Accounting – Page 4 – The Aleph Blog

Sorted Weekly Tweets

Posted on 10 August 2012 by David Merkel

Life Insurance Secondary Guarantees

Hartford Mulls Client Buyouts to Cut Risk Buffett Called Ungodly http://t.co/Nv4jRlUC Advice: don’t take the Variable Annuity buyouts $$ Aug 10, 2012
The original: Buffett Says Insurers Took ‘Ungodly Amount of Risk’ http://t.co/pXfXv8ME Warren Buffett again is prescient cc: @PlanMaestro $$ Aug 10, 2012
@PlanMaestro Thanks4 flagging this. Together w/companies scaling back gtees 4 new prods, the buyout offers show the probs in the life biz $$ Aug 10, 2012
@PlanMaestro I am not in favor of peer review. Actuaries call themselves a “profession,” but they really technicians. Aug 09, 2012
@PlanMaestro Regulators not crazy for this, because they can’t understand it, & almost makes the companies self-regulating. Peer Review? $$ Aug 09, 2012
@PlanMaestro But actuaries are trying to get regulators to cmove to a Canadian-style principle based approach. In Actuaries we Trust! $$ + Aug 09, 2012
@PlanMaestro But the devil is in the details, and GAAP reserving does not always reflect antiselection. Stat tries to do that, but + $$ Aug 09, 2012
@PlanMaestro But you’re right, the 10Ks do contain approximate partial sensitivity data on economic value for most important variables $$ Aug 09, 2012
@PlanMaestro In 1999, I saw a VA that guaranteed 7% minimum return if held till death or annuitization $$ Aug 09, 2012
@PlanMaestro I said “Wow, how do you guarantee the better of 5%/yr and performance of the underlying 4 just 2.25%?” $$ Aug 09, 2012
@PlanMaestro I have a friend who is a $PRU agent. One day he showed me his hottest-selling VA product, and ask me how I liked it. $$ + Aug 09, 2012
@PlanMaestro Acctg can get really screwy if you hedge NPV or FMV; gets really noisy because the results pile up in the current year $$ Aug 09, 2012
@PlanMaestro hedging long-dated options, w/complex contingencies built into them. Do you hedge next few years, or NPV sensitivity? $$ + Aug 09, 2012
@PlanMaestro I was an ALM actuary for many years, typically we hedged partial durations; fixed income hedging is easy, what’s hard is $$ + Aug 09, 2012
@PlanMaestro many exposures are impossible to hedge b/c the contracts r long-term, and hedge instruments r usually far shorter $$ Aug 09, 2012
@PlanMaestro That’s one of my concerns about the life industry; secondary guarantees r virtually impossible to reserve, getting big now $$ Aug 09, 2012

Insurance Industry

@ReformedBroker Good post, same thing happens with young life insurance agents to a degree http://t.co/LbMyo48G $$ Aug 10, 2012
@Bonfire_Sherman P&C – P/TB vs ROTE, adjusted 4 business mix, reserve life & conservatism, mgmt quality, U/W cycle, never premiums $$ Aug 09, 2012
@Bonfire_Sherman Most of it is change in required capital. Life actuaries typically calculate “distibutable earnings” reflting stat & RBC $$ Aug 09, 2012
Anytime anyone talks about Financial Cos & tells u about Free Cash Flow, ask how they did the calc. C if they mention chg in req capital $$ Aug 09, 2012
Wrong: 3 Life Insurance Stocks Undervalued By Levered Free Cash Flows http://t.co/gF5HYRZb GAAP financials don’t have data4 FCF calcs $$ Aug 09, 2012
Aviva profits fall as it cuts the value of its US unit http://t.co/t816IjAZ Amerus IR was annoyed @ me 4saying the orignal deal expensive $$ Aug 09, 2012
@PlanMaestro HIG is next on my list Aug 09, 2012
@PlanMaestro Thanks, I know where to get them, but I have enough GNW on my plate for now, I took me two weeks to write my AIG piece. $$ Aug 09, 2012
@PlanMaestro Have not looked at HIG, after I am done with GNW may take a look. If u r looking at stat acctg, look @ pg 5 indiv annuities $$ Aug 09, 2012
@PlanMaestro That’s the thing, like AIG prior to the crisis, and Scottish Re, they are capital constrained; things have 2go right 4 them $$ Aug 09, 2012
@PlanMaestro & not so sure about the rest if investing for more than five years. $$ Aug 09, 2012
@PlanMaestro Aye, agreed. Oddly, my interest stemmed from a reader who asked me if I would invest in GNW bonds. Yes 4 GIC-MTNs + Aug 09, 2012
@PlanMaestro I’m going to write a broad piece about it, but follow it up, with a narrow piece focusing on the specific problems. $$ Aug 09, 2012
@PlanMaestro Intercompany surplus notes and preferred stock too. Aug 09, 2012
@PlanMaestro There’s a ton. Underreserving, capital stacking, capital interlacing, intercompany reinsurance, & I’ve ony been looking 2 hours Aug 09, 2012
@Bonfire_Sherman Good guess, I need to look at the life co stmts someday, esp. page 5 for Indiv annuities Aug 09, 2012
Ding! We have a winner! RT @RennieScinto: @AlephBlog gnw? Aug 09, 2012
I’m a fun guy, looking @ statutory statements of a major US insurer, though AIG in 2008 looked worse, this company doesn’t look good $$ Who? Aug 09, 2012
Online Dating for Homes Stumps Insurers http://t.co/R2fmztPa Y not have both deposit $$ w/the insurer plus a premium payment? #wouldwork Aug 08, 2012
Regulators Probe ‘Captives’ http://t.co/xbXQ5aYO How to bend life insurance reserves. Catch my comment: http://t.co/9WQWYZ3W $$ Aug 06, 2012
Berkshire Trims Municipal-Debt Bet http://t.co/9zhhbdtD Meredith Whitney, no. Buffett, yes. But even he is only selectively reducing $$ Aug 05, 2012

Poway School District

Article near issuance of Poway School District CAB http://t.co/kxAWCNxT Letter from CA AG: http://t.co/UiZM0j3K cc: @munilass @jamessaft $$ Aug 06, 2012
@jamessaft I’m not a muni expert like @munilass, but no, I would try to find another way to refinance prior debts. $$ Aug 06, 2012
Ideal buyer4the preceding bond would b Buffett, or a P&C company w/long-tail liabilities. Prospectus 4 wonks only http://t.co/nIKJvJje $$ Aug 06, 2012
Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools http://t.co/IPaABoXY Paying 7.6% IRR at a duration of 25. Astounding! $$ Aug 06, 2012
@munilass Also, I found the prospectus here: http://t.co/nIKJvJje Last Q: Do county tax levies into a sinking fund ever fail to work? $$ Aug 06, 2012
@munilass I get the holder taxes now. Poway was structured as a series of zero coupon notes, followed by 2 series of long lottery bonds $$ Aug 06, 2012
@munilass Used to be an asset-liability manager, so I look for that. 1 question: do you know how holders are taxed on a deal like that? Aug 06, 2012
@munilass This is just a crude estimate, but the IRR on the Poway deal is around 7.7%, and is nonrefinancable. Duration estimate 25 years $$ Aug 06, 2012

Rest of the World

China Export Growth Slides as World Recovery Slows http://t.co/u4YEUPQB China sneezes & the world catches a cold? no, important anyway $$ Aug 10, 2012
India?s Biggest Corporate Loss Shows Singh?s Dilemma on Deficit http://t.co/6xl7lsZD Force oil company to lose $$, eventually lose oil co. Aug 10, 2012
Housewives With Frying Pans Protest Japan Tax Hike as Debt Soars http://t.co/z3aeqjEv Taxes to double; can’t keep borrowing 4ever $$ Aug 10, 2012
Virus found in Mideast can spy on finance transactions http://t.co/V2GgyjpV Can spy on financial transactions, email & social networking $$ Aug 09, 2012
Toronto Condo ?Roller Coaster? Peaks as Flaherty Acts http://t.co/c6sJ0CqE Is Canadian housing a basketball (sss) or a bubble (pop)? $$ Aug 08, 2012
Iran?s Big Crisis: The Price of Chicken http://t.co/WXlUIIdL Describes some the economic difficulties of Iran under sanctions $$ Aug 08, 2012
Article makes a good point. The industries where China has overcapacity are power-intensive & are shrinking. Simple. http://t.co/IzyV0Bxe Aug 08, 2012
China’s answer to subprime bets: the “Golden Elephant” http://t.co/MP7LviwT Illiquid investments touting high returns w/lousy business $$ Aug 07, 2012
RE: Things are getting less equal in the US, because we allow more freedom here.? Globally, things are getting more e? http://t.co/WeGEEJF9 Aug 07, 2012
Presidential candidate up by 15%+ in August will win. If merely ahead, 9 times out of 12 he will win the Presidency http://t.co/soCj7Kf9 Aug 08, 2012
Swiss Banks Face Slow Death as Taxman Chases Assets http://t.co/13I9NkiQ Life’s tough when u can no longer help people cheat the taxman $$ Aug 06, 2012
Germany has the most to lose from a meltdown http://t.co/9JTwRfii Basically encourages an inflationary “solution.” Prob won’t work $$ Aug 06, 2012
If policymakers are worried about this, they are worried about the wrong thing. EU does not have that big… http://t.co/eCBlZg5I Aug 06, 2012
Summary: greater structural unity, mutualization of sovereign debts and a weak euro $$ Tough order for the… http://t.co/KN9pc0Pt Aug 06, 2012
Rogoff Sees World Wishing It?s America Year After S&P Downgrade http://t.co/MpStm7ww Relative flexibility pays off $$ Aug 06, 2012

Fixed Income

Lending in the offshore markets developed because of bad regulations here. It is outside US control & we should not m? http://t.co/C8y9rVFw Aug 10, 2012
In hunt for yield, hybrids flourish anew http://t.co/GCugG6A6 Credit rally revsup ppl grab yield in exchange 4 higher poss loss severity $$ Aug 09, 2012
Please, no $$ RT @CapitalCityIFR: In hunt for yield, hybrids flourish anew http://t.co/ZWbdRRl5 Aug 09, 2012
For a bad 30-yr Tsy auction, nice rally since then $$ Aug 09, 2012
A Greek banker, the Shah and the birth of Libor http://t.co/ibvVs9mE ht: @alea_ Started w/a loan 2 the Shah. Inauspicious start 4a big # $$ Aug 09, 2012
Definitely a weak auction, surprised long end not selling off $$ RT @ritholtz: 30 yr bond auction weak as well http://t.co/1gU89HMb $$ Aug 09, 2012
“Credit default swaps are easily manipulated. Rather, watch the bond market; it’s much bigger. $$” ? David_Merkel http://t.co/tESmTJsK Aug 09, 2012

Politics

The Neocon War Against Robert Zoellick http://t.co/vZreHf1n If Romney wins, pragmatic Zoellick could be influential on foreign policy $$ Aug 11, 2012
Christie Does Tenure http://t.co/J8krPlim Tenure is one of those sacred cows that hides the intellectually weak from consequences $$ Aug 10, 2012
In New York City, Microsoft Really Is Watching You http://t.co/trNOkU2d Interesting partnership w/NYC & $MSFT Civil liberties? $$ Aug 09, 2012
Postal Service $1 Million-an-Hour Loss Puts Abyss in View http://t.co/FVXMn5Di Raise stamp prices & costs 2 $FDX & $UPS $$ #simple Aug 09, 2012
Here’s The Real Reason The Feds Are Furious At The NY Regulator Going After Standard Chartered http://t.co/OmpwBILH Made Feds look dumb $$ Aug 08, 2012
RE: @bloombergview Dream, the Republicans will block this because it favors blue states over Red. $$ http://www.bloom? http://t.co/jT7EmSS0 Aug 08, 2012
I think it is a fair tradeoff to lose 2% of GDP in 2013 in order to get the economy growing. I agree with… http://t.co/mwuvnogX Aug 07, 2012
The Numbers Inside a Hot-Button Issue http://t.co/Fwois4YN Something to make everyone unhappy. Me: Don’t focus on rates, but deferral $$ Aug 07, 2012

