and then this article ends.? I get a certain amount of pushback for being bearish on the US Dollar.? I’ve been bearish on the US Dollar since mid-2002, when I saw that our monetary and fiscal policy were shifting to aggressive levels of debasement stimulus.? Today I heard someone dismiss further US dollar weakness because “everyone knows that.”? Well, if everyone knows that, tell it to the foreign investors who are stuffed to the gills with US dollar claims (bonds), such that their economies are beginning to suffer higher inflation.? I see a continued crowded trade here, and I am waiting to see where the pain points are, such that foreign central banks begin to intervene to prop up the dollar.? It hasn’t happened yet, and we are within 20 basis points of taking out the all time low in the dollar index, set back in 1992.

The Longer View, Part 5

The Longer View, Part 5

Posted on by David Merkel

There’s no order to this post, so enjoy my reflections on broader trends that are affecting the markets.

  1. Corn-based ethanol is costly, and a mistake for our government to subsidize it, when we could buy sugar-based ethanol from Brazil. I’m no environmentalist, but even I can see the advantages of eliminating sugar subsidies and quotas here in the US. The only people hurt are some rich farmers that bribe Washington to keep the subsidies. With a little encouragement from the US, Brazil could adopt more environmentally friendly harvesting techniques, while not kicking up costs that much. Such a deal, better economics, and better for the environment.
  2. Stories like this always make me skeptical. Remember cold fusion? Maye there is a real innovation here that produces more energy than it consumes on net. I wouldn’t bet on it, though.
  3. Since the creation of the Earth, farming has been the dominant occupation of man, until now. More people are employed outside of farming, than inside it. This is not big news, except to confirm that what happened to the developed world 80 years ago is happening to the world as a whole now.
  4. ETFs are not open end mutual funds, where there is one price struck per day for liquidity. For small ETFs, the bid-ask spread can be quite wide on small funds. This shouldn’t be too surprising; the same is true of any small stock. If there is demand for an ETF concept, more units will get created as people bid for them, and the bid-ask spread will narrow.
  5. Rationality in markets is misunderstood. You can bring bright people to manage money, and they will still in aggregate become prey to the speculative aspects of the markets. Some will resist it, but most won’t. It is not a question of intelligence, but of discipline.
  6. Give Hersh Shefrin some credit. I think that behavioral finance is a much richer explanation of the markets than modern portfolio theory. MPT exists because it is easily mathematically tractable, which allow professors to publish, and not because it is a correct description of reality.
  7. It’s tough to be an orphan company. Much as I like investing in companies that have no analyst coverage, if they are cheap enough, when a company loses analyst coverage, the stock price typically declines, and often, the company disappears within a few years. Perhaps the lack of analyst coverage is a proxy for the demand for a company to be public, rather than private.
  8. Here’s a good article on why the market crashed in October of 1987. My quick summary for why it happened was that bonds were more attractive relative to stocks, and dynamic hedging left the market unstable, as many player were willing to sell on big down days.
  9. Will junk defaults triple from 2007 to 2008? Seems reasonable to me; given all of the CCC and single-B issuance over the last few years, the companies that have recently issued bonds seem weak to me.
  10. Can Thompson-Reuters give Bloomberg a run for its money? My guess would be no. Bloomberg is a much richer system, and for those that need that level of complexity, that is where you can get it with great ease.

Enough for the evening. More to come tomorrow.

Another Delisting — The Cost of Sarbanes-Oxley

Another Delisting — The Cost of Sarbanes-Oxley

Posted on by David Merkel

I know why Sarbanes-Oxley [SOX] came into existence: to give one of America’s least productive Senators a fitting legacy.? I think the legislation was perhaps well-intended, but on the whole, it has perhaps imposed more costs than produced benefits.? Today I am faced with one of the costs: Lafarge SA has delisted, and now trades on the pink sheets.? Now, big institutional investors will buy and sell shares of this fine firm on the Paris bourse, but I’m not big, so I end up with an illiquid nonsponsored ADR.? This is the third time this has happened to me since the passage of SOX, because my investing travels the world in a cheap way, through ADRs.

