June 2012 – The Aleph Blog

Sorted Weekly Tweets

Posted on 30 June 2012 by David Merkel

Eurozone

Germany Signals Shift on Europe Aid http://t.co/AcnaysGz “a common fiscal policy would be irreversible and well coordinated.” $$ Jun 29, 2012
Bermuda on track to comply with EU insurer rules http://t.co/TFdvIr1D If not, cos reinsured could not take full reserve credit;wud lose biz Jun 26, 2012
How Germany?s euro fight has turned Orwellian http://t.co/fjwZFYvb “foreigners shouldn?t overestimate Germany?s financial capacity.” $$ Jun 26, 2012
Hollande Reality Makes French Debt Less Attractive http://t.co/Rroiv8TI Bondholders care about getting repaid. Hollande = higher risk $$ Jun 26, 2012
Germany to Confront United Euro Bloc at Summit http://t.co/vWLyG6ND Time to bring back the D-mark, or, centralize the E-zone into a nation Jun 25, 2012
All the bail-out systems under the sun cannot make the eurozone work http://t.co/apMBQ3FB The loans, at whatever rate, cannot b repaid $$ Jun 25, 2012
Merkel Parries Push for Euro Debt Plan as Growth Outline Agreed http://t.co/JLWa9Ley Merkel repeated ?liabilities & controls go together? Jun 24, 2012
Bundesbank Swipes at Draghi as European Fault Lines Deepen http://t.co/EwRMq9kT Do you want your currency 2b a stable unit of account $$ Jun 24, 2012
Spanish Government in Denial: Banks Need 100B EUR to Recapitalize http://t.co/r1FaA0Lp Eurozone is under stress & estimates capital low $$ Jun 24, 2012

TEXAS SHIFT MAY SHOW WAY OUT OF IMMIGRATION STALEMATE http://t.co/eWN2NYuV Favoring guest-worker programs may break national stalemate $$ Jun 29, 2012
A defense of the tax exemption for municipal bonds (part one) http://t.co/xYV1S4Ft @munilass explains the reasonable nature of the exemption Jun 29, 2012
Congress Would Hate to Lose Its Tax-Code Toys http://t.co/2iifOmcE @cabaum points out that our current policies aren’t working $$ Jun 29, 2012
All municipalities that raise employee benefits without respect for costs deserve bankruptcy: thus Stockon, CA $$ http://t.co/5ZQITDW2 Jun 29, 2012
Pt 2 — individual does not survive, and the fragmentation of the decision makes the interpretation messy; Obama implements asmuch he can $$ Jun 26, 2012
Going to toss out a wild idea on #scotus & PPACA/Obamacare; several concurring opinions get issued overturning aspects of the law, but… $$ Jun 26, 2012
Yield spreads widening, Industrial commodity prices falling. I think those are the main factors. http://t.co/qehXYflS? http://t.co/EKG81LB0 Jun 26, 2012
No such thing as animal spirits, businessmen r cautious w/debt $$ RT @EconTalker: Spending is the consequence of prosperity, not its cause. Jun 26, 2012
Biggest U.S. Banks Curb Loans as Regional Firms Fill Gap http://t.co/kxqgOjwu Lending reduction from bigs is > increase from regionals $$ Jun 26, 2012
Flood Cleanup Continues in Duluth http://t.co/XXNH1oW6 “surge of run-off from the hill made the flood so dramatic.” Duluth flooded? $$ Jun 25, 2012
Stockton, CA Nears Bankruptcy http://t.co/H2GTkjrl Will reduce employee benefit costs; muni bondholders likely be paid $$ 14x Vallejo Jun 25, 2012
States Face Pressure on Pension Shortfalls http://t.co/h1U5PYbE GASB finally gets spine & tells states their pension acctg is liberal $$ Jun 24, 2012

Comments

@RMGSelection They get clones of portfolios that I personally own Jun 29, 2012
@RMGSelection I manage separately managed accounts of stocks and bonds for upper middle class individuals and small institutions Jun 29, 2012
@RMGSelection You’re welcome, but I don’t do Facebook 🙁 Jun 28, 2012
@BubblesandBusts 40% banks; top 10 75%, too much downside risk in a real washout, would rather consider $TEF, $REP, or maybe a CEF… $$ Jun 27, 2012
You’re sounding good, keep it up $$ RT @ReformedBroker: @AlephBlog bob auer from auer growth fund Jun 26, 2012
@ReformedBroker Who was the GARP mgr that you were interviewing late in the 1st hour, and early 2nd hour? Jun 26, 2012
@CLHinkle I don’t know enough about Gina Rainmondo; don’t live there, etc. What little I have seen of her I have mostly liked $$ Jun 26, 2012
“Hard to see how Telefonica $TEF goes bust. 5.4% is a lot of spread… $$” ? David_Merkel http://t.co/P37qVme0 Jun 26, 2012
EJ made its name w/quantitative models of corporate risk; govts aren’t the same $$ RT @fundmyfund: Egan Jones has jumped the shark Jun 26, 2012
RT @TheOneDave: Chemicals ought to come with a U.S. economic warning label. See this Chart of the Day: http://t.co/JgeNLCTI via @Bloombe … Jun 26, 2012
What a chart, but price was lower in April 2000 $$ RT @BarbarianCap: Arch Coal $ACI lifetime low, I think. Jun 26, 2012
RT @historysquared: sustained negative real yields in advanced economies (preceded double digit inflation in the 70s) http://t.co/qAhT1Y6m Jun 26, 2012
Well done! $$ RT @AmyResnick: Well beyond bonds: Digging into reports from muni borrowers : Reynolds Center http://t.co/8VqthumF Jun 26, 2012
Switched back 2 old RT @asymmetricinfo: New Tweetdeck app has broken the ability to follow conversations. Curse you, Tweetdeck developers! Jun 26, 2012
‘ @grossdm Skills that can be used by multiple employers r typically paid for by the employee; company-specific skills by the employer $$ Jun 25, 2012
@moneyscience I didn’t find this compelling; my practical experience in holding multiple auctions says differently http://t.co/eO2OVeHl $$ Jun 25, 2012
@manualofideas I agree, it is hard. But when I was a kid, my friends would say to me, “There r accidents, but Dave, that error took skill.” Jun 25, 2012
@manualofideas there is the risk of continuing to lose money, and no deal emerges… $$ Jun 25, 2012
@saraeisenFX Dissolving the Euro would be the smartest idea, but ideologues insisting on “closer & deeper union” will say otherwise $$ Jun 25, 2012
Diversification: A substitute for knowledge & a poor one $$ RT @EddyElfenbein: The most over-rated investing concept = diversification. Jun 25, 2012
Can also pull into XL http://t.co/iFcz0Hf3 RT @TheStalwart: Wow, you can download all the data on FRED in one big file. http://t.co/yFiymSDu Jun 24, 2012
@manualofideas What I sent to the SEC: http://t.co/vuNGATPK Only 2 pgs long, but offers a simple solution. Let me know what u think Jun 24, 2012
@manualofideas Two pages: http://t.co/vuNGATPK Let me know what you think. I think this is the best proposal so far. Jun 24, 2012

