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On the Facebook IPO

On the Facebook IPO

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

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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

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  • 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

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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
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Market Dynamics

 

  • On Paradigm Shifts http://t.co/h68quEDX Hunter takes us through mental exercises 2 make us intelligently contrarian. “Invert, Always Invert” May 02, 2012
  • Hedgers’ net short position vanishes in US oil http://t.co/X0hLOWGB Commercial interests do not fear lower prices, could be bullish 4 crude May 02, 2012
  • There’s Plenty of Money for Junk http://t.co/vXML0Bao Presently the credit cycle is virtuous; vicious part is coming, but no appt set $$ May 02, 2012
  • Bad Models Mistook Housing Bust for Dot-Com Bubble http://t.co/IxC8m2mk Busts of assets that are heavily levered harder than unlevered $$ May 02, 2012
  • Best U.S. Real Estate With Self-Storage http://t.co/mxyHdK2U Self storage a winner in the past, may not do so well in the future; hi vals May 02, 2012
  • Marginal oil production costs are heading towards $100/barrel http://t.co/G2zNB5JS Same as my reasoning on high crude prices $$ May 02, 2012
  • Four-percent rule a relic, advisers say http://t.co/PrdHQy48 Better rule: 10y Tsy yield plus 0% if bearish, 1% if neutral, 2% if bullish $$ May 01, 2012
  • The remarkable resurgence in synthetic credit tranches http://t.co/1iIZ8ous Increases in the notional amounts of several corp bond swaps May 01, 2012
  • Contra: Black Scholes & the formula of doom http://t.co/flVNsYMx Debt levels & Asset-Liab mismatch largest causes of crisis not BS model Apr 30, 2012
  • Energy’s Pain is Consumer Discretionary’s Gain http://t.co/lM7UW0T7 I have been on the wrong side of this trade. Sigh. $$ Apr 30, 2012
  • Notes from the DoubleLine Lunch with Jeffrey Gundlach, Spring 2012 http://t.co/KDiqA5Sp Gives a good overview, w/a large topping of snark $$ Apr 30, 2012

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China

 

  • China’s Auditing Train Wreck http://t.co/UeIZtw06 Any Chinese firm listed in the US, the auditors should be subject to SEC scrutiny. $$ May 05, 2012
  • China bear Pettis says world coming around to his view http://t.co/lo1nGc7e Pettis isn’t a bear but a realist; invt-led growth overplayd $$ May 04, 2012
  • The Family and Corruption http://t.co/R4NwZ6od Family ties & group affiliation dominate economic/political power among Chinese Communists $$ May 04, 2012
  • Who is Fu? Chinese exile is ‘God’s double agent’ http://t.co/plyQhwtg Story of a Chinese Pastor in US & escape of Chen Guangcheng $$ May 02, 2012
  • Microblogs Survive Real-Name Rules?So Far http://t.co/5UItJjwj Even the CCP would have a hard time shutting down their Twitter-apps $$ May 02, 2012
  • Beijing?s secret: It?s not really loosening http://t.co/3RPhAOwH There is not enough demand in China 2 pay all of the high prices. $$ May 02, 2012
  • China’s Left Behind Children http://t.co/OL0gmSFE Economic growth that separates parents from children imposes significant costs on China $$ May 02, 2012
  • China Closes Unirule Website http://t.co/ItkW0p0A Founder receives award from Cato Institute; China government shuts down his website $$ May 02, 2012
  • China?s property boom has peaked, forever http://t.co/aLC2U8F8 Amount of deadweight in China property is so large that prices have peaked $$ Apr 29, 2012

 

Financial Services

 

  • Caution: Contents May Be Hot http://t.co/cp9yjbH3 I worry about ETF slippage from bad creation/redemption unit design & bad trading by users May 04, 2012
  • Well, That Was Awkward? http://t.co/zS5f6zAI Bank Chiefs’ Regulatory Concerns Met With Official Silence; maybe regulators getting fed up May 04, 2012
  • A talent shortage looms as the industry booms http://t.co/QGLZzzg7 Financial planners getting old/retiring faster than the Baby Boomers $$ May 04, 2012
  • 2nd attempt2 automate bond trading 1st failed RT @BloombergNews: Goldman preps trading system for corporate bonds | http://t.co/NceasmN7 May 04, 2012
  • Mortgage Rates in US for 30-Year Loans Fall to Record Low http://t.co/LPolAP5Q Mtge rates b nimble, MR b quick, MR go under limbo stick $$ May 04, 2012
  • Spending A Year On An M&A Bidding War Is Apparently Overrated http://t.co/tKguPYGy It’s well-known that scale acquirers underperform $$ May 04, 2012
  • Every liability has an asset, but not every asset has a liability. Some are owned outright. http://t.co/fB3ARju7 May 03, 2012
  • Canadians Dominate World?s 10 Strongest Banks http://t.co/qj6TOgA3 Ask again after their housing bubble pops, same 4 other fringe nations May 03, 2012
  • Pimco’s latest ETF shields against price spikes http://t.co/TmOrCIj2 I wonder if active ETFs will have more performance slippage. $$ May 02, 2012
  • Hedge Funds Hurt by Volatility http://t.co/ogoL62qT Hedge funds r vehicles that do better when credit spreads r tightening $$ May 01, 2012
  • Bond Market Is Creating A New Galaxy for Trading http://t.co/YgvNwz1j Dealer inventories thin; trading costs rise; electronic mkts start May 01, 2012
  • US banks still cutting commercial real estate exposure http://t.co/qsqIMRph Banks still rotating out @ an almost constant rate since 2009 $$ Apr 30, 2012
  • Largest U.S. Banks Resist Federal Reserve?s Credit Limits http://t.co/JndcrvWI Big banks need 2b broken up or shrunk; they don’t accept it Apr 29, 2012

 

US Fiscal/Regulatory Policy

 

  • CEOs rank Texas tops for business, California worst http://t.co/jWEIGP89 8th year in a row for this survey; high taxes/regs annoy CEOs $$ May 04, 2012
  • Exposing the Medicare Double Count http://t.co/HIVIx3lJ Same $$ being spent twice, must borrow the difference. May 02, 2012
  • Coburn: `We Ought to Totally Revamp Our Tax Code’ http://t.co/71WquMIf Very similar to my proposals; simplify code eliminate deductions $$ May 02, 2012
  • U.S. Considers Notes That Float http://t.co/jynXGcYG Intermediate-dated Tsy floaters would trade above par, neg yields like TIPS $$ May 01, 2012
  • Trying to Shed Student Debt http://t.co/0GmvckOn Lawmakers Rethink Bankruptcy-Law Ban on Walking Away From Education Loans $$ #slavery Apr 30, 2012
  • Can the US Economy Recover Without a Housing Recovery? http://t.co/Tqy4l8J3 It will probably have to try w/o housing’s assistance $$ Apr 30, 2012
  • Central Bank paper suggests house prices have ?over-corrected? http://t.co/KDrXCkzy Have Irish housing prices overshot? Tough 2 say. $$ Apr 30, 2012
  • http://t.co/KbnUO93s Treasury floaters could b issued @ premium 2 par 2 inflation speculators allowing the Tsy 2 finance @ negative rates Apr 30, 2012
  • U.S. Perfecting Formula for Budget Failure, Says Bowles http://t.co/vlLQzZ8q It’s nice 2b a part of a nation that is a global leader 😉 $$ Apr 30, 2012
  • Will TARP Make a Profit? That’s the Wrong Question http://t.co/MZBHaO51 Conflicting govt goals make policy hard 2 implement & interpret $$ Apr 30, 2012
  • You will buy more Govvies, or else http://t.co/DLrnyb9u Financial Repression, Quantitative Easing, Debt Monetization, Hyperinflation $$ Apr 30, 2012
  • On Student Loans, Accounting Gimmicks, Electric Cars, FX and a note on SS http://t.co/2BCB9nAi Hodgepodge of insight from @brucekrasting $$ Apr 30, 2012
  • ?The Treasury should be issuing 100 year or perpetual bonds until the market can?t stand it anymore to lock in these ? http://t.co/gXMUXW4C Apr 30, 2012
  • The floating YTMs will probably be negative, as interest rate speculators will pay more than par for the floating rat? http://t.co/OSmE7QuJ Apr 30, 2012

