Category: Macroeconomics

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Companies & Industries

 

  • Falling gas prices this Fall http://t.co/EQkgsyKoSm Pollution requirements fall, people drive less, overcomes geopolitical effects $$ Aug 30, 2013
  • Wal-Mart vs Costco, Why My Critics R Wrong http://t.co/2eBuKkJ8G2 $WMT offers more variety vs $COST | thus more people lower wage rates $$ Aug 30, 2013
  • Brazilian Billionaire Who Controls Your Beer, Condiments, & Whopper http://t.co/CbfdxNQLAP Long piece on Jorge Lemann $$ #Heinz $BRK.B Aug 30, 2013
  • New York to Seattle Buyers Tap Brakes After Rates Rise http://t.co/uU0NS9CiCU Rising prices & mortgage rates mean loan payments 2 high $$ Aug 30, 2013
  • US Bank Legal Bills Exceed $100B Bloomberg http://t.co/BklYyebbFV Just think how profitable they will be when the dust settles 😉 $$ Aug 29, 2013
  • Cheap Corn Deters Buyers in US Sugar-for-Ethanol Plan http://t.co/sAYPAt1G9g Corn scarcity becomes corn glut, reinforcing sugar glut $$ Aug 29, 2013
  • Why Wal-Mart Will Never Pay Like Costco http://t.co/EPVjeV0OvF $WMT has much wider diversity of products, so more workers @ lower pay $$ Aug 29, 2013
  • Why Is Chicken More Expensive? Ask McDonald’s http://t.co/iU7OzuIF8f When $MCD adds a new ingredient to their menu, drives prices higher $$ Aug 29, 2013
  • Xerox Can Fix Number-Switching Scanners, but Not Altered Docs http://t.co/6HfzO8IqtV Could b a lot of work 2 re-scan originals if u havem $$ Aug 27, 2013
  • JPMorgan Worth 30% More If Broken Up, KBW Says http://t.co/b5eJc14Lio Pure play financial institutions always get better valuations $JPM $$ Aug 24, 2013
  • Apple, Samsung, IBM, World’s Universities in Graphene Gold Rush http://t.co/riFRiMHAzN Crystalline Carbon 1 atom thick sheets are amazing $$ Aug 24, 2013
  • College is like gasoline, demand for it is inelastic. Thus any subsidy gets captured by the college, & taxes get eaten by gas consumers $$ Aug 24, 2013
  • The Real Reason College Costs So Much http://t.co/NJNV3Ksovg Richard Vedder explains how federal subsidies push up the price on college $$ Aug 24, 2013
  • djco_corresp-031513.htm http://t.co/VwvVLv7mZi Munger’s law firm explains y $DJCO shouldn’t b viewed as an investment company. Well done! $$ Aug 24, 2013

US Politics & Policy

 

  • Obama Is About 2Undermine His Mideast Doctrine http://t.co/VveJslt6LM Obama has mostly tried 2disengage US from Mideast, this reverses it $$ Aug 30, 2013
  • The Rising Cost of Social Security Disability Insurance http://t.co/4sEVmFKDfc SSDI’s trust fund runs out is 2016; 2EZ 2get on disability $$ Aug 29, 2013
  • And Next Year There Will Be an Eighth Budget ?Showdown? http://t.co/2nflqEZLPM Rate of budget growth slowed, but scope of govt expands $$ Aug 29, 2013
  • Regulators Ease Mortgage Rules http://t.co/LuEU9uY1Hz Swiss cheese regs destroy direct incentives 4 originators 2 produce quality loans $$ Aug 29, 2013
  • Regulators Back Away From Tougher Mortgage Rules http://t.co/4WQwGVNnF9 More capital needs to be held against exotic mortgage loans, good $$ Aug 29, 2013
  • Obama Meets Panel Reviewing US Surveillance Programs http://t.co/kjDsoD3K7D Repeal the Patriot Act; modifications r not enough $$ Aug 28, 2013
  • College Leaders Wary of Obama Plan Linking College Aid to Rank http://t.co/jw7K3X29TV Plan could hurt the very parties Obama wants 2 help $$ Aug 25, 2013
  • Samantha Power on the Duty to Intervene http://t.co/B4ttOrPB3T This argues that the US should be the cop of the globe 4 the worst things $$ Aug 25, 2013

?

Rest of the World

 

  • Sinopec-Apache Deal Shows China’s Resource Appetite http://t.co/90Yr1G9aUN China learns how 2negotiate minority stakes in oil properties $$ Aug 30, 2013
  • Hollande Draws Heat From Biz 4 Tax-Driven Pension Revamp http://t.co/62E5lKMHqr France?s tax burden is ~46% of GDP, 3rd highest in Europe $$ Aug 30, 2013
  • Scandinavia?s Weakest Nation Finds Welfare Habits Too Costly http://t.co/UCNH3umT7p Denmark looks forward, realizes it must cut welfare $$ Aug 30, 2013
  • The Abenomics Mirage: In Reality, Too Many Challenges? http://t.co/542B5V4JHw Japan imports on net so a lower yen doesn’t help much $$ Aug 30, 2013
  • Schaeuble Snubs Greek Plea for Direct Bank Recapitalization http://t.co/lCStBdF3Qc Perhaps Greece needs 2 establish effective taxation $$ Aug 29, 2013
  • Spaniards Fleeing Jobless Scourge Seek Jobs in Morocco http://t.co/pZZexcIzCY Can’t earn as much but can earn something as Spain shrinks $$ Aug 29, 2013
  • Start-Ups Fill Void Left by Spain?s 26% Unemployment Rate http://t.co/9a2RqRUG6i If u can’t work 4 someone else u can work 4 yourself $$ Aug 28, 2013
  • Czech Zero Percent Lending Rate Feeds Home-Buying Frenzy http://t.co/cWZ24eKjxb Bad things happen when there is seemingly free $$ available Aug 28, 2013
  • Vietnam Rises as Middle Power at Defense Summit http://t.co/tHVz8Yn4SP Wants to stay neutral btw the US & China, while protecting itself $$ Aug 28, 2013
  • Teachers Roil Mexico Capital http://t.co/qrQif3mpsY Maybe it’s time 2 move the capital out of Mexico City, to someplace more hospitable $$ Aug 28, 2013
  • Emerging-Market Rout Intensifies on Syria Jitters http://t.co/U4upWVYVAE Jitters affect oil mkt & it spills over in to weak emerging mkts $$ Aug 28, 2013
  • Fed Officials Rebuff Coordination Calls as QE Taper Looms http://t.co/kTaFgn7CwT Emerging markets whipsawed as US monetary policy shifts $$ Aug 28, 2013
  • Veteran Saudi Power Player Prince Bandar Works To Build Support to Topple Assad http://t.co/cXFO7hLG9W Islamic proxy war continues $$ Aug 27, 2013
  • Emerging Europe Is a Haven in Selloff http://t.co/OErr8eqJjt Hard to damage nations w/more orthodox fiscal policies, but still part of EZ $$ Aug 27, 2013
  • Emerging market slump highlights Fed’s global reach http://t.co/mxmfLY6ya2 The US sneezes & the world catches cold, again $$ Aug 27, 2013
  • Charlene Chu Interview with Goldman on China?s Credit Bubble http://t.co/ytHhrZYm7H Excellent Interview showing future China weakness $$ Aug 27, 2013

