Search Results for “The Education of a Corporate Bond Manager” – Page 6

Sorted Weekly Tweets

Posted on 10 November 2012 by David Merkel

Politics

California Democrats seize super majorities in both houses of Legislature http://t.co/Wp2cVYTF CA businesses plan exit strategies $$ Nov 08, 2012
Harsher energy regulations coming in Obama’s second term http://t.co/JHDKAhok Fracking, chemical emissions, & more $$ -losing green energy Nov 08, 2012
US crop insurance a post-election target, farm bill elusive http://t.co/9OdbRVjy W/Ag doing so well over last 5 yrs, this should b ez, not Nov 08, 2012
Ethanol Going Ugly Turns Bush Plan Into Obama Test http://t.co/Pe6ixxc1 Should b a no-brainer, but Congress ag state politics r ugly $$ Nov 08, 2012
Could This Be End of Evil Filibuster? http://t.co/t72aR3OR Limit filibusters to actual votes & require physical presence on the floor $$ Nov 08, 2012
Obama Win Means Health Overhaul to Move Ahead in States http://t.co/ybXggsLt Destroy health care 2 replace it w/single-payer system $$ Nov 08, 2012
Yep, There Have Been Problems With Email Voting in New Jersey http://t.co/lZjzVNrG In general, probability of fraud in voting is rising $$ Nov 07, 2012
Defense Fund Rockets to Four-Year High: Romney Rally? http://t.co/3fzUDRTH Discounting Obama’s change of heart after election $$ 😉 Nov 06, 2012
Romney Threatens Pimco?s Gross With Bernanke-Dumping Plan http://t.co/xO6Tm0aF 2 many links in the chain of reasoning; low prob correct $$ Nov 06, 2012
Southfield Twp. voter appears to die, then asks ‘Did I vote?’ http://t.co/2ZwRgotp I found his words to his wife 2b touching in many ways $$ Nov 06, 2012
Tuesday Is Election Night, Be Careful What You Tweet http://t.co/UdPPMYiJ Measure twice, cut once, tweeps. & bring a dose of skepticism $$ Nov 05, 2012
Three Men Make a Tiger http://t.co/eX1PziJK John Mauldin predicts Romney as victor; piece is mostly about eliminating confirmation bias $$ Nov 05, 2012

China

China: Worse Than You Ever Imagined http://t.co/Kp69IC1n 40MM+ people were killed during the “Great Leap Forward.” Mao deserves derision $$ Nov 08, 2012
China’s leadership challenge in new era: douse “inequality volcano” http://t.co/pJiAksUl Widespread poverty in China scares Communist Party Nov 08, 2012
A Cheerleader for Mao’s Cultural Revolution http://t.co/d3RhdV95 Lied about Cultural Revolution & The Great Leap Forward. Millions died. Nov 08, 2012
The Chinese Credit Bubble – Full Frontal http://t.co/MDZn1jCs As I have argued for some time, total debt in China is quite high $$ #danger Nov 07, 2012

Companies

Peltz Takes Stake in Danone http://t.co/P1AdRe9G Danone $DANOY is a French firm, will be difficult to encourage change $$ Nov 08, 2012
Prudential Records $618 Million Loss on Derivatives http://t.co/6ZQK1Uk5 I worry about life industry; the acctg 4 secondary gtees: yuck $$ Nov 08, 2012
Nucor Galvanizes Gas Hopes http://t.co/NmfZ9fmJ $NUE provides capital 4 development of gas resources of $ECA -Gets 50% stake in wells $$ Nov 08, 2012
Office Depot-OfficeMax Deal Seen Rescuing Value http://t.co/bNsFKuJU The failure of office retailers as the non-profit $AMZN undercuts $$ Nov 07, 2012
SapuraKencana Agrees 2 Buy Seadrill Tender Rigs http://t.co/XXrAsjFj Interesting deal, clever investor; expands Malaysia exposure $SDRL $$ Nov 05, 2012
Sharp blunted, and it?s not alone http://t.co/5jTHzKuN Argues that Japanese electronics mfg & exports r getting killed by strong yen $$ Nov 04, 2012

Federal Reserve

Inflation, QE and forcing the banks to lend http://t.co/XuPgRPJm I’ve subscribed 2 The Economist for 25 years; they r getting dumber $$ Nov 04, 2012
Casting Dual Roles, at Treasury & the Fed http://t.co/kIwpAzZ3 Bernanke’s Last Supper & The Return Of Larry Summershttp://bit.ly/Sp9PBZ $$ Nov 04, 2012
Off of the last tweet, it would be nice 2c Bernanke retire; he really may b tired of the abuse. His prob was he thought he knew what 2 do $$ Nov 04, 2012
& as a result, could not c that Neoclassical macro does not work with an overindebted economy. We need fewer economists at the Fed & Tsy $$ Nov 04, 2012
Wrong: Seth Klarman Goes Nuts On The Fed In His Latest Investor Letter http://t.co/G6gAkMfU Y I think value investors should run the Fed $$ Nov 04, 2012
Seth Klarman, like most value investors, is farsighted & not just thinking about how to goose GDP for the next year. Klarman 4 Fed chair $$ Nov 04, 2012

Eurozone

Convergence between the core and the periphery economies in the Eurozone http://t.co/2oD2exeV Drowning PIIGS pull Germany & France under $$ Nov 08, 2012
ECB & Fed: Worlds Apart http://t.co/zZuaFiXU Axel Merk praises the ECB & disses the Fed. Argues that ECB has not gone fiscal as the Fed has Nov 08, 2012
Unsteady Greek Coalition Faces More Strikes http://t.co/dxQJYzmw Suspect they make it through; Greeks don’t want 2 leave Eurozone yet $$ Nov 05, 2012
The peripheral threat to France http://t.co/0atOAKZq Many of the PIIGS r getting more competitive relative 2 France. No E-zone w/o France Nov 04, 2012

Rest of the World

Old People Versus Babies, In One Graph http://t.co/Erk2Mu8z Global demographic crisis in one very easy to manipulate graphic $$ Nov 08, 2012
Iceland Sees Mortgage Bubble Threat From Foreign Cash http://t.co/djtYZDxw The problems of capital controls start to bite $$ #nofreelunch Nov 06, 2012
Turning Trash Into Tidy Profit http://t.co/FvM32C3a Optimistic story on turning trash into durable building materials in Senegal $$ Nov 05, 2012

Sandy and Disaster

Frederick County teen wins regional science competition http://t.co/F72thGx3 The software can read a picture & tell where it is. $$ Nov 08, 2012
Sandy’s Aftermath: Samuel Pritt Develops Geolocation Software http://t.co/InnwZaGe Young friend won Siemens US Science Competition $$ Nov 08, 2012
Insurance divides haves from have-nots after Sandy http://t.co/NngZdchm Insurance is for catastrophes; scrimp on frequency, not severity $$ Nov 04, 2012
Reserved Buoyancy, Down-Flooding, and Living Off the Grid http://t.co/TXxn9f6e The value of slack in physical systems, especially boats $$ Nov 03, 2012

