Bonds – Page 19 – The Aleph Blog

Self-Regulation in the Financial Markets: Exchange Issues, Market Structure, and Investor Protections (Part 2)

Posted on 12 June 2014 by David Merkel

Exchange SROs: Meeting the Needs of Investors and the Financial Marketplace

Questions:

How do exchange SROs contribute to the effective functioning of the securities markets?
How has the role of exchanges changed since they were first designated as SROs, and have these changes affected their ability to function effectively in that role?
Do recent breakdowns in exchange oversight functions indicate a need for an overhaul of structure/functions or point to ?fatal flaws? in the current system?
Are conflicts in the current system of demutualized exchanges resolvable or inherent in the system?
What needs to be done to reinforce the integrity of the system and increase investor protections?
How does increased competition from broker/dealer internalization networks and foreign trading markets affect exchanges under the constraints of the current self-regulatory system?

Panel

Roberta Karmel
Centennial Professor of Law, Brooklyn Law School
Former Commissioner of the US Securities and Exchange Commission

The change from fixed commissions was significant. ?NASD traders had preferential rates trading with one another. ?Existing SROs continued on. ?Expulsion was a threat. ?Exchange listing standards were a significant protection.

Many markets, and profit seeking exchanges have changed matters. ?Sarbox and Dodd-Frank have affected matters ?with listing requirements. ?JOBS act has opened up listing standards, and perhaps not in a good way. ?SEC was happy to see the monopoly of the NYSE broken, but there have been unanticipated secondary effects. ?We need to ask what kind of regulation we need now in the present environment.

Richard G. Ketchum
Chairman and CEO,?Financial Industry Regulatory Authority

Mentions MS was the first Chair of FINRA. ?Merger of NASD and NYSE Reg. ?FINRA has an enhanced majority of public governors. ?No way for industry to capture FINRA. ?Oversees all bond and equity trading. ?Exchange SROs can delegate to FINRA, but they must oversee what FINRA does for them.

Mary Schapiro
Vice Chairman of the Advisory Board, Promontory Financial Group
Former Chairman of the US Securities and Exchange Commission
Former CEO of the Financial Industry Regulatory Authority (FINRA)
Former Chairman of the Commodity Futures Trading Commission

SROs are cost-effective and flexible, with deep expertise. ?Examine participants, Surveill markets, etc. ?New tech, markets, exchanges as profit-seeking entities are new challenges. ?Conflicts of interest have grown along with HFT.

Moderated by: Andrew N. Vollmer, University of Virginia School of Law

Q: Does the current system work well? What areas do we need to change?

MS: It’s working well. ?Vigilence is needed. ?Well-functioning SROs are an aid to regulators. ?Easier for an SRO to address an issue with stakeholders.

RK: Wants the SEC to have a bigger budget, merge the CFTC into the SEC. ?SROs are necessary now because the system won’t work without them. ?Fragmentation of?trading makes self-regulation less effective.

ANV asks RGK to reply.

RGK says FINRA aids regulators. ?FINRA brings knowledge, focus and access. ?Government regulators are more confrontational, FINRA can get more done. ?Exchanges are the only ones enforcing listing?standards.

MS concurs that listing standards are needed.

Q: Have we lost some of the benefits of SROs with the delegation of authority to FINRA?

RGK: has worked with SROs his whole life. ?Comments how things were often worse in the past, not all things are worse today.

MS:?Concurs with RGK.

RK: There has been loss, much of it through the destruction of exchange-based trading. ?2008 meltdown — few firms did anything to stop the crisis. ?Everyone acted in their own interest.

Q: Aside from listing standards, what other?things should the exchange SROs do?

MS: Exchanges will always be responsible for aspects of investor protection.

RK: Exchanges will always have an interest in the integrity of their markets.

RGK: Comments that exchanges should watch over the quality of products traded [DM: think of leveraged and inverse ETFs, ETNs, penny stocks, promoted stocks, etc.]

Q: What about efficiency at the SRO level?

MS: Competition and efficiency don’t always work well together. ?SEC and CFTC should be merged.

RK:?SEC and CFTC should be merged. ?Need more than one regulator, though. ?Did not work in the UK. ?FSOC a disaster, a non-solution.

RGK: We interact with everyone. ?No opinion on whether the?SEC and CFTC should be merged.

Self-Regulation in the Financial Markets: Exchange Issues, Market Structure, and Investor Protections (Part 1)

Posted on 12 June 2014 by David Merkel

I’m at the?Self-Regulation in the Financial Markets: Exchange Issues, Market Structure, and Investor Protections Conference hosted by the CFA Institute and the DC Society. ?I will be making occasional posts on this today, in the form of summary notes.

Jim Allen, CFA
Head, Capital Markets Policy ? Americas

CFA Institute ? already self-regulated.? Aids in flexibility of regulation.? De facto standards of investment performance measurement ? GIPS [Global Investment Performance Standards].

Keynote talk

Has spent much of her life heading self-regulatory organizations [SROs].? She thinks SROs lever the effectiveness of government in regulating finance.? Congress does not appropriate the proper amount of money to regulate finance on its own.? Employee levels in the government regulators have not grown.

Regulating RIAs ? only 9% examined in 2013 managing $55 Trillion of assets.? SROs are not a second choice solution.? There is more expertise, tech knowledge, etc.

The Future of Self-Regulatory Organizations

Cited this article: Top 10 Characteristics of Effective Self-Regulatory Organizations

DM note: There are about 60 people here in this room adequate to hold about 150.

First Panel

Global Overview: Role of Self-Regulation in Increasingly Interconnected and Complex Markets

Topics

What are the benefits of an effective self-regulatory system in the securities markets?
What challenges does the self-regulatory system face in light of the complexity of financial products and trading mechanisms (algorithmic trading, dark pools, etc.), and what resources are needed in response?
How does the use of ?front-line? regulators in certain market sectors contribute to more effective regulation?
What is the future for self-regulation? How do the experiences differ between emerging markets and those that are more established?

Chris Brummer
Professor of Law — Georgetown University Law Center
No intro talk.
Amarilis Sardenberg
Chair of the Board?– BM&FBOVESPA Market Supervision

Government Bond ? Central Bank

OTC Bond, Securities, and Derivatives ? all under one regulator.? Each has its own SRO.? Her securities SRO audits brokers and custodians.? All trades tracked by beneficial owner; makes tracking manipulation easier.
Susan Wolburgh Jenah
President and CEO –Investment Industry Regulatory Organization of Canada [IROC]

Heads a national SRO in Canada.? Provinces have financial regulatory authority.? This is somewhat similar to insurance regulation in the US.? SROs have greater authority in Canada.? Audited regularly, and the results are made public.? Thinks they hold to the Top 10 Characteristics of Effective Self-Regulatory Organizations pretty well.