 

Other

 

  • Scientists Shed New Light on Black Holes http://t.co/oNyfGEJKHM The speed w/which gas is pulled toward a black hole repels some entering $$ Aug 30, 2013
  • Is It Evil to Send Your Kids to Private School??http://t.co/SljCeNm7qq Parents will always find ways 2keep children out of subpar schools $$ Aug 30, 2013
  • Age-Related Forgetfulness Tied to Diminished Brain Protein http://t.co/fFe2U2eqQw This may have some promise in reducing dementia $$ Aug 30, 2013
  • Definitive merger agreement between 2 business journalists http://t.co/Pup53ksizg Do some R&D, & create subsidiaries that will b spun off $$ Aug 30, 2013
  • How Haute Vegetables R Conquering $500 Tasting Menus http://t.co/QTAxKlwm1S Borage is a well-known medicinal herb; interesting 1st course $$ Aug 29, 2013
  • Six Reasons the US Will Dominate http://t.co/ZreqluzZJS Immigrants, more workers, entrepreneurship, labor flexibility, <Financing, strong $$ Aug 28, 2013
  • P2P lending pulls in big investors – should you bite? http://t.co/jyg3kdaSrr Soon 2 come, a peer2peer lending closed-end fund $$ #ohno #FTL Aug 28, 2013
  • Shoeshines Keep Wall Street in the Black (or Maybe Brown) http://t.co/LQNtODrhcP A unique institution stays alive on Wall Street $$ Aug 27, 2013
  • Sometimes I think Federal education policy is designed to weigh down the system, making it easier 4 private & home schools 2 outperform $$ Aug 27, 2013
  • Biggest Changes in a Decade Greet Students http://t.co/BIgJHbqiLN Some Teachers, Parents Push Back on New Standards “Common Core” $$ Aug 27, 2013
  • Home Births on the Rise for New York Families http://t.co/MYxaaeEWua Fascinating trend, though I think the best is a midwife @ a hospital $$ Aug 27, 2013
  • Midwives provides far better care than doctors w/normal deliveries, & they r cheaper. Being @ a hospital provides insurance if trouble $$ Aug 27, 2013
  • Are You Ready for the Post-College SAT? http://t.co/WyscN8A7W6 College is not valuable to some employers -> a new test 2 show your smarts $$ Aug 27, 2013
  • Regarding that last tweet, could testing replace college? Credentialing is important, but do we need to waste four years to credential? $$ Aug 27, 2013
  • Jail Becomes Home for Husband Stuck With Lifetime Alimony http://t.co/Mb4Q8Q0PjH Debtors prison returns in a new form $$ long article Aug 27, 2013
  • Muriel Siebert, First Woman to Buy Seat on NYSE, Dies at 84 http://t.co/qzeE9csU2K Used to have an account w/her firm; good company $$ Aug 27, 2013
  • Ben Franklin Gets a Makeover http://t.co/Rxm3ipFY0g Ben Franklin owned slaves?! Whouda thunk it! New presentation about a complex guy $$ Aug 25, 2013
  • Dishwashers Beat Clothes as US Moms Use Hand-Me-Downs http://t.co/cbcn0ENrp1 People buy things w/longer-term value, reduce luxuries $$ Aug 25, 2013

 

PPACA / Obamacare

 

  • A New Kind of Insurance Head-Scratcher: Estimating Future Income http://t.co/YeW19BKNhf Incentive will b2 under-report until checked $$ Aug 30, 2013
  • The Young and the Healthy http://t.co/PuODKsJBSZ One more calculator 4 Obamacare subsidies 4 young & not well-paid $$ Old win, young lose Aug 30, 2013
  • Senior Discounts http://t.co/Do37iNPq7I Interesting illustrative calculator on premium subsidies under Obamacare. Incentives to earn less $$ Aug 30, 2013
  • Thus PPACA will have an incentive 2 destroy working, & the exchanges will fail, as they will only attract the sick, young ppl stay away $$ Aug 30, 2013
  • Also, look at this graphic http://t.co/WTV8HAcVVZ As incomes go from 25K to 55K, subsidy is lost & an implied 17% tax from the loss $$ Aug 30, 2013
  • Subsidies for Older Buyers Give Health Insurers a Headache http://t.co/0eOfVj33XU Subsidies will will older poor in2 exchanges, not young $$ Aug 30, 2013

 

Harbinger Group Life Insurance IPO
?? Falcone Insurer Said to Seek $1 Billion Valuation in IPO – Bloomberg http://t.co/RoHy0ODzQu & my tart comments: http://t.co/JSu9QvtXhf $$ Aug 30, 2013

  • Harbinger’s insurance unit files for $100M IPO http://t.co/72DBoMSG6C $HRG pays itself a dividend; dig the 28pp of risk factors @ the SEC $$ Aug 29, 2013

 

Market Impact

 

  • Pimco Sees Taper in Worst MBS Slump Since 1999 http://t.co/UdXVCkajVo Bond market summary, particularly noting taper effect on MBS market $$ Aug 30, 2013
  • Some IPOs Aim for Small Investors http://t.co/3hh47lfQ6K Keep your hand on your wallet, alternative stock distribution methods untested $$ Aug 30, 2013
  • Currency Spikes at 4 PM in London Provide Rigging Clues http://t.co/fyG78r3RhI All human systems r gamed; need 2 acct 4 that w/benchmarks $$ Aug 28, 2013
  • How ?black squirrels? infested Wall Street http://t.co/6CIVfJcpAF Efforts to level playing field made it more opaque & hazardous $$ #complex Aug 27, 2013
  • Cyclical Stocks Looking Historically Cheap http://t.co/FomqlE3ZDq Yes, cheap. What will happen 2 cyclical earnings if the economy slows? $$ Aug 25, 2013

 

Central Banking

 

  • Fed’s IG says central bank violated document rules http://t.co/YCtbIbhfAJ Issued minutes of policy meeting a day b4 the scheduled release $$ Aug 30, 2013
  • Did Fed?s Forward Guidance Backfire? Paper Says Probably http://t.co/C4Ew7T2AXR The idea that clear Fed communication works is unproven $$ Aug 25, 2013
  • Summers as Obama Voice of Authority Rides Car Rescue in Fed Race http://t.co/EKKOnRhvq1 Good piece on y Obama may pick Summers 4Fed Chair $$ Aug 25, 2013

 

Wrong, Etc.

  • Wrong: CLO Rule Aimed to Pass Retention to Banks Won?t Work, RBS Says http://t.co/KkQQ8l2lqw Will shrink the # of issuers, that’s not bad $$ Aug 29, 2013
  • Bad title: Why Is Vladimir Putin Acting So Crazy? http://t.co/ILtxIFNOSO He’s acting rationally in response to changing conditions $$ Aug 29, 2013
  • Wrong:Will Obama Make the Fed Even Worse? http://t.co/YZblnIKzOe Not well argued. More about his view $$ policy is 2 tight, less about Obama Aug 27, 2013
  • Sort of: The Strong Case for Optimism About US Growth http://t.co/5LJgQuli4v Except it is optimism after 5 more years of deleveraging $$ Aug 27, 2013

?