Market Dynamics

FIRE IN THE DISCO! http://t.co/YComOnGA @reformedbroker warns us that a recession is coming, & talks about a decline in corporate profits $$ Nov 08, 2012
Even 6.75% is too high. Looking at the Q-ratio, CAPE10, & long high quality bond yields would make 4% more realistic http://t.co/vjP0X7y1 $$ Nov 06, 2012
Lightening the Pension Load http://t.co/bi2j6cdJ Never thought I’d c terminal funding return; can b bad 4 annuitants if insurer fails $$ Nov 06, 2012
Fitting Factors Into the Formula http://t.co/35speWwR Bob Arnott& Cliff Asness discuss quantitative investing; long article worth reading $$ Nov 06, 2012
TAGP expiration will put downward pressure on short-term yields http://t.co/YgwmR2bu Once guarantee goes, much S-T $$ will look 4a home $$ Nov 06, 2012
Cash as Trash, Cash as King, and Cash as a Weapon http://t.co/fWS1TOTl In different environments & hands, cash has different properties $$ Nov 06, 2012
Wrong: Is Your Manager Skillful?or Just Lucky? http://t.co/vJu2tTrd Bill Miller neglected “margin of safety” & reaped bad results $$ Nov 05, 2012
http://t.co/VRj1k4Vg They didn’t read paper closely. Performance of anomalies diminished, not destroyed, by publishing academic research $$ Nov 05, 2012
For John Maynard Keynes, Economic Theory Was a Sideline http://t.co/IVdB6Gyc He was a better investor than he was an economist $$ Nov 05, 2012
It?s the Earnings, Stupid: ?Atrocious? Q3 Turns Josh Brown Cautious http://t.co/a2ChJKTL Time 2b cautious says @reformedbroker. Calendar? Nov 05, 2012
“All I know: The next bankruptcy cycle, whether in 2 or 3 or 4 years, is going to be one for the ages. Count on it.” http://t.co/xtHy7lqj $$ Nov 03, 2012

Policy

A New Idea of How to Fix the Ratings Agencies http://t.co/fTEECPUP by @carney | My response: http://t.co/3dWFo2Pv $$ Nov 06, 2012
Investors won?t read the fine print http://t.co/t2W8Nrk9 Even many institutional investors become overworked, lazy, etc. & don’t read $$ Nov 06, 2012
Hero of the day, CPDO edition http://t.co/wIxyPo2T I remember 2006 when @alea_ @interfluidity & I (@ Realmoney) were criticizing CPDOs $$ Nov 05, 2012
Health-Care Law Spurs Shift to Part-Time Workers http://t.co/0ui2LGvm Law of unintended consequences: How 29-hr workweek got created $$ Nov 05, 2012
10 things walk-in clinics won?t tell you http://t.co/qKPj3D3R Major factor is the loss of continuity u have w/doctor who knows u $$ Nov 05, 2012
After Bailout, Giants Allowed to Dominate the Mortgage Business http://t.co/K9HZZWDu “Is this what we saved [the financial system] for?” $$ Nov 04, 2012

Retweets

Can say that again RT @bespokeinvest: Wow, big selloff in the last couple minutes of trading. Dow down 430 points since Tuesday’s close. $$ Nov 08, 2012
Some gift RT @pdacosta: Gift that keeps on taking: France, Belgium agree to pump 5.5B euros into bailed-out Dexia http://t.co/qgq8PI6R Nov 08, 2012
RT @ReformedBroker: This Greek austerity bill is the equivalent of slapping a Kick Me sign on the Troika’s back. Gives us one day’s peac … Nov 07, 2012
Rupert goes back to sleep $$ RT @felixsalmon: RT @dansabbagh: Pearson says FT is not for sale. “This particular Bloomberg story is wrong. ” Nov 06, 2012
RT @SimoneFoxman: you’ve got to be kidding me. — Southfield Twp. voter appears to die, then asks ?Did I vote?? http://t.co/2ZwRgotp Nov 06, 2012
First of many 2 come RT @FrancesDenmark: Indiana is the first state to drop its pension return expectations below 7.0% http://t.co/ir8anqN4 Nov 06, 2012
Murdoch would b interested $$ RT @ReformedBroker: The Financial Slides RT @TheStalwart: Who will buy the FT? Maybe BI in a reverse merger? Nov 06, 2012
Bite your tongue 🙂 Janet Yellen has exceeded the Peter Principle $$ RT @fundmyfund: precious metals say = janet yellen here we come Nov 06, 2012
Easy 2 talk tough, hard 2 not repay $$ RT @munilass: So much for cities standing up to Calpers http://t.co/xWIciI4C Nov 06, 2012
marriage changes u $$ RT @moorehn Surprising: single & married women are further apart politically than men & women r http://t.co/b4adY1pc Nov 06, 2012
Probably priced in $$ RT @kyles09: isn’t the exp of TAG a negative for the big bank stocks or do you think it is already priced in? Nov 06, 2012
I was just looking forward to the end of the political season, sigh RT @jfahmy: Hillary Clinton listed as current 2016 favorite (6:1 odds). Nov 05, 2012
Dog bites man RT @TheStalwart: National Review endorses Mitt Romney http://t.co/ZBAptg8Q Nov 05, 2012
Wow $$ RT @businessinsider: New York Magazine’s Breathtaking Cover Shows Manhattan From Up In The Sky by @KimBhasin http://t.co/FaTgCqA1 Nov 03, 2012

Replies

@valuewalk Thanks. $DANOY might do what they can to improve margins, but might play badly in France. Has mgmt been s/h-friendly in past? $$ Nov 08, 2012
@Frank_McG Very cool. We homeschool — only 4 left, 1 senior, 2 freshmen & a 5th grader. My wife is having a blast. $$ Nov 08, 2012
@TheOneDave You’re welcome — you do some great stuff Nov 07, 2012
@TheOneDave Hey, Dave, don’t see where we can get the Chart… Nov 07, 2012
@amacker Floating NAV, hehe Nov 07, 2012
@TheStalwart My friend and former boss Eric Hovde would have beaten Baldwin, and handily… Nov 07, 2012
@kyles09 My actuarial conservatism, and knowing that God can do whatever he wants with me Nov 07, 2012
@carney I hear you: I’m going to write a piece where I take my “eliminate the rating agencies model” and clarify it http://t.co/x4WsWaj3 $$ Nov 06, 2012
@PragCapitalist Thanks, Cullen. I applied that idea to corporate board elections when writing 4 Realmoney, Shame it didn’t get traction $$ Nov 06, 2012
@michaelroston Yes, but there is a lot of $$ on both sides, and the phones ring. WV & PA gambling firms & Christians vs MD gambling firms Nov 06, 2012
@michaelroston However, if you live in MD all u hear about is 7, the ballot measure expanding gambling. Other measures: <crickets> $$ Nov 06, 2012
@BradErvin1 That’s what I am saying — they r taking consensus risks $$ Nov 05, 2012
@BradErvin1 But my point about the balanced funds is this: in the selection he could invest in, they r all taking the same broad risks Nov 05, 2012
@BradErvin1 57, Married, one kid at home, significant assets good job, wife w/good health, 52, he not so healthy, has saved aggressively Nov 05, 2012
@FriedrichHayek I knew that Keynes got bailed out once (or was it twice?), but he learned from his losses, & was far better at the end $$ Nov 05, 2012
@MarketIntegrity @CFAInstitute @CFAcareers @CFAevents You might want to get different logos; it makes you look like u r RT-ing yourself $$ Nov 05, 2012
@japhychron Bingo. You got it. Nov 04, 2012
@TeamHeadwaters Forgot about that.. those are some of the best limestone deposits in the world, in an area ideal 4 potato farming, right? Nov 04, 2012
@nelson3748 That seems correct, but doesn’t S. Korea have the same issues w/the Chaebol, & they r functioning ok, seemingly… Nov 04, 2012
@munilass Thanks. I put it on my wish list. We discussed mishedging in the finance markets, Soros, &c. Nice of him 2 spend time w/little me. Nov 03, 2012
@munilass What’s the title of the book? I spent about ten minutes talking with him in early 2000 at a Complexity Theory conf @ Columbia U Nov 03, 2012