Fraud

New bank theft software hits three continents http://t.co/ImYJHG38 “sophisticated enough to defeat… two-factor authentication” b aware $$ Jun 26, 2012
Greed is an attitude, and it is not good. It is present with people who are addicted to making more. More, more, more? http://t.co/ChDSAB4T Jun 26, 2012
1 Year of Your Life and $100,000: Growing Cost of Medical ID Theft http://t.co/7FUFfmGV Important 2b aware of this new form of ID theft $$ Jun 26, 2012

Market Currents

Do Good Investment Managers Give Away Great Ideas? It?s Entirely Rational According to New Study http://t.co/g00pNfDy @sumzero & Value IC $$ Jun 26, 2012
Tropical Storm http://t.co/J16JmXP7 The same could be said of pricing/trading in the bond market, and few complain about that. $$ Jun 26, 2012
Chesapeake Slumps On Report Of Scheme To Suppress Land Prices http://t.co/HTTKi80j Another cockroach. Y I saw 1 of those yesterday… $$ Jun 25, 2012
Kepos’ quiet touch wins favor among quant funds http://t.co/EG7Dydaj Remains 2b tested. As a quant, how do u avoid crowded trades? $$ Jun 25, 2012

Miscellaneous

In a Shift, Chinese Exporters Cling to Dollars http://t.co/gaEIIW5I As I have sometimes said, it may be that the Yuan is overvalued $$ Jun 29, 2012
Central Banks Commit to Ease as Threat of Lost Decades Rises http://t.co/3h4MPgKn “It?s going 2b very hard for them 2 stimulate demand” $$ Jun 25, 2012
Should Tenure for College Professors Be Abolished? http://t.co/rvk7kena Tenure rewards the past, 2 the possible neglect of the future $$ Jun 25, 2012
Borg Bashes Banks in Sweden Shielding Housing Bubble http://t.co/Z0SISjQC Can a housing bubble be deflated w/o significant fallout? $$ Jun 25, 2012

Book Review: The Little Book of Hedge Funds

Posted on 30 June 2012 by David Merkel

I have worked for a hedge fund, and I have many friends that work for hedge funds.? I understand hedge funds well.

The “Little Book” people at Wiley should indeed have done this book, but with a different author.? Why?? When there are significant areas of controversy around a topic, and you write a book as if there is no controversy, it means you haven’t done your homework.

There are many like Simon Lack, who wrote “The Hedge Fund Mirage,” and Dichev and Yu, who wrote “Higher risk, lower returns: What hedge fund investors really earn.” (Note to readers at Amazon.com, if you read this at my blog, AlephBlog.com, you get links to aid your learning.

Quoting from my review of Simon Lack’s book:

But, some of the problems with hedge funds, as a opposed to open-end mutual funds, is that:

1) Many hedge funds go out of business, and as they do, their bad performance is not recorded, and sometimes lost.

2) Hedge funds with good performance give the databases their early performance.? Bad early performance does not get reported.

3) The activity of investors chasing trends is more pronounced in hedge funds than in mutual funds, with a loss of returns of 5% in hedge funds, versus 3% in mutual funds.? This is all due to greater volatility.

4) Double alpha is generally not achievable, because most managers good at longs are not good at shorts, and vice-versa.? Going long and short are different skill sets.

These are issues that the author of the “Little Book” does not address in any significant way.? He mentions Simon Lack’s book once in passing, but doesn’t do anything substantive with it.? He also does not deal with the difference between dollar-weighted and time-weighted returns.? Because hedge funds are often quite volatile, investors buy at the wrong time (after a strong performance), and sell at the wrong time (after a weak performance).? What that implies is that the average investor in a hedge fund typically does worse than a buy-and-hold investor.

Other Problems

Page 121 contains a math error in the first example on shorting.? Yo! This is only arithmetic.? Didn’t anyone proofread the work?
Page 136 attempts to describe deal arbitrage, and makes what should be an easy concept rather turgid.? It is so unclear, that I would have to assume the author does not understand what is a simple concept.
The book does not spend any significant time on how we live in a different world now than in the glory days of hedge fund outperformance.? Even some slight commentary on the limits to arbitrage would have been useful.

Some Strengths

Much of the advice that the author gives in selecting hedge fund managers is sound, especially the list of red flags.
The “due diligence questionnaire” was also interesting.
Most of the descriptive material in the book was accurate, but there are other books and blog posts that provide that information, minus the hype.
This book is not mathematical, sometimes to a fault, where a chart or graph could have proven useful.

Summary

To be truly educated about hedge funds, you would need a lot more than this book.? This book reads like you are being pitched on how great hedge funds are; it does not provide enough on the limitations of hedge funds, nor does it interact with the critiques of hedge funds.

Who would benefit from this book: Most investors would not benefit from this book.? Particularly those that advise institutional clients and high net worth individuals would not benefit. It is too optimistic about the performance of hedge funds.? If you want to, you can buy it here: The Little Book of Hedge Funds (Little Books. Big Profits).

Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

On Bond Ladders

Posted on 28 June 2012 by David Merkel

I received the following from a reader:

My primary motivation for writing to you is this post by Jeff Miller:

http://oldprof.typepad.com/a_dash_of_insight/2012/06/the-quest-for-yield-part-7-what-about-bonds.html

In my mind, you are the foremost expert blogger when it comes to bonds so I wanted to get your take.? It’s been a long time since my bond class getting my MBA and I haven’t dealt with bond math in quite awhile.

