When I started doing stock investing, I began sending off information requests to 70-120 companies at a time via mail.? In those days, I would print off the letters at my computer, and mailing labels as well.? I would generate the addresses from the AAII Stock Investor program that I still use.
But I got my kids into the game:
One kid would put the stamp on the envelope.
The next would put on the address label.
I would sign the letter, and compare the addresses hand the letter and envelope to the next kid.
The letter would be folded and stuffed by the next kid.
The next kid would seal the envelope, and drop it in a box.
It was fun to do that, but it was even more fun when the flood of “packages” came.? When I got home from work, I would grab the mail from the mailbox, and would call the children to me.
“Packages! Packages!” they would say.? I would sit on the floor, my back against the couch, and the kids would sit in a U around me.? I would open each package, and tell them:
Where the company is.
What the company does.
In this case, the annual report was a help, because the pictures aided the understanding of the children.? At the end, I would point to the “stuffed shirt board of directors.”? I have never thought much about directors, because they are mostly lapdogs of the management.? I also have thought that directors are a waste of resources, and should be eliminated.? Let the shareholders elect the CEO directly.? Yes, I know this would be awkward, but maybe we should pursue the idea that boards aren’t that useful.
After I answered questions from my children, I would analyze the data that the companies sent me.? I found the comparison across companies to be useful.
But later I found that I could submit the data requests over the internet.? So, no more paper letters.? But for some time, I would still ask via e-mail for companies to mail me physical data, which I would share with my kids.
Today, I read everything online.? There are no more packages in my mailbox, and I wonder if that is not a loss.? When I got physical mail, I would spend more time reading it than now, when I read it online.? There is more leisure in reading the physical text, than reading the online version.? Online, we all tend to move more quickly, and we ignore things that we shouldn’t.? I am reconsidering getting paper data from companies.? It is much easier to curl up with and analyze, with fewer distractions.
Indebted Valencia asks Spain government for help, markets jolted http://t.co/lDkPC9U2 Better to let a region fail, than bail them out $$ Jul 21, 2012
Favoring the French, a lesson in perception from bonds http://t.co/qa5CJEgL France’s advantage: big, which is weak 4 creditworthiness $$ Jul 21, 2012
Estonia is admirable for their courage, though I can’t imagine why you would want to be part of the Eurozone NOW $$ Jul 20, 2012
Krugmenistan vs. Estonia http://t.co/1tJssWqG Post private debt bubble, Estonia froze pensions, lowered govt wages ~10% & + VAT by 2% $$ Jul 20, 2012
Demand for Spanish Debt Continues to Evaporate http://t.co/TMdIV05Y Piecemeal solutions continue to fail as 10-year rises over 7% $$ Jul 19, 2012
Merkel Says Bailout Liability Undecided http://t.co/HuggOawS “We always get the majority we need,” Ms. Merkel said. $$ Jul 16, 2012
US Economic Policy
FSOC Supports Overhaul to Trim Risk of Money-Market Runs http://t.co/nD1CKeqv Federal Govt owned by the banks, who want to axe a rival $$ Jul 21, 2012
Let States Do the Tax-Collecting Dirty Work http://t.co/Uq1LmPwI States could decide how to tax & remit to the Feds. +1 $$ Jul 21, 2012
How the Elites Built America?s Economic Wall http://t.co/ifCcBhX6 Interesting take on how some “blue state” policies promote inequality $$ Jul 20, 2012
Treasury Auctions 10-Year TIPS at Record Low Negative Yield http://t.co/XvnQmLtg Lock in a loss against CPI to avoid a poss bigger loss $$ Jul 20, 2012
The Coming Defense Crack-Up http://t.co/JKZycDO4 If it forced us to reprioritize Defense & other Federal spending, could b good thing $$ Jul 19, 2012
D&R parties are rival teams @ same country club $$ RT @ampressman: @AlephBlog Yeah, who else would do such a thing? http://t.co/yN4GyGat Jul 19, 2012
The GOP’s Solyndra Wing http://t.co/eNvLU1Wb Republicans who love corporate welfare; this is not merely a problem of the Democrats $$ Jul 19, 2012
Post Office Might Miss Retirees’ Payment http://t.co/YvpRVLWe Draining pension funds is a stopgap, not a real solution. Raise prices. $$ Jul 19, 2012
QE, negative yields and the paradox of thrift http://t.co/oUM0hkI0 QE not only raises asset prices, but liability values as well $$ #fail Jul 18, 2012
At a Wharton conf 22 years ago, I said neg rates were possible b/c of deflation combined w/need to pay to store cash. Instructor laughed. $$ Jul 18, 2012
U.S. Public-Pension Shortfall $4.6 Trillion, Budget Group Says http://t.co/Y4fq7tj0 Probably a little high; Tsy discount rates severe $$ Jul 18, 2012
How Much Could States Benefit From Online Sales Tax? http://t.co/9d3eYZz4 Would bail out a decent amount of many states’ deficits $$ Jul 18, 2012
Wrong: Industrial Production in U.S. Rises in Sign of Resilience http://t.co/RfNT4hM6 Data revisions > current period estimates beat $$ Jul 17, 2012
Ponzi Scheme? http://t.co/kU4Yx1CW Cities r going BK b/c they didn’t adequately project their funding needs?will community ass’ns b next? $$ Jul 17, 2012
Calpers Misses Big on Investment Target http://t.co/HIRzXnw1 Assets < Liabs; A: +1% L: +7.5, plus val adj from 7.75%. Assets <<< Liabs $$ Jul 17, 2012
Romneyconomics – Good but incomplete http://t.co/6n869J9j Generally agree, but shoddy logic in the middle about GDP & debts $$ Jul 16, 2012
Treasuries Doomsday Is Four Years Away for Vanguard http://t.co/nAz67Q3k Vanguard is largest private owner of US debt @ $148 billion $$ Jul 16, 2012
Miscellaneous
I get amused when people misspell Warren Buffett’s name as Buffet. But a high profile organization: @Bloomberg? $$ http://t.co/NRsc8plk Jul 20, 2012
New Sleeping Pill Thwarts Brain?s Up-All-Night Neurons http://t.co/6I0LglFG $MRK Blocks a tiny group of receptors that keep body alert $$ Jul 20, 2012
Fore Sale http://t.co/mkUeWlVb On the plunging prices for houses where you also have to pay annual membership dues for the golf club $$ Jul 20, 2012
Task named editor in chief of Yahoo Finance http://t.co/7aiATNa6 Congratulations 2 @atask ! Great job @ important financial web resource $$ Jul 19, 2012