Moderated by: Jim Allen, CFA, CFA Institute

Q: Challenges of SROs?

CB: 2 ? points: 1) Globalization ? financial trade can go on anywhere ? affects regulation.? Coordination is helpful, the US cannot dictate international rules.? Soft principles have dominated over negotiating hard principles.

2) Disintermediation of financial services firms eliminates gatekeeping functions of financial firms.? Bitcoin, Crowdfunding, Dark pools, etc.? (DM: I would have said derivatives or money market funds?)

SWJ: Changes have been huge ? explosion of exchanges in Canada and the US. ?High frequency trading [HFT] is highly controversial ? and it is a data-intensive task to investigate what is right or wrong.

AS: Coordination of policy is important.? A little surprised at arbitrage trades.

Q: What to do about attacks from hackers?

SWJ: Big issue, the investment banks are big targets.? Smaller firms lag on resources.? We try to educate on the issue, create best practices, policies, etc.? Their SRO hires hackers to test their systems.

AS: Similar answer to SWJ, adds that the exchanges have their own efforts.

CB: Capture the right data, analyze it.

Q: Regulatory arbitrage, how to reduce?

CB: Cites: The Danger of Divergence: Transatlantic Financial Reform & the G20 Agenda

Different regulators move at different speeds, and face local challenges.? Different cultures affect implementation.

SWJ: Businesses move faster than regulators.? Are provincial securities regulators able to adapt more rapidly than a national regulator? [DM: If they cooperate, I think it can work.]

AS: There are so many trades going across borders that it is very difficult to police.? Post-trade settlement is tough ? harmonizing settlement standards has a long way to go.

Q: How do you avoid industry capture?

SWJ: IROC does not advocate, it only regulates.? Purity of purpose is important.? Board is 7 independent, 7 industry and the Chair.? Nominating Committee composed of the independent directors plus Chair.? Everything public and transparent.

AS: Her exchange SRO is established by statute, and has clear authority and goals as a result.? Board of 11, 8 must be independent.

Q: Not many SROs in banking, as finance goes more global, how will SROs fare?

CB: Harmonization of data collection would help.? Difficult to harmonize all regulation under one roof.? Federal Reserve doing some of this. [DM: not really]? Long history of SROs in finance and other areas, like accounting.? Independent majority on SRO boards need with an independent source of revenues.

SWJ: There is an academic paper to be written here.? [DM: Panic of 1907, Great Depression help explain it.]

AS: Not many exchange based SROs: US, Canada, Brazil, Columbia…

Post 2500: What is the Aleph Blog About?

Posted on 12 June 201420 June 2017 by David Merkel

Every hundred or so posts, I take a step back, and try to think about broader issues about blogging about finance. ?Tonight, I want to explain to new readers what the Aleph Blog is about.

There have been many new followers added to my blog recently, ?through e-mail, RSS, and natively. ?This is because of this great article at Marketwatch, which builds off of this great article at Michael Kitces’ blog.

I am humbled to be included among Barry Ritholtz, Josh Brown, and Cullen Roche, and am genuinely surprised to be at number 4 among RIAs in social media influence. ?Soli Deo Gloria.

What Does the Aleph Blog Care About?

I’m writing this primarily for new readers, because I’ve written a lot, and over a lot of areas. ?I write about a broader range of topics than almost all finance bloggers do because:

I’m both a quantitative analyst and a qualitative analyst.
I’m an economist that is skeptical about the current received wisdom.
I like reading books, so I write a lot of book reviews.
I’m also a skeptic regarding Modern Portfolio Theory, and would like to see it discarded from the CFA and SOA syllabuses.
I believe in value investing, in both the quantitative and qualitative varieties.
I believe that risk control is a core concept for making money — you make more money by not losing it.
I believe that good government policy focuses on ethics, not results. ?The bailouts were not fair to average Americans. ?What would have been fair would have been to let the bank/financial holding companies fail, while protecting the interests of depositors. ?The taxpayers would have been spared, and there would have been no systematic crisis had that been done.
I care about people not getting cheated. ?That includes penny stocks, structured notes, private REITs, and many other financial innovations. ?No one on Wall Street wants to do you a favor, so do your own research and buy what you want to own, not what someone wants to sell you.
Again, I don’t want to see people cheated, so I write about ?insurance. ?As a former actuary, and insurance buy-side analyst, I know a lot about insurance. ?I don’t know this for sure, but I think this is the blog that writes the most about insurance on the web for free. ?I write as one that invests in insurance stocks, and generally, I buy the stocks because I like the management teams. ?Ethical, hard working insurance management teams do the best.
Oddly, this is regarded to be a good accounting blog, because as a user of accounting statements, I write about accounting issues.
I am a skeptic on monetary and fiscal policy, and believe both of them tend to sacrifice the future to benefit the present. ?Our grandchildren will hate us. ? That brings up another issue: I write about the effects of demographics on the markets. ?In a world where populations are shrinking in developed nations, and will be shrinking globally by 2040, there are significant economic impacts. ?Economies don’t do well when workers are shrinking in proportion to those who are not working. ?(Note: include stay-at-home moms and dads in those who work. ?They are valuable.)
I care about the bond market. ?There aren’t that many good bond market blogs. ?I won’t write about it every day, but I will write about i when it is important.
I care about pensions. ?Most of the financial media knows things are screwed up there, but they do not grasp how bad the eventual outcome will likely be. ?This is scary stuff — choose the state you live in with care.

Now, if you want my most basic advice, visit my personal finance category.

If you want my view of what my best articles have been, visit my best articles category.

If you want to read about my “rules,” read the rules category.

Maybe you want to read some of my most popular series:

My blog is not for everyone. ?I write about what I feel most strongly about each evening. ?Since I have a wide array of interests, that makes for uneven reading, because not everyone cares about all the things that I do. ?If that makes my readership smaller, so be it. ?My blog expresses my point of view; it is not meant to be the largest website on finance. ?I want to be special, even if that means small, expressing my point ?of view to those who will listen.

I thank all of my readers for reading me. ?I appreciate all of you, and thank you for taking the time to read me.