I’m wondering about this whole individual bond ladder versus bond fund issue.? Maybe I?am wrong so I wanted to ask you.? Duration is duration.? Whether one owns an individual bond ladder or a bond fund, if the duration is the same, the price sensitivity to an increase in interest rates is the same?? If a person owns an individual bond ladder and rates move up, those bonds will be marked to market and show a capital loss even if they pay off at par at maturity, and you’ve locked in your cashflow.? With a bond fund, you take a price hit to the fund, but those cashflows from the fund get reinvested in the fund at lower prices and higher yields?

I guess I am just wondering if someone is going to buy and hold and sit tight for?say 5-7 years whether they construct a bond ladder or buy a?bond fund if the duration is the same, they are going to end up pretty much in the same place 5 years later.

Anyways, I hope maybe you will do a post on the ins and outs of bond math vis a vis interest rate changes and the pros and cons of bond funds versus a bond ladder from the perspective of duration.? Thanks.

From 1995-2001, I spent a lot of time doing interest rate modeling.? With the growth in computer power and modeling techniques, we finally hit the barrier of the “Turing test” as far as interest rates went in 1995 with my modeling.? As a part of our regular weekly meeting with the investment department, I brought examples of full yield curve interest rate modeling for a 30-year horizon.? When I showed what the future yield curves looked like, the bond managers said to me, “This is the first time we have ever seen a random model produce interest rate scenarios that look reasonable.”

For a brief period, my model was the best that I knew of.? By 2002 the actuarial profession as a whole came up with a better model, which they still use today for asset/liability management calculations.? Once I used it, I accepted it as better than my model, and used it for other processes beyond regulatory compliance.

Regardless, I did tests using my model and the more advanced model to see what the best strategy was for individual investors in bonds.? The only consistent result was that the ladder strategy was the second best strategy.? Never best.? Never worst. Reliable.

And I spent some time thinking about it.? Structurally, ladders work well when you don’t know what is going to happen.? If you are really, really smart, and you can consistently predict changes in yield curve steepness and levels, yes, you can do far better.

Ladders make sense from a cash flow standpoint because they are a sustainable strategy.? Maturing proceeds are invested in the longest bonds that the ladder accepts.? That keeps the interest rate risk even, and with a positively sloped yield curve, offers a relatively high yield.

I agree with the concept of ladders.? But ladders are not incompatible with mutual funds. Over the years, I have run into mutual funds that embed a ladder concept into their interest rate management strategy, but it is far enough back in time that I can’t name any that do that now. In general, I think most bond mutual funds would be better off if they used some form of ladder to implement their interest rate strategy.

But to your question, yes, there is little difference, aside from fees, whether one owns a mutual fund with the same duration profile as a laddered portfolio.? When you deal with short portfolios, the duration statistic is very descriptive of the interest rate risk.

If someone is looking to invest for many years, in the present environment, stocks may be the better choice, but if limited to bonds, choose a portfio that replicates the time horizon on average.? Then as the horizon draws nearer, adjust to reflect the need for cash paid out.

That’s my best answer for now, though I am more than willing to answer other questions related to this.

Do Insurance Stocks Do Better than Average Over the Long-Run?

Posted on 27 June 201227 June 2012 by David Merkel

Why should insurance companies be such a good place to invest?? That’s a great question, and I will try to outline an answer.? Before I do, let me draw a few distinctions:

I’m not talking about life companies, they are far more capital encumbered then P&C companies.
I am also not talking about title, mortgage, or finance insurers.? They are too risky, and that was my opinion in the early 2000s.
Health insurers have a different model, much more subject to regulation.
Many insurance companies that don’t survive 10 years as a public company do poorly.? They did not underwrite well.
Small companies tend to fail disproportionately.
We aren’t talking about specialty companies.

What I am talking about are non-microcap companies with stable P&C liability structures and conservative reserving.? Boring, maybe.? Simple, somewhat, but you try setting up a competitor to them.? It takes some doing.? That is the competitive advantage; it is the barrier to entry.? Few companies have diversified liabilities; fewer reserve conservatively.

Thus I highlight P&C companies with ten year track records.? Here are the good ones: ACE, Chubb, Cincinnati Financial, Donegal Group, HCC Insurance, Markel, ProAssurance, RLI, Selective Insurance, Travelers, United Fire Group, W.R. Berkley, Arch Capital, Alterra Capital Holdings, PartnerRe, Everest Re, Renaissance Re, White Mountains, Progressive, State Auto Financial, and Erie Indemnity.

And here are the trailing ones: American Financial Group, Baldwin & Lyons, EMC Insurance, Navigators Group, XL Group, Allegheny Corporation, American National, Allstate, and Horace Mann.

And two really lousy ones: CNA Insurance and Meadowbrook Insurance Group.

On the whole, the outperformers more than absorb the underperformers, though I can’t prove that, for these reasons:

Hasn’t happened much in a while, but P&C insurance companies do occasionally die & disappear.? Think of Reliance Insurance Company.
Sometimes P&C companies make very bad underwriting decisions, lose a dramatic amount of money, and their stock prices fall enough that they get taken over, e.g., PXRe would be an example.
I may be guilty of selection and survivor bias by sticking with diversified bigger firms that are at least 10 years old.? I know of a lot of smaller firms that flame out because they take too much underwriting risk due to hubris and/or inexperience.

To do a complete study, we would have to use the CRSP database, which has all of the data for stocks not currently living.? We would see the losses from insolvencies, and the losses/gains fhereof.? It would take place at the halfway point for US efforts, which would be 4 seconds ahead of the Greeks as they hurried to compete/complete at constant speeds.

That’s what would happen.? Now before I go, I want to leave charts behind for the stocks mentioned:

Above

Below

Well Below

So though I know many value investors think a lot of P&C insurers, my answer on whether they are a generally good industry to invest in is “possibly,” but not “certainly.”? There are advantages for sophisticated investors that can understand complex accounting and its limitations, as well as those that can sense whether a management team is conservative or not.? That may be part of the reason for how I limited the selection of companies above; I was trying to mimic what sort of companies tended to last a long time; they tend to be conservative.

That’s all for now; criticism is welcome.