Comments

I suspect that Obama ends up winning the popular vote as well, and maybe surpasses 50%, fwiw, which isn’t much… $$ Nov 07, 2012
Best thing about elections: they’re over. Second best: gridlock continues. Worst: Four more years of Bush-clone Obama. $$ Nov 07, 2012
“Stocks aren’t GDP futures, so its not a lock that they immediately fall during the recession?” ? David_Merkel http://t.co/CdH1CNuP Nov 08, 2012
Last pres election, took oldest child 2 vote. This time, took child #5 2 vote. If I live, next time will be kids 6 & 7. Time after, kid 8 $$ Nov 06, 2012
“Josh, the article is worth a read, but the Chronicle of Higher Education misreported on it. The?” ? David_Merkel http://t.co/BFGqCw04 $$ Nov 06, 2012
“People easily forget that the stocks of commodity producers are very different than buying the?” ? David_Merkel http://t.co/dDlMNxIY $$ Nov 05, 2012
Helping a client w/his 401(k). Common balanced fund risk factors chosen: Low Duration, Medium credit quality, Large Cap Blend Equities $$ Nov 05, 2012
The benchmark changes added jobs that were created at an unknown earlier point in time. If they were… http://t.co/TmRLG1vg Nov 03, 2012

Yield is the Last Refuge of Scoundrels

Posted on 31 October 201231 October 2012 by David Merkel

Governments involved in financial repression (keeping savings rates below the inflation rate) encourage their citizens to do stupid things by reaching for yield.? Remember, most people think of yield as a magic chicken that lays eggs on schedule, and never gets sick or dies.? Those who truly understand markets know that yield is an allocation of free cash flow, and that many businesses can’t control their free cash flow, so dividends are less than fully certain.

And so, I’m skeptical of the focus on income investing.? With bonds, I am not as skeptical, because there is a promised, though not guaranteed return of principal.? That doesn’t mean there aren’t problems there.? We are having a record year for issuance of corporate bonds.? Abbott Labs is offering a huge deal.? My experience with huge deals is to avoid them, unless there is some special reason to play, kind of like the last bond deal from Household International in 2002, where I bought and then traded them away for the 3o-year non-deal protected bonds bigtime.

That said, I get concerned over:

Preferred Stock
Mortgage REITs
Private REITs
Limited Partnerships
Junk Bonds and bank loans
Structured Notes
Ponzi Schemes (they sometimes look reasonable, like Madoff)
Even dividend-paying common stocks

China has low interest rates for savers, so many Chinese turn to Wealth Management Products in order to earn something decent on their money.? Many of them may be little different than a Ponzi scheme.? When governments do not allow savers to earn rates exceeding inflation, savers turn to all manner of products that could harm them, both legitimate and illegitimate.

The same thing goes on in Malaysia with their Gold Plans, and suchlike.? But let’s keep things simple: let’s invest in the best corporate bond investment out there: long Baa bonds.

What’s that I see?? We’re at a 50-year low for yields on low investment-grade-rated bonds.? Surely the economy should be booming.

What, like the Great Depression, we are in a liquidity trap?? Seems that way.? Additional capital finds rare incremental productive uses, and often the best use is shrinking the company by buying back stock.

Part of that stems from the folly of the Federal Reserve using its balance sheet to buy up all manner of high quality debts by expanding its balance sheet — its cost of finance is 0% (maybe, wait till the losses come, they came to Fannie and Freddie).? By doing so, they distort pricing in the debt markets, favoring issuers over lenders, favoring the government over the private sector.

It leads to nothing good, because increasingly marginal projects get financed.? As in Japan, the marginal efficiency of capital fell dramatically, and has not risen for two decades plus.? Though it would have been painful it would have been better to have more failures and longer recessions 1986-2007.? The Fed should have kept rates higher for longer.? We would have normal markets today if they had.

As I have said before, investors don’t do well when they don’t have a place to park excess money for a small real return.? I’m not looking for the ’80s, when the return was often huge, but something above inflation, fairly estimated.? Until then, the misguided plans of the Fed will continue to do little, as businesses look at the low marginal efficiency of capital, and shrink their operations.? Remember, when businessmen see economic policies that can’t persist, they don’t take advantage of the situation — they pull in their horns and become defensive.? Thus the budget deficits, QE, and the ZIRP lead to a slower economy in the intermediate-term.

On Floating Rates

Posted on 12 July 2012 by David Merkel

I have to admit I don’t have much sympathy for those who lent or borrowed at floating rates like LIBOR.? Personally, I have always preferred fixed-rate deals where everything is locked in from the beginning.? It means the terms are fixed, and either you can meet them or you can’t.

There are two problems with floating rate deals.? The first is that you can’t control your funding costs.? This stems from two things: short rates are volatile, and the index is typically not controlled, though it often acts like it is.? Here is an example: there were mortgages that floated off of the one-year Treasury Note rate.? Then the Treasury cancelled the one-year Treasury Note auction, and investment banks scrambled to come up with a substitute.? As I recall, they used the interpolated rate on six month bills, and two year notes.

When I was a corporate bond manager, aside from rare occasions, I never bought floating rate debt.? Why?? I needed more certainty for the client.? Fixed rate bonds and loans are more certain.? When you float, you are subject to the vicissitudes of the index, whether a borrower or a lender.

Whatever else is true, you do not control a floating rate index.? If a related party has some influence on it, that is a negative surprise, but there may be nothing illegal about their influence, particularly if it is moderate as is likely with LIBOR.

As I say to so many others in related situations: don’t give others options against you; don’t play in their casino by their rules.? Average people should not let financial institutions have variability of terms; terms should be fixed to the greatest extent possible.

And, why do borrowers go for floating rates, if they can be harmed by them?? Because they are cheaper on average.? Yield lust works on the downside as well, and many borrow shorter than is prudent for them, in order to save a little.? Works most of the time, but not all of the time, and when it doesn’t work, it can be ugly.

Thus I encourage fixed rate finance, as always, and encourage lenders and borrowers to fix their financing in advance.

On the Facebook IPO

Posted on 7 June 2012 by David Merkel

If you are a manager of corporate bonds, you get to learn the speculation cycle.? New IPOs may close in weeks if things are cold, and close in minutes if things are hot.

When things are hot in bonds, eventually the syndicate (“Wall Street”) decides that it is time to test the bullishness of buyers.? At such a time, they extend the time of the offering, and either lower the yield spread (raise the price), or increase the size of the deal.

When I was a corporate bond manager, if a deal was upsized by a large amount during a period while the market was hot, I would not buy.? Tough decision, but cutting against the grain is usually a good thing.? My brokers marveled that I was not participating in these large “benchmark” deals.? More often then not, they failed, and I smiled on the sidelines.? The brokers “stuffed” the ignorant buy-side that was all too willing to take risk.? Typically after that, corporate investors were more careful.

I don’t know the right value for Facebook, and I don’t think anyone does.? Too much of the value depends on future decisions, competitor actions, and economic conditions.? Valuing stocks where the positive cash flows are far out into the future is tough, should the cash flows materialize.

The last IPO I bought was Assurant [AIZ] where I was buying the company for <90% of book value,? and 9x earnings.? I’m a value buyer, so I buy companies where prospects are not fairly calculated by the market, but I avoid new issues where the price is outlandish.

Look, Wall Street works on two levels: distribute paper at a slight discount price, until buyers take it for granted and bid aggressively, leading to a mini-crisis, like it is for Facebook now.

Did Wall Street get the best price for Facebook’s current shareholders at the IPO? Probably yes.

Was that the right price? For recent investors, the answer is no.? But in any IPO process there were a wide number of ways to protect themselves:

1) Don’t participate in IPOs. When general valuations in the market? are high, IPO valuations are higher.