It has been said in many ways, but I will summarize it in this way: there is price, quantity, and quality.? You can at most regulate two out of three, and usually, it’s not wise for a government to regulate more than one variable at a time.? Often, it is wisest not to regulate, unless there are material problems in quality that ordinary people cannot verify, and yet ordinary people have a common need for (think of food safety, and our government does well at that, but could do better).

Large companies are complex, and the accounting is more so.? The personal burdens placed on the CEO and CFO are misplaced, in my opinion, and the degree of auditing/testing prior to SOX was adequate to catch most abusive situations.? Are financial statements higher quality now?? Yes, but at a cost: Higher accounting costs, particularly for smaller firms, more firms going private, and fewer foreign firms listed in the US.? (Note to those pushing for unification of GAAP and IFRS.? If you’re trying to get more listings in the US, it would be better to aim for reform of SOX.? If GAAP and IFRS are the same, and I were a medium-sized US firm, maybe I would list in London.)

There is a logical balancing point to regulation, and SOX tipped the balance, imposing more costs than the value of improvements in quality.

Full disclosure: long LFRGY (not LR 🙁 )

The Advantages of Being a Small Investor Amid Too Much Leverage

The Advantages of Being a Small Investor Amid Too Much Leverage

Posted on by David Merkel

Here’s a question from a reader a few weeks ago.

I consider myself to be a value investor and stick mainly to stocks
where I feel the asset to equity ratio is reasonable along with
consideration of other factors such as PE & share price to book value etc.
As a result, I am not panicking with the recent mkt downturn and expect
to hold most of my positions thru the major downturn when it happens.


Despite my resolve, I can’t help but feel uncomfortable with the recent
comments on subprime and liquidity etc. Again, I am a very inexperienced
amateur investor, but what I seem to be getting from the reports is that
there is so much leveraged investment in the markets these days that
even these mini downturns may force selling of stocks to cover leveraged
positions and could wash over the entire market. Reports of complete
funds being wiped out as a result of the necessity to cover leveraged
positions seem incredible to me. ?I personally feel leveraging should be
left to very skilled, specialized traders and will only consider it when
I have a portfolio of sufficient size that I would be able to use it as
insurance and in turn cover a position if required.

?

Having said all of this, I have several questions, if you would be so
kind as to consider.

?

Is there a way to assess the volume of leveraged positions relative to
the whole market and likelyhood to tip the whole market and the average
% the market will retreat based on the amount of leveraging in the
markets and the historical data on the effects?

?

Are there not rules that govern funds, in order to protect the investors
in the funds from complete liquidation due to leveraging by the managers
and at any rate doesn’t someone review the activities of the fund managers?

?

Is this leveraging in the marketplace so widespread and common now that
small investors like me are tilting at windmills if don’t participate?

?


I realize that these questions may be rather uninformed and somewhat
equivalent to “the meaning of life” scenerio, however I have been
reading your blog quite faithfully and with my limited understanding of
some of the technical jargon, find it very interesting.

Thanks for asking your question, and sorry I didn’t get to it earlier.? There are several things to write about here:

  • How serious are leverage problems in the market?
  • There are certain forms of leverage that are well measured, and some that are not.
  • Some institutions have leverage rules, and some don’t, sort of.
  • Am I at a disadvantage as a small investor, particularly if I stay unlevered?

Let’s go in order.? The leverage problems in the market today are significant, though none are urgent at present.? The furor over ABCP and SIVs and other bits of short-term lending have largely passed.? Good collateral got rolled over, bad collateral got picked up by stronger institutions.? That said, there are other important problems in the market that are not at a crisis point yet:

  • Falling residential real estate prices, and the effect on mortgage default, and the effect on those that hold mortgage securities.
  • Private Equity’s ability to repay debt on new acquisitions.
  • The willingness of the investment banks to takes losses on prior LBO lending commitments.
  • Losses in the CDO market, and who owns the certificates with the most exposure to loss.
  • Losses from high-yield lending to CCC, and single-B rated firms.
  • Are any significant financial institutions overexposed to the above items, such that they might be impaired?