Pensions & Endowments

State Pensions Get High Fees, Low Profits-Study http://t.co/3LRIL23c Add to that the lack of adequate funding &you have a serious crisis $$ Aug 10, 2012
Cornell, MIT Scale Back Aid Even as Endowments Rise http://t.co/WUoWDLLB Endowments provide less when rates r low, future cashflows smallr Aug 10, 2012
Defined contribution assets hit all-time high despite conservative shift http://t.co/7s9Stabd Amazing 2c bond alloc rising w/low rates $$ Aug 06, 2012
U can say that again $$ RT @e_d_sanders: @AlephBlog now this is an issue I know something about. Public pensions for execs are a nightmare Aug 05, 2012
Police Chief?s $204,000 Pension Shows How Cities Crashed http://t.co/ZorpuSjX Sloppy pension negotiating leads2 L-T cash flow crises. $$ Aug 05, 2012

Energy

Let the market decide.? If people want to pay a lot for gas, let them.? Why is Obama discouraging consumer spending? http://t.co/VT8xCyU0 Aug 10, 2012
Refiners Awash in Shale Oil Offer 10 Times Exxon Returns http://t.co/IIw9xXlb Buy cheap shale oil, ship to coasts, refine, sell & make $$ Aug 10, 2012
Louisiana sinkhole roils local natural gas network http://t.co/IkZxHLAs Now, who could have seen that coming? Risk is pervasive. $$ #sloorp Aug 09, 2012
Coal stocks typically have a lot of debt, beware $$ RT @MKTWBurton: Don?t mine this coal stock – Chuck Jaffe – http://t.co/nCQWfYzQ Aug 09, 2012

Other

Passed 10,000 tweets today. I quit Twitter after my first month, but came back to it after I saw its usefulness. Thanks 4 reading me $$ Aug 10, 2012
Heavy rain in Baltimore w/sleet and sunshine. Really weird weather. Sleet is neat, is hard to beat & will repeat, to make me tweet. $$ #ugh Aug 09, 2012
After Moods & Markets, Bailout is my next book to review. http://t.co/zkioUQ5N Aug 09, 2012
5 Questions Great Job Candidates Ask http://t.co/JpnpVWtu Questions show initiative, intelligence, & give u good jump pts 2 sell yrself $$ Aug 09, 2012
Novel Cure for Ailing Hearts http://t.co/RAiv4FYj Nanotech combines w/vascular endothelial growth factor to grow new heart muscle $$ Aug 09, 2012
Wrong: Business Is Booming in Empirical Economics http://t.co/aTNu4qfu U might get cute papers out of it, but nothing that generalizes $$ Aug 07, 2012

Companies

Yahoo Reviewing Business Strategy, Alibaba Proceeds; Shares Tumble http://t.co/ikk3dpeC Marissa Mayer has plans, & they require $$ Aug 09, 2012
Why Honda?s New Accord Looks Like the Old One http://t.co/6Ez8uL5i FD: + $HMC Designers tire of their designs long b4 users do $$ Aug 09, 2012
The WARN Act dilemma http://t.co/ilbxFsXD Defense, Fiscal cliff, DOL Guidance Letter saying ignore WARN act on 11/1, & elections $$ Aug 09, 2012
Hewlett-Packard?s Whitman Dismantles Hurd-Era Empire http://t.co/ySeeVM9w FD: + $HPQ She seems 2b evaluating each biz separately $$ #good Aug 09, 2012
The New York Times Is About to Say Goodbye to About,com http://t.co/frzrVlUq gives more details on the lossesv$$ Aug 08, 2012
New York Times Shares Rise on Deal to Sell About,com http://t.co/k5GarxXV Amazing how much $NYT lost on it, capital losses, neg income $$ Aug 08, 2012
Judge in Google, Oracle case seeks names of paid reporters, bloggers http://t.co/7vhmK5N3 Fascinating 4bloggers 2b paid $$ by corps quietly Aug 08, 2012
I do not get how http://t.co/ROsNYak3 could be worth $270M. What’s the revenue model? Ads? $$ http://t.co/n1ddWxvU Aug 08, 2012
Wrong: The PC looks like it’s dying http://t.co/IqeVAbi6 Like most tech, when it matures, it finds & stays there. Think of “dead” radio $$ Aug 07, 2012
Amazon Is No Wal-Mart…Yet http://t.co/cmEjPHHu Relatively neutral article on $AMZN by Martin Sosnoff; prob: treats AMZN as retailer $$ Aug 07, 2012
Why FedEx and UPS Want the Postal Service to Survive http://t.co/MAaCfOXQ Solution: raise stamp prices, and prices to $FDX and $UPS $$ #easy Aug 05, 2012

Monetary Policy

Fisher Says More Stimulus May Overburden Central Banks http://t.co/5ZMlKO5G 3-time winner of coveted “FOMC loose cannon award” speaks $$ Aug 08, 2012
Economic Musings – Fed eyeing a new kind of twist? http://t.co/aUezU2XE $$ Extending duration in MBS; creating larger losses later $$ Aug 08, 2012
RE: @bondtrader83 That’s not all that much different than the 1st Twist. It’s duration extension in MBS. Wait till ra? http://t.co/PrMHBSGh Aug 08, 2012
How about quantitative easing for the people? http://t.co/inHK9NF2 Would work better than current QE/Twist etc, but this frightens me. $$ Aug 08, 2012
Wrong: Bernanke to Economists: More Philosophy, Please http://t.co/9638QlHo Been down this road; utility theory doesn’t explain mankind $$ Aug 07, 2012

Housing & Related

Public-Housing Parking Lots Make Everyone Poorer http://t.co/2gensCd8 Set rates to achieve 15% vacancy; Rather than lots, have garages $$ Aug 08, 2012
Home Prices Climb as Supply Dwindles http://t.co/hMoZBsNZ Good news for the low end of the market, high end will take time $$ Aug 08, 2012
Fannie Mae profits rolled into rainy day fund http://t.co/bDWphSuE Good for Fannie & Freddie preferred, not worth anything 4 the common $$ Aug 08, 2012

Financial Companies & Markets

NYSE in talks with SEC to settle data probe http://t.co/FkxBtlbz Wow, faster data feeds 4 some special clients; level the playing field $$ Aug 09, 2012
Are Diamonds an ETF?s Best Friend? http://t.co/RHbSghCw Bad things happen when you take something illiquid and try to make it liquid $$ Aug 08, 2012
Richest Family Offices Seeing Fastest Growth as Firms Oust Banks http://t.co/NqY9650P UberWealthy get $$ talent; tax savings >> costs Aug 07, 2012
4 ETF Lessons From Knight http://t.co/st6wbNgR Lead Market Makers matter, Markets Work, Settlement Works, Illiquid ETFs Need Helpers $$ Aug 06, 2012
Other problem: active etf gives away trading information it might rather not divulge, leading to front-running. $$ http://t.co/q4XXZwRv Aug 06, 2012
A Tale of Two Fund Giants: American Funds vs Vanguard http://t.co/46rFsL9e Key advantage for Vanguard was embracing ETFs early $$ Aug 06, 2012

Repos

Banks? Liquidity Hinges on Risky Assets http://t.co/45Iw5Dz9 Repo lending is subject2runs during credit panics which depress collateral $$ Aug 08, 2012
Good one $$ RT @pdacosta: Watch out for the grim repo-er RT @cate_long Banks? liquidity hinges on risky assets http://t.co/9lk0GjA0 Aug 08, 2012
The danger of repo http://t.co/mZDG9Ocb Repo is weak financing in crisis; 3-mo T-bills would b a better index 4 Tsy floating rate notes $$ Aug 06, 2012

The Equity Premium

That would get the advantage of stocks over high quality bonds down to ~1-2%/year. Outperforms with a *lot* of noise $$ Aug 11, 2012
Bill Gross Is Wrong About Stocks: GMO http://t.co/c6gJwfUB Truth inbetween; have GMO adjust 4 $$ -weighted returns, not time-weighted Aug 11, 2012
Bonds for the Long Run http://t.co/MmkoYk3U @ritholtz nails it. Advantage of stocks over bonds is ~1%/yr over the long haul. Limited data $$ Aug 10, 2012

Comments

@LDrogen After reading this, I have more certainty that airbnb has already worked out some of the bugs http://t.co/Xx3ztVZv $$ Aug 10, 2012
@LDrogen Fine, Leigh, I hope it works. When single party lending gave way to securitization, it was unstoppable, until lending stds died. $$ Aug 10, 2012
RE: @ldrogen Multiple party economic dealings have their issues.? Consider: http://t.co/Z2rRNeTS? http://t.co/gCrEYzX2 Aug 10, 2012
‘ @TheOneDave In a word: depletion. Costs are rising to incremental barrels of oil, and ounces of gold. $$ Aug 09, 2012
@PlanMaestro $CLD LTD/E ~89%, take a look at $HNRG Hallador Energy. I’m not looking @ coal names until I see a few go BK, like steel 2002 $$ Aug 09, 2012
@PragCapitalist Depends on slope of demand curve 4 Tsys. Compare it2the former on-the-run. Jump of 6 bps high for that spot on the curve $$ Aug 08, 2012
@groditi Effective Yield series. Was trying to show that junk yields don’t compress as much when HQ-yields are low. Would have liked OAY $$ Aug 08, 2012
@PragCapitalist If it gets enough assets to survive $$ Aug 08, 2012
@footnoted …and maybe adjs for a year, but large writeoffs mean that prior earnings were overstated; testifies to bad mgmt quality $$ Aug 08, 2012
@footnoted That’s one reason why I tell investors to look at LT growth in BV + Divs rather than op income. I accept adjustments 4 a qtr + $$ Aug 08, 2012
RE: @bloombergview The single period cost to fix might be small, the continuous transfer cost would be considerably l? http://t.co/9gyFVvh4 Aug 08, 2012
RE: @bloombergview When games change from two players to three players, things get messy if no single player has most? http://t.co/TU09OZml Aug 08, 2012
Most pessimistic he’s been on China debts RT @groditi: Wow. I’m used to Pettis’ Euro-pessimism, but he’s not holding back here. U MAD, PROF? Aug 07, 2012
Always a great read RT @groditi: yaaaaaay new Pettis! Aug 07, 2012
@AnaCapMgmt Ain’t true. The foolish models of economists do not take into account political realities, and when inflation runs, no ammo. $$ Aug 05, 2012
@LisaCNBC Ask him how confident he is in India’s power grid. After that, the water supply. $$ Aug 05, 2012
‘ @pvitha Gold moves inversely to real interest rates, a.k.a. cost of carry, that’s all I know. $$ Aug 06, 2012
‘ @WTOP Romney shouldn’t worry about the Fed; they are out of ammo. QE is a joke, as is Operation Twist, and forward fed funds guidance. $$ Aug 05, 2012
+1 I like to say that 🙂 RT @BarbarianCap: “there are more debt claims than resources to pay them at par” Aug 05, 2012

The Best of the Aleph Blog, Part 15

Posted on 10 May 201220 June 2017 by David Merkel

This stretches from August 2010 to October 2010:

The Education of a Corporate Bond Manager, Part VII

On the value of credit analysts.

The Education of a Corporate Bond Manager, Part VIII

On price discovery in dealer markets, and auctions gone wrong.? I never knew that I could haggle so well.

The Education of a Corporate Bond Manager, Part IX

On the vagaries of bulge-bracket brokers, and how a good reputation helps on Wall Street.

The Education of a Corporate Bond Manager, Part X

On how we almost did a CDO, and how it fell apart.? Also, how to make money in the bond market when you reach the risk limits. 😉

The Education of a Corporate Bond Manager, Part XI

On my biggest mistakes in managing bonds.? Also, on aggressive life insurance managements.