Retweets, Replies & Comments

  • RT @EddyElfenbein: Happy 83rd Birthday to Warren Edward Buffett @WarrenBuffett. The Dow was at 240.42 eighty-three years ago. Aug 30, 2013
  • #FollowFriday Thanks @ReformedBroker @pelias01 @researchpuzzler for being top influencers in my community this week 🙂 Aug 30, 2013
  • Thanks @OGMarcusC @Metalbanker for being top new followers in my community this week 🙂 | insight by http://t.co/sern3wLA13 Aug 30, 2013
  • @ledbetreuters If you had your own website, & had a Google Page Rank over 5, u would get around two of those per week. Very pesky. Aug 30, 2013
  • RT @azizonomics: Nobel War Prize Aug 30, 2013
  • RT @ianbremmer: Knock knock. Who’s there? The international community. The international community who? Precisely. Aug 30, 2013
  • RT @treehcapital: Yet another reason to love New Zealand @pkedrosky: New Zealand bans software patents http://t.co/6ah7N84QtA Aug 29, 2013
  • Thanks @researchpuzzler @AndreCimini for being top engaged members in my community this week 🙂 | insight by http://t.co/sern3wLA13 Aug 26, 2013
  • @alisonforns And I see the glass as 70 fewer than 140. What a wonderful world! Aug 26, 2013
Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Obamacare

 

  • Boehner Tells Caucus House Will Keep Fighting Health Law http://t.co/VZeSkA5Jrq If the company mandate is delayed, y not the individual 1 $$ Aug 24, 2013
  • California Health Exchange Might Face Online-Enrollment Delay http://t.co/5nTQeDFEAR More glitches as we get closer to Obamacare fiasco $$ Aug 24, 2013
  • Jeffrey Singer: The Man Who Was Treated for $17,000 Less http://t.co/dTGoBndvj1 You have to understand how negotiable medical costs are $$ Aug 23, 2013
  • UPS to End Insurance Coverage for 15,000 Working Spouses http://t.co/Ndp3ptfaUD This is the future as Obamacare comes into existence $$ Aug 22, 2013
  • Jeffrey Singer: The Man Who Was Treated for $17,000 Less http://t.co/ymcmo3b8dg First party payment reduces health costs, not ins/govt $$ Aug 22, 2013
  • Republicans in Echo Before Big Burn Defy Affordable Care http://t.co/DwuUuc7FvL In this era, it probably helps the Reps, LBJ’s era not $$ Aug 22, 2013
  • Obamacare exemption ? none dare call it treason http://t.co/TdZ8z7sTIk Congress and Administration r exempt from the PPACA $$ #FTL Aug 20, 2013
  • GOP keeps needling Obamacare in key Senate states http://t.co/rXg2MsHiJe Complexity of PPACA makes it its own worst enemy; ez 2 thwart $$ Aug 19, 2013
  • Norquist Says Obama to Take Health Delays, Avoid Shutdown http://t.co/lKKhe0I8zo House can block things, Senate cooperation unlikely $$ Aug 17, 2013
  • Obama Suspends the Law. What Would Lincoln Say? http://t.co/uxQRHyhFtM Article made me sympathize with Lincoln. Could Obama be Impeached? $$ Aug 17, 2013

 

Wrong

 

  • Wrong: Why the US Power Grid’s Days Are Numbered http://t.co/sSjDoiXi0T Overstates the green case. More difficult to dismantle grid $$ Aug 24, 2013
  • Wrong: How To Invest Like Carl Icahn http://t.co/61croVtW0J U can’t invest like Carl Icahn b/c u can’t b big enuf 2 bully mgmt teams $$ $IEP Aug 23, 2013
  • Word to Fed: Less Talk, More Action http://t.co/EuWfo30Ilg When u have 2 re-explain what u r doing a # of times, u probably don’t get it $$ Aug 22, 2013
  • Wrong: Janet Yellen called the housing bust and has been mostly right on jobs http://t.co/wHq8SyYUT2 Yellen did not call housing bust $$ Aug 19, 2013
  • Wrong: Summers-led Fed might raise rates faster than Yellen http://t.co/GBD0jd2X0N Forces being dealt w/r larger than individual ideas $$ Aug 19, 2013

 

Politics & Policy

 

  • Has Eric Holder Found Wall Street?s Nightmare? http://t.co/spsgAgaFGq 2 early 2 say; tough to prove that people had bad motives vs stupid $$ Aug 24, 2013
  • Ivory Tower Types Fall for Bigger Inflation Fix http://t.co/alOdKibbY0 Inflation is tough to eliminate once it gets entrenched $$ Aug 22, 2013
  • Obama to Propose College Ratings System on Bus Tour http://t.co/9W4oHqAZuE Haven’t we distorted incentives on college enough already? $$ Aug 22, 2013
  • Secret Court Faulted NSA for Collecting Domestic Data http://t.co/u5ZfLMGSgt If govt can’t tell us about it, they shouldn’t b doing it $$ Aug 22, 2013
  • Why Science and Politics Don?t Mix http://t.co/yfpdWVgsD1 Science is compromised when observers cease 2b neutral & overstate conclusions $$ Aug 22, 2013
  • Justice Department Plans New Crisis-Related Cases http://t.co/S8CkRvgUS8 nothing serious here, just late grandstanding & posturing $$ Aug 21, 2013
  • New Details Show Broader NSA Surveillance Reach http://t.co/YheueW5yH0 Giving up liberty 4 security means that we will have neither $$ Aug 21, 2013
  • More Than Half of U.S. College Students Get Federal Aid http://t.co/mWuvnqKdUp If we reduced the aid given 2 students, tuition would fall $$ Aug 20, 2013
  • Fannie Mae, Freddie Mac Ignoring Write-Offs, Report Says http://t.co/DFpqBCQg8M Reported earnings may b overstated, as dud loans persist $$ Aug 20, 2013
  • Raising Kids? Your Taxes Are Far Too High http://t.co/DxMfAii5rQ Especially counting value of kids future contributions 2 entitlements $$ Aug 20, 2013
  • http://t.co/8hiwajBdQY Congress gets a bunch of general and basic nostrums about how financial risk modeling is done and implemented $$ Aug 20, 2013
  • Fed Finds 18 Large Banks Weak in at Least One Capital Area http://t.co/js2t2GA4QD Fed’s study shows moderate knowledge of risk mgmt $$ Aug 20, 2013
  • Greenwich Stilt Houses Foreshadow Impact of New FEMA Maps http://t.co/k1NCEJu3QH Think of the taxpayer subsidy from premiums that r2 low $$ Aug 20, 2013
  • Treasury Faces Coupon Conundrum With 5Yr Sale, Wrightson Says http://t.co/BlkOiDQUc2 We have computers now, not everything has 2b eighths $$ Aug 20, 2013
  • Last Bernanke Years Shows No Sign of Buyer?s Remorse http://t.co/Fxn65Dplc6 Why should he? Providing liquidity easy; taking it back hard $$ Aug 20, 2013
  • The other part of the story is that people who work have a purpose, and that makes them happier. Shame about younger people not employed $$ Aug 20, 2013
  • Mailman at 72 With America?s Longest Route http://t.co/dO83WuaDhl Long story showing future, where old people keep working til they die $$ Aug 20, 2013
  • NSA broke privacy rules thousands of times per year, audit finds http://t.co/ktru7qsjpP NSA search abuses r not rare; we need to end NSA $$ Aug 17, 2013
  • The Baby Penalty http://t.co/JrFZ7FdznR Female PhDs who have children lose opportunities. True 4 all who take time from work 4 family $$ Aug 17, 2013
  • Teachers Face License Loss http://t.co/xwUNt0eXi5 This almost never happens. The teachers’ unions always find a way 2 protect their own $$ Aug 17, 2013