New Yahoo CEO Mayer is pregnant http://t.co/Kq7ICTcD Happy for the couple; risk to put off kids into late 30s; hope her delivery is easy $$ Jul 17, 2012
Contra: The Secret Behind Romney?s Magical IRA http://t.co/uQHbSbWc Misses preferred shares & valuation issues; better work elsewhere $$ Jul 16, 2012
Rest of the World
Japanese Consumers Reconsidering Rice Loyalty http://t.co/W4WuhvKj Food grown in Japan is suspect since Fukushima; foreign rice limited $$ Jul 20, 2012
Fast slowdown $$ RT @Thevalueteam: China?s steel and concrete sectors are indicative of something potentially wrong http://t.co/ufK0Vaob ^KM Jul 17, 2012
China’s Version of ‘Too Big to Fail’ http://t.co/tNKduuPn Never knew China had a CDO mkt; also suggests a private equity bubble in China $$ Jul 16, 2012
Market Dynamics
Here?s Another Indicator Pointing Toward Recession http://t.co/c3ImTeZF Sharp cuts in earnings estimates indicate a recession coming $$ Jul 21, 2012
Mortgage Bonds Yield Hopeful Signs on Housing Recovery http://t.co/gzm1Fefi A lot of disagreement over proper credit loss assumptions $$ Jul 20, 2012
Plotting a Securitization Sequel http://t.co/WE0uhTYI Don’t think securitizing rental payments will work. no property behind cashflow $$ Jul 20, 2012
Economic Fears Hurting Obama, Poll Indicates http://t.co/vq7JzIEe No surprise, there are few policies that work against debt deflation $$ Jul 20, 2012
Everyone Hates Treasurys Now http://t.co/LGYAIcTU That’s what makes it such a great trade @carney, w/many needing2invest 4 long liabs $$ Jul 20, 2012
Failing to Connect the Boom to the Bust http://t.co/jrKGIVKs Surges in debt r associated w/booms in asset prices, vice-versa 4 busts $$ Jul 19, 2012
CMBS Leverage Most Since ?07 as Standards Loosen http://t.co/1R5FYTwb 4a long time I was a realtive fan of CMBS, but now I say: AVOID $$ Jul 18, 2012
They got hit by the shalestorm $$ RT @PlanMaestro: Wilbur Ross Says U.S. Coal Is Facing Years Of Headwinds http://t.co/2TJMPDQ8 Jul 17, 2012
Contra: Libor Flaws Allowed Banks to Rig Rates Without Conspiracy http://t.co/khuqkHTr Does not proves its case; just hypotheticals $$ Jul 16, 2012
Negative Real Interest Rates: The Conundrum for Investment and Spending Policies http://t.co/OTDe5p9Y Policies should follow nomnl yields $$ Jul 16, 2012
Companies
Marissa Mayer: Google?s Chic Geek http://t.co/Ge3zFk1l Good background piece on new CEO of $YHOO. Q: Can a technologist make a good CEO? $$ Jul 16, 2012
Buffett Empowers Deputies by Raising Funds to $8 Billion http://t.co/6C3YO1Ml Note: buying smaller companies than WB does but still big $$ Jul 16, 2012
Comments
@jake_f My original tweet stems from CMBS-like structures that did not fare well, b/c underlying property economics was too volatile $$ Jul 20, 2012
@jake_f That’s a good point; if they use that structure, could work, but will they have high enough “interest rates” to absorb losses? $$ Jul 20, 2012
@jake_f @DavidSchawel It’s probably a little of both; housing prices improving on low end, but there is a huge demand for yield now $$ Jul 20, 2012
@historysquared US paid down much of their debts post-WWII, inflated away more Jul 20, 2012
RT @AmyResnick: RT @SimonCYWong: Entertaining cartoon primer on #Basel 3: What it is & why it is needed http://t.co/rM0zPNkM via @fo … Jul 20, 2012
“We home school. We replace the teacher. Superior to the public schools because one-on-one?” ? David_Merkel http://t.co/Hia2soVu $$ Jul 19, 2012
“Good for you, KD. Glad you are safe, and powered. I grew up in Wisconsin, so I was used to the?” ? David_Merkel http://t.co/FjYt10DN $$ Jul 19, 2012
@jdstein I’m not saying those things aren’t in the LDS; those exist in other religions 2. It’s not what makes the LDS distinctive. Jul 19, 2012
@jdstein I am referring to the eighth and ninth paragraphs of the original article. Jul 19, 2012
RE: @bloombergview The virtues of Mormonism that the author thinks exist are not core to Mormonism. Romney knows well? http://t.co/qj5VH9gZ Jul 19, 2012
@kyles09 I’m in the Austrian School w/slight modification from the Santa Fe Institute Jul 19, 2012
@Jesse_Livermore @PragCapitalist Total share to wages down, profits up, well known since 1990. Profit margins will mean-revert someday $$ Jul 19, 2012
@Jesse_Livermore @PragCapitalist Ok, I get it, though my wage figure is a little higher. Real GDP rising @ 2.5%/yr vs real avg wages @ 1%/y Jul 19, 2012
@Jesse_Livermore @PragCapitalist You might need to spill the calculation for me, I don’t see that. Jul 19, 2012
@PragCapitalist At least for the average, no not stagnant, maybe not as good as post WWII, & it might be worth looking at median vs mean. $$ Jul 19, 2012
@PragCapitalist and the CPI-U average is 2.51%, looks like about 1% real average wage growth, which doesn’t seem unreasonable. Jul 19, 2012
@PragCapitalist looking at the AWI tables, http://t.co/Xy1cg1VZ it has almost doubled over that period – 3.47%/yr compounded $$ Jul 19, 2012
RE: @marketfolly They are all ruling out a depression scenario. Long Treasuries continue to rally; very contrarian. http://t.co/GumjLkeJ Jul 18, 2012
RE: @bloombergview Thanks for the old news; trouble is, kids need downtime, and our schools aren’t very good — your ? http://t.co/XBEWunfe Jul 18, 2012
@stockspot2000 Interesting, have not seen evernote before. Thanks. Jul 18, 2012
@footnoted Pension and healthcare systems will not be able to fund the obligations; lesser benefits will be paid. $$ Jul 18, 2012
Could we audit the gold at Fort Knox, also? Amazing secrecy there. http://t.co/cclHfpLk Jul 17, 2012
@mattyglesias Heard you on NPR this evening, please review http://t.co/kvzJmCXQ because it explains Romney’s IRA strategies. $$ Jul 18, 2012
RE: @bloombergview Fail: you did not mention the preferred stock. You did not do your homework. This is a perfect e? http://t.co/74HUrube Jul 16, 2012
@BarbarianCap I’m glad you like it; it works out to a minute per every 4 tweets — making it 1 of my shorter writing efforts for my blog $$ Jul 15, 2012
@BarbarianCap So far I have turned down a few book deals, mainly 4 time use reasons: asset management biz doesn’t support the family yet $$ Jul 15, 2012
In much of my life, I have been thrust into situations for which I was not ready, and ended up rebuilding the wheel, or came up with an unorthodox approach that worked.? But a lot of the problem came down to the question of time horizon.? How long can you buy and hold, even if temporary market conditions make you squeamish?