The Education of a Corporate Bond Manager, Part XII (The End)

On bond technical analysis, and how to deal with a rapidly growing client.?? Also, the end of my time as a bond manager, and the parties that came as a result.?? Oh, and putting your subordinates first.

Queasing over Quantitative Easing

Queasing over Quantitative Easing, Redux

Queasing over Quantitative Easing, Part III

Queasing over Quantitative Easing, Part IV

Queasing over Quantitative Easing, Part V

Queasing over Quantitative Easing, Part VI

The problems with the Fed’s seemingly “free lunch”strategy.? Pushes up asset prices and commodity prices, benefiting the rich versus the poor.

The Economic Geography of Publicly-Traded Companies in the United States by Sector

The Economic Geography of Publicly-Traded Companies in the United States by Sector (II)

Shows what US states have diversified vs concentrated economies by sector, and what states dominate each sector.

Portfolio Rule One

Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.

Portfolio Rule Two

Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.

Portfolio Rule Three

Stick with higher quality companies for a given industry.

Portfolio Rule Four

Purchase companies appropriately sized to serve their market niches.

Portfolio Rule Five

Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.

Portfolio Rule Six

Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.

Portfolio Rule Seven

Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.

Portfolio Rule Eight

Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

The Portfolio Rules Work Together

How the portfolio rules work together to create a “margin of safety.”

The Rules, Part XVIII

When rules become known and acted upon, the system changes to incorporate them, making them temporarily useless, until they are forgotten again.

When a single strategy becomes dominant, it can become temporarily self-reinforcing.? Eventually, it will become self-reinforcing on the negative side.

A healthy market ecology has multiple strategies that are working in separate areas at the same time.

The Rules, Part XIX

There is room for a new risk model based on the idea that risk is unique among individuals, and inversely related to the price paid for an asset.? If a risk control model has an asset becoming more risky when prices fall, it is wrong.

?The Rules, Part XX

In the end, economic systems work, and judicial systems modify to accommodate that.? The only exception to that is when a culture is dying.

?Managing Illiquid Assets

Illiquidity is an underrated risk.? Most financial company failures are due to illiquidity, which usually takes the form of too many illiquid assets and liquid liabilities.? Adding to the difficulty is that it is generally difficult to price illiquid assets, because they don?t trade often.

Of Investment Earnings Assumptions and Century Bonds

If we could turn back the clock 65 or so years and set up a more conservative method of accounting for pension liabilities, we would be much better off today.

Who Dares Oppose a Boom?

This piece won a small prize, and in turn, I received three speaking engagements.

Fairness Versus Economics

Fairness Versus Economics (2)

People care more about fairness than improving their own economic/social position.

Earnings Estimates as a Control Mechanism, Flawed as they are

Earnings Estimates as a Control Mechanism, Flawed as they are, Redux

Earnings estimates have their problems, but they exist to give us a flawed method of estimating the future performance of companies.

-==-=-=-=-=–=-=

That’s all for now.? Never thought I would do so many long series when I started blogging.

Sorted Weekly Tweets

Posted on 6 April 2012 by David Merkel

Valuations

High Yield Closed End Funds 68% over NAV, 3% avg premium. Loan Participation CEFs 40% over NAV, -1% avg discount. Conditions r medium hot $$ Apr 07, 2012
Why Stocks Look Too Pricey http://t.co/TWqZzGg3 Various Indicators Suggest the Market Is No Longer a Bargain, at best fairly valued $$ Apr 07, 2012
Contra: The alarming fall in syndicated lending http://t.co/hiGK9UoK With the high yield mkt running hot why not avoid restrictive banks $$ Apr 06, 2012
Not so new… Eddy Elfenbein said something similar 4 months ago: http://www.crossingwallstreet… http://t.co/mhIxGGwt Apr 04, 2012?(on inflation expectations driving stock prices in the short run)
Time to take some risk off the table http://t.co/sCuYxc6u Trends breaking globally, US looks okay. Humble Student has made good calls lately Apr 04, 2012
The Dangers of an Interventionist Fed http://t.co/thKsHa8J QE Removal: what happens to banks if Fed does & 2 inflation if Fed doesn’t $$ Apr 03, 2012
Junk Bonds ? Getting Risky for a New Reason? http://t.co/7bJ08JxT Record pace of junk issuance bodes ill 4 performance… 3 yrs from now. $$ Apr 03, 2012
Two Pros Weigh In on U.S. Stocks: Ben Inker’s Bearish View http://t.co/iJ7742P5 Katie Nixon’s Bull View http://t.co/Zn9jj503 $$ Apr 02, 2012
Eichengreen on Credit Bubbles http://t.co/bSs0MHPA Leading indicator of finl stress in em mkts: loan growth > 2x GDP growth 2 yrs earlier $$ Apr 01, 2012
Taking the High Out of High Yield http://t.co/WYIvHb0n Nonprofessionals are the ones buying junk at the margin. This won’t end well. $$ Apr 01, 2012

Central Banking

The ECB has completely lost control over the monetary policy for Greece http://t.co/MHNTXLHo Massive liquidity drain; total credit failure Apr 07, 2012
Post-war financial repression is back http://t.co/JGLo9Aic If the post-war experience is any guide, savers face many years of suffering. Apr 06, 2012
Bernanke – I’m Slowing Down the Ship http://t.co/TJcJl20n Stocks don’t like less inflation coming and so they fall. But bonds rally. $$ Apr 06, 2012
Draghi Scotches ECB Exit Talk as Spain Keeps Crisis Alive http://t.co/rREDdqrW LTRO can only go so far; can solve liquidity, not solvency Apr 06, 2012
The Market?s Obsessive Fixation on The Fed & QE http://t.co/W6kg1n7k Runs through a Fed tightening scenario, thinks Fed won’t sell bonds $$ Apr 04, 2012
Oest.. Nationalbank follows Bundesbank in refusing some periphery collateral http://t.co/96xx0xg7 Not so big in itself; Tear in EZ fabric Apr 04, 2012
Draghi Tested as German Pay Deals Add to Euro Divergence http://t.co/glKumOZx Inflation rising @ core? May even labor productivity some $$ Apr 04, 2012
@federalreserve Tried using your Data Download Program today http://t.co/vRroRPMt I managed 2get the data I needed, but it was tough 2use Apr 03, 2012
Bernanke – ‘The Fed never makes mistakes’ http://t.co/JBgRHqx2 He goes, speaks to soft audiences, argues that no one could have known #dope Apr 01, 2012

China

Coup Rumors in China Have Deeper Meaning http://t.co/QaoDxKFF Small fissures appearing in the Communist Party’s hold on power $$ Apr 07, 2012
Australia?s Export Slump Intensifies Rate-Cut Pressure http://t.co/sIDzeteW China sneezes, Australia catches a cold, mate. $$ Apr 06, 2012
China doomsayer sees crash coming http://t.co/2QatU1ps Hardly a crash, but GDP shrinking. Wait, that *is* a crash for China? $$ Apr 06, 2012
The Revenge of Wen Jiabao http://t.co/nw5qvCNa Long read. Eye-opening. Formal system of Comm Party eclipsed by family coalitions that war $$ Apr 04, 2012
The informal aspects of how China is governed relies on rival coalitions of elite families over the long run. Short-run, Comm party rules $$ Apr 04, 2012
China Accelerates Markets Opening as QFII Quota Doubles http://t.co/yrXVDcdR May prove 2b significant due to unintended consequences $$ Apr 04, 2012
China Manufacturing Gain Masks Exporters? Woes http://t.co/VyeN9AWF Goods unneeded by the rest of the World build up in China $$ #glut Apr 03, 2012

United States

When safe assets return http://t.co/QLUPuj1j Long piece on the status of money-like instruments, public and private. Many questions. $$ Apr 07, 2012
Income Inequality Is Killing the Economy, Obama Says?Is He Wrong? http://t.co/xrA4pGu2 Going up in developed world, going down globally $$ Apr 07, 2012
And I don’t get it as well, Josh.? I’m as Libertarian as they come, but with financial services, I know that trickery? http://t.co/lIJDCr1Y Apr 05, 2012
More woes in Fedl subsidized solar power: http://t.co/83ch2YUM & http://t.co/6XaEjl10 ht: @zerohedge | Send bureaucrats 2study physics? $$ Apr 04, 2012
The return of the US manufacturer http://t.co/75WCMyPi Manufactured goods represented 61 per cent of all US exports during 2010 $$ Apr 04, 2012
+1 RT @ReformedBroker: ADP is the Diet Arizona Iced Tea of Employment gauges. Like, we’ll take it if it’s there but no one’s looking for it Apr 04, 2012
When does the US Treasury bubble burst? http://t.co/8agHomQH “Pomboy pointed out that Treasury yields are less than current CPI rates” $$ Apr 03, 2012
Why Are the Fed and SEC Keeping Wall Street?s Secrets? http://t.co/bZYF3LgV Fed & SEC view those they regulate as their clientele $$ Apr 02, 2012
US consumers dipping into savings http://t.co/757XDPuW Implies that the recovery is weaker than presently posited, demand comes from savings Apr 01, 2012
Obama Campus Fervor Losing 2 Apathy as Students Sour on 2012 http://t.co/kcyQbWKI Students thought they were getting change, got Bush-plus Apr 01, 2012
How Stockton, California Went Broke in Plain Sight http://t.co/ggOzSOmV If you hand out benefit increases like they are candy… $$ Apr 01, 2012

Finance

Quants: The Alchemists of Wall Street http://t.co/L0CzLQVN Recommend this video, features Paul Wilmott, Matthew Goldstein, & more $$ Apr 07, 2012
The 401(k): Americans ?just not prepared? 2 manage their own retirement funds http://t.co/8Tr0wggt Conclusions similar http://t.co/etCEp8BT Apr 06, 2012
Hedge Funds Accomplishing Very Little in the Aggregate? http://t.co/pxqjw2kk HFs tend 2b volatility-averse, weaker funding than long-only $$ Apr 04, 2012
Ackman SPAC a nice touch, no? RT @ReformedBroker: Private Equity-held Burger King coming public again. “Hooray!” said no one to no one else Apr 04, 2012
Performance persistence in hedge funds http://t.co/zORfjAts How do hedge funds differ v unlevered value investors? $$ gets pulled vals drop Apr 04, 2012
ETN Double Dipping With GAZ? http://t.co/Uo9y1T5p Interesting piece. An ETN issuer can make more $$ stopping creation & lending shares Apr 04, 2012
Loan classes “season” over 10-30% of the life of loan… defaults/prepays stabilize. Large cohorts 4 bond issuance go bad in the 3rd yr $$ Apr 03, 2012
Merrill, Morgan Stanley seen losing grip on rich http://t.co/44mW7ki0 Top 4 brokers mkt share 56% in 2007, 45% in 2011 & still falling $$ Apr 03, 2012
Low Vol Underperforming http://t.co/NYqjw2Fp Every valid strategy has times when it doesn’t work, to shake out the weak hands $$ Apr 03, 2012
Corporate pension funds break away from equities http://t.co/EMPaDGea Yes, when yields r low, DB plans move 2 bonds. Brilliant. $$ Apr 03, 2012
Does Danger Loom for Multiemployer Pension Plans? http://t.co/VpfDZ04m Plans that are <80% funded must take steps 2 nurse plans 2 health $$ Apr 01, 2012
Credit Suisse Opened Volatility Bets to Small Investors http://t.co/ZLMGANXh Wall Street produces products 2 benefit itself, not retail $$ Apr 01, 2012
Keynes: One Mean Money Manager http://t.co/WJ2jESFE “The board of King’s College gave him uncontested authority to invest as he wished.” Apr 01, 2012