 

 

Rest of the World

 

  • It Looks Like 1998 Again in China http://t.co/7iMW87Dwi7 Excess capacity to export what world doesn’t need plus high financial debts $$ Aug 22, 2013
  • ‘Leftover women’ in China face tough choices in looking for love http://t.co/AFcEc1jNy5 Women like2marry up, which means many won’t marry $$ Aug 21, 2013
  • Who Is Ali Khamenei? http://t.co/sRFb9Vx1Bw Long & nuanced article on the supreme leader of Iran – History, views, influences, & theories $$ Aug 20, 2013
  • Mexico’s Pemex Looks to Tap U.S. Shale http://t.co/pNybLXhEkl This doesn’t look like a smart idea; most good business is incremental $$ Aug 20, 2013
  • Allies Thwart America in Egypt http://t.co/MaZFQgiytT Israel, Saudis and UAE Support Egyptian Military Moves $$ #choosefreedomvsdemocracy Aug 20, 2013
  • Israel Boosts Ties With Egyptian Army as US Mulls Cuts http://t.co/kCEBsYkn9r Politics makes strange bedfellows $$ Aug 20, 2013
  • Al Qaeda ‘rat line’ from Syria to Iraq turns back against Assad http://t.co/HZT5GIq1Tv Actions taken against US in Iraq now harm Assad $$ Aug 20, 2013
  • Bankers Supplanted by Elves as Iceland Chases Cash http://t.co/0Y5VaiARla A place where allowing banks to fail worked well $$ Aug 20, 2013
  • Central-Bank Moves Blur the View http://t.co/jHDD9J3YNK Bodes well 4 their bonds, tough 4 the stocks of their exporters, importers ok $$ Aug 24, 2013
  • Potash Rift Seen Lasting as Asia Sales Said to Rile Uralkali http://t.co/ZukaWiW93y Interesting article reviews potash cartel history $$ Aug 22, 2013
  • Gold Rout Seen Bottoming by Analysts as China Buys http://t.co/mMaG8Jaknq & China Gold-Mine Deals at Record http://t.co/vONBXclnCB $$ Aug 22, 2013
  • Regulatory Concern Grows along with Surge in Interbank Business http://t.co/Y0oLNP3PK1 Surge in China Interbank lending is worrisome $$ Aug 20, 2013
  • Egypt’s Former President Mubarak May Be Freed http://t.co/YbrJ7Poanv A logical outcome, 1 that shows the Army is playing “for keeps” now $$ Aug 20, 2013
  • In classified cyberwar against Iran, trail of Stuxnet leak leads to White House http://t.co/WqTyDR1dqV Will this lead 2 anything negative $$ Aug 19, 2013
  • Last of Zuma?s Main Critics Sidelined as Vavi Suspended http://t.co/ngu2QOw2pq South Africa traded one oligarchy for another $$ Aug 17, 2013
  • The Dutch, Europe’s apostles of austerity, feel the economic pain http://t.co/W9ikIwOHN8 Paying the piper 4 taking on 2 much debt $$ Aug 17, 2013
  • Easy Credit Dries Up, Choking Growth in China http://t.co/7eazmWiqGK Payoff 4 malinvestment may b arriving. Japan 1989 -> China 2013 $$ Aug 17, 2013

Market Impact

 

  • Market Size Complex Systems = More Glitches http://t.co/6Gkq77izIJ We can reduce glicthes if we reduce complexity & choice 4 large $$ mgrs Aug 24, 2013
  • Americans don?t know anything about interest rates & portfolios http://t.co/V2rqmydGq1 Investment returns r magic 2retail $$ @reformedbroker Aug 22, 2013
  • Hedge Funds Severely Underperforming This Year http://t.co/PLQBp1ssb1 Net exposure relatively high, but heavily shorted stocks rally 33% $$ Aug 22, 2013
  • Low-volatility ETFs may not be what they used to be http://t.co/p4zpWCdQRj Any investment strategy can b overused, & returns vanish $$ Aug 21, 2013
  • Looking for value: When the child outperforms the parent http://t.co/gmylpI7pC8 Spinoffs r underanalyzed companies w/incentive 2 focus $$ Aug 21, 2013
  • Bond Trading Hampered as Buyers Retreat to Crowded Exits http://t.co/EBj9OFkhqW Overstates the degree dealer inventories affect prices $$ Aug 21, 2013
  • CLO Refinancings at $50 Billion Seen Rewarding Riskiest Issues http://t.co/Ld77dfXKxB Feels like 2006 in credit craziness $$ Aug 20, 2013
  • Repo Market Decline Raises Alarm as Regulation Strains Debt http://t.co/fFydHkauRI Repo market getting less liquid, that’s not so bad $$ Aug 20, 2013

 

 

Companies & Industries

?

  • Buyout of $AIG Unit Is On the Rocks http://t.co/zb7EftICWg Difficult to overstate how sensitive ILFC profits r2 cheapness of financing $$ Aug 22, 2013
  • Water + Sunshine = Fuel as Lab in California Chases Dream http://t.co/Nqd5eVn6Ar Dream indeed. Call me a skeptic on the science here $$ Aug 22, 2013
  • A New Spate of Deaths in the Wireless Industry http://t.co/EEVOPXlUc7 Every death is tragic, but w/deaths <20/yr, that doesn’t seem high $$ Aug 22, 2013
  • Kodak Reorganization Approval Affirms Move From Cameras http://t.co/wUX4KrfsGR Unsecured creditors get 4-5% of their claims, stock gets 0 $$ Aug 21, 2013
  • Problem for Bezos: Mall Becoming Cheaper Than Amazon http://t.co/tYs8IFQ48Q Who knows? Maybe $AMZN will have to earn $$ to exist. #nonprofit Aug 20, 2013
  • The busiest acquirer you haven’t heard of http://t.co/RMHEieOBCW Many acquisitions in a short time is usually a recipe for disaster. $$ Aug 20, 2013
  • Shale Grab in U.S. Stalls as Falling Values Repel Buyers http://t.co/BYEQHshJ8T Anytime there is a boom, prices overshoot, then writeoffs $$ Aug 20, 2013
  • What Tim Cook and Apple should do with all that cash http://t.co/xHA5hdDGmv Harder than it sounds, most of the $$ trapped abroad, bond deal Aug 20, 2013
  • The 1975 Buffett memo that saved the Washington Post’s pension http://t.co/Qqz2IaMJni Buffett was always a smart guy; prescient in 1975 $$ Aug 19, 2013
  • Cisco and the Search for New Life http://t.co/C2lqAabQvb Companies w/strong core businesses have a hard time expanding into new business $$ Aug 17, 2013
  • Rail-Truck Shipments Reveal Holiday Sales Clues http://t.co/fEWjKfTd13 Holiday sales may rise, higher volume of goods transported in 2013 $$ Aug 17, 2013
  • Fixed Indexed Annuities Merit Caution http://t.co/kdT27o1bMC Law should give contractholders right 2 full value withdrawal if transferred $$ Aug 17, 2013
  • Oil-Pipeline Cracks Evading Robotic ‘Smart Pigs’ http://t.co/c7d8qMuP6f If cracks r along the welds, they don’t get detected easily $$ Aug 17, 2013

?