Full disclosure: Long HCC , TRV

PS — I will be gone the next three days, and posting will be irregular, as it has been recently.

Don’t Blame Money Market Funds

Posted on 23 June 201224 June 2012 by David Merkel

So SEC Chairman Mary Shapiro wants money market funds to use mark-to-market accounting, and publish a daily NAV.? Well, why not impose mark-to-market accounting on banks, and force them to report the fair market value of their surplus every day? Large depositors over the guaranty limit and the repo market might be interested in this data.? Oh wait, that’s procyclical, so many claim, even though it reveals cash flow mismatches, which are material to the running of a banking business.

There’s a lot of hypocrisy involved in the SEC’s proposals on money market funds.

Banks are a larger problem.? When money market funds fail, the losses are a couple percent on NAV, versus much larger on banks.
Having a balance sheet enables a bank to postpone the day of reckoning; there are more games to play.
Some banks run “money market funds” that are essentially savings accounts, but do not have identified pools of assets behind them.? In an insolvency, a holder of such is a general creditor after FDIC coverage.
Money market funds cost consumers a lot less than banks in order to provide transactional services.? In one sense, money market funds deserve to exist far more than banks — they have a very low asset liability mismatch, asset quality is very high, and they exist to pass through interest earnings on a short-term portfolio.

Money market funds should be treated like book value ETFs.? They should pass through interest net of fees, and impose credit events should the NAV fall below 0.995. [Link to my letter to the SEC]? This is a simple, stable solution, that would not require any regulation beyond that.? It would keep money market fund losses small, end deliver them to holders, not taxpayers. (Even indirectly, by borrowing from the Fed.)

So there are 300+ cases where the sponsors of money market funds put up money or offered loans where money market funds were about to break the buck.? Where Mary Shapiro sees weakness, I see strength.? Isn’t it great that financial organizations, without being required to do so by regulation, kick in their own funds or liquidity in order to preserve the interests of savers? Most banks could never do the same when they are about to go bust.

Money market funds are a way of avoiding the high expenses of banks, and offer savers a decent rate of return.? If there are losses, holders of the money market fund should bear it through a reduction in units, as described in my proposal, unless sponsors generously want to preserve their franchise.

Consumers get a better deal with money market funds.? Those that are in the pocket of the banks argue against money market funds.? I do not ever want the? government to bail out money market funds, and the US Government erred greatly when they did so in 2008.? Those holding money market funds should have borne their small losses.? There would have been little risk from letting money market funds deliver losses to holders.

Those losses were not the cause of the crisis, but the banks with their bad residential mortgage loans.? That was the crisis, and continues to be so, with so many mortgages underwater.

Sorted Weekly Tweets

Posted on 23 June 201223 June 2012 by David Merkel

A note to all of the actuaries in the audience, all three of you 😉 : an old friend from my GIC days is seeking a multi-talented actuary to work in the stable value business.? Must understand how wraps work, etc.? If interested, drop me a note, and I’ll send you the contact info.

On with the tweets:

=-=–=-=-=-=-=-=-=-=-=-=-=-==–=-=-==-=-=-=–==–=-=-=-==–=

Eurozone

May not last long $$ RT @John_Hempton: @AlephBlog Spain imposing on bank junior bonds but prefs in Santander still trading at par! Strange. Jun 23, 2012
Buying Europe Banks Is Easy for Herro as Cheap Stocks Fall http://t.co/gfCOhY8q Key question here is accounting quality; not a buyer $$ Jun 23, 2012
Spain Said to Weigh Imposing Losses on Junior Bank Bondholders http://t.co/cD1hoAVa Fine, but they won’t fund jr debt for 20yrs or so $$ Jun 23, 2012
Spanish Aid Plan Is Flawed, Says IMF http://t.co/9V2FJ0Xc IMF doesn’t like the complexity of the E-Zone, wants it 2 behave like a nation Jun 23, 2012
Debt crisis: Angela Merkel defies Latin Europe and the IMF on bond rescue http://t.co/qTKEAr5O She who pays the $$ calls the tunes Jun 23, 2012
What?s So Special About the Euro Currency Area? http://t.co/oJWyrLAk Currency unions don’t work; must centralize or die $$ Jun 21, 2012
Merkel Balks at Sovereign Debt Purchases to Overcome Crisis http://t.co/UfuN4ae8 Physically, the crisis looks like it is wearing on Angela Jun 21, 2012
Spanish short-term debt costs reach alarm levels http://t.co/Dm8d2bsv Yields high enough that Spain unlikely to grow out of the debt $$ Jun 21, 2012
Cyprus Said to Face Europe Pressure for $13 Billion Aid http://t.co/z0etJBlX Who wants to maintain influence in Cyprus? Russia, E-zone? $$ Jun 20, 2012
‘ @aarontask He might b right. Key Q is how much Germans/Nordics/Dutch view themselves as Europeans 1st rather than Germans/Nordics/Dutch $$ Jun 20, 2012
Greek Leaders Poised to Agree on Three-Way Coalition http://t.co/JvAaPDDj It will be difficult for that coalition 2 hold together $$ Jun 20, 2012
Ma?ana-nomics at Los Cabos http://t.co/GtlAj4lY Weak Europoliticians blame US, when their banking system was overlevered & malregulated $$ Jun 20, 2012
G20 summit: perils of a half-baked rescue for Spain and Italy http://t.co/7E6jPK4W E-zone not ready 2 take strong actions; don’t force it $$ Jun 20, 2012
Is Spain past the point of no return? http://t.co/zCRF7qKo ??I suspect the ECB will have to be the buyer of last resort for Spanish bonds.?? Jun 19, 2012
Saddling Spain With Bank Burden Repeats Irish Error http://t.co/dWgYAUht Protect deposits, not bank bonds, preferreds, or stocks $$ Jun 19, 2012
“Which is why $JPM had the hedge there in the first place $$” http://t.co/o61frAFX Dimon Says ?Firewalls? May Halt Spread of Europe Crisis Jun 19, 2012
Germany set to allow eurozone bailout fund to buy troubled countries’ debt http://t.co/OEFi9UI9 Last refuge of scoundrels:blame speculators Jun 19, 2012
Fran?ois Hollande said meeting btw Ezone & Obama rescheduled4this morning2brief Americans on “mechanisms that allow us to fight speculation” Jun 19, 2012
Spanish Yields at 7% Show Investors Slamming Door http://t.co/JxGxNHDn Spain is slowly passing the “tipping point” into hopelessness. $$ Jun 18, 2012
Where is the relief? RT @jennablan: Where is the relief rally? Jun 18, 2012