2) Avoid buying IPOs in hot sectors, they are often overvalued.? Only go for IPOs in sectors no one cares about, like insurance, where I offer you Assurant [AIZ} and Safety Insurance [SAFT], among others.? (I don’t suppose it helps you to learn that insurers return better than almost any other industry?? Didn’t think so… because it is a boring yet complicated business.? Even Buffett said about Assurant — “too complicated,” and he is one of the greatest insurance executives of all time.)

3) Avoid IPOs where the deal size is upsized.? When a deal is upsized that often means the underwriters are taking advantage of demand, which diminishes the likelihood of any short-term outperformance.? For this point, in the bond market, I would cut my bid, unless I really liked the credit, together with my analyst.

4) Avoid IPOs where the price talk is raised, which also limits the likelihood of any short-term outperformance.? Same thing as a bond manager, I would drop out out if the new yield did not meet my yield needs.

5) Buy IPOs when they are forced to occur and are hated, like my experience with the Prudential “C” bonds, and most mutual insurer conversions.? IPOs are like the market on steroids, you want to avoid them when things a hot, but they are interesting when things are cold.? After all, who wants to IPO when things are cold?? There are occasional situations where legal matters force a company to go public, and that can be an interesting time to be an opportunistic buyer.

6) Avid IPOs where the valuation is stretched.? It may be a great business concept, but can it grow into that fancy valuation?? Unlike Dr. Damodaran, I don’t go in for fancy reasoning that justifies high valuations.? Most investors are better off avoiding high valuation situations, and focus on more down-to-earth types of businesses.? (My recent purchases include: Crude Oil Refining & Transport, Integrated Oil Major, two basic technology companies with forward P/Es under 10, a specialty retailer that is the strongest in its category, and two insurers, one that is a holding company, and one that is a hedge fund.)

7) Finally, avoid IPOs where those that know nothing about investing are interested.? Facebook is a perfect example here, with a large number of users who love the company, but have little idea of how profits are made, or how they will grow.

IPOs are tough, I think tougher than ordinary investing, so? avoid them unless you have an edge that justifies participation.? Be tough on yourself here — what is your edge?? Share it with a friend who has expertise, and see if he agrees with you.? This is not easy stuff, it only seems easy when the market is running hot, and that is a bad place to be when it goes cold.

Full disclosure: long AIZ, for me and clients

Sorted Weekly Tweets

Posted on 12 May 2012 by David Merkel

Eurozone

Danske Bank?s Patience With Moody?s Evaporates http://t.co/eGbf3kV5 Questions over willingness of Denmark to provide support in a crisis. May 11, 2012
CIC Stops Buying Europe Government Debt on Crisis Concern http://t.co/dljk9Tau Overblown; China will return to funding the Eurozone $$ May 10, 2012
Greeks May Hold $510 Billion Trump Card in Renegotiation http://t.co/P7U4LSpG Depends on how well Core EZone banks have divested Greece $$ May 10, 2012
Spanish Banks Erode Creditors With ECB Loans http://t.co/HaEx3bgT Better collateral highly encumbered; Unsec debts implicitly subord 2 ECB May 10, 2012
Greece Euro-Exit Debate Goes Public http://t.co/0xOgsa7G Core Eurozone wrestles w/how to kick Greece out, even though they can’t. $$ May 10, 2012
How a Radical Greek Rescue Plan Fell Short http://t.co/Ds0589IG Greece is failing as a culture due2 corruption; no rescue would work $$ May 10, 2012
Denmark?s Banks Endure Writedown Shock Delaying Recovery http://t.co/A2Vdpymn Good sign on Denmark; take pain early -> in good shape $$ May 10, 2012
Greek Election Surprise Rejects ?Barbarism? of Bailout Austerity http://t.co/oX0nt5SF Growth is magic, magic I tell u! Just invoke it! $$ May 08, 2012
Merkozy End Means Franco-German Gulf; Greek Voters Rebel http://t.co/iCd0Cs6l Loss of Sarkozy may not b bad, but Greek paralysis will b $$ May 08, 2012
Francois Hollande has ten weeks to avert a French bond crisis http://t.co/3SEAWJB5 When few adults r in the room the children run wild $$ May 08, 2012
Challenge to Austerity, And Germany, Is Sharpened http://t.co/BWbgQJ85 The odds have risen that Germany will leave the Eurozone $$ May 08, 2012
Obvious but it needs 2b said $$ RT @Hawk100Clemens: Mauldin tells #CFA12 every monetary union in history has failed. May 07, 2012
France faces 40pc house price slump http://t.co/nPuMaVnJ If French banks have trouble now, just wait until the bad mortgage debt hits $$ May 06, 2012

JP Morgan

What Beached the London Whale? Credit Indices http://t.co/JKFxfaMb Crosshedging long credit risk by buying protection on an index? $$ May 11, 2012
J.P. Morgan Trades In Its Crown http://t.co/QUJ6hmoA That goes for firms and CEOs as well: $JPM and Jamie Dimon will not get free passes May 11, 2012
Drew Built 30-Yr JPMorgan Career Embracing Risk http://t.co/uocyyVC1 Lifetime 2build reputation; few years 2destroy it; revealed: 1 day $$ May 11, 2012
And the best way to reduce risk is to lower leverage & raise cash $$ RT @marydchilds: “The best way to hedge something is to get rid of it.” May 11, 2012

Facebook

Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO http://t.co/kL1VQYXU Cuts down on the tax bill; discount prior 2 IPO $$ May 11, 2012
Facebook IPO Said to Get Weaker-Than-Forecast Demand http://t.co/ktK5Bgun $FB faces slowing revenue growth, order books 4 IPO go slack $$ May 11, 2012

Miscellaneous

Google?s Brin Makes Strides in Hunt for Parkinson?s Cure http://t.co/YvL4LUNA He may get it one day; his Mother already has Parkinson’s $$ May 11, 2012
And also for those who call vegetables “veggies?” RT @jasonWSJ: Can we impose a $40 fine on dudes who refer to sandwiches as “sammies”? May 10, 2012
Firefox browser group irked with Microsoft, Windows 8 http://t.co/tBZ9GFuw Only Internet Explorer runs on Windows 8; expect some lawsuits $$ May 10, 2012
Aluminum Buyers in Japan to Pay Record Fee on Supply Drop http://t.co/7AVU1knI Smelting capacity reduced, China buys more, Japan pays up May 10, 2012
@RobTheStreet A lot depends on the definition of marriage, Would you allow people to marry inanimate objects, animals, or multiple parties? May 09, 2012
Brookstone to sell Lilliputian portable power chargers, this year http://t.co/FnSvdfOw Impressive technology if it works. $$ May 08, 2012
Economy Reshapes Wisconsin Recall Vote http://t.co/G0OetHhV My wife and father were forced in2 unions by collectivist brutes. Go Walker! May 08, 2012
Father?s Shadow as Transit Leader Hard to Evade for Shuster http://t.co/0FAZUqd4 Bud Shuster is a jerk, forcing us through Breezewood $$ May 08, 2012
Kellogg?s Kashi Targeted as Web Food Fighting Escalates http://t.co/BNhf5294 We need 2 send a lot of people back 4 science reeducation May 08, 2012

Rest of the World

Sony, Panasonic Fall to 30-Year Lows as TV Losses Mount http://t.co/Euo37RLQ Sold Panasonic after reviewing uneconomic “green” agenda $$ May 11, 2012
Kim Jong Un Bashes ?Pathetic? North Korea Fun Park http://t.co/gb4S9HBc He should know; he lived outside NK, where there is real fun $$ May 10, 2012
Sukhoi SuperJet Disappears During Indonesia Demo Flight http://t.co/0JrxAkAw Another sign of degraded Russian abilities in aerospace $$ May 10, 2012
Bad H/L: Shooting to Kill Pirates Risks Blackwater Moment http://t.co/laW55VEo Correct H/L: Hiring Armed Guards protects cargoes &crews $$ May 10, 2012
Drug-Defying Germs From India Speed Post-Antibiotic Era http://t.co/XGeno5mf Long. Scariest article of the day; wash your hands w/soap $$ May 08, 2012
Israel Pyramid Rules Turn Insurers Into Buyout Targets http://t.co/4tXBqehx Interesting:

Israel is limiting holding company levels to 3 $$ May 10, 2012

UK Pay Protests Oust Aviva Chief http://t.co/WKVdmQGM I remember when they overpaid for Amerus Life in the US; sign of bad management $$ May 10, 2012

Energy

RT @merrillmatter: @AlephBlog Methinks we’ll need to see some epic blowouts in natgas space (ha ha) before supply/demand can come back i … May 10, 2012
Chesapeake Deals Carry $1.4 Billion in Undisclosed Liability http://t.co/UFohsseZ $CHK May b worth a look when things stop getting worse May 10, 2012
When the Exxon way stops working http://t.co/BgN2zLO6 $XOM learns 2b more cooperative w/foreign countries where it wants 2 explore 4 oil $$ May 08, 2012
Argentina Taps Ex-Schlumberger Executive Galuccio to Run YPF http://t.co/j5P1oyoS Possibly a good choice to run the purloined company $$ May 08, 2012

Fixed Income

Still time to make money in Treasury bonds http://t.co/ABl43gzM The depressionary bull case 4 long T-bonds; D. Rosenberg & Lacy Hunt $$ May 10, 2012
Why Emerging Market Corporate Bond ETFs are Hot http://t.co/tWvz0sif High USD yield, but be wary. Laws governing creditor rights vary $$ May 10, 2012
In other words, the 30-year Tsy sold well today b/c some seek Depression insurance & others hedge convexity or immunize long liabilities $$ May 10, 2012
Treasuries Pare Losses as Europe Concern Aids Sale http://t.co/C7jytF08 Investors make sure they get income 4 30-yrs & $$ back when old May 10, 2012
S&P Warns Of $46T Perfect Credit Storm http://t.co/jZTbvy42 If companies have adequate cash flows from operations, this is not an issue. May 10, 2012

Canada

In Canada, Alternate Currency Keeps Traction With Fans http://t.co/ePyXRH1f Paper Money, Issued by Canadian Tire, Is Popular Way 2Pay $$ May 11, 2012
Revisit after their housing bubble pops RT @vgmac: There is a lot of love for Canada’s banking system here at the Chicago Fed conferences $$ May 10, 2012
@vgmac Then again, at the first Treasury/blogger summit I told them they should imitate the Canadian regulators and central bankers. #canada May 10, 2012
Canada Housing Bubble Concern Shown in Insurer Query http://t.co/kGHcqgDE Should the Canadian govt try2exit the mortgage insurance biz? $$ May 10, 2012
CMHC Says Capital Levels “Double” OSFI Requirements http://t.co/R4p5TuBO F&F also had capital far higher than their disaster level $$ May 08, 2012

Cisco Systems

Cisco shares drop on tech spending worries http://t.co/06maBaX4 Global economic weakness feeds into tech firms that sell much abroad $$ May 10, 2012
@ampressman Cramer said something like, “It’s not a growth company if they have to talk about the economy, weather, industry factors, etc.” May 10, 2012
@ampressman $AAPL is a growth company, at least for now, $CSCO was a growth company somewhere in the last 15 years… May 10, 2012

Delta Air Lines

Buy Delta Air Lines: Trainer Refinery Purchase & Improving Financials Will Lift The Stock http://t.co/W7YeEmgb Poorly reasoned thesis $$ May 08, 2012
Remember when $DD bot Conoco? There would b synergies in petrochemicals. $DD bot it at the peak, spit it out at the bottom $$ #limitscope May 08, 2012
$DAL substitutes risk in jet fuel pricing 4 risks in crude oil, gasoline, heating oil prices, & operational risk in a biz it doesn’t know $$ May 08, 2012
@The_Analyst Agreed, though enough capacity has come out of the industry through mergers that they might finally c some pricing power $$ May 08, 2012

US Housing

5 Pitfalls of Home Refinancing http://t.co/ZxGUF3HM Longer maturity, Closing costs, Contract terms, Hidden fees, Appraisals $$ May 10, 2012
Look Who?s Pushing Homeowners Off the Foreclosure Cliff http://t.co/T6CBkUAt Mtge docs exist to protect the lender’s property interest $$ May 08, 2012
RE: @bloombergview Read any mortgage contract; it exists to protect the rights of lenders, including protecting the m? http://t.co/ob9eIcBt May 08, 2012
No Repeating Slowdown Seen by U.S. With Banks to Housing http://t.co/A0LNwrjh While hi % of mtges r underwater, finl stress will remain $$ May 08, 2012
Pimco Housing Bear Kiesel Says It?s Time to Start Buying http://t.co/f3zaBNZA He assumes dark supply will hang on for higher prices. $$ May 06, 2012

US Regulation

Maybe to be perfectly fair, the government releases the data on a website at midnight ET, long before the US markets ? http://t.co/9Zqniljs May 10, 2012
A Jury of Peers for Broker Disputes http://t.co/5Ly14oKJ The playing field may be more even now; odds r still stacked against investors May 10, 2012
Congress Seeks Postal Overhaul While Making It Impossible http://t.co/lvcEBxmw The real danger is after reduction, PS is less relevant $$ May 10, 2012
US Millionaires Told Go Away as Tax Evasion Rule Looms http://t.co/Tx6lr1Bl Fewer foreign banks will accept accts w/US citizens/firms $$ May 10, 2012

Berkshire Hathaway

Biggest Buffett Targets Seen Spanning Deere to Henkel http://t.co/dLbp9pic Muses about what Buffett would buy 2 eclipse BNSF $$ May 08, 2012
+1 RT @Kevin_Holloway: Good read on possibilities of recent $BRK.B purchases among some other gd thoughts by @AlephBlog http://t.co/xkN8SlXu May 08, 2012
Deep in the Insurance Weeds at Berkshire Hathaway http://t.co/GkH9oWBo This helps explain the life reinsurance losses at $BRKB. LTC $$ May 08, 2012
Buffett understands tech. But he searches for revenue streams that can’t easily be obsoleted. $AAPL & $GOOG could be ? http://t.co/VyOnKUTy May 07, 2012

Market Dynamics

World?s Simplest Stock Valuation Measure http://t.co/OvmQTmHs Growth Rate/2 + 8 = PE Ratio; @eddyelfenbein & his conservative PE formula $$ May 10, 2012
Dole Food Breakup Seen Bearing Fruit With 58% Return http://t.co/C4SvaNvw Can $DOLE become a high margin biz, & pay down debt? $$ May 10, 2012