 

Eurozone

 

  • The euro crisis just got a whole lot worse http://t.co/XSqmQnGv Election of Hollande may lead2 Euozone policy paralysis; growth v austerity May 04, 2012
  • Making eurozonians, or not http://t.co/JmuO5OXC The Eurozone was never a natural place to set up a shared currency. $$ May 04, 2012
  • Madness in Spain Lingers as Ireland Chases Recovery http://t.co/BXdYSX5e Ireland may b rebounding, as Spain’s slump deepens #austerity $$ May 02, 2012
  • Why the New York Times?s Paul Krugman is clueless about the European economic crisis http://t.co/xMuzZXC7 Aside frm Ireland no austerity yet May 02, 2012
  • Core infection and eurozone PMIs http://t.co/xr97yPgD Core of the EZone sluggish @ a time when it can least afford it $$ #depressionary May 02, 2012
  • ECB Measures Pushing Domestic Bonds Into Domestic Banks, Planting Seeds for Euro Disintegration http://t.co/HAITJJnX Yeh, this da future $$ May 02, 2012
  • The rise in the Eurozone money supply has not improved credit conditions http://t.co/rYazqcuP Euro M3 diverges from bank loans $$ May 01, 2012
  • The ECB lending to periphery governments via “backdoor SMP” http://t.co/uQeG2QQK How to stuff the ECB full of Eurofringe debt, c/o LTRO $$ May 01, 2012

 

Rest of the World

 

  • Brazil: cutting at any cost? http://t.co/mh3vN1Te Pushes up asset & price inflation, as currency held down 2aid exporters; unsustainable $$ May 04, 2012
  • Turkey Credit Rating Outlook Cut by S&P on Worsening Trade http://t.co/pFDzEhZl Wide current account def & hi external financing needs $$ May 02, 2012
  • Once poster child of crisis, Iceland recovers http://t.co/Sgr2wTGl Letting banks fail & stiffing foreign creditors -> winning solution $$ May 02, 2012
  • Which emerging economies are at greatest risk of overheating? http://t.co/olHdiYRE A gauge from the Economist on which Em Mkts r2 hot $$ Apr 29, 2012

 

Company News

 

  • Buffett?s CTB Adds Chicken Eviscerators in Dutch Purchase http://t.co/K6Q3NGt2 Buffett’s firm is no chicken; it has a lot of guts! 😉 $$ May 04, 2012
  • Sorry, really sorry… May 04, 2012
  • Ackman Rejects Canadian Pacific Deal Ruling Out CEO Pick http://t.co/KYe970NJ Pick is former CEO of $CP rival $CNI – Bad blood; good CEO May 02, 2012
  • Impressive work Mr. Einhorn. The analyst that wrote up the question deserves praise; if you did that… http://t.co/tSTWxqBa May 01, 2012
  • Phillips 66 aims to run more shale oil http://t.co/tC7NBfLO LD: + $COP $PSX First day of trading for the new $PSX. Combo up 2%+ so far $$ May 01, 2012
  • Value investing does not mean cheap. It means margin of safety. Cemex does not have that. Look at the debt. $CX $$ http://t.co/ydklVkth May 01, 2012
  • Falcone Agrees To Step Aside http://t.co/bYgLxMMV “a final agreement may not be reached, and a bankruptcy filing was still possible” $$ Apr 30, 2012
  • Delta to buy US refinery for $150 million http://t.co/IsK9xsDu If zero is dumb & 100 is very dumb, this one scores in the 90s. $$ Apr 30, 2012
  • Discuss “At $1.7 billion, Nook is worth more than Barnes http://t.co/xOz6skwP Spin off Nook 2 create value $$ $BKS $AMZN #interneteatsbooks Apr 30, 2012
  • @ampressman Would it have been value-enhancing to $BKS 2 sell the whole Nook unit 2 $MSFT, in your opinion? $$ Apr 30, 2012

 

Statistical Analysis

 

  • trading-and-the-null-hypothesis http://t.co/QpYutOTb Problem:No academic journal wants2 publish studies with ‘no result’ as their conclusion May 04, 2012
  • . @thenumb47 Allows for too much of a specification search; would be good to require disclosure of everything tried but not published $$ May 03, 2012
  • Have to allow for accidents! RT @incakolanews: just scrub the word “validate” and I think you have a great idea May 03, 2012
  • Thus my proposal for economists: come up w/research idea: goes 2a database. Randomly assigned economist will analyze & trash/validate it $$ May 03, 2012
  • Unlike double-blind studies, raw statistical research allows health analysts to inject their own bias into the analysis, as economists do $$ May 03, 2012
  • Analytical Trend Troubles Scientists http://t.co/bzcAIpHG Health researchers using statistics like economists find ambiguous results $$ May 03, 2012

 

Miscellaneous

 

  • 14 Lessons From Benjamin Franklin About Getting What You Want In Life http://t.co/BWAjCz1l Advice from 1 of the wealthiest men of America $$ May 04, 2012
  • Is Wall Street Meeting God’s Expectations? http://t.co/5H5j2QGG Many Christians misuse the Bible; almost all non-Christians misuse it $$ May 03, 2012
  • What would Jesus trade? http://t.co/Dkrfwt9k Many Christians misuse the Bible; almost all non-Christians misuse it; another example $$ May 03, 2012
  • And in a more honest way than Google RT @SconsetCapital: Long good, short evil. May 03, 2012
  • Apparel-Swapping Millennials Eschew Stores and Malls http://t.co/B7jq2dcY “Is that a new outfit?” “Well, it’s new to me!” An odd trend $$ May 03, 2012
  • @TheStalwart Kasriel was different enough that he will be missed, kind of like the sound of one hand clapping $$ #littledoghasbuddhanature May 01, 2012
  • The record 4 tallest bldg s/b based on weighted average height; weighting based on cross-sectional area @ height http://t.co/03HNZ0BB $$ Apr 30, 2012
  • So if you have something thin at the top, it wouldn’t count 4 much. A rectangular parallpiped would get full credit 4 height $$ #usingmath Apr 30, 2012
  • That would work, simpler than mine $$ RT @Pollack7: @AlephBlog Meh.Highest continuous occupancy floor. Apr 30, 2012
  • As the smartest boss I ever had said “Make bets, but never bet the franchise.” http://t.co/qWdHX3BS Apr 30, 2012

 

Monetary Policy

 