I remember the first CMBS bond that I bought in 1998: it was the longest AAA tranche of a Nomura deal, which was out of favor at the time.? I did a lot of work analyzing the deal, and concluded that the bond was a lot safer than many competing bonds and offered more yield.? In early 1999, when I described this purchase to the investment committee of a charitable board the I was on, one said, “Only 7%, and you are locked in for 14 years?”? I said that stock valuations were high, and that 7% was a great return.? It was a great return, and far better than the stock market over the same time period, though I could not have known that at the time.
I became an advocate for CMBS in my firm as I realized that the hot product being offered would have the majority of its cash flows come at the 10-year maturity, but there would still be some level of withdrawals.? After some modeling, I realized that the best strategy was investing 80-85% of the money 10 years out, while leaving 15-20% of the money as pseudo-cash: 2 years out or shorter.? Of all of the mortgage bond categories, only CMBS offered assets with a ten-years or more duration, with minimal credit risk.
I used Charter/Conquest as my software.? It enabled me to set a consistent set of macroeconomic principles to evaluate a large number of properties in different economic areas.? The software would project the cash flows? of each property, given the assumptions that you fed it.
I spent time analyzing geography and property types.? I had a decent idea as to what areas of the country were doing badly, and with what property types.
I created what I called the black bucket.? Property types and geographic areas that I did not like were assigned to the black bucket, and if the? black bucket got big enough, we did not play in the deal.? It was a good method, and one CMBS expert at a bulge-bracket bank said to me that it was the most rigorous means of testing CMBS that he had run into.? Most buyers were far more trusting, and tended to buy quality issuers that were taking advantage of their reputation.
By having an independent standard of value where I worked, I did better than competitors.? I did not follow fads; I followed value to the greatest extent that I knew.
Brokers would be puzzled on why I turned down deals from good dealers, or why I bought deals from originators that were subpar.? My lesson was dig into the details, and ignore names.? Analyze the data, avoid the marketing.
Doing your own analysis is a lot of investing.? Ignore the puzzled expressions of your brokers, and buy what you have determined is valuable.? More in part 3.
I added an “annualized” field to try to equalize the results over the length of time I have been tracking them.? Helps to highlight how horrible the last six stocks have been.? Big price falls in less than four months.? Most of those have had negative net worth, negative earnings, little revenue, and often have changed industries to the “next hot idea.”
What was hot three years ago?? Mining companies.? Well, not really.? That mostly popped in 2007-8.? But inexperienced investors, those that might buy the promotion for a penny stock, are always late to the game.? Regency Resources IPO’ed in April 2009 for a nickel a share, and has lost money ever since.? No revenue, negative earnings, negative revenues — no action.
They owned two bodies of land where they expected to find gold.? But in a letter to the SEC, the management wrote:
Neither of our officers and directors has visited either La Trinidad Claim or the Mara Claim.??In response to this comment the following has been added to the risk factor disclosure as shown on page 8 in the Form 10-KA and page 15 in the Form 10-QA.
?Neither of our two directors has visited La Trinidad or Mara claims.
Our two directors have not visited our two mineral claims, being La Trinidad and the Mara claims.??Therefore, they have no personal knowledge of the mineralization on each of the claims, the terrain and the possibilities of hazards during exploration activities.??They have had to rely upon the advice and opinions of the geologists working on each of the claims.?
So now, when I receive the glossy mailer that says something to the effect of, “Here is the Miracle Company that has a miracle technology that will lead to it being bought out by Google, Facebook, or Microsoft for $2-3 billion dollars,” I say ridiculous.? If I had such a technology, I would grow it myself, with no help from others, or maybe with the aid of a few angel investors.? After all, the company has little in the way of liquid assets at present.? How will it achieve its great aims?
The simple answer is that it won’t, and the stock price will follow the same decay pattern as the above sham companies.? Look at this disclaimer from the tout (done in 5 point type):
IMPORTANT NOTICE AND DISCLAIMER: This is paid advertisement by Eric Dany and/or Eric Dany?s Stock Prospector (collectively, “EDSP”). EDSP has received twenty three thousand dollars from Belmont Group Ltd. in compensation for this advertisement and related market materials to enhance public awareness of Digital Development Group Corp (hereafter DIDG). EDSP also expects to receive new subscriber revenue the amount which is unknown at this time as a result of this advertising effort. EDSP does not perform any due diligence on the stocks and companies discussed herein EDSP relies on generally available public information and representations made by DIDG. EDSP does not purport to provide an analysis of any company’s financial position, operations, or prospects and this is not to be construed as a recommendation by EDSP or an offer to sell or solicitation to buy or sell any security. DIDG, the company featured in this issue, appears as paid advertising. Belmont Group Ltd. has paid eight hundred and fifty thousand dollars for the dissemination of this info to enhance public awareness for DIDG.
On Judgment Day, I do not want to be Eric Dany.? To write glowingly of a lousy stock and say that it is an aggressive buy, in big type, and then in tiny type say that none of this is research — it is all advertising, is the legal fiction hiding the lying.
The SEC should bar these practices, and make illegal the advertising of stocks.? Research is one thing, there are some regulations there, but the rank promotion of stocks is ridiculous.? When I started writing about this, I never dreamed that the results would be so bad, but they are that bad.
I have come to value each of their opinions.? Hoisington has been one of the leading deflationists for the last 20 years, racking up a 10%+ return annually in T-bonds.? I don’t know of anyone that can beat that in bonds. Their commentary is not posted on their website yet, but they did say:
Based upon the historical record of effects of excessive and low quality indebtedness, along with the academic research, the 30-year Treasury bond, with a recent yield of less than 3%, still holds value for patient long-term investors. Even when this bond drops to a 2% yield, it may still have value in relation to other assets. If high indebtedness is indeed the main determinant of future economic growth and further government ?stimulus? is counterproductive, then a prolonged state of debt induced coma may so limit returns on other riskier assets that a 30-year Treasury bond with a 2% yield would be a highly desirable asset to hold.
Michael Pettis is a leading observer of China and other emerging economies.? You can read half of his commentary here.? The rest comes if you get on his e-mail list.