FOMC Meeting/Press Conference

Fed Seen Extending Operation Twist and Avoiding Bond Buys http://t.co/qFOSA0rf Fed can’t do nothing, so it does something that is nothing Jun 21, 2012
RT @ezraklein: Hypothesis: Bernanke doesn’t do more because he doesn’t think he can. He says otherwise is because he doesn’t want the ma … Jun 20, 2012
Dr. Bernanke: Couldn?t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets? Jun 20, 2012
That’s all folks!!! Jun 20, 2012
Dr. Bernanke, Isn?t stagflation a possibility here? I mean, no one expected it in the ?70s either. $$ Jun 20, 2012
Q for Bernanke: If the Fed ever does shrink its balance sheet, what effect will it have on the banks? $$ Jun 20, 2012
Stocks trading off — correlated with future inflation rates; long Treasuries rallying nominal yields falling -> real rates stable-ish $$ Jun 20, 2012
What Bernanke is describing in terms of hedging and risk management has to be done in the insurance industry; actuarial risk analyses Jun 20, 2012
W/MBS rates, those mtges that are underwater don’t benefit, same for Alt-A & Jumbo; low rates don’t help many in residential real estate $$ Jun 20, 2012
Effect of Tsy ylds on corporate yields is stronger 4 AAA-A bonds, moderate 4 BBB bonds, little 4 junk & the effects get weaker w/maturity $$ Jun 20, 2012
That’s the wrap up for the central tendencies and averages of the FOMC’s additional data release. Anyone find those summaries useful? $$ Jun 20, 2012
Changes in Avg Target Federal Funds Rate at Year-End 2012-2014, Longer -0.07%, -0.10%, -0.22%, -0.09% $$ Levels: 0.30%, 0.50%, 1.11%, 4.11% Jun 20, 2012
Average appropriate timing of policy firming moved out 1.6 months to November 2013 $$ Jun 20, 2012
Changes in PCE Inflation central tendency 2012-2014, Longer -0.4)%, -0.07%, -0.12%, 0% $$ Levels: 1.48%, 1.76%, 1.77%, 2.00% Jun 20, 2012
Changes in unemployment central tendency 2012-2014, Longer +0.18%, +0.20%, +0.24%, +0.03% $$ Levels: 8.10%, 7.71%, 7.28%, 5.60% Jun 20, 2012
Changes in real GDP growth central tendency 2012-2014, Longer -0.50%, -0.37%, -0.11%, -0.04% $$ Levels: 2.13%, 2.57%, 3.28%, 2.44% Jun 20, 2012
+1 RT @bondscoop: Steve Liesman is the Fed’s Helen Thomas Jun 20, 2012
Fed wants to see long TIPS up in price relative to long nominal Treasuries. http://t.co/X5Gjt6jI Jun 20, 2012
@TheStalwart #FOMCGuesses OT extended, no QE3, central tendencies move back to where they were in January, shades lang down GDP, CPI, etc $$ Jun 20, 2012
C?mon, Ben, Just Say It; Please, Just Say QE3 http://t.co/ksIKxZ6C Sad that equity guys beg 4 stimulus; think OT extends; no QE3 yet $$ Jun 20, 2012

Rest of the World

Glencore Protests Bolivia’s Move on Mine http://t.co/OcIzatJ5 Bolivia has Venezuela envy; won’t end until Morales is shown 2b a fail. $$ Jun 23, 2012
Children of Mao’s wrath vie for power in China http://t.co/pWzj4Dbq All of the current ruling class survived the Cultural Revolution $$ Jun 22, 2012
Riskier Bets Pitched to Asia’s Rising Rich http://t.co/P6PjFqyR Yield is the oldest scam in the books; Asia’s brokers fleece clients $$ Jun 21, 2012
China warns its rare earth reserves are declining http://t.co/ve2e6PQq I doubt this, but if true -> significant scarcity of rare earths $$ Jun 20, 2012
Britain doomed, apparently http://t.co/WdvPCsxs Countries that don?t reset their systems through default, will experience money decay $$ Jun 20, 2012
Suicides, Arrests Show Trouble at Korean Savings Banks http://t.co/aP1fu6KS Pride drives suicides, rather than confession of wrongdoing $$ Jun 19, 2012
The UN’s Internet Power Grab http://t.co/LE704S74 Never surrender an advantage for no gain; does the Obama administration get that? $$ Jun 18, 2012
The Return of Egypt’s ‘Deep State’ http://t.co/i1IkbmMq Islamists & liberals checkmated by Egyptian Army 4 now. Liberals s/b glad $$ Jun 17, 2012
@dpinsen Agreed, better H/L would have been: “Egyptian Army reveals full control, ends show that played w/democracy 2 smoke out enemies” $$ Jun 17, 2012
Noda Ends Japan Nuclear Freeze, Risking Voter Backlash at Polls http://t.co/Jcoxl91Z He does the right thing, but will the voters agree $$ Jun 17, 2012

Banks

A History of Money Funds http://t.co/KXCpfCDz Let the critics of money market funds apply the same2banks; mark2market accounting. $$ Jun 23, 2012
Bank Investors Dismiss Moody?s Cuts as Years Too Late http://t.co/5cOsGOyG True. Moody’s should’ve done it in 2008; did politics stopthem? Jun 23, 2012
Citigroup Faces $5 Billion on Dollar?s Rise, Peabody Says http://t.co/5HZtJfvx So, on the heels of $JPM, $C has a currency mismatch? $$ Jun 21, 2012
Eminent domain for underwater mortgages could have biggest impact on banks http://t.co/NK9W0PyO Comments at end; disagreement welcomed $$ Jun 20, 2012