  • Bernanke Charts New Mission For Fed: Financial Stability http://t.co/6RrWEQws Fed has a hard enuf time w/a double mandate, triple will b wrs May 02, 2012
  • Then again, if focusing on financial stability forces the Fed to be more restrained in its monetary policy, that would be good. $$ May 02, 2012
  • Bernanke: Be Humble! http://t.co/6icSHD1K The picture says it: http://t.co/OqOflqsI Humility in BB’s view: leaving monetary policy loose $$ May 01, 2012
  • My Speech Delivered at the New York Federal Reserve Bank http://t.co/DbAhOdQR An Austrian let loose amid the marble palace in NYC?! Wow. $$ Apr 29, 2012

 

US Politics

 

  • Renewed Hope that Jon Corzine, President Obama’s Top Tier Campaign Bundler, Will Face Criminal Charges http://t.co/wCLrXFve J. Tavakoli $$ May 01, 2012
  • Occupy Wall Street Plans Global Protests in Resurgence http://t.co/0FLjKfiJ #OWS won’t b effective until they organize as a 3rd party $$ + May 01, 2012
  • Or, organize to influence the Democrats the way the t-party does the Republicans. #OWS is irrelevant until then, b/c it doesn’t do anything May 01, 2012
  • Is that a bailout in your pocket? http://t.co/8xwW4Cbi Boyazny, panel’s populist, replied that the credit markets had become ?undemocratic? May 01, 2012
Weekly Sorted Tweeets

Weekly Sorted Tweeets

Federal Reserve

 

  • Long Term U.S. Credit Boom Chart http://t.co/Ywub8HQH By bailing out short-term credit cycles, the Fed created a big asset bubble $$ Apr 28, 2012
  • Quantitative Deleting: The Fed’s $400 Billion ‘Gift’ http://t.co/qavtYcQy Fed’s actions lower cost of funding the US Treasury’s deficit 4now Apr 26, 2012
  • Bernanke Takes On Krugman?s Criticism Ignoring Own Advice http://t.co/AZ37nx1W Blind & Blinder $$ Apr 26, 2012
  • I think Ben needs one too. Barkeep, make that a double for the the Fed Chairman! $$ RT @soooouuuuurrrrr: @AlephBlog I need a drink. Apr 25, 2012
  • That’s all folks — the FOMC show is over!! $$ Apr 25, 2012
  • Stocks loving Bernanke, who says he doesn’t act to please markets, but I think that he does, b/c he aims to reduces rates & spreads $$ Apr 25, 2012
  • Good Qs on Labor force participation rate and the “bond bubble.” Bernanke obfuscates. Apr 25, 2012
  • But the real canard here with the enhanced guidance is that the Fed is poor at forecasting & consistently drags toward current conditions $$ Apr 25, 2012
  • When will Fed “transparency” finally be understood to not mean “increased reliability?” Apr 25, 2012
  • Interesting that long Treasuries r rallying off of the FOMC second stmt after falling on the first. Not much difference between the 2. $$ Apr 25, 2012
  • So, short-term inflation up, LT unch. ST Unemp down, LT unch. ST GDP up, 2013-4 down, LT unch. Tightening 6 mos closer than Jan, FF path up Apr 25, 2012
  • Central tendencies and ranges of economic projections, PCE average change 2012-14 +0.22%, +.10%, +.09%, longer run 0% (natch) $$ Apr 25, 2012
  • Central tendencies and ranges of economic projections, unemployment average change 2012-14 -0.40%, -.21%, -.08%, longer run -.01% $$ Apr 25, 2012
  • Central tendencies and ranges of economic projections, GDP average change 2012-14 0.16%, -.08%, -.24%, longer run 0% $$ Apr 25, 2012
  • The enhanced guidance of the FOMC is causing more confusion than enhancing understanding $$ Apr 25, 2012
  • Overview of FOMC participants’ assessments of appropriate monetary policy; Appropriate Timing of Policy Firming 6 months sooner than Jan12 Apr 25, 2012
  • Target Federal Funds Rate at Year-End average change 2012-2014, +.015%, +.044%, +.206%, long-run -.015% $$ Apr 25, 2012
  • PDF isn’t as friendly as HTML… but that’s probably intentional on the part of the Fed. $$ Apr 25, 2012
  • here they are, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents http://t.co/OzeYZbRa $$ Apr 25, 2012
  • Clocks must be slow at the Fed’s website… Apr 25, 2012
  • Bond/stock trading bots set loose within the next minute! Apr 25, 2012
  • @bondscoop When the FOMC said they would do this, I said “Do they really get what they are setting themselves up for?” Tight coupling. Apr 25, 2012
  • @bondscoop Thanks. I’ve got the ancillary data loaded into a spreadsheet to make a quick comparison Apr 25, 2012
  • @bondscoop That’s not out yet, right? Apr 25, 2012
  • Redacted Version of the April 2012 FOMC Statement http://t.co/wJbPNf5P Shaded up views on housing, inflation & global financial risk. $$ Apr 25, 2012
  • Of course, that can only last so long as inflation stays low. Brian Wesbury thinks inflation might be rising http://t.co/YfLFURA3 $$ Apr 24, 2012
  • Gundlach Says Fed Won?t Preemptively Raise Rates http://t.co/YTfjQ6Wj W/debt building up 1 thing saving us: interest rate collapsing $$ Apr 24, 2012
  • There r historical accidents. The worst that we r dealing w/is Ben Bernanke as Fed Chairman with his mistaken views on the Great Depression! Apr 24, 2012
  • Awash in money and piles of debt http://t.co/C9hbSWmf Up next: More QE, financial repression, inflation, deficit spending -> stagflation $$ Apr 23, 2012
  • $$ Coming soon +1 RT @ReformedBroker: Hilsenrath: After-Hours Sell-Off in Netflix Pushes Fed Governors Toward to Further Easing… $NFLX Apr 23, 2012

 

China

 

  • Are these companies feeling the Chinese slowdown? http://t.co/bIO0m2vF Machinery companies: Volvo, ABB, $CAT seeing China orders fall $$ Apr 26, 2012
  • China Internet Crackdown Silences Another http://t.co/ukw0qzWg More closure of accts found 2b spreading ?malicious political rumors.? $$ Apr 26, 2012
  • Why Wukan Will Remain a One-off http://t.co/LO3tK7kT Optimistic piece shows when there is enough pressure in China, change can happen $$ Apr 26, 2012
  • China Tire Demand Slows as Economy Decelerates, Bridgestone Says http://t.co/yUK3UEye Q is how much things slow for the Chinese economy $$ Apr 26, 2012
  • China Escalates Crackdown On Internet Amid Scandal http://t.co/QblN4v3S China wants the internet 4 its economy, but not its politics $$ Apr 26, 2012
  • China and Social Media Today vs. Japan bubble in 80s http://t.co/0uxQ40xV Vitaliy Katzenelson shares his reasoning on bubbles $$ Apr 26, 2012
  • Why China’s Economic Policies Are a Failure: Andy Xie http://t.co/WZjILv4J Building redundant capacity, cronyism, recipe for disaster $$ Apr 25, 2012
  • China Hidden Liabilities for Central Government Seen @ CNY10.94Trl http://t.co/gaqD4suu Opaque governments w/lots of debt can b trouble 2 $$ Apr 25, 2012
  • Shide Group Mired in Financing Crisis, Massive Debt http://t.co/Iws3h9Ec Beware complex companies w/lots of debt. Default probs higher $$ Apr 25, 2012
  • The Startling Plight of China’s Leftover Ladies http://t.co/WWK3en7R Leftover Chinese men r not good enuf 4 them, even w/sex ratio tilted $$ Apr 24, 2012
  • Behind a Chinese City’s Growth, Heavy Debt http://t.co/6eKX3kJp Bo Xilai leaves behind a legacy of debt 4 taxpayers to fund $$ #surprise Apr 23, 2012
  • Cities get a sinking feeling: report http://t.co/xQE2d46k If China’s cities aren’t careful about their water tables, they’re sunk 😉 $$ Apr 23, 2012
  • Can China Reflate the Housing Market? http://t.co/rMtYHX0Y Maybe one more time, but eventually you can’t resuscitate a corpse $$ Apr 23, 2012
  • US barnyards help China super-size food production http://t.co/38GkPJ0T China builds protein industry by purchasing live animals from US $$ Apr 23, 2012
  • Beijing’s Cracked Consensus http://t.co/1Xep2j6s Don’t assume the fall of Bo Xilai 2b 2big; the CC Party still fights 4 the CC Party $$ Apr 23, 2012
  • Farmers Retool to Feed China http://t.co/c0loHf82 Dairy processors make longer-lasting milk powder 2sell2 China. They like almonds 2 $$ Apr 23, 2012
  • China May Finally Let Its People Move More Freely http://t.co/fiTQgY5c Of hukou: how China uses household registration 4 control purposes Apr 23, 2012
  • The End of China’s One-Child Policy? http://t.co/dK7sUMTq China is getting old before it gets rich. Toxic combo. Watch wages rise. $$ Apr 23, 2012
  • The China Rising Leaders Project http://t.co/QuKsr7w2 Very long piece giving very detailed info on next generation of China’s leaders $$ Apr 23, 2012
  • China?s Biggest Banks Are Squeezed for Capital http://t.co/uveB69fJ Too much and overaggressive lending strains their balance sheets $$ Apr 24, 2012