Other

 

  • JPMorgan Sub-New Normal Growth Seen Vexing Next Fed Chief http://t.co/gFB1O6s6o0 New Fed Chief will face economy traveling @ stall speed $$ Aug 23, 2013
  • Economists Need to Admit When They?re Wrong http://t.co/GSX4QDPKuf Crisis caused by a huge rise in private debt; economists missed that $$ Aug 22, 2013
  • Green Bay: More Legends Than Streets http://t.co/eGukXTOlvd Smallest franchise city has more heroes than streets to append their names $$ Aug 22, 2013
  • Abandoned Dogs Roam Detroit in Packs as Humans Dwindle http://t.co/AJd1lBtxKG This is strangely fitting; Detroit slowly becomes 3rd world $$ Aug 21, 2013
  • Eating of Sausages http://t.co/Nwp7mpZZvY “no Christian is bound to do those things which God has not decreed.” Of Calvinism old & modern $$ Aug 20, 2013
  • Seth Lipsky: Ben Bernanke’s Anger and the AIG Case http://t.co/EIxoFh4jwu Questionable legal ground4the Fed’s takeover of AIG 2b explored $$ Aug 20, 2013
  • Why An M.B.A. Isn’t Good Enough Anymore http://t.co/P6JKKWoP8R High costs, changing demographics, technological change-> reinvent the MBA $$ Aug 20, 2013
  • Broker Audits Marred by Conflicts of Interest, Watchdog Says http://t.co/00kRqPx3xm Deficiencies >95% of brokerage audits it reviewed $$ Aug 20, 2013
  • What’s Ailing America’s Cattle? http://t.co/eTaMLTK1zc Scientists Suspect Livestock-Feed Additives Are Behind Distress $$ Be careful Aug 20, 2013
  • Student Test Scores Rose When Teachers Retired Early http://t.co/su46ULkSKm Teachers peak in effectiveness after 5-10 yrs of experience $$ Aug 20, 2013
  • Hybrid Bond Gamble Pays Off as Stimulus Spurs Gains http://t.co/O2KMEkGHDm Paid off for now, but these hybrids sting w/higher probability $$ Aug 17, 2013
  • John Laporte, T. Rowe Price Manager Who Beat Peers, Dies at 68 http://t.co/DcVjjdwE8w Pretty certain I met him @ Baltimore CFA, good guy $$ Aug 17, 2013
  • Are College Costs Reaching a Breaking Point? http://t.co/jF7uod3s6q Possibly, if Federal aid drops & fewer people go to college $$ Aug 17, 2013
  • New Software Forces You to Pay Attention During Company Training http://t.co/KMDa0N54Ju Next, they’ll give you drug that makes u like it $$ Aug 17, 2013
  • Price Manipulation Includes Silver and Gold http://t.co/n1GDExJFz4 When prices r fixed by survey or transactions, games will b played $$ Aug 17, 2013
  • Francis Ouimet’s U.S. Open Victory That Changed the Game Forever http://t.co/I6Gg0BIBmU Meet Francis Ouimet, the amateur who won US Open $$ Aug 17, 2013
  • A Chance to Own a Home for $1 in a City on the Ropes http://t.co/b6InU728br Get your own home in Gary, Indiana for $1 $$ Aug 17, 2013
  • How a Black Hole Really Works http://t.co/H80JnUplKE Scientists watch black hole at center of Milky Way eat a cloud of gas $$ Aug 17, 2013

?

Comments, Replies, and Retweets

  • #FollowFriday Thanks @ReformedBroker @pelias01 @researchpuzzler for being top influencers in my community this week 🙂 Aug 23, 2013
  • Commented on StockTwits: ILFC very different than NetJets. $BRK.B capable of buying ILFC, but Buffett won’t pay to… http://t.co/wa4vHaf3I6 Aug 22, 2013
  • Thanks @dpinsen @ReformedBroker for being top engaged members in my community this week 🙂 | insight by http://t.co/sern3wLA13 Aug 22, 2013
  • Thanks @pelias01 @TopInvestBlogs for being top engaged members in my community this week 🙂 | insight by http://t.co/sern3wLA13 Aug 22, 2013
  • Thanks @howardlindzon @moneyscience for being top engaged members in my community this week 🙂 | insight by http://t.co/sern3wLA13 Aug 22, 2013
  • Thanks @brasil247 @JerseyDemic for being top new followers in my community this week 🙂 | insight by http://t.co/sern3wLA13 Aug 20, 2013
  • “Many acquisitions in a short time is usually a recipe for disaster.” ? David_Merkel http://t.co/6Qch6bCndG $$ Aug 20, 2013
  • @pdacosta FWIW, I thought the document was amateur in discussing financial risk management http://t.co/ncoMMMv3oG Open 2other thoughts $$ Aug 20, 2013
  • @buzzmerk @StevStiffler @truedat157 @pcyansee the greater Q is why the Mars Corp hasn’t sued him for trademark infringement- ruins the brand Aug 20, 2013
  • Thanks @AboveAvgOdds @Nonrelatedsense for being top engaged members in my community this week 🙂 | insight by http://t.co/V4fE5CrHI4 Aug 19, 2013
  • Thanks @japhychron @The_Analyst for being top engaged members in my community this week 🙂 | insight by http://t.co/V4fE5CrHI4 Aug 19, 2013
  • Thanks @GaelicTorus @AndreCimini for being top engaged members in my community this week 🙂 | insight by http://t.co/V4fE5CrHI4 Aug 19, 2013
  • Thanks @ReformedBroker @dpinsen for being top engaged members in my community this week 🙂 | insight by http://t.co/V4fE5CrHI4 Aug 19, 2013
  • Thanks @pelias01 @TopInvestBlogs for being top engaged members in my community this week 🙂 | insight by http://t.co/V4fE5CrHI4 Aug 19, 2013
  • Thanks @howardlindzon @moneyscience for being top engaged members in my community this week 🙂 | insight by http://t.co/V4fE5CrHI4 Aug 19, 2013
  • “Buffett would have made a very good actuary, and with a bonus: he can communicate complex concepts?” ? Merkel http://t.co/IMKXael1nL $$ Aug 19, 2013

?

The Fed Needs Valuation Actuaries (and More Steel in the Spine)

The Fed Needs Valuation Actuaries (and More Steel in the Spine)

Posted on by David Merkel

I reviewed the following report from the Federal Reserve to Congress today, and found it disappointing.? From my prior experience as an actuary, and the time that I spent on the asset-liability committee of a small bank, I know that? the banking industry is far behind the life insurance industry on risk control.? The Fed would have done far better to have studied the works of the Society of Actuaries and the National Association of Insurance Commissioners, and learned from their efforts.

Now, I know that the contingencies of banks are far less predictable then those of life insurers.? Further, life insurers have long liabilities, whereas the liabilities of banks are short, and thus, they are more subject to runs.? But liquidity risk management does not play a large role in their document — and this is a severe defect in what they write.? Almost all failures of financial firms are due to loss of liquidity.? The word liquidity only appears once in the document, on page 15.? This shows the amateurish work of the writers.