Central Banking

Bernanke Acknowledges Tsy Strategy @ Odds W/Fed Policy http://t.co/MqW6qda2 “Thx, Unca Ben 4letting us issue morre 30s” Ben:”Arrrgh!” $$ Jun 23, 2012
The Fed?s second best solution http://t.co/YJhiHbNd “collateral damage will mount, making the next policy steps even more excruciating.” Jun 21, 2012
Fed Born of Morgan?s Bailout Under Scrutiny After Dimon?s Loss http://t.co/7EHPlSvM How significant is it 4 Jamie D 2b on NY Fed board? $$ Jun 19, 2012
Krugman’s Intellectual Waterloo http://t.co/brrRB3CP Suggested possible Fed stimulus: blow housing bubble 2replace tech bubble $$ Jun 17, 2012
Also, the last H/L could have been: “Bernanke?s GDP View Invalidated as Economy Slows” FOMC has been lousy economic forecasters lately $$ Jun 17, 2012
Bernanke?s Inflation View Validated as Commodities Fall http://t.co/pjRKhXWv Median & Trimmed mean CPIs mot falling, better measures $$ Jun 17, 2012

Asset Management

Pimco?s Gross Warns of Risk Assets as Aberdeen Avoids Stocks http://t.co/pcqnMis6 Bill Gross signs on to deflation late & promotes it $$ Jun 23, 2012
Private Equity Has Too Much Money to Spend on Homes http://t.co/VPToSU8I Big buyers need to stay quiet if they want 2 make good returns $$ Jun 22, 2012
Simon Lack responds to AIMA’s hedge fund cheerleading http://t.co/VQq4s1O8 Backfill bias, IRR vs Buy&Hold, high fees, survivor bias $$ Jun 21, 2012
At 40,000 feet, Fidelity’s Danoff ponders Groupons http://t.co/BwOKJR8X Danoff is a survivor; he’s right it’s lonely 2b a stockpicker $$ Jun 21, 2012
Very good point. Wall Street is a 1-note Sam RT @chadstarliper: Has there ever been a time when Wall St didn’t think stocks were “cheap?” $$ Jun 20, 2012
Wall Street says stocks are bargains, but that assumes surging profits http://t.co/0c0iDdK6 Or at least growing sales w/flat profit mgns $$ Jun 20, 2012
America?s $8T corporate debt market faces liquidity drought as banks retreat from the trade http://t.co/rvXwFsjW Shouldn’t b that bad $$ Jun 19, 2012
Equities entail less risk than ?haven? investments http://t.co/u3befAMT Ain’t necessarily true; think of the Great Depression or 1871 $$ Jun 19, 2012
Valuation Matters…. Equity vs Bonds Edition http://t.co/23IikMDJ Earnings ylds v Tsy ylds unstable; Q-ratio, CAPE10, Price/resources bettr Jun 19, 2012
Biggest Stocks Beat S&P 500 Most in 13 Years as Valuations Fall http://t.co/7vLxG6VN Once valuations get so low, they must go up $$ Jun 18, 2012

Companies

DuPont selling Conoco at oil mkt trough $$RT @BarbarianCap: “Delta seals deal to buy Pennsylvania refinery” > hasn’t that been tried before? Jun 23, 2012
DuPont buying Conoco at oil mkt peak $$ RT @BarbarianCap: “Delta seals deal to buy Pennsylvania refinery” > hasn’t that been tried before? Jun 23, 2012
J.C. Penney Falls After Francis Leaves Amid Strategy Flop http://t.co/jfAVGj3V Rare setback 4 Ackman/Pershing on $JCP; retail is tough $$ Jun 20, 2012
Buffett Extends Real-Estate Bet With ResCap Pursuit http://t.co/ZsN6J0Pm Buffett is early, in my opinion, but has the capital to do it $$ Jun 18, 2012

Pensions

US public retiree benefits gap grows to $1.38T http://t.co/7bZ18GRB Gap widened by $120 billion since last year; thx Ben 4 low discnt rates Jun 20, 2012
Joe Nocera Is Wrong About Woonsocket’s Crisis http://t.co/Z3RM9UGO Harder2discharge muni “pension” bonds than renegotiate muni pensions $$ Jun 20, 2012
GM Seen Fueling Pension Deals as Employers Face Shortfall http://t.co/noz9auU0 Hope $MET & $PRU survive; guaranty funds limited in size $$ Jun 19, 2012
Terminal funding of DB pension plans will be a growing phenomenon if corps/states bite bullet and kick in more $$ to fund annuity purchases Jun 19, 2012
Problem to annuitants is companies can go broke; no PBGC coverage of annuities, and state guarantees r usually limited 2 $100,000 total $$ Jun 19, 2012

Media

Love the Leaker, Hate the Leak http://t.co/wiY7RwJU Value of releasing sensitive govt data to the public is in the eye of the beholder $$ Jun 21, 2012
How David Weidner Changed My Life http://t.co/g9LVJIWD @reformedbroker – how getting on @davidweidner ‘s Top 10 list gave him a big boost $$ Jun 19, 2012
+1 won’t watch RT @ReformedBroker: Bloomberg PR pushing their Meredith Whitney interview video hard today. They haven’t gotten the memo yet. Jun 19, 2012
Wrong: 20 rules that can save you from the Doomsday Cycle http://t.co/jLB0s2pL Why does Marketwatch give Paul Farrell space 2 write? $$ Jun 19, 2012
So long, suckers ? I?m leaving Wall Street http://t.co/x1Ju1fmZ David Weidner: Some lessons from 15 years observing the industry $$ Jun 19, 2012

Miscellaneous

Liquidity, Noise, and Signal http://t.co/cV15Mr2z Shorter the time period-> higher ratio noise/signal; leads2bad trades @ turning points $$ Jun 21, 2012
‘ @JATranfo Never criticized ECRI when out of favor; FWIW, I reverse-engineered their main model: industrial commod pxs & credit spreads $$ Jun 21, 2012
Lawmakers Push for Overhaul of IPO Process http://t.co/qhh7tX1V Every “fix” creates its own set of problems. Mania can hit auctions 2 $$ Jun 21, 2012
Yes $$ RT @Fullcarry: A point I have made many times in the past: the drop in yields the past decade is mostly due to a drop in real rates. Jun 20, 2012
Housing Starts in U.S. Fall 4.8% in May on Apartments http://t.co/PhMFwHQL Interesting contrary data; $EQR chart http://t.co/vleXkVAM $$ Jun 19, 2012
Asians Top Immigration Class http://t.co/Sir2IFxQ Certainly noticeable here in Ellicott City; most businesses have signs in Korean $$ Jun 19, 2012
Poorly reasoned: Court-Ordered Care ? A Complication of Pregnancy 2 Avoid http://t.co/DqmhsvkU Mothers w/child in womb uniquely affect child Jun 18, 2012
Please follow @jarrodwilcox, He has taught me many things, and I respect him a great deal #FF Jun 17, 2012
A Jewish-Asian Couple?s Union Leads to a Scholarly Interest in Intermarriage http://t.co/U3jfPkyK Both ethnic groups prize education $$ Jun 17, 2012