Japan

Just a guess, but after Japan’s Current Account goes into deficit for ~2 years, the big adjustment down in the Yen will happen. $$ #ouch Apr 06, 2012
@valuewalk Probably because so many have lost money shorting the yen, & some have made $$ long the yen, that many just trust the momentum $$ Apr 06, 2012
@valuewalk long-dated yen currency puts have fairly low vol 😉 Not doing that either, but… someone will. Apr 06, 2012
Yen Forecast: Xie Sees 40% Drop, Japan Bubble Bursting http://t.co/EjI7hytt Wow. Thinks Japan near tipping point 4 internal financing fail Apr 06, 2012
Japan?s Strongest Storm Since 1959 Slams Into Tokyo Region http://t.co/CCOVz7C6 Very unusual 4 Tokyo 2 have such strong winds w/no typhoon Apr 03, 2012
Yen Losing Most Since ?95 Not Enough for Toyota http://t.co/IT0g84s8 Japanese Industry cheerleaders 4 “penny parity” $$ #race2thebottom Apr 02, 2012

Insurance

Advisers, B-Ds retreat from Hartford http://t.co/garB6Bwn Not offering new annuities means can’t roll to $HIG products when surr chg ends $$ Apr 03, 2012
Agents will try to get holders of $HIG annuities to roll elsewhere when surr charge ends (new commission $$ ), but be careful if you own an+ Apr 03, 2012
annuity from $HIG, b/c one reason they are getting out of the biz, I think, is that some of the secondary gtees were 2 generous + Apr 03, 2012
there is probably a business in analyzing secondary gtees, b/c some r quite valuable, &u wouldn’t want 2get tricked into rolling it by agent Apr 03, 2012
Contra: Rising equity markets to drive US life insurers-Barclays http://t.co/S6JtPun7 Catch my comment at the end, didn’t get new DAC issue Apr 02, 2012
Insurance Fees, Revealed http://t.co/mLzhpT6V NY State says agents must disclose how compensated & offer to provide full details #woohoo Apr 01, 2012

Personal

Sinkhole at the bottom of my street after a water main break. The water is more than 5′ deep & and hollowing out the road beneath. Apr 07, 2012
Street is one way, so I took my son who is a Police Explorer 2 talk to the policeman there. They knew each other. It’s a one-way street so + Apr 07, 2012
I asked the policeman (who was short handed) if he would like us 2 block street 2 traffic. Gratefully “yes.” We set up the safety gear. Apr 07, 2012
This is the opposite of last summer where we didn’t have power 4 6+ days, but we had water. We have power but no water. Hope it won’t b long Apr 07, 2012
Three Year Anniversary http://t.co/0HDD3iyD Congratulations, Hunter! @DDInvesting is our internet guide to all distressed debt $$ Apr 04, 2012
LinkedIn Events: Towson University Investment Group – Markets Summit http://t.co/kpgkDTto I’ll b participating on a panel. See you there! $$ Apr 04, 2012
@Frank_McG @volatilitysmile As I said to my wife today, “Take care of your wife, and she will take care of you.” Worked for the last 25 yrs Apr 02, 2012

Miscellaneous

Reprise: The Elfenbein Gold Model http://t.co/r3rHvZw3 @eddyelfenbein at his best, I fully subscribe to his model, reflecting cost of carry Apr 06, 2012
Matzo Ball Soup, Check. iPad, Check. For Passover, Jews Try Techie Seders http://t.co/xUW3izZl I dislike technology in religion. Yuck $$ Apr 06, 2012
Flying Auto Reviving Dreams of Chitty Chitty Bang Bang http://t.co/WixQb8AV Cheap @ $279K, this one might actually work $$ Apr 06, 2012
This discussion has problems because there is no agreed upon definition of what “free will” means.? As with all quest? http://t.co/NoMpZf0U Apr 04, 2012
Here Come Tablets. Here Come Problems. http://t.co/ezFK4Wfu Five common mistakes: a slow rollout is better to get the bugs out. $$ Apr 03, 2012
Gene Maps Are No Cure-All http://t.co/JOLTtWTK Study Warns That DNA Scanning to Predict Disease Can Mislead; ‘Not a Crystal Ball’ $$ Apr 03, 2012
Ten Claims in Support of IFRS Adoption by the SEC ? & Why They are False http://t.co/nj2PZ1pd & http://t.co/4YrMSvaH & http://t.co/7lLtioGo Apr 03, 2012
The Mighty Mathematician You?ve Never Heard Of http://t.co/9Qp1NqOB Never heard of her & her impact on physics was as great as that of math Apr 01, 2012
Mangled Horses, Maimed Jockeys http://t.co/6Dl1gEmJ Maybe there is a public policy reason to close down racetracks, & after that boxing $$ Apr 01, 2012

Energy

Australia LNG Boom Threatened by US Shale Exporters http://t.co/qleN6sVd Cheap US Hydrocarbons invert prior economic certainties $$ #shale Apr 04, 2012
Shale oil: from curse to cure for East Coast refiners? http://t.co/MdlXvjIb US Shale oil is high quality; challenge is delivery2refineries Apr 04, 2012
Repsol Worst Debt Swaps on YPF Seize Threat http://t.co/BewpJA4p Argentina not 2b trusted; would buy $REP bonds on weakness, stock a ?? $$ Apr 04, 2012
Encana in Play as Petronas Seeks Natural Gas http://t.co/SEx832F1 Petronas looking long-term, b/c prospects for natgas pricing r poor $$ Apr 04, 2012
Why high gas prices at the pump? The answer is BICS http://t.co/LopjaesG Brazil, India, China, & Saudi Arabia have increased gasoline demand Apr 03, 2012
The rapidly shifting supply fundamentals in US natural gas http://t.co/myofZrQD Injection cycle starting early w/supplies high already $$ Apr 03, 2012

Rest of the World

Contra: The Buck Stops Here: A BRIC Wall http://t.co/RYykjXXr The BRIC nations r2 statist 2 link 2 gold. Good idea, doesn’t fit the politics Apr 06, 2012
Germany Asked to Forgo $1.3 Billion Deutsche Telekom Payout http://t.co/b8cvOOlB Interesting how Capex constrains euro-telcos, not US $$ Apr 04, 2012
Europe?s Ratings Revenge Founders on Market Reality http://t.co/D3dNu7sF Eurocrats stumble in dark; will return 2 old system; it worked $$ Apr 04, 2012
How A Baby Bust Will Turn Asia’s Tigers Toothless http://t.co/VE78u9tu Economic growth is partially population growth; sterile societies $$ Apr 01, 2012
Swedish High Street Rebound Ends Bets for Riksbank Cuts http://t.co/jYioq0NN A relative bright spot in Europe; having the Knonor helps $$ Apr 01, 2012

Company News

RE: @emergingmoney Never been crazy about firms that perpetually run w/neg working capital. Interesting idea, though. http://t.co/Xx6yFf8v Apr 04, 2012
Optical Delusion? Fiber Booms Again, Despite Bust http://t.co/9QiAmZOH Whouda thunk it? I knew this was getting close, demand 4new fiber Apr 04, 2012
Scarred Avon Is Takeover Target http://t.co/f2T9E7V7 Don’t think $AVP is a good takeover target: toss dist syst or incompatible syst $$ Apr 03, 2012
Technology obsoletes too easily, particularly in hot sectors. Very difficult to get to $1T of?Market Cap. Bit-by-bit? http://t.co/XjGU9ouG Apr 03, 2012
$AAPL ‘s War on Android http://t.co/ILGQVAZD Long, fascinating article; perversely, attempts to enforce patent can invalidate patents $$ Apr 02, 2012
Dude, is There any Value Left in $DELL ? http://t.co/iG5q5iea U know your marketing is stale when people reference advertising >10yrs ago $$ Apr 02, 2012

Housing

The rebound is now http://t.co/l4coNvgt Worth watching, but I would wait until the foreclosures have been mostly cleared, b4 saying bottom Apr 07, 2012
Home Prices Seen Dropping 10% in US on Foreclosures http://t.co/BBjzxKiU Once f/cs clear out, the market will normalize maybe even rise $$ Apr 03, 2012
McClellan on Lumber?s tendency to leading housing stocks http://t.co/cevWyVTs If past is prologue, housing prices are set for another dip $$ Apr 01, 2012

Funds

I’ve owned this in the past, but not now.? It’s been around for 19 years as a CEF — just have to watch the premium/d? http://t.co/XMVs6RBS Apr 06, 2012
Why I Won?t Be Buying TAGS http://t.co/2S8bqcQJ Expense ratio does not include the expenses paid on underlying ETFs owned by $TAGS $$ Apr 04, 2012

Financial Distress

Reddy Ice Considers Filing for Bankruptcy http://t.co/IgpYjHue Is it just me, or are we seeing an uptick in insolvencies? $$ Apr 04, 2012
Hostess Serves Up New Batch of Cuts http://t.co/fHBXwHes Future failure as people don’t buy so many of the “sugar fat bombs” 4 kids $$ Apr 02, 2012
Failures: Pinnacle Airlines http://t.co/BXkJ8v9j AFA Foods http://t.co/xs4wsFEE Airlines & Meat renderers r born 2 fail $$ Apr 02, 2012

Sorted Weekly Tweets

Posted on 30 March 2012 by David Merkel

China

China’s first bond default could be good market medicine http://t.co/8ShFniYM Bond trader: “We don’t really have a credit risk culture.” $$ Mar 31, 2012
Is China’s slowdown worse than previously estimated? http://t.co/CkZw8tLK Could b business conditions that are worst since 2009. $$ Mar 31, 2012
China Banks Said to Underestimate Local Government Risks http://t.co/qpPicyEe China has a clever bureaucracy; always has; big CYA $$ Mar 25, 2012
Chinese capitalism is just another knockoff http://t.co/w2hSozQL China is not Capitalist; it rewards Party members, not citizens. $$ Mar 25, 2012
Debating a ?Hard Landing? http://t.co/NMnYk2XX friendly debate – Andrew Batson & Patrick Chovanec over China facing a ?hard landing? in 2012 Mar 25, 2012
I Am Jordan’s Complete Lack of Surprise: Chinese Co’s Forced to Falsify Data http://t.co/BMj7ux0T Command & control economy, not free $$ Mar 25, 2012

Market Dynamics

The Nature of a Crowded Trade http://t.co/sf1phJjP A July 2008 article of mine where I reflected on the high correlations of the prior 3 yrs Mar 31, 2012
A Market Lacking Diversification http://t.co/khXUVjaL Correlation conditions similar to 2006-2008, only diversifier hi-qual long bonds $$ Mar 31, 2012
Pension Deficit for 100 US Company Plans Increased 41% in 2011 http://t.co/FdIZTltW Low long hi-qual rates & cruddy returns on risk assets Mar 31, 2012
2277 Stocks and Still Not Diversified? http://t.co/iu0Pw8Ty Recommended solution is similar 2a levered version of the Permanent Portfolio $$ Mar 31, 2012
New from Aleph Blog The Rules, Part XXXI: The offering of liquidity through limit orders is a real service to th… http://t.co/ZiuzWIo5 Mar 30, 2012
Passive Aggressive: Index-Linked Securities and Individual Investors http://t.co/ZrjMCKCz Curbs stock picking, encourages factor timing $$ Mar 29, 2012
Bankers are telling corporate clients this is their chance to refinance http://t.co/Eh9tHEX6 The window of cheap junk financing is open $$ Mar 28, 2012
New from Aleph Blog Replacing Defined Contributions: I think that it is pretty certain that defined contribution… http://t.co/Dis34ql2 Mar 27, 2012
What Will Replace the 401(k)? http://t.co/miLAuoYc How about DB pensions where it depends on how much the employee kicks in plus match? $$ Mar 27, 2012
US Stocks Advance Following Bernanke?s Comments http://t.co/D7sORuIU Stox react 2 increases in inflation expectations. TIPS & Bonds fall $$ Mar 26, 2012
Hedge Funds Capitulating Buy Most Stocks Since 2010 http://t.co/XHwxzxNO Short-term money alert! Will propel mkt 4 a while, then… $$ Mar 26, 2012
If Bloomberg Business Week is a better magazine than old Businessweek (I think so), what magazine should we use now 4 a dumb $$ indicator? Mar 26, 2012