China’s GDP growth is slowing, and a rebalancing is necessary so that domestic consumption can fuel the Chinese economy.? That may be happening now but will likely require that Chinese GDP growth slows further.? A quotation near the end of the piece, not on the blog:
Since these two processes, commodity de-stocking and flight capital, work in opposite ways to affect the trade account, it is hard to tell whether China?s real trade surplus is lower or higher than the reported surplus. But once de-stocking stops, we should remember that the trade numbers probably conceal capital outflows.
How does all this affect the world? In the short term rebalancing may increase the amount of global demand absorbed by China, but over the longer term it should reduce it. Rebalancing will inevitably result in falling prices for hard commodities, and so will hurt countries like Australia and Brazil that have gotten fat on Chinese overinvestment. Rising Chinese consumption demand over the long term and lower commodity prices, however, are positive for global growth overall, and especially for net commodity importers. Slower growth in China, it turns out, is not necessarily bad for the world. The key is the evolution of the trade surplus.
I am less convinced that the rebalancing is taking place, because of the command & control mindset of many Chinese leaders; it is hard to exit the “growth via forced investment” mindset.
John Mauldin is well-known to many. I have known of him since the ’80s.? He is a flexible reasoner who thinks we will get significant deflation, before we get significant inflation.? I tend to agree, but that leaves us watching for a change in bank-lending to see when the scenario shifts.? Here is his most recent missive.? Comparing alchemy and central banking is fitting, I think, with central bankers toying with the asset side of the balance sheet, since liability policy has hit the zero bound.? Sorcerer’s apprentices, I think; they do not know what they are doing.
There you go.? We live in deflation world for now until the time for inflation is ripe, where banks compete for loans.?? One thing is for sure, when things shift, they will shift dramatically.? I don’t believe that the central banks of our world have more forecasting power than the rest of us.? I think they have less, because they always have to defend their prior bad decisions.? Those with nothing to defend can look at the future, and estimate with less bias.? Remember that some of those who called the housing bubble were business economists who did not buy into the idea that debt is neutral.? Debt is not neutral; wherever there too much of it, failures occur.? The big expansion of debt is with governments now; what happens if they have a lack of willingness to pay for political reasons?? Inflation or repression are more likely, but higher taxes or government defaults are not impossible if the politics lead to a stalemate, where no one is willing to compromise.
When I first saw the book, and read the introduction, my heart sank and I said to myself, “I doubt I will like this one.”
I was wrong, very wrong, and liked the book more and more as I read it.? The author is a professor of Psychology, Biology and Neurobiology, and is writing about economics.? Those who have read me for some time know that I favor ecological analogies to explain economics, rather than the pseudo-physics that most neoclassical economists employ.? I am beginning to think that non-economists have a better chance of understanding economics than most economists do, because they are free from the indoctrination that comes in the early economics classes where they teach you to assume away all reality, and assume that all men are maximizers of utility or profits, and that the world is radically simple, when it is really very messy.
To the Book
Sorry to be verbose, but I found the author’s approach to be refreshing.? Men are economically rational, but what do we mean by rational?? To some, being rational means imitating what seems good.? “My neighbor is making lots of money speculating in real estate, I will do this also.”? Or rationality can mean something higher, “Real Estate prices are getting far beyond the prices that rentals could justify, I think I will sell my house and rent.”? The difference is the degree of analysis, and the willingness to think about the system as a whole.
The book also highlights why free markets and democracy do not necessarily go together.? There is pressure from the moneyed to affect the democratic process, and there is pressure from the less-well-off to vote money to themselves from the public purse.
The book takes on the concept of economic efficiency, and shows that it leads to instability, as I have argued.? Stable economic systems have slack.? Stable systems do not optimize to the hilt.
He describes the process where more and more loans were provided to the housing market, leading to a bubble.? The bubble involved some sideshows, like CDOs, where Collateralized Debt Obligation buyers provided cheap capital that purchased risky pieces of residential mortgage loans.
Economists like to talk about equilibrium, because that allows them to publish their complex math papers, but economies are big on variation, things are far more volatile than theory can admit.
He takes a dim view of central banking but does not see how we can get rid of it.? The politics are too strong, and the aversion to gold too great.? He lays most of the blame for the bubble and bust at the feet of the Fed, which is right.
He finds Keynes to be a bright guy but with many unrealistic assumptions, and too much aggregation.? The simplification of the economy is too great, and the models don’t work.
Unlike many other books, he offers solutions, and I think they are reasonable.? He inveighs against insurance where the risk is voluntarily takes on.? We should not backstop voluntary risks, nor should we allow people to speculate on the losses of others, as I have argued elsewhere.
He also argues that the Dodd-Frank bill will largely be ineffective because it does not set rules. You can have rules or scrutiny.? We have used scrutiny in the past for financial regulation and it has not worked, because the regulators were wimps.? Over the last 30 years, they have mostly been wimps.
Rules have value, and insurance regulation has been more rules-based, which helps to account for its success.? Principles-based approaches allow a minority to bend the principles, leading to financial failure.
Particularly the Fed has been lax in financial oversight, as they are the overall regulator, and they have not been tough on the regulators that they oversee.
Naive faith in economic efficiency leads many to neglect the need to regulate banks tightly.? It is far better to set rules that provide negative feedback to banks that are taking too much risk, and negative feedback to those who borrow from or lend to other banks, which increases systemic risk.
At the end, he offers four rules that I will summarize:
Limit the monetary policy discretion of the Fed. (Yes!)
No bailouts.
Insurance products that have the possibility of positive feedback should be banned.
Investment Banks should be partnerships, and commercial banks should be limited from investment banking business.
I am in hearty agreement with all of this.? He adds one further proposal that suggests taxing investment banks on the riskiness of their books; if that can be properly achieved that is a worthy idea.
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.
You might remember my “Education of a Corporate Bond Manager” 12-part series.? That was fun to write, and a labor of love, but before I was a corporate bond manager, I was a Mortgage Bond Manager.? There is one main similarity between the two series — I started out as a novice, with people willing to thrust a promising novice into the big time.? It was scary, fun, and allowed me to innovate, because in each case, I had to rebuild the wheel.? I did not have a mentor training me; I had to figure it out, and fast.? Also, in this era of my career, I had many other projects, because I was the investment risk manager for a rapidly growing life insurer.? (Should I do a series, “The Education of a Financial Risk Manager?”)
One thing my boss did that I imitated was keep notebooks of everything that I did; if this series grows, I will go down to the basement, find the notebooks, and mine them for ideas.? When you are thrust into a situation like this, it is like getting a sip from a firehose.? Anyway, I hope to do justice to my time as a mortgage bond manager; I have been a little more reluctant to write this, because things may have changed more since I was a manager.? With that, here we go!