As one final comment, I need to say this. ?I note people unfollowing my blog at certain times, and I say to myself, “Oh, I haven’t been writing about his pet issue for a while.” ?Lo, and behold, after these people leave, I start writing about it again. ?That is not intentional, but it is very similar to how the market works. ? People buy and sell investments at the wrong times.

To all my readers, thank you for reading me. ?I value all of you, and though I can’t answer all e-mails, I read all e-mails.

In summary: the Aleph Blog is about ethics and competence. ?I want to do what is right, and do what gives the best investment performance, in that order.

On Bond Risks in the Short-Run

Posted on 7 June 20148 June 2014 by David Merkel

From a letter from a reader:

Hi David,

I’ve been following your blog for the last few months and the articles are extremely insightful.

I’ve been working with fixed income credit trading the last few years but I feel that I have not been measuring risk well. I only look at cash bonds

Right now I’m only looking at DV01 and CR01, but my gut tells me that there’s a lot more to risk monitoring that can be done on a basic cash bond portfolio.

From your experience as a bond portfolio manager, what other risk metrics have you found useful?

I’d really appreciate if there were a few pointers you could give or just a trail that you could show me and I’ll follow it.

First, some definitions:

Basis Point [bp]: 0.01% — one one-hundredth of a percent. ?If you have $10,000 in a money-market fund, and they pay one basis point of interest per year, at the end of the year you will have $10,001. ?In this environment, that’s not uncommon.

DV01:?A?bond valuation?calculation?showing the?dollar?value?of a one?basis point?increase or?decrease?in?interest rates. It shows the?change?in a?bond’s?price?compared to a decrease in the bond’s?yield.

CR01: Credit Sensitivity ? Credit Default Swap [CDS] price change for 1bp shift in Credit par spread — same as DV01, but applied to CDS instead of a bond.

Now, onto the advice: when you manage bonds, the first thing you have to do is understand your time horizon. ?Is it days, weeks, months, or years? ?When I managed bonds for a life insurer 1998-2003, the answer was years. ?Many years, because the liabilities were long. ?That gave me a lot of room to maneuver. ?You sound like you are on a short leash. ?Maybe you have a month as your time horizon.

When the time horizon is short, the possibilities for easy profits are few, and here are a few ideas:

1) Momentum: yes, it works in the bond market also. ?Own bonds that are rising, and sell those that are falling. ?Be sensitive to turning points, and review the relative strength index.

2) Stick with sectors that are outperforming. ?Neglect those that underperform.

3) If you have significant research that has a differential insight on a bond, pursue it with a small amount of money if it may take a while. ?If the change might happen soon, increase the position.

4) Try to understand when CDS is rich or cheap vs cash bonds by issuer. ?Look at the price history, and commit capital when pricing is significantly in your favor.

5) Set spread?targets for your investing. ?Decide on levels where you would commit minimum, normal, and maximum funds. ?Be generous with the maximum level, because markets are more volatile than most imagine.

6) Look at the criteria for my one-minute drill:?http://alephblog.com/2010/07/17/the-education-of-a-corporate-bond-manager-part-ii/

(and look at the end of the piece, but the whole piece/series has value.)

7) Analyze common factors in your portfolio, and ask whether those are risks you want to take:

Industry risks
Duration risks
Counterparty risks

8 ) Look at the stock. ?If it is behaving well, the bonds will follow.

Maybe your best bet is to trade CDS versus cash bonds, if the spread is thick enough to do so. ?If not, I would encourage you to talk with more senior ?traders to ask them how they survive. ?Trading is a tough game, and I do not envy being a trader.

Sorted Weekly Tweets

Posted on 7 June 2014 by David Merkel

Rest of the World

Q&A w/Bill White – former chief economist of the Bank for International Settlements?http://t.co/EoDdKnoD4x?Worth a read, still bearish $$?Jun 07, 2014
China City Crash-Lands to Zero Growth on Coal Bust?http://t.co/sROcEjLThJ?For Taiyaun, it is a coaled, cruel world $$ $KOL $FXI?Jun 06, 2014
Welcome to Baku, the Fiercely Modern, Millennia-Old, Capitalist-Socialist, Filthy-Rich Capital of Azerbaijan?http://t.co/SCr1Yyb1o5?LONG $$?Jun 06, 2014
Swiss Garbage Police Irk Foreigners Reeling After Vote?http://t.co/a2Nul3KysI?Picky, piddly, part of what makes Swizerland unique $$ $SZE?Jun 06, 2014
China Central Bank Calls for More-Targeted Loosening Measures?http://t.co/fwKv9QQcTa?Central banks r not good @ micromanaging an economy $$?Jun 06, 2014
China?s Rare Earth Toxic Time Bomb to Spur Mining Boom?http://t.co/XWrbnSKptk?That’s a boom outside of China, as econ policy raises costs $$?Jun 05, 2014
Obama Pledges to Bolster Europe’s Security?http://t.co/XYVI5Bi9p1?I’m not 4 entangling alliances, but really only $1B 4 E. Europe?! $$ $SPY?Jun 05, 2014
Dai-ichi to Buy Protective Life?http://t.co/rxdOapKZth?When Japanese life cos buy American life cos they overpay; this 1 is colossal $$ $PL?Jun 04, 2014
Cameron Threatened as ?People?s Army? Marches on Newark?http://t.co/GZQ4fIdnWR?UK independence Party: anit-EU, anti-immigrant, anti-Tory $$?Jun 04, 2014
Putin Pausing as Russia Volatility Kills Trade-to-Invest?http://t.co/jZhiKnR8t1?Whaddaya know? Maybe the sanctions do have some bite $$?Jun 04, 2014
China Builds Sulawesi Smelters as Ore Ban Cuts Jobs?http://t.co/yXCVATdl5l?Unemploy a lot of miners 2 create inefficient smelting jobs $$?Jun 03, 2014

Companies & Industries

It’s Watershed v Pipeline in Latest Fracking Battle?http://t.co/D9kHxY9Xmf?High-Profile Spills Prompt Water Utilities to Fight Pipelines $$?Jun 06, 2014
Amazon Feud With Publishers to Escalate as Contracts End?http://t.co/KRe3cWvSw8?Dominance of $AMZN especially in e-books vexes publishers $$?Jun 06, 2014
Buffett?s $26B Power Bet in West Seen Paying Off?http://t.co/CZkw7nlZwB?Needed infrastructure financed by insurance premiums: brilliant $$?Jun 06, 2014
Wells Fargo Requires Principal With Home-Equity Payments?http://t.co/zeNbOeBGhg?Good practice 2 require principal amortization $$ FD: + $WFC?Jun 05, 2014
US refiners struggle with too much light crude?http://t.co/PcA1I4gymX?Light crude is more volatile; difficult to separate the light stuff $$?Jun 04, 2014
Abbott CFO: How and Why to Spin Off?http://t.co/ZLgszwAgRM?Explanation of how & why the spinoff unlocked a lot of value $ABT $ABBV $$?Jun 02, 2014

US Politics & Policy?