 

Eurozone

 

  • Spain’s current unemployment rate exceeds the US rate during the Great Depression http://t.co/bj86umZp Ugly chart: http://t.co/M6uchbAx $$ Apr 28, 2012
  • Why Spain Won’t Reform http://t.co/aIuYUctZ Cultural argument that Madrid historically does not act on problems outside of Madrid $$ Apr 28, 2012
  • Rising Italy-to-Spain Yields Keep Banks on Life Support http://t.co/kSdshke5 Many banks simply cannot refinance their maturing debt $$ Apr 25, 2012
  • Continuing flow of capital out of Greece http://t.co/psvzWbJk E.g. Greek refineries r unable to obtain credit & rely on Iran for crude $$ Apr 25, 2012
  • Spanish property crisis will require Ireland-style banking system recapitalization http://t.co/pDLNF2X7 But who has the money 2do it? $$ Apr 23, 2012
  • Bundesbank?s Weidmann Says What No EU Politician Wants to Hear http://t.co/ecLHlLIJ EZone monetary policy loose; fiscal union negligible Apr 23, 2012
  • Holland, Not Hollande, Is Europe’s Latest Worry http://t.co/AeQtOIVv If Dutch don’t care 4 austerity, little hope 4 rest of the EZone $$ Apr 23, 2012

 

Pensions

 

  • How Retirement Benefits May Sink the States http://t.co/oIEsAWhh Companies emigrate 2 states where future tax pressures r lower $$ #bye Apr 28, 2012
  • Point Man on Pensions http://t.co/DaXsdkgx PBGC director has experience in restructuring; serves him well negotiating w/dud companies Apr 23, 2012
  • Tidbit in last article: FV of DB pension liabs for $SWY > market cap. Actuarial profession goofed on DB plans valuations; ests r liberal $$ Apr 23, 2012
  • The Multiheaded Pension Monster http://t.co/oBDNBZYN Multiemployer DB plans- not enough coverage: moral hazard, low PBGC guarantees $$ Apr 23, 2012

 

Energy

 

  • Chevron sticks with oil. And it pays off. http://t.co/uUlsjbBK FD: + $CVX | That said, buy & hold conventional NG could b good idea now $$ Apr 28, 2012
  • Tough Talks Loom at Chesapeake http://t.co/OkMGyu8J Having a CEO who has differing interests from common shareholders is a risk $CHK $$ Apr 28, 2012
  • Saudi oil puzzle, continued http://t.co/z76fSKTZ Prices r high, but the Saudis keep stockpiling oil. Why? $$ #idunno #gouging #painfreak Apr 25, 2012

 

Information Issues

?

  • Saudi Clerics Out-Tweet Liberals Forcing King to Balance http://t.co/A1TcHeSJ Don’t underestimate the influence of Wahhabi Islam. $$ Apr 26, 2012
  • Google Stores, Syncs, Edits in the Cloud http://t.co/BrRSauno Walter Mossberg likes $GOOG Drive, thinks $MSFT Skydrive worth a try $$ Apr 25, 2012
  • PGP Creator Phil Zimmermann Has a New Venture Called Silent Circle http://t.co/KNJQJ4X4 There?s also a promise of no backdoors 4 anyone $$ Apr 24, 2012
  • A New Email Encryption App Your Network Admin Might Not Like http://t.co/7b967z7e Enlocked can encrypt email w/a click, could go viral $$ Apr 24, 2012
  • Surveillance State evils http://t.co/BKkmM78J Don’t say anything that you don’t want the government 2 know. Repeal the Patriot Act! $$ Apr 23, 2012
  • Astounding. Reprogram it $$ RT @AnnieLowrey: This essay awarded a perfect score by a robo-grader is just delightful. http://t.co/Vc1ORC8T Apr 23, 2012

?

Company Issues

 

  • Heat Turned Up on Falcone http://t.co/zaiW1Jzu The deal w/the devil comes due for payment; Falcone faces checkmate or LS bankruptcy $$ Apr 28, 2012
  • Woes at Law Firm Deepen http://t.co/to4dZbJY Dewey & LeBoeuf’s troubles w/debt & revenue shrinkage. Law does not work well 4 big biz $$ Apr 28, 2012
  • Health Insurers to Give Back $1.2 Billion, Goldman Says http://t.co/VX0V9sL9 health overhaul limits <20% premium for expenses & profit $$ Apr 26, 2012
  • US Airways Said to Approach AMR Bondholders on Merger http://t.co/iArkC4nq The unsec bondholders r the economic equity of $AAMRQ now $LCC Apr 25, 2012
  • Genworth Credibility Eroded as Australia Plan Shelved http://t.co/oyJJ4OCC I’ve almost always ben a sceptic on $GNW. Toxic lines of biz $$ Apr 24, 2012
  • Google Unveils Drive Storage Service http://t.co/5R1CAkR0 I use Microsoft Skydrive as a real time backup of my files. $$’ Apr 24, 2012
  • MGIC Posts $19.6 Million Loss as Borrowers Struggle on Loans http://t.co/fvoY6cZN Regulators should halt $MTG’s ability 2 write new biz $$ Apr 23, 2012

 

Rest of the World

 

  • Bubble Down Under? http://t.co/jk4UBFzA ?Name a credit bubble built on a commodity bull market built on a bigger Chinese credit bubble?? Apr 26, 2012
  • North Korea Poised to Rattle Region With Nuclear Blast http://t.co/MJmALgYi Will believe when it happens; NK always seems 2 get tech wrong Apr 26, 2012
  • Swiss housing market inching towards bubble http://t.co/KCbYrs6x Makes me wonder when the Swiss Central Bank will break its Euro peg $$ Apr 24, 2012

 

Financial Markets

 