Liquidity for a Moment
In any vanilla corporate bond deal, when it comes to market for its public offering, there is a period of information dissemination, followed by taking orders, followed by cutoff, followed by allocation, then the grey market, then the bonds are free to trade, then a flurry of trading, after which little trading occurs in the bonds.
Why is it this way?? Let me take each point:
period of information dissemination — depending on how hot the market is, and deal complexity, this can vary from a several weeks to seven minutes.
taking orders — you place your orders, and the syndicate desks scale back your orders on hot deals to reflect what you ordinarily buy and even then reduce it further when deals are massively oversubscribed.? When deals are barely subscribed, odd dynamics take place — you get your full order, and then you wonder, “Why am I the lucky one?”? After that, you panic.
cutoff — it is exceedingly difficult to get an order in after the cutoff.? You have to have a really good reason, and a sterling reputation, and even that is likely not enough.
allocation — I’ve gone through this mostly in point 2.
grey market — you have received your allocation but formal trading has not begun with the manager running the books.? Other brokers may approach you with offers to buy.? Usually good to avoid this, because if they want to buy, it is probably a good deal.
bonds are free to trade — the manager running the books announces his initial yield spreads for buying and selling the bonds.? If you really like the deal at those spreads and buy more, you can become a favorite of the syndicate, because it indicates real demand.? They might allocate more to you in the future.
flurry of trading — many brokers will post bids and offers, and buying and selling will be active that day, and there might be some trades the next day, but…
after which little trading occurs in the bonds — yeh, after that, few trades occur.? Why?
Corporate bonds are not like stocks; they tend to get salted away by institutions wanting income in order to pay off liabilities; they mature or default, but they are not often traded.
By this point, you are wondering, if the title is about mortgage bonds, why is he writing about corporate bonds?? The answer is: for contrast.
period of information dissemination — depending on how hot the market is, and deal complexity, this can vary from a several weeks to a few days.? Sometimes the rating agencies provide “pre-sale” reports.? Collateral inside ABS, MBS & CMBS vary considerably, so aside from very vanilla deals, there is time for analysis.
taking orders — you place your orders, and the syndicate desks scale back your orders on hot deals to reflect what you ordinarily buy and even then reduce it further when deals are massively oversubscribed.? When deals are barely subscribed, odd dynamics take place — you get your full order, and then you wonder, “Why am I the lucky one?”? After that, you panic.
cutoff — it is exceedingly difficult to get an order in after the cutoff.? You have to have a really good reason, and a sterling reputation, and even that is likely not enough.
allocation — I’ve gone through this mostly in point 2.
grey market — there is almost no grey market.? There is a lot of work that goes into issuing a mortgage bond, so there will not be competing dealers looking to trade.
bonds are free to trade — the manager running the books announces his initial yield spreads for buying and selling the bonds.? If you really like the deal at those spreads and buy more, you can become a favorite of the syndicate, because it indicates real demand.? They might allocate more to you in the future.
no flurry of trading — aside from the large AAA/Aaa tranches very little will trade.? Those buying mezzanine and subordinated bonds are buy-and-hold investors.? Same for the junk tranches, should they be sold.? These are thin slices of the deal, and few will do the research necessary to try to pry bonds out of their hands at a later date.
after which little trading occurs in the AAA bonds — yeh, after that, few trades occur.? Same reason as above as for why.? Institutions buy them to fund promises they have made.
Like corporate bonds, but more so, mortgage bonds do not trade much after their initial offering.? The deal is done, and there is liquidity for a moment, and little liquidity thereafter.
Again, if you’ve known me for a while, you know that I believe that liquidity can’t be created through securitization and derivatives.? Imagine yourself as an insurance company holding a bunch of commercial mortgage loans.? You could sell them into a trust and securitize them.? Well, guess what?? Only the AAA/Aaa tranches will trade rarely, and the rest will trade even more rarely.? The mortgages are illiquid because they are unique, with a lot of data.? You would have a hard time selling them individually.
Selling them as a group, you have a better chance.? But as you do so, investors ramp up their efforts, because the whole thing will be sold, and it justifies the analysts spending the time to do so.? But after it is sold, and months go by, few institutions have a concentrated interest to re-analyze deals on their own.
And so, with mortgage bond deals, even more than corporate bond deals, liquidity is but for a moment, and that affects everything that a mortgage bond manager does.? More in part 2.
TIPS 20-Year 3.375 04/15/2032 166-21? / 0.00 -0-02+ / 0.002 15:09; They are trading flat to CPI 4 next 20 years http://t.co/2sJ5NEDK $$s Jul 13, 2012
Buffett Says Muni Bankruptcies Set to Climb as Stigma Lifts http://t.co/WBYjoUW1 Buffett’s claim is modest, but current trend is down $$ Jul 13, 2012
Indeed excellent RT @munilass: Excellent discussion of CA bankruptcies from @randalljensen http://t.co/iSEudKw5 Jul 13, 2012
Big Dealers Sweat as Swaps Face Reckoning http://t.co/iAmp2p4X Interest rate swaps should be vanilla enough to clear on exchanges $$ Jul 10, 2012
Politics
Financial Advice for Presidential Candidates http://t.co/MUqMOWNv Tips from Brett Arends for politicians on how to handle money. $$ Jul 14, 2012
Too clever $$ RT @hblodget Here’s One Of The Clever Financial Tricks That Mitt Romney Used To Become Dynastically Rich http://t.co/frz1hkxP Jul 13, 2012
Condi for VP? Mitt’s Done It Before http://t.co/ns1Kj6s7 Article makes a good case that MR could pick someone unexpected, as before $$ Jul 13, 2012