U.S. Workers’ Productivity Falters?http://t.co/XKmjss5R6o?First-Quarter Decline, Worst in 6 Years, Comes as Job Market Heals $$ $MACRO $SPY?Jun 06, 2014
Service Industries Propel Broad Rebound in US Growth?http://t.co/Sx8JzPi28F?Let’s see how well this persists $$ $MACRO?Jun 05, 2014
Smoke and Mirrors Hide the Collapse in Corporate Profits?http://t.co/tKzMwwAKF8?Economy-wide profits take a hit in the revision of GDP $$?Jun 05, 2014
Obama’s Next Fed Fight?http://t.co/wMrsvbkqA2?Why Michael Barr will be just as unacceptable to progressives as Larry Summers $$ $TLT $SPY?Jun 05, 2014
Now Who Wants to Change the Constitution?http://t.co/tD35tVeQTj?@CassSunstein I would prefer my anti-gerrymandering amendment $$ $TLT $SPY?Jun 05, 2014
Fed Officials Growing Wary of Market Complacency?http://t.co/tv1RsY2LLP?Go ahead, Fed: Raise Fed Funds by 0.1% & c how mkt reacts $$ #blammo?Jun 04, 2014
Growing Student Debt Focus of Senate Hearings Today?http://t.co/4rUJrpv7LY?Expensive colleges extract more $$ from students, parents, govt?Jun 04, 2014
Waiting game: Why small businesses won’t hire?http://t.co/8LZXP8YqUg?Workforces r not overloaded; if demand really picks up then hire $$?Jun 04, 2014

Market Impact

Morgan Stanley Is Said to Cut London Fixed-Income Traders?http://t.co/W29BnWm9nU?Not enough action for $MS 2 pay in an illiquid market $$?Jun 06, 2014
Hedge Funds Betting on Calm as Volatility Shorts Increase?http://t.co/vmUQXsSdbB?I get worried when I c exotic side bets grow $$ $SPY $VIX?Jun 06, 2014
Wall Street Adjusts to the New Trading Normal?http://t.co/41Lzn1AJFA?Transaction Volume in May Fell 2 Lowest Level Since Financial Crisis $$?Jun 06, 2014
Dueling Indexes: A Big Name Is # 2 in Returns?http://t.co/dltXFxHPeU?Russell 2000 trails enhanced index S&P600. $IWM $IJR Earnings/float $$?Jun 06, 2014
different this time?http://t.co/BGJ7SSKS3D?@researchpuzzler on the delusions of chasing returns late in this current bull market $$ $SPY?Jun 06, 2014
Kass: Prepare for a Minsky Moment?http://t.co/fP2m7jtyJk?@DougKass tells us 2b concerned about the low volume accompanying the new highs $$?Jun 06, 2014
Hedge-Fund Wolfpack Stalks Financials as Alpha Pangs Grow?http://t.co/B28wHitYlQ?Got utilities & other yield sensitive sectors? NO? $$ $XLU?Jun 06, 2014
The unglamorous life of hedge fund startups?http://t.co/g2rjcehsT3) @JesseSolomonCNN meets w/ @allstarcharts -> lots of work to do $$ $SPY?Jun 06, 2014
Value Funds Are Beating Growth-Stock Funds This Year?http://t.co/D1yoMyPN8U?This is true most years, nice 2feel the wind @ my back $$ $SPY?Jun 05, 2014
Fresh Records Get Stale With S&P 500 Volume at 6-Year Low?http://t.co/oeu4OnFmkK?Volume is low & few stocks are reaching new highs $$ $SPY?Jun 05, 2014
Word Power: A New Approach for Content Analysis?http://t.co/DAd7cyppAF?10K filed, language sounds cautious 2 the computer which sells $$?Jun 05, 2014
Unstoppable $100T Bond Market Renders Models Useless?http://t.co/GAU74xkHdt?Many bonds forced into being via QE, spread relationship hurt $$?Jun 04, 2014
Bond Bankers Have 144 Reasons to Fret Over Underwriting Frenzy?http://t.co/66VsCIy8ct?Top 9 banks have lower mkt share & fees then past $$?Jun 04, 2014
Fortress Tries ?Nuclear Option? for Trups CDOs?http://t.co/RkavoJkPYW?American Back hasn’t paid in 5 years; Fortress takes it to BK court $$?Jun 03, 2014
Are Stocks Expensive? The 2 Perspectives?http://t.co/uVHaq4Tlsu?On an intrinsic basis, yes. Can the market go up anyway? Yes. Safely? No $$?Jun 03, 2014
Icahn won?t be joining the Mount Rushmore of insider trading?http://t.co/HJOOM0ez3Y?This one is overblown in terms of facts & size $$ $IEP?Jun 03, 2014
What investors must know about new accounting rules?http://t.co/Mx6FONELtv?It still doesn’t eliminate uncertainty from earnings accruals $$?Jun 03, 2014
Investors Rewarded for Trek Into Little Known Markets?http://t.co/VW6N768dUz?I wouldn’t put much trust in the low vol argument; looks odd $$?Jun 02, 2014

Other

With His Eye on the World Cup, Soccer Coach Jurgen Klinsmann Overhauls Team USA?http://t.co/GKnao1ZmtR?New attacking style fits Americans $$?Jun 06, 2014
In Search of America’s Best Burrito?http://t.co/RaCIa2nXBc?via @fivethirtyeight Visit “The Well Dressed Burrito” in Washington, DC #cult?Jun 06, 2014
New Chip to Bring Holograms to Smartphones?http://t.co/KaWS9b8T5H?Ostendo’s Tiny Projectors r Made 2Display Video, Glasses-Free 3D Images $$?Jun 05, 2014
No Pain, No Gain, as Tattoo Regret Fueling Laser Removals?http://t.co/GHS89tzV4A?New pico-second lasers remove tattoos w/moderate pain $$?Jun 04, 2014