  • Conference Notes http://t.co/VF5FIPOg On 4/13, Chicago Booth held its 7th Annual Distressed Investing & Restructuring Conference. $$ Apr 26, 2012
  • No surprise when they only put 3.5% down $$ RT @pdacosta: Falling home prices drag new buyers under water http://t.co/bayZVELO Apr 26, 2012
  • TARP Profit A Myth, Claims TARP Inspector General Christy Romero http://t.co/iv77kkne Q is related to foreclosure prevention aid & GSEs $$ Apr 26, 2012
  • My Sister?s Pension Assets and Agency Problems by Jeremy Grantham http://t.co/ANDMdZae On the value of a non-constrained mandate $$ Apr 25, 2012
  • Force Fed by Ben Inker of GMO, last 3 pgs of http://t.co/ANDMdZae Goes through the problems of Asset Allocation with yields so low $$ Apr 25, 2012
  • Wall Street Promotes Junk Bonds as Europe Erupts http://t.co/5kIRG7Oi grabbing for yield — it’s the national pastime! $$ Apr 25, 2012
  • US 10 Year Bond Yielding 0.5% http://t.co/Zrnj9zdL Japan scenario for the US? The 10Y at 0.5% seems farfetched, but everyone hates bonds $$ Apr 25, 2012
  • REITs Spring an Unnerving Surprise http://t.co/qgStDii0 I’ve warned b4 on Private REITs http://t.co/liQr20vq More bad surprises coming $$ Apr 25, 2012
  • So, if Egan-Jones did do ABS & governments, that would have been news to me. Surprising to see the SEC going after them $$ Apr 25, 2012
  • Credit Rater Egan-Jones Lied, SEC Charges http://t.co/c1ym3feC Firm was known 4 its corporate bond ratings by a contingent claims model $$ Apr 25, 2012
  • Misleading ETFs http://t.co/Z8uKHfA7 Buyer beware, read your prospectuses and semi/annual reports; go to the sponsor websites 4 more data $$ Apr 24, 2012
  • Who Gets the Equity Risk Premium? http://t.co/gqdPYexG LT holders, brokers, taxes, firms that issue & retire shares at inopportune times $$ Apr 24, 2012
  • Commodities don’t provide “diversification” in a crisis http://t.co/7ue9vvjJ Commodities provided diversification when few did it; no more Apr 23, 2012

 

Catastrophe Bonds

 

  • @merrillmatter If I ran a life insurance portfolio, a closed end fund, an open end HY fund, I would buy cat bonds, u need a balance sheet $$ Apr 24, 2012
  • @merrillmatter With all the goofy ETFs issued, surely someone could create $CATB, the Cat bond ETF. Would b very tough 2 source bonds 4 $$ Apr 23, 2012
  • @merrillmatter That’s why many high yield funds buy them w/both hands. Also special hedge funds that tear Cat bonds apart 2 get the best $$ Apr 23, 2012

 

The Perils of Sitting

  • On the sitting kills you piece, would like to get a copy. Est’d increase in death rate from 0.76% to 1.06%/yr. Big %, not so big absolute $$ Apr 23, 2012
  • Confirmed: He Who Sits the Most Dies the Soonest http://t.co/aif1e8xX I found this article worrisome. I sit > half of my waking hours. $$ Apr 23, 2012

 

US Economy

 

  • New Mad-Cow Discovery Stirs Fears http://t.co/DPm6aLzI This story will have legs, 4 2b exact. 😉 Beef will b down until scope clears $$ Apr 25, 2012
  • On the Social Security 2012 Report to Congress http://t.co/RPG3qz1p Age <53 today can expect to get 75% of the value a baby boomer got $$ Apr 24, 2012
  • Rosenberg: U.S. Clients View Canada as ?51st State? http://t.co/EqVvLFpX Careful, w/rates so low, housing is looking bubbly & banks?? $$ Apr 24, 2012
  • Fees and Anger Rise in California Water War http://t.co/9GjE5jwx Bad geography to get water to, unless you want to try desalinization. $$ Apr 24, 2012
  • @moorehn Heidi, I was 1 of the 8 bloggers @ the 1st blogger summit at the Treasury, & not 1 of the noisier ones. I spoke twice in the 90mins Apr 24, 2012
  • @moorehn So here is my Q4 Geithner: How do we get out of the entitlements crisis? We have promises equal to 4-5x GDP!? [Amid the deficit] $$ Apr 24, 2012
  • Housing market no longer yours for a steal http://t.co/xb2E2JIy Low end res RE is not accepting lowball offers to buy as it used to $$ Apr 23, 2012
  • You Won’t BELIEVE How Bearish Investors Are On Treasuries http://t.co/q9t2sZdE 2% bullish, 81% bearish in Barron’s poll. FD: + $TLT $$ Apr 23, 2012

 

Miscellaneous

 

  • US College Education Bubble, Planning for the Wrong Future http://t.co/BScEbQJI But many smaller job fields req college & pay well. $$ Apr 28, 2012
  • Hong Kong Glued to ?Bride Wannabes? http://t.co/6p9RCs0X Reality TV aids lovelorn 30-something women, ending w/a mass marriage 4 some $$ Apr 26, 2012
  • But really, with Agriculture doing so well in the US, isn’t it time to finally cut farm subsidies? And beef up (oops) USDA food safety? $$ Apr 25, 2012
  • Government Keeps Picking Winners, Losers on the Farm http://t.co/PKiJBHIp Farmer complains healthy food gets less subsidy than unhealthy Apr 25, 2012
Ways to Buy Cars

Ways to Buy Cars

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.

=–==-=-=-=-=-=-=-=-

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!

Five Years at the Aleph Blog!

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.

 

Against Risk Parity, Redux

Against Risk Parity, Redux

Here are two articles to read on risk parity:

Pro: Pick Your Poison

Con: The Hidden Risks of Risk Parity Portfolios

I’m on the “con” side of this argument, because I am a risk manager, and have traded a large portfolio of complex bonds.? For additional support consider my article Risks, Not Risk.? Or read the second half of my article, “The Education of a Corporate Bond Manager, Part X.” There is no generic risk in the markets.? There are many risks.? Interest rate risk and credit risk are different topics.?? There are bonds that have interest rate risk but not credit risk — long Treasuries.? There are bonds that have credit risk but not interest rate risk — corporate floating rate notes, my favorite example being floating rate bank trust preferred securities.

It is not raw price volatility that drives investment results as much as the underlying drivers of the volatility.? For fixed income, I described those in the two articles linked in the last paragraph.? During non-credit-stressed times, a bank’s 30-year floating rate trust preferred security is roughly as volatile as a five-year noncallable bond that it issues.? But during times of credit stress, the first security becomes volatile, whereas the second one doesn’t.? The first moves in line with 30-year swap yields, LIBOR, and long junior bank spreads.? The second moves in line with 5-year Treasury yields, and short senior bank spreads.? The underlying drivers have little in common, and when things are calm, their volatilities are similar, because the drivers aren’t moving.? But when the drivers move, which in this case is one correlated driver, credit stress (30-year swap & junior bank spreads go a lot higher), the volatilities are very different, the first one being high and the second one low.

Thus equating volatilities across a bunch of asset subclasses, investing less in the volatile, and levering up the non-volatile, is hard to do.? History embeds all the curiosities of the study period, and calls them normal, and that past is prologue.