Now, some of the leverage is well measured, and some is not. We really don’t know with derivatives what the total exposure is, and whether the investment banks have been clean with their counterparty management.? (That said, so far it looks like it is working.? There may be a Wall Street rule, that if someone is near the edge, find a way to kick them over the edge, so that you can foreclose with more collateral.)

We also don’t know about lending to or from hedge funds, and hedge fund-of-funds. ?? Non-bank lenders, we know about what they securitize publicly, and that’s most of it, but the rest, we don’t know.? Foreign lenders to the US — the Treasury collects some data on them, but the detail is lacking.

All of these are areas where reporting requirements are limited to non-existent.? Regulated domestic finance — we know a lot about that, and that’s a large part of the system; the open question there, is how much the regulated part of the system has lent to the non-regulated part of the system.? Difficult to tell, but given the slackness of bank exams over the past five years, it could be significant, but I doubt perilous to the system as a whole.

Banks, S&Ls, Mutual funds, Insurance companies, and margin accounts have leverage rules. ? Many non-regulated entities face leverage rules from the ratings agencies, which limit their ability to borrow and securitize.? Still other face limits on leverage from those who lend to them, in the form of debt covenants.? Almost everyone is limited in some way, but in a bull market, those limits often get compromised as a group.? The limits are not as wide as would be optimal for financial system stability.

So, there are some protections for those who lend to hedge funds and hedge fund of funds, but little protection to those who invest in them.? Hey, if you’re a big institution, and invest here, you are your only protector; no one is coming to rescue you in a crisis.

But onto the last question:? Am I at a disadvantage as a small investor, particularly if I stay unlevered??? You have many advantages as a small investor.? One? of the largest advantages is that no one can force you to be hyper-aggressive, except you yourself. If you are reasonable in your return goals, you can safely achieve better than your average levered competitor through a crisis.? An unlevered investor can’t be forced by anyone to take on or liquidate a position.? Levered investors, or those with return requirements from outside parties, do not fully control their own trades.

Second advantage: you can be more picky.? You can avoid trouble areas in entire if you want.? Many institutional investors face diversification or tracking error requirements, which force them to in vest some in areas that they don’t like.? As an example, I was one of the few investors that I knew that didn’t take some losses from the tech bubble popping.

Third advantage: you don’t have to take risk if you don’t want to.? If the market is too frothy, and shorting is not for you, just reduce exposure, and wait for a better entry point.? (Warning: that entry point may not come.)

A disciplined private investor may not have the same level of knowledge as the institutions, but he can have a longer time horizon, and play the out of favor ideas that might threaten job security of those who work inside institutional investors.? With that, I would advise you to take use your advantages, and invest accordingly.? Keep it up with the value investing!

For those with access to RealMoney, I advise reading these longish articles if you want more background on how I think here:

Managing Liability Affects Stocks, Pt. 1
Separating Weak Holders From the Strong
Get to Know the Holders? Hands, Part 1
Get to Know the Holders? Hands, Part 2

Buying Formerly Investment Grade Bonds of LBO Deals

Buying Formerly Investment Grade Bonds of LBO Deals

Posted on by David Merkel

Here was a reader question from yesterday:

I?ve been reading your blog for awhile, and I appreciate all the hard work you put into it. I especially like how you comment on intermarket relationships, and it?s helping to quicken my ever so slowly growing knowledge of the markets.

I read your comments that higher quality bonds should perform better than lower quality, because of a probable rising cost of capital for lower quality companies. In a different environment, or for financially secure companies, is it ever a good idea to make a leveraged buy of higher yielding bonds, where the bond sells at a discount and the coupon is greater than the margin interest rate?