Wrong

Maybe not: This Time, Russia-China Alliance Will Last?@BloombergView?http://t.co/NYNTGV1mH3?Cultural alignment is lacking; econ not enuf $$?Jun 06, 2014
Wrong: Hydrogen Fuel Finally Graduating From Lab to City Streets?http://t.co/lkboflU5Sr??I usually call them ?fool cells.?? – Elon Musk $$?Jun 06, 2014
What New College Grads Need To Know About Money?http://t.co/mJpL4ckJoa?Disagree. If renter’s insurance optional, take the risk, don’t buy $$?Jun 04, 2014

Comments, Replies, and Retweets

RT @derekhernquist: bookmarked “Investment Mgmt: A Science to Teach or an Art to Learn” via @cfainvestored HT @alephblog?http://t.co/ozoStZ??Jun 05, 2014
RT @susanweiner: Financial #blogging insights from David Merkel of @AlephBlog?http://t.co/PVhL3tX9yq?Jun 05, 2014

Investment Management: A Science to Teach or an Art to Learn?

Posted on 5 June 2014 by David Merkel

Imagine for a moment that you move to a new country that you have never been to before. ?When you get there, they give you a map of the country. ?But as you use the map, you find that it does not accurately represent the country at all. ?You never get to the place you want to go.

So, you complain to some of your new friends about the map, and they acknowledge the shortcomings of the map, but they say it is correct in theory, and is better than having no map at all.

This is economics and finance today, and there are changes that need to be made. ?They would rather have a wrong map than admit that their theories are bogus.

Today I read?Investment?Management: A Science?to Teach or an Art to?Learn?? I think its 99 pages are well worth reading, and if half or more of the observations get implemented by the CFA Institute, the Society of Actuaries, and Departments of Business, Finance, and Economics, the entire industry will be better off.

It is better to have an accurate uncertainty, than an inaccurate certainty. ?We are better of professing ignorance of what we don’t know, than being certain about things where we are wrong.

Investing is an art to learn. ?There is little science here. ?Stocks and other investments do not behave like modern portfolio theory would dictate. ?There is not one central risk factor that accounts for most of investing. ?There are many risk factors, and the credit cycle. ?The credit cycle is dominant, because as debts build, there is a boom in the favored asset classes. ?Then, as debts become unsustainable, there are crashes where the previously favored asset class returns to reasonable pricing or less.

We have to absorb the idea that most people are not rational, they merely imitate. ?”If my friends are doing it, it must be a ?good idea,” is the thought of many. As such, crises are easy to understand, because people imitate “the success” of others, not realizing that an asset?bought at a lower price might be good, but the same asset bought at a higher price might be bad.

We also have to grasp that physics is the wrong model for finance, and ecology offers us a better model — actors pursuing scarce resources in order to survive/thrive. ?In physics, it is simple. ?Human actions don’t matter; what humans care about does not affect physics. ?It does affect economics.

Beta vs Credit

Beta is not risk. ?Risk is more akin to the likelihood of bankruptcy, and the severity thereof. ?Crises happen when a lot of companies and individuals face the threat of bankruptcy. ?In some ways, we need to retrain all investors to think like bond managers — examining balance sheets, cash flow statements, and avoid companies that have higher probability of bankruptcy.

What do we Need to Change?

We need to end the idea?that markets natively are in?equilibrium. ?Indeed markets may weakly tend toward equilibrium, but the shocks to the system are far greater than the equilibrium tendency. ?Markets may tend toward equilibrium, but they are almost never in equilibrium.

We must teach students that the beauty of markets is that they function in disequilibrium. ?That is their glory. ?We should not expect perfection of markets in the short-run, but in the long-run many imperfections get eliminated where the government is not interfering.

We need to teach that crises are normal, and not accidents. ?They happen because a class of assets gets overbid, and often because of debt incurred to buy the assets.

We need to teach economic history to students, so that they grasp the wide array of what can happen in markets. ?What? ?That can’t happen today because the Fed watches over us? ?No way.? The same problems will recur in different forms.

The most important thing to teach new students about statistics is how they can be manipulated. ?Teaching them advanced statistics is overkill, because the markets are more random than that.

Quibbles

We don’t need to teach more macroeconomics to investors, because the theoretical foundations are shaky. ?I agree that we need to teach more qualitative reasoning to students. ?Maybe there should be some practical tests, where they work in a startup, and have to reason broadly, because there is no one to break it down to a simple level for the newcomer.

Beyond that,on page 98, if you don’t know how to value a derivative contract, you will not be able to trade it properly. ?As a former mortgage bond manager, it helped me a lot to understand the math. ?I could make better bids than most could.

Summary

The main idea here is to develop qualitative reasoning, and neglect quantitative reasoning when there is no reason to think it is impartial.

I write this as a mathematician who mostly understands where math fairly represents the world, and where it does not.

Buy Stocks When Credit Spreads are High, Sell When They are Low

Posted on 3 June 2014 by David Merkel

Credit spreads and implied volatility are cousins. ?When there is complacency, both are low. ?When there is panic, both are high. ?For those of us with strong balance sheets, when do we buy? ?We buy during panic. when we can get quality assets at bargain prices. ?When things are euphoric, we sell, or at least reduce exposure, increase quality, etc.

That’s why I don’t have much sympathy for articles talking about Great Moderation 2.0. ?Ask yourself, “How did the Great Moderation work out? ?Was taking a lot of risk then a good idea?

There were many that chased past returns 2005-7 that got hosed 2008-9. ?So when I see articles like?Trends Point to Growth & Stability, I shake my head and say, “Driving by looking through the rear-view mirror.”

I feel the same about this article,?Investors Rewarded for Trek Into Little Known Markets. ?Anytime a lot of new money spills into any new asset class, returns are high and implied volatility falls. ?That tells us little about the future.

When implied volatility and credit spreads are low, that tells us that people are very certain about the future, and they are relying on things remaining stable. ?It doesn’t tell us when the bear market will come, but it does tell us that gains are limited before the bear market.

I can’t tell you when things will break, or how badly they will break. ?I can tell you that stocks are producing earnings gains by levering up more, and not through organic growth. ?In the short run, it pays to issue debt to buy back stock, but the additional debt eventually exacts its price — when the cycle turns, and the price of liquidity rises, the debts will still be there, and interest costs to refinance them will be considerably higher. ?Or, equity might have to be issued at an unfavorable moment.

