1)? A number of blogs pointed to this piece by Howard Marks of Oaktree, and I thought it was very well-thought out for the most part.? There are few people who think about history in the markets; they just follow present trends.? Learning how to see unsustainable trends and avoiding them not only reduces risk, but enhances long-term return.
2) Crisis!? Choose how you want to view it:
- The SEC is inadequate for the task of regulating investment banks.
- The TED spread is high, and A2/P2 CP rates are high compared to AA short-term spreads.
- US T-bill rates are below those of Japan.
- There is a flight to safety going on in the money markets, leading to hoarding of Treasuries, repo fails, and negative repo rates.
- High yield spreads are challenging prior high spread levels.
- America is starting to pay a premium for borrowing in the US dollar LIBOR market, as compared to yen.
3) Tony Crescenzi sounds an optimistic note on the short-term lending markets.? His opinion should be taken seriously.? The money markets are a specialty of his.
4) To err is human, but to really mess things up, you need derivatives.? With Bear Stearns, different parties have different incentives regarding the firm.? Senior bondholders and derivative counterparties owed money by Bear are much, much larger than the teensy equity base of the small-cap firm.? It is my guess that they are protecting their interests by buying stock at prices over the terms of the deal.? They want the deal to go through.
5) How are the European investment banks?? My guess is that they have greater accounting flexibility, and things are better than US investment banks, but worse than currently illustrated.
6) Save our markets by risking our national credit?? I’m skeptical of many government solutions that bail out the markets, including those the Fed is pursuing.? Same for the GSEs… it seems like a free lunch to allow the GSEs to lever up further, but the losses are growing at Fannie and Freddie from all of the guarantees that they have written.? The US government backstops the whole thing implicitly, but even the capacity of the US government to fund these bailout schemes is limited.? Calling Fitch! — you often have more guts (or less to lose) than S&P and Moody’s.? Let’s have a shot across the bow, and downgrade the US to AA+.
7) Are mortgage rates finally falling?? I guess if the expectations of Fed policy get low enough, it will overcome the increase in swaption volatility.? Then again, PIMCO, Fannie, Freddie, and many others are buying prime mortgage paper again.
8 ) Thornburg, alas.? Dilution and more dilution, in order to survive.? (That could be the fate of many financial and mortgage insurers.)? Misfinancing in the midst of a crisis gives way to a need for equity that kills existing shareholders.
9) In terms of actual losses, Commercial Real Estate lending is not in as bad of a shape as residential lending.? That said, it’s not in great shape and the market is slowing dramatically.? What lending market is in good shape today? 🙁 We overlevered every debt market that we could…
10) When actual stock price volatility gets high, that is typically a sign of a bear market.? When it actual volatility peaks, that is often a sign of an intermediate term bottom.
11) Finally, an article on ETNs that mentions credit risk, if briefly.? Be wary of ETNs, they are obligations of investment banks, most of which have high credit spreads that you are not being compensated for in the ETNs.
12) Give the guys at Dexia some credit for being opportunistic during the crisis of financial guarantors… they had the balance sheet, conservative posture, and the team ready to take advantage of the dislocation in their subsidiary FSA.
13) Someone tell me otherwise if I am wrong, but I am not worried about the assets in my brokerage account.? In a crisis, there is SIPC and excess insurance.? Brokerages are prohibited from commingling client assets, and even if their are delivery failures from securities lending, those issues are solvable, given time and the insurance.
14) I worry about inflation in the US, because it is a global problem.? As the dollar declines, it slows foreign economies because they can’t export as much, and it raises prices here because imports cost more.
15)? This is an article that is just too early.? So the markets have rallied, and commodities have fallen?? It’s only one week, and that is no horizon over which to make the judgment that Fed policy is succeeding.? Look at it in 9-12 months, and then maybe we can hazard a good guess.
David makes a great point on ETN’s. I’ve used the relatively new Elements ETN in Ag (RJA) because I like the underlying index, but also because the credit backing the ETN is a Swedish Commercial bank that is owned by the Swedish government. I admit to being ignorant on the ownership agreement or that government’s history of financial crisis management and/or backing up banks in such a crisis, but I would venture a guess that it is just as good if not better than owning credit of Barclays… which is probably to big to fail considering that the Brits bailed out a relatively small firm like Northern Rock.
One must weigh the credit risk with the benefits of access to real index returns. Many of the ETF’s suffer from managing futures positions and the gain/loss of returns from whether the futures curve is in backwardation or contango. One need only look at how the major Oil etf has done relative to spot crude prices to see this impact – it has been MAJOR. There is nothing worse than getting a trade/investment theme correct and failing to benefit because the vehicle used doesn’t track what you expect it too!
I appologize in advance if this question is foolish, but why bother with agricultural ETF’s or ETN’s if you have access to the futures markets?
Disregard my last question. Having reviewed the RJA prospectus, I assume the answer is the difficulty in replicating the holdings.
David,
I don’t know about calling for Fitch to downgrade to AA+; isn’t it axiomatic that the sovereign credit rating is the highest possible, and hence every other USD issuer would be limited to AA+, at best? And wouldn’t that therefore temporarily cause a problem, for funds that are limited to only holding AAA credits, and hence would be forced to sell?
I suspect that you were suggesting the downgrade in jest, a case of saying that “the emporer has no clothes”. How about Fitch just rating them AAA, with a negative outlook? 🙂
Happy Easter,
Steve
Why downgrade the US when they can create money by using it power and authority to tax tax and tax again. Ther are plenty of rich people they can tax again and again. Where does most of the governments money come from??? TAX.
Hello Andrew,
Two other reasons why an ETN vs the futures market are regulatory and taxes. At present, ETN’s qualify (non currency that is) for long term capital gains treatment while futures are taxed at 60%/40%. Also, many people don’t have access to trading futures and with good reason – they are extremely dangerous tools that can easily seduce people into taking more risk than they otherwise would due to the ability to use massive leverage. I personally trade futures but would never do so with my clients’ assets, who are for the most part upper middle class and would not be thrilled with the kind of 5-10% per day swings I tolerate trading futures. As I believe most who trade futures have, I paid some tuition money during the first stretch of time learning to deal with leverage and unfortunately pay a refresher course fee on occasion when my arrogance gets the best of me.
James, do I have to hold the agricultural etn for a year to get long term gains treatment? Also, are there any other blogs you would recommend? Thank you so much for responding to my questions. I really appreciate it.
Andrew,
The taxation on commodity ETN’s is still not final, as the IRS has not made a final ruling. At present, they are being treated as pre-paid forward contracts and I believe a 1 year holding period qualifies for long term capital gains, but that could change when/if the IRS rules. The mutual fund industry lobbying group is attacking capital hill with both guns blazing for obvious reasons, so we’ll have to wait and see.
As for other blogs, Seeking Alpha is a good place to start. I read Ritholtz and Jeff Matthews and also subsribe to Realmoney Silver and Minyanivlle.com which are “bloggish”. I am a self taught investor with an undergraduate degree in finance and have the CFA designation, but I can truly say that without the web I would not have the career I have and love. It has truly been a blessing for me to have people like David be willing to share their vast knowledge and experiences.
I also read John Hussman’s weekly commentary, the Pimco boys’ monthly commentaries, Jeremy Grantham’s quarterly letters, Bill Fleckenstein, Mark Faber, Fred Hickey and Jim Stack. I try to listen to Jim Rogers wherever/whenever he speaks.