From the Pick Your Poison article above, what I think is the (lose) money quote:

Gundlach insists most money managers misunderstand junk bonds, comparing them to 5-year Treasurys to determine how rich their yields are, when the correct comparison should be to 30-year Treasurys.

How can Gundlach compare junk bonds, which do better when the economy heats up, with long-term Treasurys, which get killed when the economy revs up and the Fed raises interest rates?

That?s irrelevant, he responds. The thing to look at is volatility, because that tells you the odds you will have to sell at a loss when you need to raise cash in an emergency. On that basis, junk bonds that were trading at a seemingly reasonable spread of 5 percentage points, or 500 basis points, to 5-year Treasurys in mid-2011 were actually trading at an intolerably low 250-basis-point spread to the proper bond. (By then DoubleLine had cut its junk bond allocation from 10% to 1%.) Sure enough, junk fell 12% as the year went on, and the spread to 30-year Treasurys has doubled since mid-2011.

?It?s called risk parity,? Gundlach says. ?There?s only two investors who seem to understand it?me and Ray Dalio,? the highly successful manager of $122 billion (assets) Bridgewater Associates.

Personally, I don’t think Gundlach makes his money that way for his funds, but in case he does, how should a good bond manager view junk bonds?

First, ignore Treasuries — they aren’t relevant to the price performance of junk bonds.? I’ve run the regression of Treasuries vs junk bond index yields many times.? It’s barely significant for BBs, and insignificant thereafter.? Second, look at stock market indexes of industries that lever up and issue junk debt.? Junk corporate debt is a milder version of junk stocks, i.e., the stocks that issue junk debt.

Third, a corollary of my first reason, realize that risks with junk aren’t driven by spreads, but yields.? With highly levered, or very junior debt, it does not trade on a spread basis, but on a price basis.? Anyone looking at spreads will see too much volatility versus yields and prices.

But mere volatility won’t tell you the riskiness.? Indeed, when economic times are good, junk will do well, and long Treasuries do poorly.? Now, maybe that makes for a very noisy hedge, but I wouldn’t rely on it.

And, volatility is a symmetric measure, which as bond yields get closer to zero, the symmetry disappears.? Most asset classes display negative skew and fat tails, which also makes volatility problematic as a risk measure.

Going back to my first piece on the topic, if I were applying risk parity to a bond portfolio, it would mean that I would have to buy considerably more of shorter and higher quality instruments, and lever them up to my target volatility level, somehow with spreads large enough that they overcome my financing costs.? Now, maybe I could do that with mispriced mortgage securities, but with the problem that those aren’t the most liquid beasties, particularly not in a crisis if real estate is weak.

I guess my main misgiving is that levered portfolios are path-dependent, as pointed out in the GMO piece above.? You can’t be certain that you will be able to ride through the storm.? The ability to finance short-term disappears at the time it is most needed.

Now, if you can get leverage after the bust, and invest in beaten-up asset classes, you can be a hero.? But that’s a time when only the most solvent can get leverage, so plan ahead, if that’s the strategy.? If an investor could consistently time the liquidity/credit cycle, he could make a lot of money.

As the GMO piece concludes, the only benchmark that everyone could hold would be a proportionate slice of all of the assets in the world, which implicitly, would strip out all of the leverage, because one would own both the shares of the company, and the debt it owes, and in the right proportion.

So I don’t see risk parity as a silver bullet for asset allocation.? I think it will become more problematic, as all strategies do, as more people show up and use it, which is happening now.?? First in the hands of the master, last in the hands of a sorcerer’s apprentice.? Be careful.

PS — I have respect for the skills of Gundlach and Dalio.? I’m just skeptical about what happens to risk parity when too many use it, and use it without understanding its limitations.? And, here is a nice little piece about Bridgewater and its strategies.

Everything Old is New Again in Bonds

Everything Old is New Again in Bonds

Unconstrained strategies for bonds are hot now with yields so low.? But wait. Let’s take a step back.? What do we mean by a constrained strategy?

A constrained strategy is one that limits the investments one can engage in either through:

  • Specifying an index that the manager is charged with beating
  • Specifying percentage limits for investments, split by categories such as credit quality, interest rate sensitivity, asset subclasses (ABS, RMBS, CMBS, Corporates, Agencies, etc.), and other variables
  • Barring investment in more funky fixed income instruments such as preferred stock, trust preferreds, junior debts, CDOs, ABS, RMBS, CMBS, etc.
  • Or some combination of the above.

There have been unconstrained strategies in fixed income before — they just weren’t called that.? Many value investors in the old days didn’t care what the legal form of the investment was — they only looked for an adequate margin of safety.? Their portfolios were a hodgepodge of debt and equity instruments.? Specialization in only doing debt instruments wasn’t common.

Most debt-only investments were constrained, particularly those from bank trust departments.? Of course, this was an era where investing in junk debt was not respectable for all but the most intrepid of investors.

With the advent of the 1980s we had two innovations: junk bonds and bond index funds.? The first took the world by storm with the demand for yield; I experienced that at the first insurance company that I worked for — they overloaded on junk bonds.? This was before the regulators began regulating bond credit quality more strictly.

The second took a longer time to germinate.? The first bond index fund came into existence in 1986 at Vanguard.? They couldn’t call it a bond index fund, because they could not exactly replicate the index.? There were too many bonds that were illiquid, and they could not buy them at any reasonable price.? Instead, they took an approach that we would call “enhanced indexing” today.? Match the interest rate sensitivity of the index, and the credit quality, but choose bonds that had more potential than the bonds in the index.

In that sense, though the SEC allows bond funds to be called index funds today, all bond index funds are enhanced index funds because there is no way to source all of the bonds.? And from my own days as a corporate bond manager, I learned that bonds in major indexes always trade rich.? From my piece, The Education of a Corporate Bond Manager, Part IX:

There was another example where I crossed bonds where it was legitimate ? if it was done to help a broker in distress.? One day, someone offered me a rare type of Capital One bonds at a normal level, and I asked whether the bonds in question were the ones that were in a major bond index, without saying that per se.? After figuring that out, I bought them at the level, and called a broker that was likely to be short the bonds to see if he wanted them.? He certainly did, and offered them at a three basis point concession to where I bought them, as opposed to ripping the eyeballs out (as the technical term went).

The whole set of two transactions took 15 minutes, and made $15,000 for my client.? What was funnier, was that my whole family came to visit me that day, my wife and at that time, seven kids.? They heard the two transactions, though I had to explain it to them later. To the second broker, I had each of the kids say ?Hi,? ending with the then three-year old girl who squeaked ?Hi.?? He said something to the effect of, ?I knew you had a large family, but it only really struck me now.?

That three-year old is now a beauty at twelve, and bright as anything, but I digress.? (They grow so fast… the nine-year old girl is cute as a button too.)

Bond management was once unconstrained by those who looked for total returns in the old days, and constrained in the old days by those who looked for yield.? (Many managers would not buy bonds that traded at a premium.)? Then the bond indexes became popular as a management tool.? In one sense, it freed bond management, because rather than hard constraints, they matched credit and interest rate sensitivities of the index.

But what that constrains is credit policy and interest rate policy.? One managing to beat a benchmark index has limited options.? What if you want to position for:

  • Widening credit spreads
  • Narrowing credit spreads
  • Rising interest rates
  • Falling interest rates
  • Yield curve steepening
  • Yield curve flattening
  • Outperformance/underperfomance of a given sector

Any sort of directional bet could go wrong, and more often than bonds that fit the idea of replicating the index parameters, but are special in ways that the index does not appreciate.? So rather than going “whole hog” with the bet, you merely lean toward it, such that if you are wrong, you won’t destroy the outperformance versus the index.