Comments

DavidMerkel’s discussion on “The New Yorker’s Newest Writer Is a Big Self-Plagiarist” http://t.co/g1i0YeF4 Writing belongs2those that paid Jun 20, 2012
“High energy particle physics is only a small part of science, and not adequate to measure the?” ? David_Merkel http://t.co/T4BrvWBj Jun 20, 2012
“Please, accidents per passenger mile would be better, rather than: “He also pointed to the fact?” ? David_Merkel http://t.co/Yg6r5N3X Jun 20, 2012
RE: @bloombergview Maybe DC city govt should start a reality TV show, w/prizes 2 the official who commits the most cr? http://t.co/lIXL6eMi Jun 20, 2012
RE: @bloombergview ?How will you deal with deferral of individual taxes on investment from DC plans, unrealized CGs, ? http://t.co/NY0Q3Ia5 Jun 20, 2012
“Cool picture, Ed. Thanks for sharing it.” ? David_Merkel http://t.co/Mg9lx0ij Jun 19, 2012
“Hitting the fiscal cliff won’t happen, and that’s too bad, because we need to discuss long-term imbalances” ? D_Merkel http://t.co/csiaLXlV Jun 19, 2012
“Here is a proposal for how rating agencies could be eliminated: http://t.co/rLrOK4vu…” ? David_Merkel http://t.co/q2mxmhpW Jun 19, 2012
“I trust ratings agencies more than mismanaged governments. Ratings are needed to provide?” ? David_Merkel http://t.co/vOdPJvzv Jun 19, 2012
“If this is representative of what the ruling Greek coalition will do, the government will fail?” ? David_Merkel http://t.co/HEe4GwHt Jun 19, 2012
“Much as we may dislike financial fraud, suggesting that those in the US that mismanaged their banks?” ? David_Merkel http://t.co/fEZQIo0h Jun 19, 2012
‘ @FilmCriticOne You say u want tax reform, but ur willing2let value grow untaxed through deferral? Get real; ability2defer is the issue $$ Jun 16, 2012

Dimon for Fed Secretary

@dlevineMW @moorehn and pay cut. The same rumors were applied to Hank Greenberg $AIG 4 Tsy Secretary user Bush, Sr. Said the same then $$ Jun 19, 2012
Jamie kind2let us live in his world 😉 RT @ReformedBroker He’s hedging the Senate w/the House right now, y’all r just pawns in a bigger game Jun 19, 2012
Why should Jamie accept the demotion? $$ RT @moorehn: This is just Jamie practicing for confirmation hearings as Treasury Secretary, right? Jun 19, 2012

Tax Policy

Tax Panels Turn Focus to Investments http://t.co/sq6AnHdE Best poss is lowering corp tax rates, equalizing all tax rates for individuals Jun 23, 2012
How to Kill the Corporate-Income Tax http://t.co/T5MgnVuD Evens out personal income tax rates by class. Good, but what about deferral? $$ Jun 20, 2012

Book Review: The Decline and Fall of Europe

Posted on 21 June 201221 June 2012 by David Merkel

This book is written by a man who wants to see the European experiment succeed, but is not confident that it will succeed.? I think this is a fair book on the topic; it does not absorb all of my biases on why I think the Eurozone is hopeless: a) Currency unions have never worked; they must either become a nation, or break up.? b) I have a saying, “Governments are smaller than Economies, and Economies are smaller than Cultures.”

This saying puts things in their place.? Government can’t in the long run prevent things that are economically successful, those things fill human needs.? But cultures are bigger than economies; we don’t live to consume. We live for ideals.? Different cultures have different ideals, and it means that a purely individualistic or collectivist view of economics won’t be accepted in the Eurozone.? They muddle in the middle.

The Eurozone is a political and economic experiment, and was pretty successful and harmless until they began to seek a common currency.? Yes, there were other problems, bureaucrats in Brussels, seeking human perfection though regulation, helped to strangulate a previously more competitive Eurozone economy.? That said, the common currency offered some offsetting advantages of efficiency.

Other Troubles

But there are other troubles.? There are unaffordable pensions in many countries that lie behind that economic problems.? As one who is 51, and well off, why should anyone, aside from oil wildcatters, who endure a lot of physical stress retire at age 50 on the largess of the taxpayers, that is, if you have taxpayers.

Even retiring at age 60 is ridiculous, which France has recently reverted to from 62.? France will never be able to afford it as a nation.

But then there are cultural issues: do you care what your laws are?? Would you care if immigrants are ruled by Islamic Law?? Would you care if your grandchildren, a minority like the Maronites (Roman Catholics) in Lebanon, are ruled by Islamic Law?

The Main Economic Issue

After all of the strangu-regulation, what if economies can’t grow at levels sufficient to exceed the rates at which they borrow?? They slowly fail, as debts grow, and doubts about repayment grow.

In the Euro-zone this is particularly pertinent, because countries can’t depreciate; they must repay in Euros.? When the Euro was introduced it was heaven for many nations, because they could borrow cheaply.? Eventually, they had too much debt, and lenders rebelled.

This is the nature of an area that is not a natural currency area — the Eurozone.? This was an experiment doomed to fail.

Quibbles

None, but I would be a full Euro-sceptic.? This can’t work.? More effective human labor is always better than less.

Who would benefit from this book:?? If you want to learn about the problems in the Eurozone from someone that is fair, you will find it here.? If you want to, you can buy the book here: The Decline and Fall of Europe.

Full disclosure: The PR flack asked me if I wanted the book, and was kind enough to send me the book.