I realize that junk bonds are called such for a reason, and that if reaching for yield was a no-brainer prospect then everyone would be doing this. But I notice that a company like Alltel with a 7/01/2012 maturity has a 7% coupon and 9.156 YTM, and a borderline investment grade rating. While a lot more research would need to go into a bond before buying, would something like this, in theory, be safely bought with any leverage?

Lastly, is debt issued by companies acquired by private-equity firms worth looking at, or is it to be avoided at all costs?

Thank you very much for any help you could provide, and I apologize for the long length of my email,

Yes, in a different environment, a leveraged purchase of lower quality bonds can be a great idea, though I tend to purchase the equity instead. Starting about the time of the Iraq war, we hit a period where low quality bonds outperformed for four years. Since then it has been tough; it goes in cycles. Typically, the time to buy low quality bonds is when everyone is scared to death, the VIX is over 40, and realized defaults are high. This scares everyone away.

Now, with Alltel, this reminds me of an ?Ask Our Pros? question that was asked of me on RealMoney, back when they had that feature. (I think I got asked the most, because of my unconventional skill set, but I don?t know that for sure?) A read asked about Toys ?R Us bonds. Here?s what I wrote back then:

Toys R Us Debt
4/4/05 7:26 AM EDT

Reader: What do you think of buying debt of Toys R Us (TOY:NYSE) now that they are being acquired, I don?t see KKR buying a company and defaulting on its debt. I am specifically looking at the 7 5/8 2011 trading at about 95. ? G.S.

David Merkel: I think you ought to be careful here. Buying the debt of a junk-rated company owned by private investors is not trivial.

Suppose you source the bonds at $95, for a yield to maturity in about 6 1/2 years of 8.66%. The best thing that could happen is that the private buyers turn around and sell Toys R Us to an investment-grade buyer who foolishly decides to guarantee the debt. Less good, but still good, is that the spread compression in the market continues, your bonds get bid up and you sell for a profit. Still less good is that it matures and you make your 8.66%. Now for the bad scenarios.

When the Toys R Us bond in question was issued, it was an investment-grade bond. Toys R Us won?t file financial statements. There are no covenants to protect you. In principle, the private buyers could sell a profitable division like Babies R Us and pay themselves a special dividend with the proceeds. You just lost security as a result. Granted, a case could be made for fraudulent conveyance, but try proving that in the courts against the private buyers? legal team. Also, you could be structurally subordinated by bank debt at Toys R Us. The private buyers could borrow at the bank with Toys R Us as the borrower and pay themselves a special dividend (if the bank lets them). You now have less security.

Or, they could use the money to grow the business. If things go well, they win big, and you get principal and interest. If things go badly, you both could end up with zeroes, but remember, they are private buyers; they probably got some level of dividends out of the deal. Their objective is to skate on a thin equity base to make the highest return on equity that they can. They don?t care about bondholders, unless they are selling bonds.

Their interests and yours are not perfectly aligned. The spread on the bond is weak single-B, which is fair in my opinion for the risks that you would be taking on relative to other securities like it in the market. Those risks are real, and not ones that I typically like to play.

No positions

With Alltel, you are similarly facing a private equity buyout, which will get done if the LBO debt market normalizes (not holding my breath). It is junk-rated by two agencies, and investment grade by two. Unless the deal fails, it is junk grade, with all of the problems listed in my note above for Toys ?R Us.

There is a time in the cycle to buy debts like this, but it is not now. The level of panic is too low. Wait until we see significant defaults in high yield borrowers, and then revisit this question. Spreads have widened on high yield names, but not as much as they will when defaults start coming through.

One final note, when the cycle turns, you don?t want to mess around with AT paper maturing in 2012. You would want the stuff maturing in 2029 or 2032. If you?re going to play it, play it to the hilt, but only once the cycle has turned.