But in this modern world where derivatives are widely accepted as fixed income instruments, a la Pimco, fixed income managers can do a lot more.? There is more freedom to make or lose a lot of money.

The unconstrained strategy can be thought of? in two ways: always trying to earn a positive return with high probability (T-bills are the benchmark, if any), or being willing to accept equity-like volatility while the bond manager sources obscure bonds, or takes large interest rate or credit risks.

I prefer the first idea, because it is more conservative, and fixed income management should aim for safety on average.? As I have said before, I only believe in taking risks that are well-compensated.

But here’s a hard one.? With the yield curve so wide, shouldn’t a bond manager with an unconstrained mandate put a little into long bonds or long zeroes?? I would think so, but I wouldn’t put a lot there unless the momentum started to favor it.

I like the concept of the unconstrained strategy; indeed, it is what I am doing for clients, but it is of the first variety, try to make money for clients in all markets, and not just be a wild man in search of yield or total return.

I find the move to unconstrained mandates to be a return to what value managers did long ago, but in a more complex fixed income environment.? I wonder though, as to whether the future failures will invalidate the idea for most.? It is tough to manage any asset class while adjusting the risk level to reflect what should not be done in a given era, whether in equities or debt.? The danger comes from trying to maintain yield levels that are higher than what is sustainable.

Musings on Yield

Musings on Yield

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.

Dumb Regulation is Good Regulation — How to Regulate the Banks

Dumb Regulation is Good Regulation — How to Regulate the Banks

Should regulation be dumb?? In one sense yes, in others, no.? It really depends on how well the regulators understand the risks involved, and how much they can encourage professionalism among profit center heads and risk managers.? As those two increase, regulation can be smart.? ?Follow these detailed rules to calculate the capital you need to be solvent 99% of the time.?

But when either of those two aren?t true, dumb regulation may be in order:

  • Strict leverage limits, reflecting the worst outcome from underwriting poor quality loans.
  • Disallowing risky types of lending, regardless of capital level.
  • Disallowing liabilities that can run easily.
  • Disallowing products that commonly deceive buyers.
  • Disallowing certain types of contracts that fuddle accounting.
  • Those regulated may not choose their regulator.? The highest regulator assigns a regulator to you.? The highest regulator must evaluate the jobs that lower regulators are doing, and eliminate/lessen regulators that do not use the powers they have been granted, and get co-opted by those that they regulate.

If everyone were smart, things could be different.? Deceiving people would not take place, and managements would not take undue risks.? Limits could be looser, and products would be designed for discriminating buyers.

But, face it, we are dumber than we think, myself included.? Consumer choice is a good thing, though it implies that some will be deceived, no matter where one places the line of demarcation.? Along with that, some bank will not fit the rules and go insolvent, though it previously passed the solvency tests.

Dumb Regulation: Insurance in the US

My poster child for relatively good dumb regulation is the insurance industry in the US.? The industry is far less free-wheeling than the banking industry, and under most circumstances, the solvency margins are set high enough to have few insolvencies.? There is room for improvement, though:

  • Make risk based capital charges countercyclical.? Perhaps tinkering with the Asset Valuation Reserve would do that.
  • Have some sort of rigorous testing for capital relief from reinsurance treaties.
  • Ban surplus notes in related party transactions.
  • Ban all forms of capital stacking, especially where the transactions go both ways.? I.e., subsidiaries can?t own securities of any companies?in their corporate family.? All subsidiaries must be owned by the holding company.
  • More rigorous testing for deferred tax assets.
  • Assets as risky as equities, including limited partnerships, should be a deduction from capital.
  • Securitized bonds that are not ?last loss? should have higher RBC charges than comparable rated corporates, because loss severities are potentially higher, and assets that are originated to securitize are always lower quality than those held on balance sheet.
  • A standardized summary of cash flow testing results should be revealed.

As for the banks, they need to do that and more:

  • Insurance companies list all of their assets.? Banks should as well.
  • Intangible assets should be written to zero for regulatory capital purposes.
  • Risk-based capital standards need to be tightened to at least the level of insurance companies, if not tighter.
  • Some sorts of lending to consumers should be banned.? I am talking about complex agreements, that individuals with IQs less than 120 can?t understand.? Insurance policies have to be Flesch-tested.? Bank lending agreements should be the same.? If some argue that the poor need access to credit, I will say this: the poor need to get off of credit.? Credit is for the upper-middle-class and rich.? Poor people should not go into debt.
  • Standardized summaries of terms and fees must be created for consumer lending, with large, friendly letters, and simple language that all can read.

What I am saying is that accounting has to be more conservative, and that regulators have to require larger amounts of capital to support their business, particularly at the banks.? Financial products must be made simpler for consumers to understand.? More transparency is needed everywhere, and if the financial companies complain, tell them that they will all be in the same goldfish bowl, so no one will gain an unfair advantage.

Preventing Too Big to Fail

As part of preventing too big to fail, the Risk based capital [RBC] percentage should rise with the amount of risk-based capital.? Say, when RBC gets over $10 billion, the percentage of capital needed for RBC grades up to 50% higher than the level needed at $10 billion by the time RBC gets up to $50 billion.

Here is my example of how it would work:

Equity [RBC]

Assets

E/A Ratio

Marginal E/A Ratio

Marginal Income

Income

ROE

Marginal ROE

10.00 100.00

10.00%

10.00%

2.00

2.00

20.00%

20.00%

26.25 200.00

13.13%

16.25%

1.90

3.90

14.86%

11.69%

42.50 300.00

14.17%

16.25%

1.80

5.70

13.41%

11.08%

58.75 400.00

14.69%

16.25%

1.70

7.40

12.60%

10.46%

75.00 500.00

15.00%

16.25%

1.60

9.00

12.00%

9.85%

I have assumed that firms undertake their highest ROE projects first, and do progressively lower ROE projects later.? Now, by raising capital requirements on bigger firms, a common response is, ?Well, then they will just take on riskier loans to compensate.?? Sorry, but that dog don?t hunt.? If they take on riskier loans, their RBC goes up even more rapidly, because loan quality is reflected (or, should be reflected) in RBC formulas prior to adjustment for bank size.

More Dumb Regulation

Dumb regulation bars certain lending practices, and raises capital levels higher than is needed over the long run.? So be it.? Smart regulation is far more flexible, and trusting that companies and consumers know what they are doing.? Unfortunately, when financial firms fail, there are often larger repercussions.? It is better to limit regulated financial companies to businesses where the risks are well-understood.? Let the less understood risks be borne by those outside the safety net, and bar those inside the safety net from holding any assets in those companies.

That brings me to the Volcker Rule, which is a good example of dumb regulation.? My preferred way would be to do something similar through adjusting the risk-based capital formulas ? Equity-like risks should be funded through a 100% allocation of equity. Few banks would take on that level of speculation at that level of capital used.

If you need proof, look at the life insurance industry. Companies used to hold a lot more equities prior to the tightening of RBC rules. Now they hold little, except at a few mutual companies that are flush with capital.

That also has preserved the insurance business in this crisis, leaving aside mortgage and financial risks, where the state regulators still have no idea what they are doing ? that a proper reserve level would leave most of the companies insolvent today, but had it been implemented ten years ago, would have preserved the companies, but eliminated much of their profits.