Financial Sector

What about front-running? $$ RT @abnormalreturns: @MebFaber: Nail in the Mutual Fund Coffin (NAV Based ETF Trading) http://t.co/SZ3CbIY3 May 08, 2012
BTW, for those holding dividend funds, back in 1994, stock managers following a yield strategy got crushed. $$ #annushorribilisforbonds May 08, 2012
The Dangers of Dividend Funds http://t.co/5WSdEFwN Dividend funds may b safer than other stock funds, r still stock funds w/real risk $$ May 08, 2012
True 4 many $$ RT @ReformedBroker: ?Daddy, what do you do at your job?? http://t.co/mxrcVyhm May 08, 2012
BofA?s New Black-Belt Data Chief Targets Blinding Gaps http://t.co/P60yhtAk Merger integration didn’t happen in $BAC ‘s IT areas $$ #mess May 08, 2012
Billion-Dollar Traders Quit Wall Street for Hedge Funds http://t.co/2yFJ2JXr Volcker Rule reducing dealer-driven market liquidity $$ May 08, 2012
Flash-Crash Story Looks More Like a Fairy Tale http://t.co/0mBQDGKZ Still a mystery; but4any self-feeding panic, players leaning wrong way May 08, 2012
Almost Half of Finance Graduates Seek New Jobs, PwC Says http://t.co/YUuH9KJl The bubble in financial jobs has popped, decamp 2 other inds May 08, 2012
?Where is Everybody?? http://t.co/7YPOcMUb Little retail participation is bullish; it means that only the relatively smart $$ is playing May 08, 2012
50 Ways to Restore Trust in the Investment Industry http://t.co/VHhllKyp The CFA Institute gathers opinions from members on cleaning up $$ May 08, 2012
RE: @bloombergview Equity is more expensive than other types of bank capital; raising the cost of capital means fewer? http://t.co/qPvVygll May 07, 2012
Heat’s on Triparty Repos http://t.co/7Jk7DrTS Fed Is Pressing Big Players to Reduce Exposures to $1.7 Trillion Market $$ May 06, 2012

Company Specific

How Hewlett-Packard lost its way http://t.co/pA683e3H Very long & ugly article about board & mgmt dysfunction @ $HPQ. FD: +$HPQ 4 me&clients May 08, 2012
A Real Concern For Apple?s Stock: Telecom Carriers Threaten to Kill Subsidies on Phones http://t.co/JlQwSDAq Interesting thesis $$ May 08, 2012
AMR Said to Seek More Overseas Flights as Suitor Circles http://t.co/eUHdHju4 $LCC wins more backing, could allow filing another plan $$ May 08, 2012

Politics

Exodus From Tiburon to Texarkana Is Exaggerated http://t.co/nsyd3QjF Truth is, people & firms r sticky, until they finally get fed up! $$ May 10, 2012
If we do not discipline ourselves, the bond market will discipline us $$ RT @carney: Why the left will keeping winning. http://t.co/kJcfgEt4 May 08, 2012
Too bad, we need a better opponent to Obama $$ RT @BloombergNews: Breaking: Santorum Endorses Former Rival Romney as Republican Nominee May 08, 2012
Don’t Worry (About GDP), Be Happy http://t.co/BaSDMbTM GDP approximates economic growth; more subjective progress measures r ridiculous May 08, 2012
@justinwolfers Last thing we need on the Fed is another neoclassical Ph. D. economist. Let’s try some brainy generalists, value investors $$ May 07, 2012
@GaelicTorus @justinwolfers All I am saying is value investors understand how the economy works better than neoclassical economists do $$ May 07, 2012
Disabled Americans Shrink Size of U.S. Labor Force http://t.co/NX6ZzCjK I still resent former neighbor on SSD, putting Xmas lights on roof May 06, 2012
But are they ending with an accrual basis surplus, not just a cash surplus? That’s the question. http://t.co/uGa7WX14 May 06, 2012

Ways to Buy Cars

Posted on 31 March 20121 April 2012 by David Merkel

To start, I will extensively quote a prior article that I wrote on the topic:

When I buy a car, I analyze what car I would like to buy.? I look at reliability, repair costs, overall costs, and style.? I use Consumer Reports to help me analyze this.? Then I go to the website(s) of the manufacturer in question, and copy the data on all of the used models on offer at the dealerships within 30 miles of me.? With price as the dependent variable, I then run a regression with model year as dummy independent variables, and total miles as an independent variable.? After I run my regression, I look at the cars with the biggest price deviations, the predicted price is a lot higher than actual.? I then look at the features of the underpriced cars, and choose one where there are good features with a discounted price.

I go to that dealer, review the car, test drive it, and if it passes my tests, I haggle over the price, and buy it. ? In my experience, this cuts thousands off the price of the car.? What a great reason to have studied econometrics.

But then there is another way to do it, and I have done it before with success, and you can review it here.? Decide what car you want to buy, and solicit offers from nearby dealerships, and buy the cheapest offer. ? For used car, you will have to adjust for quality.

I will offer you one more tweak which stems from this article from my bond manager days.? Call up all of the dealers offering the car that you want and tell them that you will buy from the dealer that offers the best offer, but at the second place price.? You’ll have to explain it on average at least once more.? If you want bonus points, mention that this idea stems from the research of a Nobel Prize winning economist William Vickery.? In my experience Vickery auctions even the odds against the experts, because it takes them out of their comfort zones, and makes them bid.

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One final note: I have one idea that I think is a hole in the system — an area that I think harbors inexpensive cars relative to their value.? In applying the first method — gathering prices and mileages and running a regression, I found one class of vehicles to almost always trade cheaper than they should.? Cars with low mileage that are old tend to be underpriced.? There is a lot of variability here, but if you want to buy a car cheaply that is in good shape, it is a good initial screen to find some good vehicles because people prize younger cars overly, even if they have been driven heavily.

My idea here gives you a way of buying something of greater quality, though unusual, for a lower price.? There’s usually a story behind the vehicles, but it often involves vehicles that had owners that rarely drove them, then had an accident, and the insurance company bought the vehicle as part of a settlement, an a used car dealer rebuilds the car, buys it cheaply, and sells it for what is for him a large markup, but cheap compared to the mileage and condition of equivalent cars of later vintages.

There.? Some practical ways of saving some money for you.? Hope it works well for you.

Five Years at the Aleph Blog!

Posted on 23 February 201223 February 2012 by David Merkel

When Jim Cramer asked me to write for RealMoney, it was a dream come true, and I didn’t ask for it.? After year of writing him on bond issues, he told me I wrote better than most he knew.? Trouble was, in 2003, I had a new job at a hedge fund, and was doing well at it.? It took some doing, but eventually my boss (a good guy, generally) agreed that I could do it, and my public writing on investing began.

Writing for RealMoney, I always felt a little odd.? As I do at Aleph Blog, it is my goal to help you think better, not shovel “buy this now” ideas at you.? I wrote more comments relative to articles than any other writer; I was told that I was RealMoney’s most profitable writer, because people re-read my articles & comments.? Oddly, I had less feedback from Cramer than when I was an e-mailer.? That said, if I ever e-mailed him, which I did rarely 1-2 times/year, he would always give me a short gracious response.? Long before I actually did so, he encouraged me to start my own asset management shop, when I asked his advice in the matter.

Roughly one year before I left RealMoney (which I did unceremoniously, never said goodbye), I started Aleph Blog.? I did it for greater freedom of expression.? I also never read RealMoney anymore, and as such, did not feel the compulsion to contribute to a publication that I had loved.

I wanted to write more article-length pieces about issues that were deeper to investing, and not simple buy/sell this asset pieces.? So, beginning with the Shanghai Market crisis in February 2007, we were off and running.? Most of my initial pieces were shorter; I would write two per evening, six days a week.? That morphed into one longer piece once an evening.

It was my goal to try to take my generalist experiences and turn them into something valuable for the general public.? I did not want to be an “all crisis, all the time” blog.? When the crisis was hot, or promising to be so, I would write.? And though I have distinct views on how economic policy should be done, that is not what defines me.? We have to act and live in the face of suboptimal policies.