Tickers mentioned: AT

Watching the Maple Leaves Rise as Fall Approaches, or, Maybe I’m Just Looney

Watching the Maple Leaves Rise as Fall Approaches, or, Maybe I’m Just Looney

Posted on by David Merkel

What a day.? We’ve had too many “What a days” lately, and its late.? Over at RealMoney today, I posted this:


 David Merkel
Watching the Maple Leaves Rise as Fall Approaches
9/20/2007 12:49 PM EDT

It brings a lump to my throat, but the Canadian dollar briefly traded over parity to the U.S. dollar today. My guess is that it decisively moves above the U.S. dollar, and stays there for a while. Why not? Their economy is in better shape.Oh, and to echo one of Doug’s points, watch the 10-year swap yield. Nothing correlates better with the prime 30-year mortgage rate. It’s up 13 basis points since the FOMC move.

Looking at slope of the yield curves 10-years to 2-years, the Treasury curve has widened 20 bp and the swap curve 23 bp. If all Bernanke is trying to do is calm the short-term lending markets, that’s fine, but the long-term markets are getting hit.

Even in the short-term markets, things aren’t that great. We’re past the CP rollover problem, but the TED [Treasury-Eurodollar] spread is 135 bp now, and that ain’t calm.

I’m not a bear here, but there are significant risks that we haven’t eliminated yet… most of them stemming from the need for residential real estate to reprice down 10%-20% in real terms. Hey, wait. Hmm… what if the FOMC doesn’t really care about inflation anymore? They could concoct a rise in the price level of 20% or so, which would presumably flow through to housing, bailing out fixed-rate borrowers with too little margin (ignore for a moment that floating and new financing rates will rise also).

Okay, don’t ignore it. It will be difficult to inflate our way out of the problem. Even as the dollar declines, it will cause our trading partners to decide whether they want to slow their export machines by letting their currencies rise or buying more eventually depreciating dollar assets.

I would still encourage readers to be cautious with real-estate-related assets and those who finance them. Beyond that, just be wary of firms that need financing over the next two years. It may not be available on desirable terms.

Position: none, but who is not affected by this?

Interesting Times

We are within a half percent of taking out the all time low (1992) on the Dollar Index [DXY].? Since the move by the FOMC the ten-year Treasury has moved up 21 basis points.? That’s not stimulative.? Then again, maybe the FOMC wants to address the short term lending crisis, but could care less about stimulating the economy as a whole.? If this is their goal, let’s stand up and applaud their technique, but perhaps not their goals.

All that said life has returned to the investment grade bond market, and may be returning to the junk market, and maybe even the LBO debt market, if the banks will take enough of a loss to get things moving.? What I am finding attractive currently in fixed income right now is prime residential mortgage paper (this is rare — I usually hate RMBS).? Implied volatilities in are high, just look at the MOVE index, but they will eventually come down, at which point, the prices of mortgage bonds should improve (on a hedged basis).

Beyond that, I like foreign bonds, but am uncertain as to what currencies to go for; I still like the Canadian dollar, yen and the Swiss franc, but beyond that, I don’t know.? Aside from that, keep it short and high quality, because the long end isn’t acting well, and the junk credit stress is starting to arrive.

Away from that, I also still like inflation protected bonds, but they have run pretty hard since April.? TIPS overshot on the FOMC announcement, and have undershot since.? What a whipsaw.

So where would that leave me if I were a bond manager?? Foreign, mortgages, inflation-protected, and short duration high quality.? Sometimes the game is about capital preservation, and nothing more.

Post 300 (Mainly About Friends)

Post 300 (Mainly About Friends)

Posted on by David Merkel

Well, its that time again.? WordPress informs me that this is post 300.? For me, that means a time to stop and reflect, and let readers know what’s going on in my life.