One practical tip — the area with the greatest percentage amount of credit growth is usually the one that performs the worst when the cycle turns — candidates for that include E&P firms engaged in fracking, student loans, US Government debt, and more. ?If anyone can think of additional areas, please mention them in the comments.

I’m not running away. ?I’m just trimming here and there, and investing in safer companies that seem to have good accounting. ?All for now.

A Bond Manager Thinks about the Equity Premium

Posted on 31 May 20141 June 2014 by David Merkel

One of the things that annoys me about the concept of the equity premium is that it is an academic creation that does not grasp the structures of the markets. ?Send the academics to be bond and equity portfolio managers for a time, and maybe we would get a better theory than Modern Portfolio Theory [MPT].

Here is the first thing that is wrong with MPT — it doesn’t understand the bond market. ?The best estimate of what bonds will return over time is the current yield less expected losses from defaults and optionality. ?Hold a bond to its maturity, and the standard deviation of returns is low, over the full time horizon.

Thinking about bonds in the current environment, virtually nothing is earned with high-quality short-dated debt. ?The yield curve is still relatively steep, as people expect the economy and lending to pick up.

Think for a moment. what is a longer asset, a corporate bond, or the stock of the same company? ?The stock is the longer asset, because the cash flows of the business in question potentially stretch far longer than the maturity of the corporate debt, at least in most cases.

Also think, in a bad scenario, where insolvency is possible, who has the better claim: the equity or the unsecured debt? ?The unsecured debt, of course.

Longer assets in general possess more risk and should carry higher yields to induce people to take those risks. ?Inverted yield curves are exceptions. ?Also in general, longer corporate bonds have higher spreads over Treasuries most of the time, than shorter corporate bonds.

The one significant advantage that equities have over corporate bonds is that of control. ?Increases in earnings go to the stockholders. ?Buyouts go to the stockholders. ?Bondholders get paid off at best.

That said, in the losing scenario, bondholders get back 40% of par on average, while stockholders get little if anything.

I believe that the equity of a company needs to be priced to return more than the longest unsecured debt or preferred stock of the company.

Thus when I think about MPT, I think they are positing an asset-liability mismatch, comparing T-bills versus a long asset, common stocks. ?The comparison should be broken down into several spreads:

T-bills vs T-notes/bonds of the longest maturity issued by companies like them.
Corporate bond yields minus Treasury yields at the same maturity.
The earnings yield of the stock minus the corporate bond yield.

This takes apart the seemingly simple MPT calculation, revealing the complexity within, helping to explain why beta doesn’t work. ?It embeds an asset-liability mismatch. ?Stocks are long term, T-bills are not. ?There is no reason why their returns should be considered together, without a model of yield curve spreads, corporate spreads, and equity financing spreads.

That’s a sketch of the correct model, now who wants to try to build it out?

Sorted Weekly Tweets

Posted on 31 May 20141 June 2014 by David Merkel

Debt Markets

Leverage Addicts Get Junk-Loan Fix With Derivatives ETF?http://t.co/CWMxLXlz3v?Not much different than a HY closed-end fund or a CLO $$?Jun 01, 2014
Bond Market Flips the Script on Risk and Reward?http://t.co/3geslTXRMo?Difficult for rates 2 rise when monetary velocity keeps falling. $$?Jun 01, 2014
Shakeout Threatens Shale Patch as Frackers Go for Broke?http://t.co/pGj2CUiTxG?Not healthy 4 so many 2b financing w/high amount of debt $$?Jun 01, 2014
Bond Market to Fed: Your 4% Rate Forecast Is Way Too High?http://t.co/Ji55pmAlYZ?Forward rates r much lower than wrong Fed forecasts $$?Jun 01,
New Fund Stars Ride Junk Bonds to the Top?http://t.co/1WtqogYOZX?Junk credit & HQ long duration risks have paid off, what an odd couple $$?Jun 01, 2014
The Hidden Risks in Your Local Housing Market?http://t.co/7OcDXnTvGC?As the amount of debt behind housing rises, systemic risks rise also $$?Jun 01, 2014
Pimco Rehires Former Senior Executive Paul McCulley?http://t.co/7U71N8jO12?Wish he had stayed retired; I enjoyed him not publishing $$?Jun 01, 2014
And so it begins: Square is to start lending to customers?http://t.co/F7xDzGTxAQ?Harder than it looks 2b a lender; 2 much optimism $$?May 31, 2014
S&P, Moody?s Lose Bid to Block Calpers $800M Suit?http://t.co/crQdAbw2v2?Ratings r advice not guarantees, sophisticated investors know it $$?May 31, 2014
How to Manage Bankers Voracious Risk Appetites?http://t.co/yrwkZkQaHW?Criminal liability, clawback of pay, & boards holding mgmt acctable $$?May 31, 2014
Goldman Shuns Bonds Pimco?s Gross Favors in ?New Neutral??http://t.co/bTPbJpi6Me?Go with Goldman over Pimco; buy tails, short belly $$ $GS?May 31, 2014
You?re All Whales in Bond Market Now With Trading Volume Slump?http://t.co/ewXmldKzC5?It means that more Tsy notes r held 2maturity $$ $IEF?May 30, 2014
Pimco Rehires Former Senior Executive Paul McCulley?http://t.co/7U71N8jO12?Wish he had stayed retired; I enjoyed him not publishing $$?Jun 01, 2014
How to Manage Bankers Voracious Risk Appetites?http://t.co/yrwkZkQaHW?Criminal liability, clawback of pay, & boards holding mgmt acctable $$?May 31, 2014
Goldman Shuns Bonds Pimco?s Gross Favors in ?New Neutral??http://t.co/bTPbJpi6Me?Go with Goldman over Pimco; buy tails, short belly $$ $GS?May 31, 2014
You?re All Whales in Bond Market Now With Trading Volume Slump?http://t.co/ewXmldKzC5?It means that more Tsy notes r held 2maturity $$ $IEF?May 30, 2014