Chavez Hits Campaign Trail in Bid to Prove He?s Cancer-Free http://t.co/dQCPHEU2 Dream, Hugo; ur dying as your goals on Earth r dying $$ Jul 13, 2012
In Kansas, Stronger Mix of Ethanol http://t.co/Iv7LrQpA Economically and environmentally, corn-based ethanol is one big boondoggle $$ Jul 12, 2012
Peugeot to Close Plant http://t.co/uUvm4vNK If u make it difficult 4 employers 2 terminate workers, they will hesitate 2 create jobs $$ Jul 12, 2012
Social Security Hole Overwhelms Taxes, Cuts http://t.co/DLbk9MgD Analysis right, prescription wrong. Dumb comments by innumerate readers Jul 12, 2012
Company to acquire part of Marcus Hook refinery http://t.co/VTXySbbv Spending $75,000/job saved is dumb, even if you lock Braskem in. $$ Jul 12, 2012
A New, Improved Draft? No Thanks http://t.co/wH8fcpHx Conscripted labor of youths would be a false economy; work would b poorly done $$ Jul 11, 2012
And that leaves aside the constitutional & legal aspects of conscription in peacetime; I do not favor reviving the draft. $$ Jul 11, 2012
FBI warned Labor Department data might be leaked http://t.co/KpsZplxo Until DC pays up 4 some good quants, lots of games won’t b caught $$ Jul 11, 2012
Helpless President, Hopeless Congress http://t.co/aVq8gq5d Becomes difficult as the # of factions expands. t-party fractures consensus $$ Jul 11, 2012
No Sign of Voter Polarization Waning http://t.co/7FXzckao Good smile from Obama; dee red, dey get redder, dee bloo, dey get blooer $$ Jul 10, 2012
Obama Intensifies Tax Fight http://t.co/GG0C1Eo5 Looks like a recipe 4 gridlock. BTW, Obama needs2work on his smile, very pouty pics $$ Jul 10, 2012
“It is the regulators who require ratings, largely for purposes of measuring risk at financial institutions.” $$ http://t.co/nPGJNhjy Jul 10, 2012
America Already Is Europe http://t.co/BCK8nfnI similarities: growing government & equalizing incomes, cronyism, Uninformed electorate $$ Jul 10, 2012
LBJ?s Lessons for Obama http://t.co/ILtH9ZH9 Politics is the art of avoiding making permanent enemies & Obama is aloof 2 his enemies $$ Jul 09, 2012
States Interpret Ruling to Cut Medicaid Now http://t.co/ArPTMDPp File this under “unintended consequences;” some poor lose some care $$ Jul 09, 2012
LIBOR
NY Fed does not deserve much credit here. They only began investigating after leverage began collapsing… http://t.co/5WHt8Rrt Jul 13, 2012
They only began investigating after leverage began collapsing with bank off-balance sheet vehicles. $$ Jul 13, 2012
They were more concerned w/LIBOR being viewed as2high as primarily a systemic risk issue, & secondarily as a “is LIBOR accurate” issue. $$ Jul 13, 2012
In Libor Scandal, a Push For Criminal Charges http://t.co/eBkV0926 Outside the mainstream here; I don’t think criminal charges will work $$ Jul 13, 2012
Fed knew of Libor issue in 2007-08, proposed reforms http://t.co/hHUdUXnP The Fed moves slowly on regulatory issues. Very slowly. $$ Jul 11, 2012
Exactly & few say that $$ RT @carney: Running the numbers on March 13, 2006 Libor. I don’t see how Barclays could have manipulated it. Jul 11, 2012
So I Need To “Be An Adult” About Fraud Eh? http://t.co/t8owUMbU Yes Karl, being adult means waiting until fraud is proven b4 rash speech $$ Jul 10, 2012
Eurozone
Spanish Bank Borrowing from ECB Surges http://t.co/3cIvgaZu Feel sorry for the ECB; politicians do little so they try2do it alone $$ Jul 13, 2012
Euro-Zone Banks Still Hoarding http://t.co/3cIvgaZu The ECB can solve it all; just ask them they’ll tell you $$ Jul 13, 2012
Euro-Split Case Drives Danish Krone Appeal in Binary Bet http://t.co/tgPPZgKW People r willing to lock in losses 2 avoid bigger losses $$ Jul 11, 2012
Euro zone fragmenting faster than EU can act http://t.co/GpqSfYht “Deposit flight from Spanish banks has been gaining pace” $$ Jul 09, 2012
German anti-euro backlash gathers pace http://t.co/ZK57rBp3 The compromises hammered together r starting to come apart at the seams $$ Jul 09, 2012
Hollande Urged to Deliver Competitive Shock By Executives http://t.co/oZj9D7Jt Strange brew. Socialist pushes labor productivity rise $$ Jul 09, 2012
Spain Braces for Renewed Austerity as Tax Take Hemorrhages http://t.co/EIhmTfja I don’t suppose reducing govt size is an option here? $$ Jul 09, 2012
Spanish Yield Hits 7%, Stocks Slip http://t.co/QD7icJSX Okay, what new “baby step” toward mutualizing debts will the EZone try now? $$ Jul 09, 2012
Residential Housing
Blackstone, Hovnanian in Land Banking Deal http://t.co/KGx60uQs Too much $$ on the sidelines waiting to play in residential real estate Jul 13, 2012
Americans Living Larger As New-Home Sizes Defy Economy http://t.co/KjPRALro 1st ping I’ve seen on improvement for high-end home demand $$ Jul 13, 2012
Shadow inventory should also include those inverted on their mortgages, and will sell when prices are high enough. $$ http://t.co/HMT2rdci Jul 13, 2012
Housing Passes a Milestone http://t.co/x1rch8KR Lows seen in some areas, in low-end housing, look4those who waited4better prices2sell $$ Jul 12, 2012
Watch income producing investments w/care RT @stockspot2000: $$ A Big Captain Hook in DividendLand http://t.co/mF9i6wnX $DVY $FED $PCEF Jul 12, 2012
Contra: Financial conditions are actually quite normal http://t.co/zSHolTk2 W/long Tsys yielding little, conditions r anything but normal $$ Jul 11, 2012
Not surprising in a time of debt deflation $$ RT @sm_sears: Finding a reliable counter party on Wall Street is becoming a rare commodity. Jul 11, 2012
Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms http://t.co/68BGLh8l They should know better $$ Suffering from proximity bias… Jul 09, 2012
Pensions
Common when low funded RT @BobBrinker: “San Bernardino has seen its workers? pension costs more than double since 2006” http://t.co/CLX7jhkC Jul 13, 2012
The new retirement age: 70 http://t.co/SdIVhjwE That is, if it isn’t 70+. Too few years to accrue savings vs many to spend over $$ Jul 11, 2012
Companies
Activist Investor Sets Sights on P&G http://t.co/5kGN1m5W $PG too big; Ackman bites off more than he can chew, IMO. $$ Jul 13, 2012
What went wrong at Supervalu (plenty) and who could buy it? (um?) http://t.co/9GfsQZZ6 Wonder what $SVU bulls @ Seeking Alpha r saying? $$ Jul 12, 2012