Asset Management

Nontraded REITS should be a nonstarter for clients http://t.co/O1ZuMvX8 And here’s one that just announced a 72% loss: http://t.co/la8d29my Mar 31, 2012
Oaktree IPO Could Pay 2 Founders $117.2M Each http://t.co/Yufla6Jk The Most Important Thing is getting rewarded 4 building AUM 😉 $$ Mar 31, 2012
The Trouble With Exchange Traded Notes http://t.co/ZL7dVpjO Unsecured credit, total return swaps, low level of regulatory protection $$ Mar 31, 2012
Good 4 all of us RT @frankvoisin: My interview Research Magazine’s April issue: http://t.co/zioono6R Also features @VitaliyK @alephblog $$ Mar 30, 2012
Bain Gave Staff Way to Swell IRAs by Investing in Deals http://t.co/4LlAExBt Letting employees in on the fun shares the wealth. Good $$ Mar 30, 2012
Lying By Omission: Mutual Funds, Track Records & Departing Managers http://t.co/4MUyNRYs Track recrds shuld b suspended when critical ppl go Mar 29, 2012
New from Aleph Blog A Pox on Promoted Stocks (2): By this time, I would think that it would be worth the the tim… http://t.co/DJkH6E4W Mar 28, 2012
The Measured Approach to Value http://t.co/XiZOUMOn Features investors Vitaliy Katzenelson & Croft-Leominster, & smaller Frank Voisin & me Mar 28, 2012
GoodHaven Realizes Its Vision http://t.co/zJVmCFMa The CIO of Markel, Tom Gayner showed them favor and invested with them. Good for them. $$ Mar 27, 2012
What This Industry Needs is a Good Disruption http://t.co/imKDcElR There r a few areas of the financial industry that justify their fees $$ Mar 27, 2012
Found PDF slide presentation: http://t.co/0GfhME7m The Market for Financial Advice: An Audit Study $$ Worth a read, paper not free @ SSRN Mar 26, 2012
Treasuries Rise for Fourth Day on Global Growth Concern http://t.co/JYpanHTu Funny how the sentiment has reversed; who is surprised? $$ Mar 25, 2012

Monetary Policy

@kyles09 No, not a believer in MMT, MMR, or neoclassical macro. 2 much aggregation, not everything happens at once, goods/services central + Mar 30, 2012
@kyles09 and $$ only facilitates goods/services. Debt is important, but not central, some goods owned outright, w/no liabs. Money is a + Mar 30, 2012
@kyles09 creation of a culture, not the government, because @ the edges, FX & commodities will crowd out bad currencies. MMT -> inflation $$ Mar 30, 2012
What Does Bernanke Know? http://t.co/LydpOqk1 Introduces “The Guy Rate” http://t.co/zNVeUYmP Unemployment of older guys has hi costs Mar 29, 2012
Demand for U.S. Debt Is Not Limitless http://t.co/NWKHcpCD In 2011, the Fed purchased 61% of Treasury issuance. That can’t last. $$ Mar 29, 2012
Bitter Money Fights Shaped U.S History http://t.co/36jWnkQq Abandoning Gold Helped Dollar Gain Preeminence http://t.co/QbYMkTNL $$ Mar 28, 2012
For the last tweet, those r2 good articles by Simon Johnson & James Kwak, authors of ?13 Bankers? & co-founders of The Baseline Scenario $$ Mar 28, 2012
Housing bubbles and interest rates http://t.co/9TfzMpt2 Makes my point that asset price levels should be part of monetary policy $$ Mar 31, 2012

Banking & Finance

FiveBooks Interviews > @Ritholtz on Causes of the Financial Crisis http://t.co/RQQZfHTz Many good perspectives from 6 authors on the crisis Mar 31, 2012
Geithner?s Math Puzzle Beyond Numbers for DeMarco http://t.co/Eg9BjcgE Principal forgiveness would have moral hazard impacts. $$ Mar 30, 2012
Why not make LIBOR off of binding offers of the banks to borrow/lend to any of their group $10M short-term unsecured? Avg — LIBOR/LIBID $$ Mar 30, 2012
Libor Links Deleted as UK Bank Group Backs Away From Rate http://t.co/HOy8TOof British Bankers? Association distances itself from LIBOR $$ Mar 30, 2012
Branson?s Virgin Money Seen Disrupting U.K. Retail Banks http://t.co/bPcD8im7 Always been a Branson skeptic; he have audited financials? Mar 30, 2012
Why not make LIBOR off of binding bids/offers of the banks to borrow/lend to any of their group 10 million dollars sh? http://t.co/wK3HyopV Mar 29, 2012
Is Hartford Financial’s market exit a death knell for the annuity crowd or just more Hartford haplessness? http://t.co/AUEVqxWQ Both. $$ Mar 29, 2012
The Birth (and Death) of the Moral Age of Wall Street http://t.co/eStszd7i At one point the moral code of $GS had some meaning, not much now Mar 29, 2012
@BarbarianCap More subtle than that; for insurance accounting &the concept of release from risk, it is the conservative side of realistic $$ Mar 27, 2012
A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market http://t.co/WYQGAVVx +1 $$ Mar 26, 2012
But, disagree. Would b simpler and more effective to disallow repo financiers unrestricted access to collateral even in counterparty default Mar 26, 2012
Obama Relies on Debt Collectors Profiting From Student Loan Woe http://t.co/pYWwgLq2 How independent debt collectors get people 2 pay $$ Mar 26, 2012
A Bailout by Another Name http://nyti.ms/GRTNMM GSE writedowns would constitute a direct & sizable gift from taxpayers 2 the largest banks Mar 26, 2012
Banks? preemptive strike against Dodd-Frank http://t.co/wjHW0nyv Banks adjusting strategies in order to keep doing as much biz as possible Mar 26, 2012
MF?s Corzine Ordered Funds Moved to JP Morgan, Memo Says http://t.co/cYaT9sHy The most likely cause may prove to b correct $$ #corzine Mar 26, 2012
BOE’s Tucker: Rehypothecation Consequences ‘Under the Radar’ http://t.co/0X8ZQMMH Good. Rehypothecation should b reviewed, perhaps limited Mar 26, 2012
@EpicureanDeal @dsquareddigest I would still lay the blame @ the door of $GS mgmt. Could have grown via retained earnings &stayed private $$ Mar 26, 2012
@EpicureanDeal @dsquareddigest Also, there r real advantages 2 partnership culture in an investment bank; risk control works a lot better $$ Mar 26, 2012
The Age of the Shadow Bank Run http://t.co/deJRQGgy Borrow short, lend long; clip a spread. Surprise! During the crisis you lose big! $$ Mar 25, 2012
The Interest Rate Swaps that Are Bankrupting Local Governments http://t.co/yHQZ1r3u Not true. Gov’ts tried to minimize taxes w/swaps, failed Mar 25, 2012
Three?s a Crowd http://t.co/KHtbrqpe Disagree w/the conclusion, because $GS did not have to go public; problem is mgmt, not shareholders $$ Mar 25, 2012

Pensions

Brazil?s pension system http://t.co/90O97tQ4 They allow people to retire too early & offer too much. More unsustainable than Medicare $$ Mar 30, 2012
@AlexRubalcava Perhaps a cash balance plan would do that. DB plans are not expensive because of explicit costs. They r expensive b/c + Mar 28, 2012
@AlexRubalcava during boom times benefits look free and get set too high, leading to high costs in the bust phase & plan terminations. $$ Mar 28, 2012

Politics

Obama Is a Loser Who Wins, Like FDR in 1936 http://t.co/K0x9go0T Don’t assume a bad economy insures the defeat of Obama. FDR won in ’36 $$ Mar 31, 2012
The Rejection of Austerity Begins http://t.co/CgWKa9x6 Until failure, ppl vote 4 politicians who promise magic prosperity thru govt fiat $$ Mar 30, 2012
Germany: The Final Frontier… Whose True Debt/GDP Is Now 140% http://t.co/KgW2d76E When you add up the guarantees, doesn’t look so good. $$ Mar 29, 2012
Justices Suggest Parts of Health-Care Law May Be Thrown Out http://t.co/cMvKHR20 B best 2 throw the whole law out; let Congress start over Mar 29, 2012
Contra: Court Can?t Let Broccoli Get in Way of Health Care Law http://t.co/5Yp2o8tB Sup Ct is moving 2 define interstate commerce better Mar 26, 2012
Death Tax Defying http://t.co/FrkL5yLB Eliminate the estate tax; Tax everyone on unrealized capital gains. $$ Same result. Mar 25, 2012
Intelligence community can keep data on Americans with no ties to terrorism for up to 5 years http://t.co/PCM7ldiG Stinks; call the ACLU $$ Mar 25, 2012

US Economy

Why Natural-Gas Prices Could Fade to Red http://t.co/GApb0xie When everyone tries 2 frack @ once, there is too much natgas, price falls Mar 30, 2012
US coal production declines as industry faces further stress http://t.co/l3WpZtDC Fracking has unpredictable consequences; affects energy $$ Mar 29, 2012
Bidding Wars Erupt as U.S. Supply of Homes for Sale Falls http://t.co/JsgIdewr In certain locales, & on the low end, there r bidding wars Mar 29, 2012
The Biggest Bellwether In The World Is Giving Some Ominous Comments About Growth http://t.co/vHWs9lwB $FDX says things r slowing down $$ Mar 29, 2012
Planned Pipelines to Rival Keystone XL http://t.co/qQZ1Dsj2 Enterprise Products Partners & Enbridge may build competing pipelines $$ Mar 28, 2012
‘Pink slime’ producer suspends operations http://t.co/CvptYPhU Goes from 4 factories to 1. 600 people will probably lose their jobs $$ Mar 28, 2012
@valuewalk @The_Analyst It is better for students to start small businesses. Forget economics, it is a waste. Profit/loss best teacher $$ Mar 27, 2012
The Economic Surprise Index is now trending down http://t.co/eJCEEdvy @soberlook reminds us that not everything is going well $$ Mar 27, 2012

Miscellaneous

Like it? I’ve actually bought cars that way! RT @mprobertson: http://t.co/UHdFL0Eu How to buy a car using game theory. very interesting. $$ Mar 31, 2012
Eating Chocolate Regularly May Make You Leaner, Survey Suggests http://t.co/l8c6MMpA This means one dark chocolate Dove promise/day $$ Mar 27, 2012
The second most dangerous people in the world are smart people with wrong postulates. Mar 25, 2012
The most dangerous people in the world are politicians who peddle the views of the smart people with wrong postulates. $$ Mar 25, 2012
Madoff FBI Files Reveal How He Fooled His Own Employees http://t.co/lmq2AoZG Gives hope to those accused; Madoff controlled data tightly. Mar 25, 2012

Why Auditors Should be Rotated

Posted on 29 March 201229 March 2012 by David Merkel

There is a proposal afoot to mandate auditor rotation every fiver years or so.? Some don’t like it.? I think it is a great idea, with large benefits relative to the costs.

My insights, or lack thereof come from working in life insurance financial reporting in a number of different ways for around 15 years.? Only on time in 15 years, in what is arguably one of the most complex industries as accounting goes, did I ever find serious questioning going on.? Should I tell this story?

Yeah, I should, because it involves the “piece of work” that I reported to at AIG who told me, “Dealing with auditors is bloodsport.”? He also said, “Dealing with reinsurers is bloodsport.”? Delicious that this came to bite him in both ways.

A certain life reinsurer who was large then (call them Geta Life), but is out of the business now (unimaginable then, but given what happened here, no surprise), reinsured a large portion of the immediate annuities and structured settlements, including rated structured settlements that the AIG domestic life companies had written.

Did the treaties pass risk?? With a vengeance they did; not only did they pass mortality risk, but all investment risks were passed as well.? For this fine service, Geta Life earned 1% per year on the surplus relief, i.e., the difference between the book value of liabilities and assets reinsured.