The Fed focuses on a lot of process issues that don’t matter as much as the substantive issues of discovering forward-looking measures of risk, and changing business processes to reflect those risks.

Here are some examples:

1) Internal controls matter, but it is a rare internal control auditor that can truly analyze a complex mathematical process.? They don’t have the capacity to review those processes, or they would be doing it and earning far more.

2) Risk identification is important, but the Fed document would have not helped in 2007-2009.? How do you detect risks that have (seemingly) never happened before?? Further, if you do detect a major problem that has happened before, and it would impair some very profitable businesses, why do you think management will kill profits to appease your lunacy?

3) Governance is important, but the board gets data so late that it is useless.? This is not worth bothering with.? Management has to do the job here.

4) The language on capital targets is weak, and allows the banks way too much latitude in performing their own calculations.? The Fed needs to be far more specific, and prescribe the scenarios that need to be tested.? It need to prescribe the loss severities, asset class by asset class.? It needs to prescribe the correlations, if any, that can be used in the models.

5) The document does not speak of ethics.? Valuation Actuaries do the same work on a higher level, and they have an ethics code.? That may occasionally make them oppose the management team that pays them, but it is a necessary check against managements trying to manipulate results.

6)? The piece spends too much time on the dividend policies of bank holding companies, and no significant time on the abilities of the subsidiaries ability to dividend to the bank holding companies.? The proper focus of a bank regulator is on the health of the operating subsidiaries.? Who care if the holding company goes broke?? Big deal, at least we protected depositors.

Banking regulators should adopt the same policy as insurance regulators.? Outside of ordinary limits, they can deny any special dividends from subsidiaries to the holding company.

7) The piece does not get forward-looking estimates of risk.? On new classes of assets, you don’t have historical data to aid in estimates of risk.? At such a point, one must look at similar businesses that have gone through a failure cycle, or do something even more difficult: do a cash flow model to estimate where losses will fall if asset values decline for an unspecified reason (okay, no more ability to buy…)

8 ) Macroeconomic factors rarely correlate well with the factors that lead to losses on assets.? Most of that effort is a waste.

9) As Buffett said (something like): “We’re paid to think about things that can’t happen.”? This is why the Fed has to specify scenarios, and be definite.? The mealy-mouthed language of the document can be gainsayed.? Life Actuaries have better guidance.

10) So all of the banks did not pass the mark.? With the vagueness of the guidelines, no surprise.? Let the Fed put forth real guidelines for bank stress tests, and let the banks scream when they get them.? Better to have slow growth in the banking sector than another crisis.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Companies & Industries

 

  • Odyssey Hits Wall as Honda Redesigns Minivan to Ace Test http://t.co/6VyK2N2EcO $HMC goes all out to reduce crash injuries 4 2014 Odyssey $$ Aug 16, 2013
  • Fairholme Fund May Increase Bet on Fannie, Freddie http://t.co/EOj8Z9SCzg BB reopens fund 2 get more buying power 4 F&F. Wouldn’t do it $$ Aug 16, 2013
  • Warren Buffett Stake in Suncor Energy, Much More Than It Seems http://t.co/ULDMXqYAnt $SU will be producing high cost oil 4a long time $$ Aug 15, 2013
  • Mall Owners Entice Hispanic Shoppers http://t.co/k42J96Nhxc Temporary stopgap 4 malls being hollowed out by retail over the internet $$ Aug 15, 2013
  • Losing Faith in Gold From Ghana to Vancouver Proves Rout http://t.co/K6VcC7Duyj More high cost mines come out of production as gold falls $$ Aug 15, 2013
  • The iCahn Effect: Apple’s Market Cap Jumps by $17B After Tweets http://t.co/8qb0rUWjCR Don’t c how $1B should move a stock $17B $$ $AAPL Aug 14, 2013
  • Y Food Companies Are Fascinated by the Way We Eat http://t.co/NhIRtprRWj Do u like 2 chew, crunch, smoosh or suck? Food companies study u $$ Aug 14, 2013
  • Financials near to regaining S&P 500’s top spot http://t.co/fgSKGOrfyC We do not learn, we do not learn, we do not learn, we do not learn $$ Aug 13, 2013
  • Endurance Welcomes Fred Cooper 2Head US Financial Institutions Insurance Practice http://t.co/XpQcxwYwJS Picking up nickels… $$ FD: + $ENH Aug 13, 2013
  • Heinz announces layoffs in Pittsburgh and Canada http://t.co/VG3WI8OTfs Now that the merger has closed, the cost rationalization begins $$ Aug 13, 2013
  • Funny in a way: pricing rationality & profits flow to hard disk makers once the industry consolidated down to three players $$ Aug 13, 2013
  • WD? Founds New Storage Association To Promote The Critical Role Of Magnetic Storage Technologies http://t.co/4jKYDyGGb2 FD: + $WDC $$ Aug 13, 2013

 

Rest of the World

 

  • India Shares Slump, Rupee Sinks to Fresh Low http://t.co/cfEnRd5EjQ Central Bank tightens credit conditions- Rupee still falls & stocks2 $$ Aug 16, 2013
  • How Mexico Ended Political Gridlock With a Pact http://t.co/GjNEfA0Ela How the PAN & PRI managed to work together & get most mutual goals $$ Aug 16, 2013
  • What Obama Misunderstands About Egypt http://t.co/UAKXAQBOPs No one worthy of support here, as Egypt slides into a situation like Syria’s $$ Aug 16, 2013
  • Cayman to Singapore Gain as Rules Stump Clinics http://t.co/giudbhHATR Medical Tourism looks elsewhere as India makes things hard $$ Aug 14, 2013
  • Petrobras Downgrade Looms as Slump Sinks Rating Outlooks http://t.co/EpRahHggSF Brazilian corporate sector got too aggressive w/debt $$ $PBR Aug 13, 2013
  • Death of 75-Year Monopoly Can?t Come Soon Enough: Mexico Credit http://t.co/wqfnynnYkP PEMEX monopoly lasts 75 yrs, dies in a few weeks? $$ Aug 13, 2013
  • Japan Inc. Profit Doubles to Add Support to Economic Rebound http://t.co/xv5dPxlRHO Sends $$ from consumers 2 exporters 2 invest abroad Aug 13, 2013
  • Mexico Plans Oil Reserve Sweetener to Lure Exxon, Chevron http://t.co/Ol0sGlse9h Will allow companies 2count reserves from profit-sharing $$ Aug 14, 2013
  • Buffett-Style Dinner Auctions Lure Chinese Seeking Just Society http://t.co/7dK9W52Yhe Long article on odd business seeking a freer China $$ Aug 14, 2013
  • What Brazilian Slowdown? Petrobras Maxes Out Refining Capacity&Imports Oil2Meet Demand http://t.co/0FsI0V6V27 $PBR Milked by Brazil govt $$ Aug 13, 2013

?

Bond Markets

?