Apple Quitting Green Registry Leads to Purchasing Fallout http://t.co/Y4vOZ9Vm Interesting article, but the comments section is rabid $$ Jul 12, 2012
Silicon Valley’s Biggest Secret Technology Company — 7 Clues http://t.co/35rQYQuy One more clue: Its name starts with a “V.” $$ $V Jul 11, 2012
Billionaire Forrest Leads BlackRock Buying Iron Ore http://t.co/XNP3FGXv Only invest what u can afford2lose 4 an industry in oversupply $$ Jul 11, 2012
Patriot Bankruptcy May Leave Peabody Liable for Expense http://t.co/S0Upoai8 W/low natural gas prices, many coal companies suffer $$ Jul 11, 2012
Chesapeake retreat ends American energy land grab http://t.co/k7TsqNz3 Fracking creates new energy ecology, lower prices, less coal use $$ Jul 10, 2012
Central Banking
That’s what I thought also $$ RT @Alea_: so employee of Markets Group of the New York Fed doesn’t know how to use bloomberg #brilliant Jul 13, 2012
John B. Taylor: Monetary Policy and the Next Crisis http://t.co/9ajScehv Argues Fed kept rates2low in 2000s, leading2current crisis $$ Jul 11, 2012
What’s Wrong With the Federal Reserve? http://t.co/JxFpBArR ALLAN H. MELTZER explains y activist monetary & fiscal policies r failing $$ Jul 10, 2012
What if the Fed Throws a QE3 and Nobody Comes? http://t.co/kU3N83aX Hussman:”The way out is2restructure bad debt instead of rescuing it.” $$ Jul 09, 2012
Dealers Declining Bernanke Twist Invitation http://t.co/ZGVObmE1 Fed eats large % of long Tsys, dealers get into act front-running them $$ Jul 09, 2012
Fed Weighs Revamped Monetary Report as Guide to Policy http://t.co/PXGKNfSv No, @federalreserve, ur not unclear 2 us; just bad $$ policy Jul 09, 2012
Miscellaneous
Anne-Marie Slaughter on having it all http://t.co/bz7oQly4 No one can have it all; life is a series of choices 4 men & women $$ Jul 13, 2012
The death of cash http://t.co/aCoVfmsP Few technologies die totally; we have phonographs, tube mikes, AM radio. $$ will continue smaller Jul 12, 2012
Agreed, cash is a form of freedom RT @DavidBCollum: @AlephBlog Cashless society should be feared. Jul 12, 2012
Cocoa Grader: Hard Job, Sweet Perks http://t.co/wn8YXGVt Becoming a cocoa beans grader is ~4x harder than passing the NY State Bar exam Jul 12, 2012
A Cut Above: In These Knife Fights, Only Pride Gets Wounded http://t.co/xPvWlxA9 Very American & weird. Very, very weird. $$ #enjoy Jul 12, 2012
Wall Street’s Secret Weapon for Getting an Edge http://t.co/UJtMPEJu Testosterone injections to feel great & b dumb as a teenage boy $$ Jul 11, 2012
Climate was HOTTER in Roman, medieval times than now http://t.co/cc5fNyyI “cooling effect of orbital shifting on the climate” $$ Jul 11, 2012
Congratulations to one of the best financial bloggers still active $$ RT @EddyElfenbein: Crossing Wall Street turns seven years old today. Jul 11, 2012
Does This Smell Clean to You? http://t.co/pT1qlfxg There r many new scents giving sense of clean: ginger, hibiscus, greens, jasmine.. $$ Jul 11, 2012
Air Conditioning, Blessed Invention http://t.co/TSvTonfJ A most significant invention; no server farms w/o air conditioning $$ Jul 11, 2012
Last Amateur Bannister Is No LeBron Chasing Olympic Ideal http://t.co/Nwi4173U Last of the true amateurs, he breaks the 4-minute mile $$ Jul 11, 2012
Living Cells Show How to Fix the Financial System http://t.co/li0tmyHJ Healthy biological systems inspire economics systems $$ Jul 11, 2012
How the Mormons Make Money http://t.co/BAi5CF9W Really about how the Mormon “church” has significant businesses that make lots of money $$ Jul 11, 2012
Game Written by a 14-Year-Old Passes Angry Birds as Top Free iPhone App http://t.co/fAGtex2A Bubble Ball popular & Mom helps out $$ Jul 09, 2012
Rest of the World
Banks play cat-and-mouse with Beijing to comply with rules http://t.co/Nin3k8xH Banks are the weak link of the Chinese economy $$ Jul 12, 2012
Hit at home, China’s ghost fleet sails high seas http://t.co/aGSF13Ue Are there any more ways to increase oversupply of shipping? $$ Jul 11, 2012
Canadian Banks Seen Superior by Regulator Surviving Global Shock http://t.co/rKNfUc2M When housing prices fall in Canada will b tested $$ Jul 11, 2012
Eric Schmidt: The Great Firewall of China will fall http://t.co/N3vm0IuL You can’t build a sophisticated economy… w/active censorship $$ Jul 10, 2012
Norway Banks Under Pressure as Asset-Bubble Risks Swell http://t.co/BcHyayIQ Norwegians have never had such a high % of debt/net income $$ Jul 09, 2012
Tokyo Considers Buying Islands China Claims http://t.co/vWUmR6Zr Another potentialflashpoint in Asia, though war is impossible 😉 $$ Jul 09, 2012
Economics
Contra: The problem with ?structural? explanations for U.S. unemployment http://t.co/32zfqXyW Foreign competition limits job creation $$ Jul 11, 2012
Low-Paid Grads On Tight Budgets Switching to Discounters http://t.co/v4kEfPMq B4 going to college, ask what future employers might like $$ Jul 10, 2012
Murdoch, Moguls Head to Sun Valley as Mobile Shapes Media http://t.co/YFVQcQwm Content is King, can u squeeze dat onto my dinky device? $$ Jul 10, 2012
Fracking claims an unusual victim $PCX $$ RT @BloombergNews: BREAKING: Patriot Coal Bankruptcy Filing Said To Come as Soon as Today Jul 09, 2012
Patent ‘Troll’ Tactics Spread http://t.co/MECQeMFO Tour through grand diversity of games companies play w/patents 4 offense & defense $$ Jul 09, 2012
Finance Companies
SAC?s Cohen Joins Loeb Starting Reinsurer for Capital http://t.co/8aSjsa3w Adv: Captive $$. Disadv: Can lose $$ if underwriting is poor 🙁 Jul 10, 2012
JPMorgan Silence on Risk Model Spurs Calls for Disclosure http://t.co/btmeSkbM Banks should share their risk modelsw/regulators yearly $$ Jul 10, 2012
Indentured Students Rise as Loans Corrode College Ticket http://t.co/VvNosGcC Students tricked into debt-slavery “pursuing their bliss” $$ Jul 09, 2012
Price of Plastic Going Up? Merchants May Get Surcharge Rights http://t.co/e2wXuCC5 Will make4interesting competition & ppl hold more $$ Jul 09, 2012
Comments
Commented on Banks Defend Against Libor Lawsuits By Asking “Libor? Who Uses Libor, Anyway?” / Dealbreaker http://t.co/oIRzvh72 Jul 13, 2012
Fun fact: Take the current $VIX, divide it by the square root of 52. That’s the market’s one standard deviation forecast for the next week Jul 12, 2012
RT @EddyElfenbein: Fun fact: Take the current $VIX, divide it by the square root of 12. That’s the market’s one standard deviation forec … Jul 12, 2012