There are many pieces and series that I could never have done at RealMoney that I have done at Aleph Blog.? As a sampler:

Education of a Corporate Bond Manager (12 parts)
Flavors of Insurance (12 parts)
The Rules (30 parts so far, and may go to 60 if I do them all)
A Day in the Life of John Davidson (my one attempt at fiction, 8 parts)
Most of my articles dealing with flaws in institutional investment strategies, accounting rules, etc.
My occasional rants on how I thank neoclassical economics is wrong, and sometimes, very wrong.
Articles on accounting rules and the effect on investing.? In some circles, this is (wide eyes here) an accounting blog. (I’ve never taken an accounting course in my life.? I’ve had to create accounting statements for 12-18 years of my life corporately.? I have read through accounting standards, and theories on accounting polices repeatedly.)
Many of my quantitative posts they would have blinked at, and said, “Uh, who will benefit from that?”? My view is, you may not get any initial benefit from such a piece, but if you get some idea into how the markets interact, you may be better prepared when things get weird.
All of the book reviews. That was not an early goal of the blog, but has become 10% of what I do.
The interactions I have had with agencies of the US Government.
The (7 part) first blogger summit at the US Treasury.? It was a pleasure to meet Steven Randy Waldman, Yves Smith, Kid Dynamite, Accrued Interest, John Jansen, Michael Panzner, and Tyler Cowen.

That said, RealMoney gave me more room to run than most columnists.? They rarely turned down my ideas, but they did want me to become more “practical,” and crank out more investment ideas.? The hard thing for me was/is, I have no lack of investment ideas/opinions, but the response I get to giving them is far less civil than sharing ideas on how to think about investing.? To that end, I appreciate Tom Brakke, who does that in a very structured way.? We had tea together last June or so, and I started to write about it but could never get it out.

In late summer of last year, Josh Brown came through the area, and we had lunch together.? Great guy; a ton of fun and ideas.? A man like him in some ways is my pal Cody Willard, who is a fountain of ideas and connections.? Add in James Altucher, who is prolific, and has been willing to give me time on two occasions.

Last fall I had a late dinner with Miguel Barbosa of Simoleon Sense.? Very bright guy; great conversation.? During the same trip to Chicago, got to talk with Eric Falkenstein for a few hours.? Wish I could have met up with Tadas Viskanta then; maybe another time.

Yet that reminds me of those I interact with.? Though I have never physically met them, I appreciate Barry Ritholtz, Jeff Miller, Felix Salmon, Bruce Krasting, Howard Simons, Roger Nusbaum, Gonzalo Lira, Michael Pettis, Victor Shih, Carl Walter, jck at Alea, the crew at FT Alphaville, and more.

There was the Aleph Blog lunch in late 2010, and the relationships that engendered.? I am very grateful for all of the relationships that blogging has created for me, whether close or distant.

And, with all of the virtuality of blogging, the relationships are what make it for me.? I am happy to write bits on the sites of others, and give them content.? I appreciate those that I read and comment on.

And to the many who have written me, though I may have never responded, thanks for writing me.? I get fifty+ messages per day and can’t keep up.? So, thanks to all have interacted with me, that’s what has made it valuable to me.

PS — If I forgot you, my apologies, I have so many interactions that it is difficult to keep track of them all.

Musings on Yield

Posted on 1 March 2011 by David Merkel

When I closed my piece on Warren Buffett’s Annual Letter, I ended with an important statement tat when I read it in the morning, I thought many would find it cryptic.? Here it is:

And much as I like Buffett and Ray DeVoe, I would like my readers to internalize that there is no such thing as yield.? Yield is the decision of the company, but what you should? ask is what is the increase in value of the company.? Look for investments that increase your net worth the most.

And I would add “With an eye toward safety.”

When I say there is no such thing as yield, I am overstating a matter to make a point.

Will the debtor make the interest (or principal) payment?
Will the company pay the regular dividend?? Will they increase it?
Will you be able to hold the instrument so that you can realize the yield over the long haul?

During times of stress, yield has a nasty tendency to disappear, often with significant principal losses.? Thus I am skittish whenever I hear someone say that they need to get a certain yield.

Individuals and Institutions, for better, but usually for worse, often rely on getting a certain yield from fixed income investments.

If I don’t get this yield, I won’t be able to meet my monthly expenses.
If I don’t get this yield, my quarterly earnings will miss.
If I don’t get this yield, our ability to support our charitable endeavors will suffer.

Sigh.? Look, this could have been entitled “Education of a Corporate Bond Manager, Part 13,” but I didn’t because this is more broad and important.? It affects everyone.

Once there are no wages/nonfinancial profits, investors usually move into a yield-seeking mode.? I experienced this in spades for the insurance company that I helped to manage money for.

And yet, in the midst of the furor 2001-2003, we often acted against the insurer’s wishes in order to save their hide.? Particularly me; I could not bear doing the wrong thing, thinking that I would have the failure of an insurer on my conscience.

So in the midst of the nuttiness of 2002, I often did up-in-credit trades, reducing complexity trades, etc., when the market favored it.? Lose yield, gain safety, when the market is hot.? (Not when it is cold.)

I preserved the capital of the insurer, and it survived.? I even made extra money for them in the process, which they wasted on writing underpriced annuity business.

There was no level of yield that could have satisfied that client, even assuming that we could get it with safety.

But now as I start my asset management business, I deal with clients that are aiming for a certain yield.? To my surprise, even my Mom, the one who taught me the rudiments of investing is seeking for yield now.

You might or might not recall that the fourth real post at this blog was entitled Yield = Poison.? There are times to look for yield, and times not to.? The times not to are when yields and spreads are low.? At such a time, the best decision is not to reach for yield, but rather to forgo yield and preserve capital.? Buy TIPS, foreign bonds, and move up in quality and down in maturity in dollar terms.

I did this for an internal client 2004-2007, and made money for them, but it was utterly unconventional.? They could afford to deal with my idiosyncracies, because they didn’t need a current yield.

So, as I move to offer a fixed income strategy, I find myself butting heads with those that want a reliable income from bonds, and other fixed income instruments.? I’m sorry, but preserving principal is more important than getting yield.? Far better to eat into principal a little when spreads are tight, than to meet the spread target and get whacked in the bear phase of the credit cycle.

So, do I have a market for such investing in bonds, or is human nature so unchangeably mixed up that there will be few if any takers for my fixed income management?? Sadly, I think the answer is the latter.

Post 1300 — Changes for David ? III

Posted on 14 September 201014 September 2010 by David Merkel

Every 100 posts or so I try to look back and think about where we have been.? At the last century mark, things were very different.? I was employed, though I wondered about the staying power of my firm.

Since then, I have spent time with the staff of the Congressional Oversight Panel regarding AIG.? They used a decent amount of my work in their report.? I have also spent some time talking with regulators, congressional staff, over a variety of things that I write about.? Proximity to DC helps.

Proximity to DC also allowed me to attend events at the Cato Institute, American Enterprise Institute, and Heritage Foundation.? I must admit that I was generally disappointed by what I saw there.? I am basically a libertarian, but one that appreciates that there are some areas that is impossible to be “hands off,” places where average people can’t accurately estimate the deal that they are entering into.? Also, many of the problems of our society are more complex than dealing with tax, spending, and regulatory policy.? In many cases social issues would have to be solved for the economic issues to be solved.? But politicians tiptoe around such matters, because they are not willing to risk their careers without any significant chance of reward.

Since the last century mark, I wrote the “Education of a Corporate Bond Manager” series, and added to my “The Rules” series.? I also appeared on StockTwits TV, interviewed by the estimable Tadas Viskanta.? A half hour never moved so fast.

One more change for? me.? Though I still work from home, I now have an office in my home.? Two of my children moved out, and after shuffling around the remaining five children as they would like it, I ended up with the small room that allows me to concentrate better while my wife homeschools.? I like it a lot, but I miss being able to comment on history, science, and math.? That said, I am guiding the oldest remaining through Calculus.

In terms of new things for the blog, I was sad when my old WordPress format broke and I could not fix it.? I like the new format, and that it loads fast.? I will be doing a lot of book reviews in the near term, and I will be adding a new page to summarize my book reviews by category.? Let me know if you like it, of if it is wasted effort.

I am also looking to do a few small blog fixes to increase contrast, type size, and add a print article option.? I am open to other ideas for improvement, so please comment, and I will consider it.