The blog has been live now for about seven months, and it has seen growth.? Growth in readers at syndicated sites (I’ve lost count), growth in readers through Feedburner (RSS) and Feedblitz (e-mail), growth in the number of blogs linking to me, growth in comments, personal e-mails, and spam.? Since the blog started, I have screened out over 6000 spam comments.? It fascinates me how much effort goes into trying to penetrate the comments filter of this blog.? I review the spam filter periodically to rescue the 0.1% of captured posts that are genuine.

As in most of life, we don’t succeed purely on our own.? It helps to have friends.? My most personal support comes from my family and my church.? Beyond that, though, I don’t think this blog would have gotten where it is today with the aid of James Altucher at TheStreet.com, Abnormal Returns, Charles Kirk at the Kirk Report, Barry Ritholtz at the Big Picture, StumbleUpon.com (surprising how much traffic has come from there, and all recent), Roger Nusbaum of Random Roger’s Big Picture, Bill Luby at VIX and More, Seeking Alpha (Aleph – Shalom), and Jeff Miller at A Dash of Insight.? A special thanks to my friend Cody Willard who encouraged me to do this early on, and who has received the promotion of a lifetime recently by becoming an anchor at the new FOX business news channel.? The quality of insight in business journalism has just taken a turn for the better.

Speaking of friends, I’d like to talk a little about what I am up to now. ? No one has bitten yet on my equity management product, which has handily outperformed the market over the past seven years.? In one sense, that’s no surprise.? Doing well with a small asset base is not going to attract many takers, even if you have done in a liquid, disciplined, institutional way, as I have.? But I am still talking to people, and I have a four page synopsis of what I have done over the past seven years.? If any of my readers has an institution or a wealthy friend that you think might like to seed me (early investors get advantageous terms, permanently), please e-mail me.? Any real referral puts you in my “friend for life” category.

We’ll see where this leads. My dream is to manage money for others using my eight rules, and eventually set up a mutual fund so that smaller investors can join in.

But friends help in other ways also.? Two friends have decided to employ me as a consultant.? One for bond management advice at his bank, and management of two balanced funds, and another to analyze four insurance companies that he owns big stakes in to get a second opinion.? I am available for other consulting arrangements as well.? My wide (shallow?) skill set makes me particularly good for projects requiring knowledge of a broad range of subjects.? I’d like to say that no problem is too tough for me to take on, but that’s probably not true.? I have solved many tough problems for life insurers and investment firms, though.

Friends help in other ways also.? I have an article coming out in MoneySense magazine in November; an editor came to know me through RealMoney and my blog.? I am friends with a number of public insurance management teams.? One of them has granted me an interview in October; we will see where that leads.? My friends from my corporate bond management days are helping me as best they can; I need all the help I can get.

That’s what I am up to now, aside from seeking for venture capital for a friend, and aiding other friends in their business pursuits.? Oh, and seeking out other writing assignments.

A special thanks to the 22% of my audience that hails from outside of the US.? It surprises me that I have many readers in Canada, the UK, the Netherlands, China, Uruguay, France, Hong Kong, Switzerland, Singapore, Australia, Germany, Japan, Italy, Spain, South Korea, India and Taiwan.

Now, about future blog plans. ? Here’s what I have coming up:

  • Build out my books page, with book reviews, complete with a little Amazon store.
  • Articles: How markets and traffic are similar, When to be flexible versus rigid, hidden correlations in strategy, problems in academic finance, rescuing Capitalism from capitalists, and more.? Also more articles that answer reader questions.
  • My usual coverage of current topics, particularly when things are hot.
  • One more thing: a stock picking contest, akin to the Value Line contest done in the mid-1980s, with a prize to the winner.? This contest will test skill in picking stocks, rather than luck in trading, as so many contests do.? Sponsors are welcome to apply, otherwise the prize will come out of my pocket, which means it won?t be large.? A sponsor will receive free advertising on my site for the duration of the contest.

Finally, thanks to all my readers who take time to read what I write.? It is a pleasure to produce content for you, and I will do my best for you.

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