“Very low value analysis. Did a computer write this?” ? David_Merkel http://t.co/pUs2DJaj http://t.co/zmt4cMgf $$ Jul 12, 2012
“Banks feel more confident to foreclose when they can sell the property for a small loss at worst.” ? David_Merkel http://t.co/z3EUOoRk $$ Jul 12, 2012
“?Everyone needs to lighten up.? No, everyone needs to *tighten* up, and respect the rights of the?” ? David_Merkel http://t.co/yVrsu4jc $$ Jul 12, 2012
“On the new highs list, look at all the bond CEFs, ETFs, preferreds, etc. Everyone is grabbing income!” ? David_Merkel http://t.co/8ek4vm4E Jul 11, 2012
@Royal_Arse @LDrogen definitely think it doesn’t make sense LT, but long Tsy yields could go lower b4 a rather nasty whippy reversal $$ Jul 11, 2012
low quality $$ RT @jsphctrl: It’s unconventional, certainly. (Bloomberg:) *Urpilainen: One Collateral Option Is Shares From Spanish Banks Jul 11, 2012
@LDrogen with interest, even $JNK made $$, I’m not saying it is the only signal, but $TLT shows a demand4long certain cash flow FD: +TLT Jul 11, 2012
@LDrogen 1 yr price return only $JNK -2%, $LQD +7%, $TLT +32%. I would argue that indicates economic weakness FD: +LQD, +TLT 4 me&clients $$ Jul 11, 2012
“I think they are dreaming. China overbuilt its steel industry & they are losing $$ now.” ? David_Merkel http://t.co/RyQOw5tD Jul 11, 2012
@izakaminska @TheStalwart Problem happening w/Danish bonds also http://t.co/tgPPZgKW Ppl willing 2 lock in a loss 2 prevent larger loss $$ Jul 11, 2012
“Because those that are politically powerful in Europe have their own Swiss Bank accounts. Can’t?” ? David_Merkel http://t.co/8F93WNQm $$ Jul 11, 2012
+1, we r starved 4 news $$ RT @Fullcarry: FED minutes today probably not that important since BB had a presser after the meeting. Jul 11, 2012
Cat bond sales double in H1http://reut.rs/Nm0whV More alternative reinsurance capacity. Diversifies junk portfolios; invites catastrophes $$ Jul 10, 2012
@historysquared trouble is, few cat bonds have ever triggered, looks like free $$ to many HY bond mgrs, terms will tighten 2deliver losses Jul 10, 2012
When I look at the data for 3/13/06, Barclays actions had no effect on 3M LIBOR. It was excluded from the… http://t.co/gbEPYIXN Jul 10, 2012
“Life actuaries reveal their models annually to the regulators, though not to the public. The same?” ? David_Merkel http://t.co/pTqT1F2L $$ Jul 10, 2012
@randomroger Congratulations on the AdvisorShares Global Alpha & Beta, Roger! $RRGR $$ Jul 09, 2012
‘ @Nonrelatedsense 4 mkt val measures: Q-ratio, CAPE10, Price-Resources (Michael Alexander), & @eddyelfenbein ‘s stocks as a bond measure $$ Jul 09, 2012
“P/E has been an unreliable measure of value for the market as a whole. Why rely on it?” ? David_Merkel http://t.co/B4ZuMOLz $$ Jul 09, 2012
Commented on The Economist | The LIBOR scandal: The rotten heart of finance http://t.co/qvSysBKt Jul 08, 2012
Commented on The Economist | The LIBOR scandal: The rotten heart of finance http://t.co/Y7JVFkDP Jul 08, 2012
I’ve had good returns on bonds over the last year, largely because I invested in long deflation investment grade bonds.? I took on a lot of duration risk by investing long, and it paid off.? I’ve reduced the size of my duration bet, but it is still large relative to the consensus.? That said, momentum tends to persist.
But what to do now?? Yes, rates could still go lower on the long end.? Credit spreads could still tighten on the long end and elsewhere.? Most of my credit related positions have done well, including preferred stocks of banks.
I have a positive view on conforming mortgages, though I have no position there now.
On illiquidity I have a negative view because things are volatile enough that you need flexibility.
On FX, I am long the Swiss Franc, and it has been a loser.? I suspect that with weakness in the euro, the Swissie will not break its link with the Euro.? At present, the US Dollar seems ascendant.? What can stand in its way?
I am tempted to put money into emerging markets debt, because their economies are run in a more orthodox manner than the developed economies, but not by much.
Really, I am scratching my head over all the various risks, and thinking that short-term investment grade credit is the only thing that I like.? Beyond that, I am open to suggestions.
I have to admit I don’t have much sympathy for those who lent or borrowed at floating rates like LIBOR.? Personally, I have always preferred fixed-rate deals where everything is locked in from the beginning.? It means the terms are fixed, and either you can meet them or you can’t.
There are two problems with floating rate deals.? The first is that you can’t control your funding costs.? This stems from two things: short rates are volatile, and the index is typically not controlled, though it often acts like it is.? Here is an example: there were mortgages that floated off of the one-year Treasury Note rate.? Then the Treasury cancelled the one-year Treasury Note auction, and investment banks scrambled to come up with a substitute.? As I recall, they used the interpolated rate on six month bills, and two year notes.
When I was a corporate bond manager, aside from rare occasions, I never bought floating rate debt.? Why?? I needed more certainty for the client.? Fixed rate bonds and loans are more certain.? When you float, you are subject to the vicissitudes of the index, whether a borrower or a lender.
Whatever else is true, you do not control a floating rate index.? If a related party has some influence on it, that is a negative surprise, but there may be nothing illegal about their influence, particularly if it is moderate as is likely with LIBOR.
As I say to so many others in related situations: don’t give others options against you; don’t play in their casino by their rules.? Average people should not let financial institutions have variability of terms; terms should be fixed to the greatest extent possible.
And, why do borrowers go for floating rates, if they can be harmed by them?? Because they are cheaper on average.? Yield lust works on the downside as well, and many borrow shorter than is prudent for them, in order to save a little.? Works most of the time, but not all of the time, and when it doesn’t work, it can be ugly.
Thus I encourage fixed rate finance, as always, and encourage lenders and borrowers to fix their financing in advance.