Redacted Version of the June 2012 FOMC Statement

Posted on 20 June 2012 by David Merkel

Comments

Operation Twist is extended for six months, but there is no amount set for it.? Looks like an oversight, then again, they may not have a lot of bonds three years and shorter to sell.
The changes are significant, because in the space of one meeting, they went from things are good to things are bad.? They shaded down their views on GDP growth, employment, inflation, and household spending.
In my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
Do they want the yield on 30 year TIPS to go negative?? Looks that way.
GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.? Inflation has moderated, but whether it will stay that way is another question.

Questions for Dr. Bernanke:

Is it possible that you don?t really know what would have worked to solve the Great Depression, and you are just committing an entirely new error that will result in a larger problem for us later?
Why do think extending the period of accommodation by a little more than two years will have any significant effect on the economy, aside from stock and bond prices?
Discouraged workers are a large factor in the falling unemployment rate. Why do you think the economy is doing well?
Couldn?t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
Why do you think that holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself?
Why will reinvestment in Agency MBS help the economy significantly?? Doesn?t that only help solvent borrowers on the low end of housing, who don?t really need the help?
Isn?t stagflation a possibility here?? I mean, no one expected it in the ?70s either.
Could we end up with another debt bubble from keeping short rates so low?
If the Fed ever does shrink its balance sheet, what effect will it have on the banks?

Interview with Howard Marks

Posted on 20 June 2012 by David Merkel

As you might know, I reviewed Howard Marks’ excellent book The Most Important Thing, and its enhanced version, The Most Important Thing Illuminated.? Some PR flacks are more tenacious, and some less so.? Some come to me prior to publication, and some after.? Some represent an amazing author and book, others less so.

Even though the PR flack came to me after publication, she was tenacious, and offered me an interview with Howard Marks, Chairman of Oaktree Capital.? How could I refuse?

Now, I need to offer one apology before providing the link to the half hour audio interview.? If you read Howard Marks’ newsletters you know that he runs a shop that focuses on bonds, particularly high yield, convertible, and distressed debt.? But almost all of the principles that he puts forth apply to equity value investing as well, and so I assumed that he did some of that as well.? I should have looked at Oaktree’s strategies, and seen that they do little in vanilla asset classes like domestic US equities.

That invalidated a number of questions that I asked Mr. Marks via e-mail, but I had enough good questions to fill out a good half hour.? One final note: during the interview, he needed to take phone calls twice, and I edited those out of the audio file.? They took place near minutes eight and twenty-one.

With no further ado, here is my interview with Howard Marks:

Howard Marks Interview

Best of the Aleph Blog, Part 17

Posted on 19 June 2012 by David Merkel

These articles appeared between February and April 2011:

On the Percentage of Market Cap held by Domestic Stock ETFs

Implications

Domestic stock ETFs tend to pick more volatile stocks.

Domestic stock ETFs tend to pick stocks held by major institutions.

Domestic stock ETFs tend to pick stocks less held by insiders.? (They tend to be more boring.)

Goes Down Double-Speed

Bear markets move at 1.9x the rate of bull markets. (double speed)

Consider the Boom in the Bust; Consider the Bust in the Boom

We would all be better off if policymakers thought at least half a cycle ahead in the credit cycle. Sadly, they are linear thinkers, and would be better off working at the county landfill, if they qualified for such authority.

Critical Analysis of Buffett?s Annual Letter

Critical Analysis of Buffett?s Annual Report

Analyzes Berkshire Hathaway in 2011.? Points at the growth in debt at BRK, and concentration risk in the subsidiaries.

Musings on Yield

Why you should not use yield as a criterion for investment.

On the Usefulness of Yield Spreads

So what does this tell us?

There is a credit factor that effects yields, and the effect on Baa bonds is roughly 1.5x that of Aaa bonds.

As Treasury yields get lower, Baa bond yields rise at roughly 45% of the rate.? There is the nominal yield need ? even Baa bonds tend to need a certain nominal yield, particularly for 20+ year bonds.

Present yield levels are fair for long Baa bonds, to the extent that Moody?s measures them accurately.

On Con Men

So avoid complex investments.? Particularly avoid investments that you don?t understand.? At minimum, find a competent friend, or some neutral party that will look at the deal.? If you can?t find such a friend/party, don?t do the deal.? The friend is important, because he does not want you to come to harm, or lose you as a friend if things go bad.

Three Years from Now

There are real advantages to managing for the intermediate term.

Responding to a Bright Reader

Why I started a bond product.

Things are not as good as they look

Analyzing economic statistics when they don’t sound right.

Limits: Models, Governments, and Central Banks

Most writers say the governments and central banks are all-powerful.? I disagree, and I try to explain why.

Regarding David Sokol

Regarding David Sokol, Redux

Regarding David Sokol, Part 3

Regarding David Sokol, Part 4

The growing sentiment, though ahead of the crowd, that David Sokol should leave Berkshire Hathaway.

Everything Old is New Again in Bonds

On unconstrained mandates and managing for total returns with bonds.

When I was Young

What I went through in investing in my younger days.? Taught me a lot.

When Everything is Strong

When Everything is Strong, Redux

When the only thing weak is high quality bonds, what do you do?

It Would Have Happened Already, Redux

What do you do when all you hear are consensus opinions?

April 2012	June 2012	Comments
Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately.	Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year.	?This year? makes it more of a historical statement, and shades the GDP view down.
Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated.	However, growth in employment has slowed in recent months, and the unemployment rate remains elevated.	Shades labor employment down.? Still thinks there is growth in employment rate.
Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed.	Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed.	Shades down household spending.
Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.	Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.	Shades down ?their view of inflation. TIPS are showing virtually unchanged inflation expectations since the last meeting. (5y forward 5y inflation implied from TIPS.)
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	No change.
The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate.	The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.	Shades down its views of future GDP growth.
Strains in global financial markets continue to pose significant downside risks to the economic outlook.	Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.	No real change.
The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.	The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.	Declares victory in their view on energy prices.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.	To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.	No change.
In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.	In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.	No change.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September.	The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.	Extends Operation Twist for six months.? Doesn?t say how much.
The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.	The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.	I guess the renewal of Operation Twist changes the language here.
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.	The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.	Adds in the two new doves; can?t have enough groupthink.
Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.	Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program.	Does this mean Lacker is on board with policy accommodation through 2014?? Don?t think so, but maybe a reporter should ask.