It was not so well understood then, but mortality risk for structured settlements did not tend to work out well.? After an injury giving rise to a court case which would structure a settlement for the plaintiff, the defendant would ask insurance companies to bid on the settlement, which was a stream of certain and life contingent payments.? When the injury impaired the life of the plaintiff, bidding would get stiffer, because it is cheaper to fund life-contingent payments to those who aren’t likely to live so long.

Or so you would think… there was one case where a two-year old boy was injured, to the point of being in a coma, and the underwriter who bid the case rated him as having the lifespan of one who was age 73.? But the money transferred to the parents in the judgement was more than enough to care for the boy, and have a lot left over for the parents.? Ding!? The kid would live a lot longer than 15 years as a result of the settlement.

Rated settlements, where one bid on impaired lives, carried the “Winner’s Curse.” If you won, you overpaid.

But this was not on the radar screen of the somewhat oblivious Geta Life, until they found that the treaties were passing large losses to them, and they decided to audit the treaty.? Sadly, the actuaries above me, who had signed the treaties before I was employed by AIG, forgot to inform the investment department that the treaty limited the trading of around 20% of the bonds of the company in ways that would be mimicked 10 years later in CDOs.

Trades may not lower credit quality
Trades may not lower yield
The cashflow profile of the assets can’t be materially changed.
And a few more things…

This problem got dumped in my lap as a young actuary, as I found we were way out of compliance with the treaty terms, selling had gone on with abandon, on assets the reinsurer relied on, reducing the investment income the reinsurer would receive in a falling interest rate environment.

So, I proposed to the reinsurer that I go back in treaty history, and select assets purchased to replace those sold that would have kept the treaty in compliance, and put those into the segregated portfolio, and inform the investment department of the rules.? Once Geta Life understood that, they agreed to my “solution.”? That solution took me several months to work out, but I got it done.

In the meantime, the reinsurance treaties with Geta Life had become so valuable to AIG’s domestic life subsidiaries that if they came into question, the subsidiaries would fail.? The accountants of the auditors, realizing that there was something big to analyze, but not knowing how to do it, called in one of their best actuarial auditors.? My ever-confident boss knew he could beat him.

I still remember critical parts of the meeting as the actuarial auditor slowly checkmated my boss, and forced him to reduce the reserve credit for GAAP accounting, resulting in a sizable loss.

Closing off the story, Geta Life was satisfied on the changes in the asset portfolios, but was still annoyed at the losses.? The changes in assets did not avail much; bad underwriting was pinching.? They came to us saying that “Reinsurance is a good faith venture. You’re not supposed to take advantage of us.? Refund our losses, or we will take you to court for not having having managed the treaty properly from inception.”

I said, “You wrote the treaty.? You accepted my asset changes.? You are supposed to absorb mortality risk, such as there is.? I am not an officer of the company, so if you aren’t happy with this, talk to my boss.”

Shortly after that, I left AIG; it was not a great place to work.? Geta Life sued AIG for damages and won (far more than they should have).? Should have produced a blip in terms of earnings, and didn’t.

Mmmmm…. back to the original point.? Should auditors be rotated?

In all my years of financial reporting, I got wind of things in other areas of the company that I served that auditors should have questioned.? Auditors have often been “lap dogs.”? Only once did I ever see a significant challenge.? More often, I saw the auditors try to help the company explain an “accounting oddity.”? (AIG had a nonstandard way of reporting deferred annuity reserves that was very liberal, and it was proposed by their auditors.)

If auditors know that they are only going to be on the job for five years, they will realize a few things:

If this is going to die in a few years, it doesn’t matter as much if it dies next year.? Maybe firm reputation is worth more than two more years of a contract.
My work will be reviewed by someone unsympathetic to me in a few years.? He will have little incentive not to tear my work up, and call for restatements.
Having a fresh set of eyes on corporate finances will lead to questioning of assumptions that get ignored because they are boilerplate to the continuing auditor.
If auditing ceases to be an annuity to auditors, they will be less complacent, and might even act like auditors on occasion.

My experience with auditors was that they spent a lot of time on the data, and rarely asked the tough questions on assumptions and methods.? They were bean-counters, not actuaries, and certainly not businessmen.

If auditors are rotated, the incentives for just letting things slide will diminish.? That’s why auditors should be rotated.

Book Review: Accounting for Value

Posted on 22 March 2012 by David Merkel

Before I start this evening’s book review, I would like to ask a favor of my readers.? If you like my reviews, maybe you can say that they are helpful at Amazon.? I rank in the 2000s at present, which was a challenge to get to, because not many reviewers of finance, investing, and economics books get to levels like that.? So, to the degree that you like my reviews, and have extra time to do this, I appreciate it.? If not, no worries — I’ve well exceeded my expectations; I appreciate that you read me.

I have never taken a course in accounting.? But I have had to do accounting for most of my working life, including doing financial reporting inside life insurers, which is the most complex industry for accounting. I have even opined on 10+ financial accounting standards over time.? And Aleph Blog is a leading accounting website as a user of accounting. (Dubious distinction, I know, but when you are a blogger, you take what you can get. 😉 )

As a value investor, I have taken a skeptical view toward the accounting of the companies that I invest in.? Cash entries can be trusted; accrual entries are less trustworthy in proportion to the length of time and uncertainty to the collection of cash.

This book relates accounting principles to value investing principles, and it is uncanny as to how they overlap.? It also attempts to connect it to Modern Portfolio Theory [MPT] concepts where it makes sense, but with less success. (No surprise, because value investing has a decent theory behind it and MPT doesn’t.)

The cornerstone of this book is return on net operating assets [RNOA].? The idea is to split the company in two, and separate operating results from financing results.? Give little value to financing results, which are likely no repeatable, and give significant value to operating results.

Note: this means that there is no way of evaluating financial companies under this rubric, but that’s a common problem.? Financial companies are a bag of accruals; value is difficult to discern.? That is why I spend most of my time analyzing the management teams of financial companies to see if they are conservative or not.

The book offers two measures of accounting quality, the Q-score and the S-score.? You would have to do more digging to make these practical, but at least you get some direction in the matter.

There are two simple prizes that the book gives to readers:

1) Profit results mean-revert; don’t trust strong or weak current ROEs. (or RNOAs)

2) Stocks with low P/Es and P/Bs do well.? Each works well, but they work better together.? Maybe if Ben Graham were still alive, he would not have been dismissive of his life’s work at the end, value works.? It’s an ugly brain dead strategy, but it works.

Quibbles

None.

Who would benefit from this book: Those who want to improve their perception of investment value would benefit from this book.? If you want to, you can buy it here: Accounting for Value (Columbia Business School Publishing).

Full disclosure: The publisher asked me if I wanted the book, so I asked for the book 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.

Misunderstanding the Tax Debate

Posted on 22 March 2012 by David Merkel

This should be a short post, because my comprehensive view on tax reform is found here.? The summary is that the problem is not tax rates.? The problem is the definition of income.? Just as in ancient times, people would make themselves look poor when the taxman came, so do the wealthy do today.? “Income? I hardly earn any income.”

And that is because of loopholes in the tax code for social engineering purposes, but even more for the ability to defer taxation of what should be income.? My view is that we should all be taxed like traders, with no opportunity to defer taxation.? No tax deferral for IRAs, HSAs, 401(k)s, DB pensions, insurance, annuities, endowments, stock (even private stock will have to report transactions).?? As asset prices rise, you would get taxed.? No deferral.

You might think this is an ugly system, and it is, though Zillow would have one amazing business when the government uses it to tax increases in housing values, with a true-up at the eventual sale.? They might even find new business by creating pricing grids for other sets of illiquid assets.

The idea is that taxation should follow value creation, which is income, even if it is not cash income.? Gone would be the days where one has an appreciating asset, and borrows against it, and pays no tax.? All increases in value would be taxed, and assets where the increase can’t be measured would assume a 15% annual return for taxation purposes, with a true-up at the sale of the asset.

Deferred tax liabilities would be made payable in a few years, and deferred tax assets would receive payment in the same period.? Deferred gains in stock would be immediately taxable.? Hello, Mr. Buffett, you want the rich to pay taxes, here is your bill.

This would include an elimination of all deductions, corporate and individual.? And, I would beef up the IRS to enforce this.? Once the concept of income gets simple and immediate, enforcement gets easier.? The IRS could focus on one question: how much are they prospering?? Tax in proportion to that.

A proposal like this could rapidly balance the budget without raising tax rates.? Now none of the midgets running for President would adopt such an idea — it offends both the left and the right.? But it would raise taxes on the rich, unlike what an otherwise bright guy like Buffett proposes.? Rates aren’t the question, the question is the definition of income.

And until we focus on the definition of income, we will continue to drift as a nation, at least until a crisis hits that reveals our weakness.

Sorted Weekly Tweets

Posted on 17 March 2012 by David Merkel

Central Banking

Norway Faces Housing Bubble as Krone Steals Policy Agenda http://t.co/15hzb0So By cheapening the currency Norway gets an asset bubble $$ Mar 17, 2012
Unintended Consequences http://t.co/eLrKtCJc Sprott suggests that the financial system has a chemical dependency on the Central Banks. $$ Mar 17, 2012
Is the bond market tightening for the Fed? http://t.co/iRSerA8X The bond market is larger than the Fed; they can’t control the curve $$ Mar 17, 2012
Germany Turns Up Pressure on ECB http://t.co/w2yyfvU1 Difficult to see how the liquidity drains out of the ECB ~3 years from now $$ Mar 13, 2012
China central bank news conference on policy, yuan http://t.co/w8cy5K1Z & http://t.co/XcIFAbvb Japan buys Yuan, don’t think it means much Mar 13, 2012
Bond market certainly did not like the FOMC statement. “Don’t worry about energy prices, we got it all under control.” $$ #fuelinginfltion Mar 13, 2012

Investment Banking

Why banks will continue to rip off clients http://t.co/oTT9fd2i Conflicts on Wall Street, especially at $GS. Big guys know that. So what? Mar 17, 2012
Goldman Sachs?s long history of duping its clients http://t.co/2sXmKl0D Tells the story of how $GS foxed its way out of Penn Central CP $$ Mar 17, 2012
The CMBS maturity wall is here http://t.co/GrcEm1KO I remember buying CMBS deals 11-12 years ago. Bullet loans weak if can’t refinance $$ Mar 17, 2012
Goldman Roiled by Op-Ed Loses $2.2B for Shareholders http://t.co/yz0f0oLy A passing matter; of course IBs have conflicts of interest #duh Mar 17, 2012

China

Bo?s Ides of March http://t.co/mnKFU8Zx Not so much a move to the right as a statement against being flashy and self-promoting $$ Mar 17, 2012
Chinese Economy Already in ?Hard Landing,? JPMorgan?s Mowat Says http://t.co/kwFW2Ty6 Cyclical industries will produce less in China 2012. Mar 17, 2012
China’s official admission of slowing commerce activities http://t.co/br7H4D2o When a long trend changes, often moves further than expected Mar 17, 2012
China’s fixed asset investment growth moderating http://t.co/CEl5mZTc “Growth in real estate and manufacturing projects remains steady.” $$ Mar 13, 2012
GMO: Something’s Fishy in China http://t.co/DO8v4w8p Goes through the 10 signs of a bubble; finds that Chinese economy has most of them $$ Mar 13, 2012
US and Europe Move on China Minerals http://t.co/xyGsdkDq WTO ruled against China in January, pressing similar case 17 rare-earth metals Mar 13, 2012
Another call for an end to China driven industrial commodities “super-cycle” http://t.co/VAd5gR0D Investment is way too high & unproductive Mar 13, 2012