  • Confident Consumers Step Up Their Borrowing http://t.co/QkD3Xss4NS Auto Loans Post Largest Gain in 7Yrs, as Total Consumer Debt Declines $$ Aug 16, 2013
  • California Sells $5.5B in Bonds http://t.co/TbUGTpmTk7 Better fiscal mgmt, maybe, at least it is not Michigan. Liquidity is abundant $$ Aug 16, 2013
  • Muni Investors Make Michigan Pay http://t.co/zCWMx5Ba2a To get a muni deal done in Michigan, you need extra yield & guarantees/covenants $$ Aug 15, 2013
  • Summer Lull Draws Investors to Riskier Debt http://t.co/08H0vfFj1b Feels like time to begin peeling back credit risk $$ Aug 13, 2013
  • Bond Hubris Overwhelms Fed in Riskiest Credit-Market Sectors http://t.co/WUKgfpse77 No free lunch; Fed’s asset inflation will mean-revert $$ Aug 13, 2013
  • Michigan Safety Net for Boomers Frays on Bankrupt Detroit http://t.co/tTso4JMxTR What happens when u make 2 many promises vs tax base $$ Aug 13, 2013

?

Central Banking

 

  • Fed’s Yellen Says Stance on Banks Hardened http://t.co/KZIfgPncaN Yellen tries 2 differ from Summers, but bank regulation was weak 2003-8 $$ Aug 13, 2013
  • Next Fed Head Should Meet the Bernie Sanders/Elizabeth Warren Standard http://t.co/xM9MF71dvM Questions aren’t realistic about $$ policy Aug 13, 2013
  • Yellen, Fischer Among Participants at Jackson Hole This Year http://t.co/MBui5Hfc3y Bernanke not attending as he slips into the shadows $$ Aug 13, 2013
  • Rand Paul on Republicans’ Voter Appeal and the Federal Reserve http://t.co/oVdaavHWsj Can we find another Reagan, who united the GOP? $$ #no Aug 13, 2013

 

Market Impact

?

  • Hundred-Dollar Stocks Double as US CEOs Dismiss Splits http://t.co/OOmXdpWSrU With trading costs so low, y do we need splits anyway? $$ Aug 15, 2013
  • How to Invest Like Seth Klarman http://t.co/JDxW9VbROs Easier said than done. Who has the conviction 2 sit on $$ when opportunities r poor? Aug 13, 2013
  • Greater &lesser rotations http://t.co/XZ6D4CgIZq “no evidence that retail investors r very overweight bonds or very underweight equities” $$ Aug 13, 2013
  • Will Mom and Pop investors blow it again? http://t.co/95lZYtIZ6u @BrettArends on retail $$ coming back into stocks; time 2b careful Aug 13, 2013

?

Politics & Policy

?

  • What We Lose if We Give Up Privacy http://t.co/ZOddurR51k When 4th Amendment rights erode, 1st Amendment rights follow, eg, free speech $$ Aug 16, 2013
  • Free Work Entices Businesses to Hire Long-Term Unemployed http://t.co/Lhemn5JIWp Try b4u buy lets employers figure out who they like $$ Aug 15, 2013
  • Problems With Authority http://t.co/JjIgnIJVEh Obama ignores unusual writ of mandamus, which compels the govt 2fulfill a legal obligation $$ Aug 14, 2013
  • Everything you know about immigration is wrong http://t.co/UpHiI0Wwfd Militarizing the border did not stop the flow in, did stop flow out $$ Aug 13, 2013
  • Encryption App Silent Circle Shuts Down E-Mail Service ‘To Prevent Spying’ http://t.co/95KCJt80mH Destroying data 2 preserve secrecy $$ Aug 13, 2013
  • Eric Holder Owes the American People an Apology http://t.co/07JtmV95QA Vastly overstated the efficacy of mortgage relief programs $$ Aug 13, 2013

?

Housing

 

  • Report: Half of All Homes Are Being Purchased With Cash http://t.co/p9GF4dOBUz Good sign. More equity means greater sustainability $$ Aug 15, 2013
  • Baltimore Foreclosures Surge Again as Legal Logjam Breaks http://t.co/xphbxvRXjv Foreclosures take longer 2work out in judicial states $$ Aug 15, 2013
  • Why Home-Price Growth Will Slow http://t.co/IZaE08udfI Prices up, mortgage rates up, fewer distressed homes available 4 sale $$ Aug 13, 2013

 

Other

 

  • Mom, Dad, Sorry I Was So Expensive http://t.co/VakZSkmE3r If u think having children is expensive, imagine the $$ of a society w/out them Aug 15, 2013
  • DNA Sequencing of Tumors Brings Hope of New Lung-Cancer Drugs http://t.co/YRul3Gfiva Costs high, distinguishing between diff cancers worx $$ Aug 13, 2013
  • Companies Ease Up on Non-Compete Agreements http://t.co/iEhtgQ7qjq Restraint of Trade laws also make it difficult to enforce non-competes $$ Aug 13, 2013
  • Overhaul Proposed for Annual Audit Reports http://t.co/8LAgJf5rrU Could b good 2 get past the the present binary pass/fail $$ Aug 13, 2013
  • Stocktwits ? Happy 5th Anniversary http://t.co/AQ8vI1kOsC @howardlindzon extols efforts made as they r the premier social investing site $$ Aug 13, 2013
  • Browser wars: Chrome rules the web http://t.co/QoGqVlVNcI The sun never sets on the Empire of Google’s Chrome; IE dying, Firefox choking $$ Aug 13, 2013

 

On Fiduciaries

  • On brokers as fiduciaries, choose: mixed advice, paid for by commissions, best advice, but u have to pay more 2a fiduciary, or no advice $$ Aug 13, 2013
  • You Can’t Afford Your Broker, at Any Price http://t.co/C46ndiTx6U by @asymmetricinfo on holding brokers 2a fiduciary standard $$ Aug 13, 2013
  • Look Who?s Locking Horns Over Retirement Accounts http://t.co/xSRFtbFndD @jasonzweigwsj tells us 2 act as our own fiduciaries or hire one $$ Aug 13, 2013

?

Wrong

  • Wrong: Don?t Kill Fannie Mae http://t.co/JqDk0kNJM5 People forget the incredible losses on prime mortgages when housing prices fell $$ Aug 15, 2013
  • Dumb: Retirees in Enemy Territory Go Door-to-Door on PPACA http://t.co/4xSgHH2qNL Won’t work unless young & healthy sign up on exchanges $$ Aug 14, 2013
  • Wrong: Your mortgage documents are fake! http://t.co/rErbfMzP7B Mistakes procedural justice 4 real justice. U don’t pay, U get foreclosed $$ Aug 13, 2013
  • Wrong: In defense of the 30-year mortgage http://t.co/cc9kgtRJpM Over-investment in housing & levers up the economy, creating fragility $$ Aug 13, 2013

?

Replies, Retweets, & Comments

  • RT @TheLimerickKing: QE has not led to inflation It’s now a much worse situation Velocity’s low But risk assets grow So now it’s just wealt? Aug 15, 2013
  • Commented on StockTwits: No, I don’t. Ultimately all assets boil down to their cash flows. This doesn’t change th… http://t.co/xjshS62La2 Aug 14, 2013
  • A shout-out to DarkCloud @p0stk0m for being my 8,000th Twitter follower. Thanks a lot, & thanks to all who follow me $$ Aug 14, 2013
  • @marketfolly @EquityNYC That is a very good point, and I internally noted it, but did not comment. I should have. 🙁 $$ Aug 14, 2013
  • “Congratulations, Howard. Well done, particularly the way you survived Twitter’s $ grab.” -Merkel http://t.co/tOlvvEqy0P @howardlindzon $$ Aug 12, 2013

?