Changes for David

I have settled on setting up my own asset management shop.? I will manage separate accounts, including services to help minimize taxation.? I will only be managing equities, though I will offer the equities two ways: long only and fully hedged, where I sell futures contracts against the equities, to eliminate market exposure.? My next steps are:

Incorporate as an LLC in Maryland.
Set up my RIA.
Set up an arrangement with a clearing broker, who will provide brokerage, custodial and client communications services.
As things get close to being set up, I will talk with those who have expressed interest in the past.

A question to readers already providing separate account management services.? Is there anything material that I have left out here?? If so, would you e-mail me?

My initial minimum is likely going to be $100,000.? Fees will be 1%/year for accounts below $1 million, and slide down from there.? I have some preliminary marketing documents available for discussion purposes only.? E-mail me if you might have interest.? Please understand that all figures in the documents have not been audited.? That said, those that evidence serious interest can look at all of my account statements over the last 10 years, and receive an Excel file that reconciles all of the results to the penny.

Now I may get my track record audited when I get big enough, or if enough people tell me that I have to do it.? I am reluctant to do it before I know that I have a sustainable business.? The auditors charge a lot for what they do, and personally, I’m not sure I would trust the non-forensic audits that they do.? So you tell me, do I need the audit?

Later, once I get going, I would look to set up a mutual fund for smaller accounts, perhaps by buying up the management contract for a failed mutual fund, and using the tax losses to shield initial income for my shareholders.? There are also cheapish ways to set up a series trust for those that want to start a new mutual fund.? I would try those if I can’t recycle an old mutual fund.

So if you have interest in learning about what I am up to, you can e-mail me here.? Beyond that, I live near Baltimore and DC.? If you have a significant interest we can meet.? I will also be in NYC the third week of October, and am available to meet people then, and in Denver the second week of November? for similar meetings.

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Finally, as I always do, I want to thank my readers and commenters, even those that disagree with me.? You make my blog a richer place, and I am grateful that you take time to consider what I think.? I write my blog primarily as a means of giving back for all of the good that I have received in society; I hope and pray that it benefits you a lot, and that God would bless you in all matters.

Sincerely,

David

PS — By the way, do I need to take the series 65 exam?

The Rules, Part XV

Posted on 19 May 201020 June 2017 by David Merkel

What if securitization allows the economy to expand more rapidly than it would at a price of volatility, when intermediaries would prove useful?

Sometimes securitization and tranching creates securities for which there is no native home.

As the life insurance industry shrinks, it will be hard to find buyers for subordinated structured product.

Securitization is an interesting phenomenon.? Take a group of simple securities, like commercial or residential mortgages, and carve the cashflows up in ways that will appeal to groups of investors.? Do investors want ultrasafe investments?? Easy, carve off a portion of the investments representing the largest loss imaginable by most investors.? The remainder should be rated AAA (Aaa if you speak Moody’s).? Then find risk taking parties to buy the portion that could suffer loss, at ever higher yields for those that are willing to take realized losses earlier.

What’s that, you say?? What if you can’t find buyers willing to buy the risky parts of the deal at prices that will make the securitization work?? Easy, he will take the loans and sell them as a block to a bank that will want them on its balance sheet.

That said, securitized assets are typically most liquid near the issuance of the deal, with the short, simple and AAA portions of the deal retaining their liquidity best.? Suppose you hold a security that is not AAA, or complex, or long duration, and you want to sell it.? Well, guess what?? Now you have to engage in an education campaign to get some bond manager to buy it, or, take a significant haircut on the price in order to move the bond.

It helps to have a strong balance sheet.? If the credit is good, even if obscure, a strong balance sheet can buy off the beaten path bonds, and hold them to maturity if need be.? And yet, there is hidden optionality to having a strong balance sheet — you can buy and hold quality obscure bonds, but if thing go really well, you can sell the bonds to anxious bidders scrambling for yield, while you hold more higher quality bonds during a yield mania.

Endowments, defined benefit pension plans, and life insurance companies have those strong balance sheets.? They do not have to worry that money will run away from them.? The promises that these entities make are long duration in nature.? They have the ability to invest for the long-run, and ignore short-term market fluctuations, even more than Buffett does, if they are so inclined.

If there was a decrease in the buying power of institutions with long liability structures, we would see less long term investing in fixed income and equity investments.? Investments requiring a lockup, like private equity and hedge funds, would shrink, and offer higher prospective yields to get deals done.

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But what of my first point?? There are securitization trusts, and there are financial companies.? During a boom phase, the securitization trusts can finance assets cheaply.?? During a bust phase, the securitization trusts have a lot of complicated rules for how to deal with problem assets.? Financial companies, if they have adequate capital, are capable of more flexible and tailored arrangements with troubled creditors.? Having a real balance sheet with slack capital has value during a financial crisis.? Securitization trusts follow rules, and have no slack capital.? Losses are delivered to the juniormost security.

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Sometime around 2004, a light went on in the life insurance industry regarding non-AAA securitized investments.? In 2005, with a few exceptions, the life insurance industry stopped buying them.? AIG was a major exception.? The consensus was that the extra interest spread was not worth it.? Fortunately for the investment banks there were a lot of hedge funds willing to take such risks.

There should be some sort of early warning system that clangs when the life insurance industry stops buying, and those that buy in their absence have weaker balance sheets.? When risky assets are held by those with weak balance sheets, it is a recipe for disaster.

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During the boom phase, securitization trusts provide capital, cheaper capital than can be funded through banks.? That allows the economy to grow faster for a time, but there is no free lunch.? Eventually economic growth will revert to mean, when securitizations show bad credit results, and the economy has to slow down to absorb losses.

In addition, when losses come, loss severities will tend to be higher than that for corporates.? Usually a tranche offering credit support will tend to lose all of its principal, or none.? (Leaving aside early amortization and the last tranche standing in the deal.)? For years, the rating agencies and investment banks argued that losses on securitized products were a lot lower than that for corporates, because incidence of loss was so low on ABS, CMBS and non-conforming RMBS.? But the low incidence was driven by how easy it was to find financing, as lending standards deteriorated.

Thus, securitization allowed more lending to be done.? First, originators weren’t retaining much of the risk, so they could be more aggressive.? Second, the originators didn’t have to put up as much capital as they would if they had to hold the loans on a balance sheet.? Third, there were a lot of buyers for higher-rated yieldy paper, and ABS, CMBS and non-conforming RMBS typically offered better yields, and seemingly lower losses (looking through the rear-view mirror).? What was not to like?

What was not to like was the increased leverage that it allowed the whole system to run at.? Debt levels increased, and made the system less flexible.?? Investors were fooled into thinking that assets were worth a lot more than they are worth today because of the temporary added buying power from applying additional debt financing to the assets.

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Securitization has been a mixed blessing to investors.? It is brilliant during the boom phase, and exacerbates trouble during the bust phase.? And so it is.? As you evaluate financial companies, have a bias against clipping yield.

Regulators, as you evaluate risk-based capital charges, do it in such a way that securitized products get penalized versus equivalently-rated corporates.? Just add enough RBC such that it takes away any yield advantage versus holding it on balance sheet, or versus the excess yield on equivalently rated average corporates.? It’s not a hard calculation to run.

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Off-topic end to this post.? I added Petrobras to my portfolio today.? Bought a little Ensco as well.? I haven’t been posting as much lately since I was busy with two things: studying for my Series 86 exam, which I take tomorrow, and I gave a presentation on AIG to staff members on the Congressional Oversight Panel the oversees the TARP yesterday.? Good people; they seemed to appreciate what I wrote on AIG’s domestic operating subsidiaries last year.

Full disclosure: Long PBR ESV