Rest of the World

Sarkozy?s Yield Drop at Risk With Hollande Victory http://t.co/ti25ozdq Surprise, if Hollande cares for poor in France, E-Zone suffers $$ Mar 17, 2012
Saudi Arabia Lifts Curtain on Diplomacy as Syria Killings Spur King to Act http://t.co/H8g8D5nG Favors 85% Sunnis over ruling 15% Alawites Mar 13, 2012
How about those Japanese net-net’s? http://t.co/SAZEcofy Making money in very ill-known small companies in Japan $$ Mar 13, 2012
The Islamic World’s Quiet Revolution http://t.co/ChNksuFm They’re having fewer children, which I already noted here: http://t.co/KnOGFeOA $$ Mar 13, 2012
Portugal Yield at 13% Says Greek Deal Not Unique http://t.co/bPBconfk After Greece, the next places to watch are Portugal & Spain. $$ Mar 13, 2012
Iran-Israel History Suggests a Different Future http://t.co/M1IzxuuB I never knew that Israel sold weapons to Iran in the ’80s. $$ Mar 13, 2012

Financial Sector

MetLife CEO’s Stress Test http://t.co/YaVV4GMp $MET doesn’t deserve to be treated as a systemically risky firm. Long liabilities protect Mar 17, 2012
Assurant Falls as California Seeks Rate Cuts http://t.co/d0OcDS09 FD: long $AIZ; this is overrated; ability of the commissioner limited $$ Mar 17, 2012
Felix Salmon At Columbia Journalism School: Don’t Blame Journalists For Failing To Prevent Financial Crisis http://t.co/0LrCwisB true, but Mar 13, 2012
Journalists, even if they understood what was going on in the finl mkts would face a tough time writing warnings in the midst of boom $$ Mar 13, 2012
US Government Agencies Comparing Notes On Algo Feeds http://t.co/15oAxpn9 Little speed advantages w/econ data can lead to big profits #SEC Mar 13, 2012
Marketview:Point of Reference http://t.co/Xlp5jczH “4 the 1st time this yr I can feel the true bullish sentiment among the investing public” Mar 13, 2012
Banks foreclosing on churches in record numbers http://t.co/fR3Ro9CJ Frankly, I am surprised that banks lend to some churches. $$ Mar 13, 2012
Banks Buy Treasuries at Seven Times Pace in 2011 http://t.co/SDKsJIUB What else to do with all the excess liquidity & weak borrowing $$ Mar 13, 2012

US Government-Related

Pension Benefit Costs Cut by Record 43 States, Study Says http://t.co/B8ZRg4gZ State take actions to reduce benefits to active employees Mar 17, 2012
Best Treasury Forecaster Says 10-Year Yield to Drop From Highs http://t.co/ma8YoN4u Don’t be too sure about Treasury rates rising $$ Mar 17, 2012
International Demand for U.S. Assets Rises http://t.co/FwdXqrWH As the E-Zone gets worse, demand for US debt improves. $$ Mar 17, 2012

Investing

Temporary Hedges eventually force Deleveraging http://t.co/0jVSWRzw On Energy Future Holdings, & why predicting the future is tough $$ Mar 17, 2012
Cyclicals persistent underperformance http://t.co/KkJ2q05p Cyclicals started underperforming in August. Relatively they never recovered. $$ Mar 17, 2012
Magnetic Fields http://t.co/S6VYIe5Y Good post. This graph is worth a look: http://t.co/EBhPh6ZN May help explain recent lost decade $$ Mar 13, 2012
Stock Compensation, Tax Law, Financial Reporting and Facebook’s IPO http://t.co/ULyVLNkr Future dilution may pressure $FB shares $$ Mar 13, 2012
A Value Investor’s Take on Shorting http://t.co/cZYueqGH Tactical discipline, not structural, b/c market can go nuts. Can help hedge $$ Mar 13, 2012

Miscellaneous

Considering Bankruptcy? Head to the Mall http://t.co/UvgEArMj Legal services offered for simple situations in mall locations. $$ Mar 13, 2012

Sorted Weekly Tweets

Posted on 3 March 20123 March 2012 by David Merkel

I am considering making this an end-of-the-week feature as a news recap.? Comments?

Financials

BofA?s Clash With Fannie Intensifies as Insurers Reject More Loan Claims http://t.co/fKgxwcVO Originators need to bear UW error results $$ Mar 03, 2012
Life as Libor Traders Knew It Seen as Abusive http://t.co/H5o5cH3G An inside look at the problems of LIBOR. Collusion & marketless numbers Mar 03, 2012
$AIG Earnings an Illusion of a Bend in US Tax Laws http://t.co/GCZHUKsu IRS gives AIG special treatment by allowing it to use NOLs post-BK Mar 03, 2012
You have a good point, and I may reference it when I write this evening, but valuations have compressed for all insur? http://t.co/BRTuHnvf Mar 01, 2012
Fannie, Freddie and the $180 billion hole http://t.co/Lnoh7VPH F&F transferred wealth to early investors from taxpayers & late investors $$ Feb 25, 2012
Make losses and prosper, AIG edition http://t.co/EYykmbmZ Hey Q: how much $$ will $AIG make in the future in order to not pay taxes? $$ Feb 25, 2012

Berkshire Hathaway

Contra: Warren Buffett on Investing http://t.co/OH0dQxXP Buffett has not been a deep value investor for 30 years; this article misses it $$ Mar 02, 2012
+1 RT @valueprax: Thoughts On Mergers, Acquisitions And Conglomeration From Rothbard And Buffett (@AlephBlog, $BRK) http://t.co/khZH5Uiq Mar 01, 2012
The Truthiness of Berkshire’s Performance http://t.co/5iSsrAHL Don’t think Buffett anticipated the P/B squeeze in insurance stocks. $$ Mar 01, 2012
Buffett Plans More Solar Bonds After Topaz Deal http://t.co/pjrAKQub Buffett doesn’t give suckers an even break, no guarantees on solar $$ Mar 01, 2012
RE: @TheStreet_News When I wrote for RealMoney, I was often critical of Buffett, but I have shifted.? He is a great e? http://t.co/r4z14uUC Feb 29, 2012
When you think you made a great purchase (Warren Buffett edition) http://t.co/ME9RwqFf I was surprised to learn about this $BRKa sub also $$ Feb 28, 2012

Home Schooling

Question of priorities, could conserve RT @ReformedBroker: “How am I supposed to live on $350,000 a year?” – you’re right, kill yourself $$ Mar 01, 2012
@ReformedBroker Have his wife call my wife; can save lots of $$ if u go from private school 2 homeschool, & it is easier than 1 would expect Mar 01, 2012
@ReformedBroker The downside is that it is a lot of work, but not hard work, and the challenge is controlling your children frequently $$ Mar 01, 2012
@merrillmatter I know you’re kidding, but the mothers I know who homeschool would be fearsome in the business world were they redirected $$ Mar 01, 2012

Municipal Finance, or lack thereof

If Stockton Is Broke, Then Why Isn?t San Diego? http://t.co/dzCE9FjX Govt Unions fight to keep benefits govts shouldn’t have granted $$ Mar 03, 2012
Pension Pain Mounts, Low Rates Boost Liabilities http://t.co/NZndpR5g More evil results of Fed policy substituting debt 4 organic growth $$ Mar 01, 2012
To Pay New York Pension Fund, Cities Borrow From It First http://t.co/feOXK8E3 Shell game at best; net contributions needed to DB plans $$ Feb 29, 2012
Raiding the coffers http://t.co/5h2Fx5ZL State pension plans r borrowing from their pension plans 2 fund their own pension contributions Feb 29, 2012

North Korea

@LSilverspar You made me laugh, yes, all of these have impacts on us… but given their counterfeiting, some action should be taken $$ Feb 29, 2012
@dpinsen And access of the Dear Leader to his favorite Scotch… hitting him where it hurts. 😉 $$ Feb 29, 2012
@dpinsen Agree, bigtime. We got them to the bargaining table last time by cutting off their financial access to the rest of the world. $$ Feb 29, 2012
Then once NK starts to counterfeit it, go back to new $50s & $100s; make their life tough. Feb 29, 2012
How the U.S. Could Pressure North Korea Tomorrow: Quit the $100 Bill http://t.co/DkXUZsy7 This is worth doing, and create a $75 bill $$ Feb 29, 2012

Eurozone

Greek PSI exchange summary – an offer you can’t refuse http://t.co/K4OUOqm3 Yes, we all voluntarily give up 70% of the value of r claims $$ Mar 03, 2012
Greek Crisis May Test the Value of Swaps http://t.co/hG27iIak ISDA wimps out and does not declare a credit event; will destroy Sov CDS mkt Mar 03, 2012
A Primer on the Euro Breakup http://t.co/OB2sdwzB Explains why the Euro will break up, at least at the fringe &y this should not surprise $$ Mar 02, 2012
ECB Free Money May Carry a Cost http://t.co/g1bNl281 Makes governments relax & ignore structural problems, & banks arb the ECB $$ Mar 01, 2012
ECB Allots ?529.5 Billion in Long-Term Refinancing Operation http://t.co/8o0OE7XO Higher than anticipated takeup of cheap funding $$ Feb 29, 2012
More signs of Draghi’s “stabilization” http://t.co/zdFol9Vj euro area banks show material tightening conditions in the banking system $$ Feb 28, 2012
On PIGS on Drugs http://t.co/VtOZYdwt European states owe ?12-15 billion to the pharma industry; they stop paying suppliers b4 cutting staff Feb 28, 2012
http://t.co/wQYFVFWH “Amused – Italian banks figured it out. An hour before LTRO results, 5 Italian banks issued & bought their own bonds.” Feb 28, 2012
Europe Gets Ready for Round 2 of Bank Loans http://t.co/N0rpX9O7 Heightening the dependence of stressed banks and govts on the ECB. $$ Feb 28, 2012
You may want to hold off on buying that Italian villa http://t.co/EP92Zd4m 66.5% of agents report a fall in housing prices during 4Q $$ Feb 28, 2012
@japhychron Can’t think of anyone, btw, there is a theory that a decent # of stressed banks used LTRO 2 buy in their own debt… $$ Feb 28, 2012
LTRO programs’ impact on sovereign bond purchases by banks (past and present) http://t.co/ffbNfY3B Indirect way of financing fringe govts $$ Feb 28, 2012
Mario Draghi reveals the Grand Plan http://t.co/Dal4wEDo & http://t.co/KNj9mhgx Good austerity results in freer mkts, more growth $$ Feb 28, 2012
Merkel torn by conflicting pressures in Greek vote http://t.co/0iCZV4kQ Any other Firefox users noticing that Reuters pages format badly? $$ Feb 27, 2012
@moorehn Good piece, I think many will benefit @soberlook has been writing some good stuff also http://t.co/tAlkFpXR & http://t.co/jcLBc04c Feb 24, 2012

China

China?s Billionaire Lawmakers Make US Peers Look Like Paupers http://t.co/d2haqyDc China’s lawmakers r absolutely more wealthy than US peers Mar 01, 2012
China May Double Rare Earth Exports as Demand Rebounds http://t.co/MaDQX4rc Quite a change from prior, makes u wonder why they change… $$ Mar 01, 2012
Why China Will Have an Economic Crisis http://t.co/xn3W2Wxa This is getting very mainstream, makes me think I could be wrong. $$ Feb 29, 2012
Fortress? Michael Novagratz on Lessons from OWS, and China http://t.co/yTSqXqYR Cronyism raises the odds of domestic violence in China $$ Feb 25, 2012
Evil Overlords or Lucky Devils: The Men Who Rule Hong Kong http://t.co/BEqw7Z0Z Long but interesting, re the influential wealthy in HK $$ Feb 25, 2012

Credit

Junk Isn?t http://t.co/olYEeOGe Spreads are down and investor interest is up; this is my biggest intermediate-term concern at present. $$ Mar 02, 2012
Junk vs. Loans http://t.co/JbIHAFtt & http://t.co/tccF8pML Loan participation funds cheap compared 2 junk, but downside still there. Feb 29, 2012
The rating agencies are the farm teams for credit analysts, in the same way that Value Line is for stock analysts.? A? http://t.co/Qfj1lYhu Feb 29, 2012