US Politics & Policy

Geithner’s Dubious Accounting?http://t.co/8uwwJyeKHo?”justifying the bailouts b/c a simplistic measure shows the govt made $$ is a stretch.”?Jun 01, 2014
Seven States Running Out of Water?http://t.co/pXpEU9Hu7K?All in southern west & midwest — CA, NV, NM, KS, AZ, OK, & TX $$?Jun 01, 2014
State Pension Transparency Is Right Message At Right Time?http://t.co/vwGqJn7ZDq?Read about troubles of North Carolina Public Pensions $$?Jun 01, 2014
‘Pink Slime’ Makes Comeback as Beef Prices Spike?http://t.co/XmDfVz5zAB?”Finely textured beef” returns to cheap hamburger; ask yr butcher $$?May 31, 2014
Economy Shrank, U.S. Now Says?http://t.co/qm9rarCX9P?They’re blaming the weather which is always a weak reason 4 the structural slowdown $$?May 30, 2014

Rest of the World

Japan Begins Purposely Dumping 100s Of Tons Of Radioactive Water From Fukushima In2 The Pacific?http://t.co/TklIa4ECs2?Source fish w/care $$?Jun 01, 2014
Spain Sees Embers Glow in Wreckage of Property Crash?http://t.co/J1KWh56u0l?Prices finally gaining real money buyers $$?Jun 01, 2014
Escape From Tiananmen: How Secret Plan Freed Protesters?http://t.co/yAmoc6MfKT?Unlikely group of people risked their lives 2 aid escapees $$?Jun 01, 2014
Iran, Stable but Miserable?http://t.co/1HNuO03Ncv?@Steve_Hanke Once Govts start giving subsidies, is very difficult 2 end them $$ #bigbang?May 31, 2014
Aging Swiss Face Pension Funding Dilemma on Immigration?http://t.co/9k2X7Oeszf?Demographic eclipse faces Switzerland, needs immigrants $$?May 30, 2014
No, China Isn’t Really Rebalancing?http://t.co/HbR7rVIiOZ?@WilliamPesek notes quick return of stimulus measures in China as growth flags $$?May 30, 2014

Market Impact

Bad Credit No Problem as Balance-Sheet Bombs Rally 94%?http://t.co/6xLjaGnBCp?A backward-looking insight, one common 2 late bull markets $$?Jun 01, 2014
Reynolds Aims to Oust Fidelity in Push to Gain 401(k)s?http://t.co/CO9RF3YZsk?401k financial servicing is a scale game 4 Great-West Fin’l $$?Jun 01, 2014
Bets on Higher Food Costs Reach 11-Week Low: Commodities?http://t.co/Bqi5PPkTsS?Time for food costs to move up $$?Jun 01, 2014
Neff?s do?s and dont?s?http://t.co/Sx2oExlAHb?The thinking of John Neff is underrated in my opinion; this article summarizes some of it $$?Jun 01, 2014
Top 10 Valuation Ratios and How to Use Them?http://t.co/bbdT2lMHeI?Worth a read $$?Jun 01, 2014
Dragon King beats Black Swan: Ted Talk with Didier Sornette?http://t.co/QMJNGE3N8w?Listen to Sornette; black swans can be predicted $$?Jun 01, 2014
New Rules 2 Alter How Companies Book Revenue?http://t.co/3siTlXkluz?Mostly liberalizes revenues, lowers earnings conservatism, watch $$ flow?Jun 01, 2014
Nasdaq Nears 13-Year High as Technology Becomes Loved?http://t.co/0Q7VrPsnUy?Note unprofitable IPOs coming 2 market eating sideline cash $$?Jun 01, 2014
Dennis Gartman: We Were Wrong Calling for a Correction?http://t.co/IhmICbVO2M?Few more capitulations & then the topping process will end $$?Jun 01, 2014
Managing a Portfolio I – Stop Wasting Time, Start Adding Value, Part V?http://t.co/2z2bLQV7zK?A very good series, very worthy of a read $$?May 31, 2014

Other

Little Children and Already Acting Mean?http://t.co/4RRva4OVu1?Should only surprise if u think ppl r natually good; good must b trained $$?Jun 01, 2014
The Myth of the Climate Change ‘97%’?http://t.co/BCsHXfzudX?I know science Ph.D.s who don’t agree, but how 2do a fair count? $$?Jun 01, 2014
How Many Kidneys Is an NFL Career Worth??http://t.co/EdaeHVt8zW?Gives reasons to eliminate team doctors; players, get yr own doc 4 safety $$?May 31, 2014
Mementos of triumphs make a return to bankers? desks?http://t.co/1fetPsXSrc?Deal toys made of Lucite return to Wall Street $$ $GS $MS $XLF?May 30, 2014
My Resume?http://t.co/lkMocQczJB?James Altucher spills all of the beans on his business career & life. A train wreck in slow motion $$ $SPY?May 30, 2014
Railcar Shortage in US Pushes Up Lease Rates?http://t.co/bcaqp0DvwV?If pipelines aren’t built, more crude will flow by rail $$ $GATX $TRN?May 30, 2014

Wrong

Wrong: SEC Set to Spur Exchange Trading?http://t.co/jU2JJvc3vi?This may help mutual fund managers, but it won’t help small investors $$?Jun 01, 2014
Wishful thinking: Is Hillary Clinton Too Old for the White House??http://t.co/Fy0qYw11a6?People, particularly women live longer than b4 $$?Jun 01, 2014
Wrong:Annotated History Of The World’s Next Reserve Currency?http://t.co/XtCSg2WQPt?Only free countries w/open markets r reserve curncies $$?Jun 01, 2014
Fink Says Leveraged ETFs May ?Blow Up? Industry?http://t.co/cVTubsqeiY?More likely they blow themselves up, & not the all mutual funds $$?Jun 01, 2014
Wrong: Paper money is unfit for a world of high crime and low inflation?http://t.co/XC4pAWjHf2?We need 2get currency out of govt hands $$?May 31, 2014
Wrong: Borrowers Show in Rush to Grab US Rate Break?http://t.co/H8yJX9TCQQ?Funny how everyone keeps saying rates will rise $$ FD: + $TLT?May 30, 2014
Wrong: Make more money by dumping your investment adviser?http://t.co/8hSPQqgDlr?Investment advisers can prevent panic & greed $$ $TROW

Retweets, Replies & Comments

RT @ReformedBroker: Nice that we printed a new record S&P 500 high today. Too bad so few stocks are involved. Via @allstarcharts?http://t.c??May 26, 2014

Classic: The Ins and Outs of Stable Value Funds

Posted on 30 May 2014 by David Merkel

The following article was published at Realmoney.com in 2004. ?Rates were lower then but the issues remain the same.