At the Treasury meeting with bloggers in November 2009, I commented that the insurers were better regulated for solvency than the banks.? One of the reasons for that is that they do harder stress tests, and they look longer-term. Life and P&C insurers survive the process because of better RBC standards, and ?scaredy cat? state regulators. What a great system, which prior to the crisis, was criticized as behind the times.? (I suspect that if we ever get a national regulator of insurance, there will be a big boom and bust, much as in banking at present. It is easier to corrupt one regulator than fifty.)? The more state involvement in bank regulation, the dumber (better) bank regulation will be.

What to Do

So, if one is trying to regulate banks for solvency, there are seven things to do:

  • Set risk-based capital formulas so that few institutions fail.
  • Make it even less likely that larger institutions fail.
  • Limit the ability of financial institutions to invest in other financial institutions.
  • Regulators must benchmark the underwriting culture, and raise red flags when underwriting is poor.
  • Insure that equity is truly equity.
  • Institute a code of ethics for risk managers.
  • Make sure that balance sheets fairly reflect derivatives.

It is almost always initially profitable to borrow short and lend long.? That said, it is a noisy trade.? Who can be sure that short rates will remain below the rates at which one invested long?? Another component of a good risk-based capital formula is that there is no investing in assets that are longer than the liabilities that fund the financial institution.? (For wonks only: regulated financial institutions should be matching assets versus liabilities as their most aggressive posture.? Unregulated financials can do what they want.? And no investing in unregulated financials by regulated financials.)

One of the great subsidies banks get is the cheap source of funds through deposits.? It is only cheap because depositors know the FDIC is there.? The FDIC should raise its fees to absorb that subsidy back to the taxpayer.? Keep raising it until you see banks begin to shift to repo and other short-term sources of funding.

As a clever old boss of mine once said, ?A banks liabilities are its assets, and its assets are its liabilities.?? The idea is this ? banks that focus on their deposit franchises have something of real value ? that is hard to replicate.? But any bank can invest their funds aggressively, which will lead to defaults with higher frequency.? It is true of insurers as well, most financials die from bad investing policies, and short-term liabilities that require complacent funding markets.

That?s why there has to be a focus on liabilities in regulating solvency.? Financial institutions, even simple ones, are opaque.? Most die from the deadly combo of illiquid assets and liquid liabilities.? Those that have funded the bank in the short run refuse to roll over the loans at any price.? Assets can?t be liquidated to meet the call on cash, and insolvency ensues.? Those that have read me for a long time know that I don?t buy the malarkey that some managements will trot out, ?We?re not insolvent; we merely have a liquidity crisis.?? Hogwash.? You took too much risk, because the first priority of risk control is liquidity management.? Assets are only worth what you can sell them for, or, what cash flows they can generate.? If assets can?t generate cash flows or sale proceeds adequate to service liabilities, then you are insolvent, not merely illiquid.

Cash flow testing for banks should focus on the ability of the bank to finance itself without recourse to selling assets.? To the extent that selling assets is allowed in modeling, they must be Treasury quality assets.

The essence of a good risk-based capital formula is that it forces intelligent diversification, and forces adequate liquidity.? No assets should be bought that the liability structure of the bank cannot hold until maturity.? There should be no concentration of assets by class, subclass, or credit, that would be adequate to lead to failure.

My view is that a proper risk-based capital regime would start with asset subclasses, and double the capital held on the largest subclass, and 1.5X the capital on the second largest subclass.? After that, within each subclass, the top 10 credits get twice the level of capital, the next 10 1.5x the level of capital.? Having managed assets in a framework like this, I can tell you that it creates diversification.

Beyond that, no modeling of asset correlations would be brought into the modeling because risky asset correlations go to one in a crisis. Any advantage derived from diversification should be accepted as earned, and not capitalized as planned for.

Securitization deserves special treatment: risk based capital should higher for securitized assets versus unsecuritized assets in a given ratings class, because of potentially higher loss severities, and assets that are originated to securitize are always lower quality than those held on balance sheet.? Capital charges should be raised until banks don?t want to securitize as a matter of common practice.

Eliminating Contagion

In order to avoid systemic risk and contagion, banks should not lend to or own other financial firms.? That would end contagion.? At least that should be limited to a percentage of assets, or through the RBC formula. Think of it this way, financials owning financials is a form of capital stacking across the country as a whole.? In a stress situation it raises the odds of a deep crisis.? Setting a limit on the ability of financials to own the assets of financials is the single most important step to avoid contagion.? I would set the limit at 5% for equity, and 20% for debt.

Regulating Underwriting

Most of the real risks came from badly underwritten home mortgage debt, whether conventional, Alt-A and Jumbo, or subprime.? Underwriting standards slipped everywhere.? Commercial mortgage lending hasn?t yet left its marks ? there is a lot of hope that banks can extend maturing loans rather than foreclose and take losses.

For much but not all of this crisis, it was not a failure of laws but a failure of regulators to do their jobs faithfully. ?Regulators should have looked at indicators of loan quality, and raised red flags when they saw standards deteriorating.? Where I worked, 2003-2007, we saw the deterioration, and were amazed that the regulators had been neutered.

Let Equity Be Equity

Beyond that, there was a dearth of true equity, and a surfeit of preferred stock, junior debt, trust preferreds, and particularly, goodwill. ?Equity has to reflect assets that are high quality and that are not needed to support short-term obligations from the cash flow tests.

Code of Ethics for Risk Managers

One reason the banking industry is worse off than insurance, is that they don?t have many actuaries.? Actuaries have a code of ethics.? They tend to be ?straight arrows? telling it like it is.? Bank risk managers need the same thing, together with the rigorous education that actuaries receive.? Accept no substitutes: CFAs and CERAs are no match for FSAs.

Reflect Derivatives Properly

Derivatives must come onto the balance sheet for regulatory purposes, revealing leverage increases/decreases, counterparty risk, overall sensitivity to the factors underlying the contracts.? Any instrument that can cause cash to flow at the regulated entity should be on the regulatory balance sheet.

Other Issues

I would not create a prospective guarantee fund. The insurance industry has a retrospective fund that has worked fairly well.? ?Do you really know what it would take to create a macro-FDIC, big enough to deal with a large systemic risk crisis like this one?? (The FDIC, much as it is pointed out be an example, is woefully small compared to the losses it faces, and it is not even taking on the large banks.)? It would cost a ton to implement, and I think that large financial services firms would dig in their heels to fight that.? Also, there would be moral hazard implications ? insured behavior is almost always more risky than uninsured behavior.

Though it is not bank reform, we need to end the Greenspan/Bernanke Put.? The Fed encouraged risk-taking by the banks by not allowing recessions to damage them.? They tightened too late, and loosened too early, and that pushed us into a liquidity trap. Monetary policy that is too loose creates perverse incentives for the solvency of financial institutions in the long run.

Bonuses to executives skew incentives.? Bonusing a financial executive on current earnings creates perverse incentives.? It is a form of asset/liability mismanagement, because cash flows in the short run, while the value of the institution is a long-run issue. Far better to incent using long dated restricted common stock.? The only trouble is, it doesn?t incent as well as cash.? Tough, sorry, but that is a loss that must be accepted for the good of the system as a whole.

Summary

Dumb regulation is good regulation.? Regulators should be risk-averse, and take actions that limit ROEs for banks in order to promote solvency, and reduce the likelihood of liquidity crises.? The remedies that I have proposed here will do just that.? May we use them to regulate our financial sector better, for the good of all in our nation.

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