Upcoming Book of Josh Brown

I invite you to read his website http://t.co/Qom9t2Zy .? He writes a lot of clever stuff there.? One of ? http://t.co/r34pi1pR Feb 29, 2012
Confessions of a Reformed Stockbroker http://t.co/B4dkJ5XI Another preview article 4 @reformedbroker ‘s forthcoming book $$ Feb 29, 2012

Personal Investing

Dividends Rise Again http://t.co/gT6AcZXq Their coffers bulging with cash, companies are increasing the once out-of-favor common dividend $$ Mar 03, 2012
IRAs Get Sexier http://t.co/XVG5u56g All manner of illiquid assets can b crammed in2 an IRA if you have a friendly custodian $$ #beware Mar 03, 2012
Treasury yields and credit spreads divergence is not sustainable http://t.co/LvfHNU4t Ordinary times credit spreads r inverse 2 Tsy yields Mar 02, 2012
The Myth of Commodity Diversification http://t.co/ZoMhgv7M A defense of why gold is a true diversifier of portfolios versus commodities $$ Feb 29, 2012
Conflict of All Conflicts http://t.co/RgZmO3nv from @reformedbroker I rarely get angry, but this one annoyed me; skewed incentives $$ Feb 29, 2012

Accounting rules (yes)

Standard Setters Strain 2 Avert More Revenue-Recognition Angst http://t.co/jRlnmLPa Industry-specific revenue policies r better; reject IFRS Mar 03, 2012
Another “Case” of Terrible Decisions Borne of Terrible Accounting Rules http://t.co/wb2PB5BF Don’t compromise on revenue recognition. $$ Feb 29, 2012
Mark-to-Market Pensions Show Brutal Year http://t.co/NhwMePZG Some companies are biting the bullet and moving pension acctg to mark2mkt $$ Feb 25, 2012

Corporate News

Natural Gas Renaissance Sparks Favorable Chemical Reaction http://t.co/G0QHxkVu Petrochemicals benefit from cheap fracking feedstock $$ Mar 02, 2012
Apple Dividend May Return Part of $98B Cash http://t.co/FzFTTr2X If $AAPL can’t use all of its cash then give it to shareholders $$ Feb 29, 2012
@PlanMaestro Operating profitability is poor, and given their business mix, their P/B is fair for a company with a 5% anticipated ROE. Feb 29, 2012
@ToddSullivan Now if they can achieve a decent ROE, and not have weak reserving… I was wrong regarding Maiden Lane when I wrote about it. Feb 29, 2012
CNA: A P&C Insurance Turnaround Story http://t.co/WRwhf5sV A fair analysis of $CNA, worthy for insurance investors 2 read. O, he cites me $$ Feb 29, 2012
One thing that is not mentioned frequently is that shale gas production profiles tend to peak and decline rapidly. Th? http://t.co/flnQvRwt Feb 28, 2012
?Hope Phase? for Stocks May End in Tears Again http://t.co/z6Sbfu7n Markets anticipate sustained US growth & soft landing for China $$ Feb 28, 2012
Confronting a Law Of Limits http://t.co/kIFgxwk8 How does $AAPL grow into its valuation? Especially where obsolescence moves rapidly? $$ Feb 25, 2012

Miscellaneous

FDA Warns on Statins http://t.co/7K37iJVe Every drug has side effects, w/statins it may be diabetes. Be wary, & avoid all drugs if u can $$ Mar 01, 2012
Seriously? Any reason to avoid it? RT @kasie: Days since Mitt Romney has taken questions from the national traveling press corps: 17. Feb 25, 2012
Slavery should be an issue where liberals and conservatives could agree for policy, and maybe apply the Palantir technology 2 root it out $$ Feb 25, 2012
Fishing as Slaves on the High Seas http://t.co/0Bakkir5 Another place where slavery still exists; sex trade, Dubai construction & more $$ Feb 25, 2012
Why Doctors Die Differently http://t.co/e3rnOTz8 Careers in medicine taught them the limits of treatment & the need to plan for the end Feb 25, 2012
‘Japanese Madoff’ Flagged http://t.co/U7vgrOap Industry Newsletter Warned in 2009 About Firm’s ‘Unnaturally Stable Returns’ $$ #ponzi Feb 25, 2012
Killer App http://t.co/kUT8X9Ji Have a bunch of Silicon Valley geeks at Palantir Technologies figured out how to stop terrorists? Palantir. Feb 25, 2012
At 35, I was a devoted Husband and Dad of 5 children, with the oldest being 7 years old.? Nominally, I was the invest? http://t.co/AYUuRMsi Feb 25, 2012
War with Iran:Would you go bankrupt for your country? http://t.co/d5rVA9Ww War does not stimulate the economy, contrary 2 popular belief $$ Feb 25, 2012

Economy

Is Japan Doomed? http://t.co/qZev2jSA What? There’s a free lunch where the Govt can borrow indefinitely? NO! Cash flows about 2 shift b wary Mar 02, 2012
Core inflation is once again above expectations http://t.co/uxjbXofE There is inflation coming; stagflation even; bad policy begins to bite Mar 02, 2012
A Wake-Up Call for Japanese Watchdogs http://t.co/r1JMhnM2 Bigger than MF Global, smaller than Madoff; how do you say Ponzi in Japanese? Feb 28, 2012
Oil denominated in EU currencies is at record highs; demand destruction likely http://t.co/KwWkFvJM Wonder where breaking point is? $$ Feb 28, 2012
Gundlach warns U.S. stock market vulnerable http://t.co/g8hKrNSJ Investors concede rally almost over; still expect to earn coupon-> danger Feb 28, 2012
Architecture Billings Index indicated expansion in January http://t.co/nZV1OCdw leading indicator 4 new Commercial Real Estate investment $$ Feb 28, 2012

Notes on the 2011 Berkshire Hathaway Annual Report, Part 2

Posted on 28 February 20123 March 2012 by David Merkel

Picking up where the last post left off:

13) So Buffett told us he has a successor lined up, but won’t tell us who, but will tell us that the successor doesn’t know that he is the successor.? Really does not seem like much of an improvement over the past, except that the CIO function is getting better defined with Todd and Ted.

14) Todd & Ted share their performance 80/20 — 80% of their own and 20% of their colleagues performance.? Seems like a fair idea, balancing the team vs the individual.

15) The regulated subsidiaries, and manufacturing, services and retailing did well. That operating income growth is what drove the year.? The turnaround at NetJets was also a help, and that was fast.

16) We are still waiting to see what problems BRK’s decentralized system can develop.? To this point, the flexibility for managers within a structure that oversees reinvestment of cash flow is admirable.

17) The economic spread of BRK businesses is significant, and I would argue, unrivaled in terms of conglomerates.? It almost makes me think that Buffett is aiming for owning an extra-productive slice of US/World GDP.? It makes acquisition criteria #1 less relevant, because if you are small and private, and want to be acquired by BRK, it means that you analyze BRK, identify the portion of it that you are most similar to, and talk to the CEO of that segment, not Buffett.

18) That brings up my view of Buffett at present.? He has changed as the amount of assets under management has grown.? The last phase for Buffett is not large cap value manager, but private equity manager / conglomerateur.? He uses the float that his insurers produce to invest in a wide number of enterprises that will produce excess returns.? He does not run a closed end fund, but runs a conglomerate.

19) Interesting to see Nebraska Furniture Mart open its third store.? Logical to do, if the experience is replicable.

20) ?We do not talk one-on-one to large institutional investors or analysts.? Bravo.? Would that this would be true of more companies.? When I represented a large holder of Safety Insurance, the management asked me what we wanted in terms o market disclosure.? I said that it did not matter to us, and that we would be happy if they never talked to the media/analysts, and only emitted 10-Qs and 10-Ks, even without notifying us as to timing.

21) Buffett notes that a decent number of borrowers that lost their homes did well in the crisis, because of all the money they extracted from loans.? That might be similar to a private equity manager profiting through deals to borrow where he pays himself a dividend.

22) Owning 11% of Munich Re gives Buffett additional influence over the reinsurance market.

23) Because of the need for collateral, BRK will not be making any more significant derivative bets.

24) Buffet repeats his screed that he issued to Fortune regarding bonds and gold.? I repeat my screed.? It’s all logical, Warren, but you have to think more broadly and read about the gold medal gold model.

25) It makes sense that flying to Kansas City is a better strategy than going to Omaha.? But as this becomes widely used, make sure you reserve a car early.

26) If you want to ask Buffett a question at the annual meeting, you can do it by e-mailing the following:

Carol Loomis, of Fortune, who may be e-mailed at cloomis@fortunemail.com
Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com
Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com

(In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)

27) There will be insurance analysts at the annual meeting, and they are Cliff Gallant of KBW, Jay Gelb of Barclays Capital and Gary Ransom of Dowling and Partners.? I have a lot of respect for Gary Ransom — listen to the questions that he asks.

28) Minus & Plus: Negative change in AOCI & comprehensive income of noncontrolled interests down.? Strong CFO, net of capex, supports goodwill.

29) At for BRK’s big options: BAC in the money, GS at, GE/DOW out of the money.

30) Do parts of all asbestos liabilities eventually go to Berkshire Hathaway for reinsurance?? Who don?t they reinsure?? “The liabilities for environmental, asbestos and latent injury claims and claims expenses net of reinsurance recoverable were approximately $13.9 billion at December 31, 2011.”

I know that Buffett thinks he can earn money off of the float on these claims in excess of the implied interest rate.? But when he begins to become the preferred habitat for reinsurance, he makes BRK more volatile with respect to legal judgments.

31) “Without prior regulatory approval, our principal insurance subsidiaries may declare up to approximately $9.5 billion as ordinary dividends before the end of 2012.” And that is because only 10% of the regulatory surplus of $95 billion can be released.

32) BRK, unlike many firms, has more reasonable assumptions on DB pensions: expected return: 6.9%, discount rate 4.6%.

33) To date, share repurchases have been insignificant.? Looks like $67 million from the Statement of Shareholders Equity.

34) “On January 31, 2012, we issued an additional $1.7 billion of parent company senior unsecured notes, the proceeds of which were used to fund the repayment of $1.7 billion of notes maturing in February 2012.”

Why not pay down short-term debt?? BRK has the cash, and you state that you have an aversion to debt, particularly at the holding company level, but you are not acting like you have an aversion to debt over the last 10 years.

To Buffett: is there a level of debt at which you would be uncomfortable at the parent company, or subsidiaries?? Also, would you ever make an effort to get the AAA rating back?

35) BRK has a very diversified reserving book if you look at page 84 of the annual report — impressive.

36) I appreciate acquisition principle 6, which deal with aspects of value that accounting does not capture.? Buffett takes the right position to value those fully, because you will eventually get that value, and others will not pay up for it.

37) Buffett makes a lot out of the virtues of deferred taxes and float. He argues “they are liabilities without covenants or due dates attached to them.”? This is true, though deferred tax liabilities assume that you will make money, and will continue to grow.? Float is similar, it assumes you will underwrite well, and it would be nice if you grew.

38) Buffett says toward the end of the annual report:

There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.

I’ve written about this before.? Some managements teams with skill should retain all earnings, and not pay a dividend.? Management teams without skill should act like REITs and pay out 90% of taxable income (or free cash flow).

39) Buffett says he was wrong on housing.? I think he is still wrong on housing; it will take a lot longer for this situation to normalize.? The key variable is the proportion of houses with debts exceeding a 90% LTV.? Those houses are illiquid; can’t be sold except in a short sale.

40) One final wild idea: would BRK consider buying out the corpus of AIG?? I have better small insurance acquisition targets than that, but buying out AIG would be delicious given the comments Greenberg made to Buffett back when BRK was smaller.? He was very dismissive of BRK.? Also, Buffett could fold ILFC into NetJets (or vice-versa), sell off the life companies, and impose greater discipline on the P&C underwriting.? Personally, if BRK made a bid for AIG at $32, I think Buffett could make a lot out of it, and he would not have to worry about a lot of fuss, because the major holder is the US Government.