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My 401(k) plan has a stable value fund that currently pays a preannounced annual rate of 5.30 percent. ?The fund enters into guaranteed investment contracts (GICs) with insurance companies which invest in government and corporate bonds and mortgages.
?
I’ve heard that stable value funds can now be purchased outside of retirement plans.? Does anyone know of any fund families or brokers that offer these funds to individual investors?

— Reader Question from M. J.

In my career, I have run a GIC (Guaranteed Investment Contract) desk at an insurer, designed one stable value fund, and helped administer and invest for several others.? I know stable value funds, respect them, invest in them when it makes sense, but I am still a skeptic at some points.

Legal Risks Lead to Elimination of Non-401(k)-type Stable Value Funds

Last year, there was a big scandal over mutual fund pricing, and non-401(k)-type stable value funds came under the microscope because of the obvious difference between the value of the assets and the stated NAV of the funds.? The SEC made an inquiry about the accounting for the funds in December 2003.? Since then non-401(k)-type mutual funds have died a slow death. ?There is one left, and they are probably going to turn the fund into a short term bond fund, as the others did.? Their reason for existence has gone away, and now they are expensive short-to-intermediate term bond funds.

Your opportunity to invest in stable value funds outside of 401(k)/defined contribution world has gone away, but given that there is over $200 billion invested in stable value funds, and not much has been written on them from a third party point of view, I?ll describe them in more detail.

Defining the Investment

So what?s a stable value fund?? It?s a short-to-intermediate term fixed income pool that has some agreements on the side to allow the assets to be accounted for at book value, so that the investment accrues at a positive rate.? It looks like a savings account to the investor, not a short-to-intermediate term bond fund.? Because it invests at longer maturities than money market funds, they deliver higher yields than money market funds, except in years worse than 1994, where yields rise rapidly and the yield curve inverts.? (Stable value funds did not exist in the 1979-1981 era; perhaps money market yields would have been higher than stable value yields would have been then.? The precursor to Stable value funds, initial participation guarantee funds, ran into trouble then.? That trouble led to the development of GICs.)

A stable value fund invests in insurance contracts, money markets, and highly rated (usually AAA) short-to-intermediate term bonds.? Insurance contracts are always valued at book value, unless in default, which we saw a little of in the early 90s.? Among major GIC writers, default has not been a problem since 1994.? (General American gave us a scare in 1999; Metlife bought them, and all payments were made.)

The bonds held in stable value funds can?t be valued at book value because accounting rules require that they be held at market.? The stable value pool goes out and purchases derivatives known as wrap agreements in order to allow the bonds to be held at book value.? The wrap agreements agree to pay or receive money if any of the bonds have to be liquidated at a loss or gain respectively, thus making the fund whole for any book value loss.? Typically, wrap agreements are only done on the highest rated bonds (AAA), so credit risk is not covered by most wrap agreements.? With most wrap agreements, once a payment is received or made by the wrapper, the wrapper enters into a countervailing transaction with the pool to pay or receive, respectively, a stream of payments over the life of the bond that was wrapped equal to the present value of the initial payment when the bond was tapped.? The wrapper bears almost no risk in the arrangement; the risks are rated back to the stable value pool, and the stable value pool pays for the gains and losses through an adjustment to the pool?s credited rate.

Since wrappers bear almost no risk, wrap pricing in 401(k)-type plans is typically 0.05%-0.10%/year of assets wrapped.? The only risk a wrapper faces is that the interest rate-related losses on a bond in a rising interest rate scenario is so severe that the losses can?t be repaid out of the yield of the wrapped bond.? In this case, the wrapper would have to pay without reimbursement.

Interest Rate Risks

Stable value funds attempt to maintain a stable share price, but the assets underlying the fund vary as interest rates, prepayment behavior and credit spreads change.? There is almost always a difference between the book value of the assets, expressed by the NAV, and the market value.? When the stable value fund has a higher market value than book value, typically it pays an above market yield.

There is a risk that in an environment where interest rates have risen sharply, that a stable value fund would have a lower market value than book value, with a below market yield.? In a situation like this, particularly when the yield curve inverts, there is a risk that shareholders in the stable value fund will leave in search of higher yields.? If that happens to a high degree, it will worsen the gap between the market value and book value of assets, which will be covered by the wrappers in the short run, but will reduce the fund?s yield as they pay the wrappers back.

It is unlikely, but possible to get a death spiral here, if more and more shareholders leave the pool and the yield sags to zero.? It hasn?t happened yet, so this is theoretical for now.? In theory, the wrappers would keep paying once the funds credited rate dropped to zero, so no one would lose money unless a wrapper defaulted on his obligation.? There would likely be some legal wrangling in such an event; the wrappers might try to get the fund manager to take on some of the liability.? In 401(k) plans, there are limitations on transferring funds out of a stable value fund to funds that would offer an easy arbitrage, so the risk of a death spiral are further reduced, but not eliminated.

Asset Default Risks

As an aside, for the most part, stable value funds take little credit risk, but (little known) this is not universally true.? Some of them buy corporate bonds, or other riskier structured product bonds.? Some of them take credit risk in hidden ways.? Here?s an example: there are some exotic, asset- or commercial-mortgage backed interest-only bonds that are rated AAA by the rating agencies.? The agencies rate them AAA because they can?t lose principal; they have no principal to lose.? But if the loans underlying the interest-only bonds default or prepay, the interest stream gets shortened.? The sensitivity on these securities to default risk is more akin to BB or BBB bonds, but a manager using them can count them as AAA.

If an asset in a stable value fund defaults, the fund will likely temporarily suspend withdrawals while it pursues one or two courses of action.? If the loss is small, they might buy a wrap contract for the loss, which will haircut the yield on the stable value fund for the life of the wrap contract.? If the loss is big, they will reduce the NAV, and attempt to keep the NAV stable from there.? Given the history of money market funds breaking the buck, it is possible that the fund manager might pony up the funds to make the stable value fund whole, but I wouldn?t rely on that.

Summary

There are two main risks: asset default, and severely rising interest rates.? In exchange for those risks, what do you receive?? In most circumstances, you get a higher yield than a money market fund, with nonguaranteed stability of principal.

If you need a good yield, and stability of principal with modest risk, a stable value fund can be a good place to get it. That said, if you can live with fluctuations in the NAV over the intermediate term, it would be better to use a short-to-intermediate-term bond fund, and thus avoid the wrapper and high asset manager fees.? Stable value manager fees are typically higher than those for bond funds.? Over a five-year period (or so), your total return should be better.