Value Investing when Debt Levels are High

Value Investing when Debt Levels are High

Posted on by David Merkel

I would ask yourself how to implement value investing in an era where debt is no longer expanding. Arguably an era where inflation is increasing (albeit from a low starting point).

A few years ago, everyone ?knew? housing prices never went down nation wide. Today, CNBC constantly tells us that the consumer is 70% of the economy? undoubtedly true when debt levels were expanding. But consumer income is not growing as fast as the cost of living, and debt levels cannot expand again. The ?consumer is 70% of the economy? assumption probably won?t hold over the next few decades like it did in the past few decades. How does one implement value investing in such an environment?

So asked on reader in response to last night’s post.? His full comment was similar to some of the musings of Bill Gross, in that we don’t live long enough to really prove we have skill in investing, but over the last 40 years the overall macroeconomic regime of expanding debt favored certain classes of investors.

A few thoughts:

1) Value investing is SAFE and cheap, not CHEAP and safe.? Focus on margin of safety.? Spend time asking what can go wrong.? Test the strength of moats.

2) In 2008-2009, there were a lot of value investors that got savaged.? Why?? They invested a lot in statistically cheap financial companies that were carrying a lot of credit risk.? Having worked for a hedge fund 2003-2007 that did the opposite, my own investing was constrained because I feared what might happen when the bear part of the credit cycle emerged (leaving aside a mortgage REIT that I foolishly held onto).

Credit-sensitive financials are like cyclical non-financials that have over-invested in productive capacity.? They have high operating leverage, and will only prosper when demand is strong/credit is good.? Cyclical companies often have low P/E multiples near the top of the cycle, because the bear phase is anticipated.? They have high or negative P/E multiples near the bottom of the cycle, because the bull phase is anticipated.

The main idea here is to be skeptical of companies carrying a lot of credit risk, particularly after they have succeeded for some time.? When the credit risk manifests, it is savage.

3)?? Avoid debt and products that require it.? My portfolios ordinarily avoid companies with a lot of debt.? I like companies that finance themselves internally through retained earnings.? During bear market phases, companies with financial flexibility do better.? It is always better to get financing at a time when you don’t *have* to get it.? Seeking liquidity when little is available is never an attractive place to be.

Also remember that big ticket items like houses, cars, boats, RVs, college educations, do badly when credit conditions tighten.? Luxuries are disadvantaged versus necessities also.? Before the bear part of the credit cycle hits, own companies that are self-financing, and have stable revenues.

4) Inflation tends to favor value investing based on flow (income statement, cash flow statement) versus stock (balance sheet).? In one sense, corporate pricing power boosts the value of companies that can pass on the inflation and then some.? This was true in the ’70s when value investor did relatively well.

In summary, I would say that in the future, value investors need to focus on:

  • Safety first
  • Avoidance of credit risk, implicit and explicit
  • Investing in companies that don’t have to seek external finance
  • Companies that can pass on the effects of inflation.
Against Government-Subsidized 30-Year Mortgages

Against Government-Subsidized 30-Year Mortgages

Posted on by David Merkel

I don’t think that those who disagree with me are dumb.? It is often that the person in question is bright, but has presuppositions that disagree with mine.? I am for the most part a libertarian.? Thus I don’t often agree with liberals, or the pro-big-business wing of the Republican party.? Most of the time, I also favor regulation of financial companies, because when too many of them borrow short and lend long, something horrible happens to the economy as a whole.

That is the main reason why I think government encouragement of 30-year mortgages should end.? It increases leverage in the economy, and makes it more susceptible to crises.? Societies that have a lot of debt tend to be more fragile.? We forget how certain we were that Fannie and Freddie could never fail.? I was one of the few people that argued the opposite at RealMoney.com.? (Sadly, those posts are lost.)? F&F assumed that there would never be a sustained period where housing prices would fall across the US as a whole.? When prices began to fall, their business model was destroyed, because they were levered very high.

30-year mortgages allow some to buy houses that they should not buy.? If you have to have a 30-year mortgage instead of a 15-year mortgage, you are buying too much house for your income.? We spend too much money as a society on housing, and we take on too much debt as a result, leading to fragile financial systems.? Debt-based systems are fragile relative to equity-based systems.

If there are to be 30-year mortgages, let them be purely private, like Alt-A, Jumbo, and Subprime loans.? Don’t let the government place any guarantee on them.? If we have to guarantee mortgages, do it from 15 years and shorter.? Reduce the amount of leverage in the economy as a whole.? Make the system stronger, against those who think that encouraging borrowing is a free lunch.

What is the cost to my proposal?? Fewer people buy houses, and fewer houses get built.? Good.? We are over-housed already.? Far better that investment should go to production rather than consumption in the US (opposite in China).? We already subsidize mortgage lending through the tax code, which we should eliminate.? Why should we favor one class of borrowing over another?

Let the apartment REITs house people.? They borrow over a wide maturity spectrum, and do not rely on long-term finance.? Loss of government guarantees on 30-year mortgages will not affect them.

Now, I am responding to this article of Mike Konczal.? Here is one thing that he said:

The second [reason] is that providing macroeconomic stability is a legitimate and important function of the government. After the crash, the government had to step in, prevent a banking crisis and run the entire mortgage market after private capital disappeared. As such, the government holds the tail risk of the mortgage market imploding already; why not make this insurance explicit, while also regulating and pricing it?

Sorry, that’s not the way it works.? The Fed provided too much liquidity, and F&F provided too much lending up to 2007.? Now we suffer the bust from having over-stimulated housing demand.? The government rarely makes things more stable; they are pro-cyclical, and make things less stable.? That’s the way politicians are, because no one will oppose a boom.

We need to move to a less-levered system, where debt is discouraged, to create a system that is not fragile.? After two failures due to high debt levels (current and the 1930s), we should learn that high levels of debt lead to economic failure, and move to a system where interest in not tax-deductible, but dividends are.? This will lower debt levels, and our economy will become more stable.

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Financial Companies & Lending Markets

 

  • Hedge Fund GSO Scores Win With MBIA Bet http://t.co/eMYUgX6Syg Risky bet that paid off; he realized the banks would have2 compromise $$ $MBI Aug 10, 2013
  • Mortgage Delinquencies Hit Five-Year Low http://t.co/HlfyPTbUAV Judicial states trail non-judicial states as cases drag on $$ Aug 10, 2013
  • The bailout Wall Street is blocking from Main Street http://t.co/gFasMd4jdG Eminent domain should not b used 4 trivial reasons $$ Aug 10, 2013
  • The US July 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices http://t.co/JAL5TggXg1 Perhaps bank lending is turning up $$ Aug 08, 2013
  • The US Has a Really Helpful Student Loan Repayment Program?and No One’s Using It http://t.co/xyAgjk24PE Pay % of your income for a # yrs $$ Aug 08, 2013
  • BofA Trader Avoided Bank’s Bad Mortgages ‘Like A Fat Kid In Dodgeball’ http://t.co/3OdziStl8r Colorful, shows awareness of credit issues $$ Aug 07, 2013
  • Consumers Find Investors Eager to Make ‘Peer-to-Peer’ Loans http://t.co/5gKhnAzJ2x Eventually credit will b abundant leading 2 failure $$ Aug 07, 2013
  • Obama Urges Mortgage Overhaul With Limited Role for Gov’t http://t.co/MCtNMlBlJX Guaranteeing 30Y mtges incents housing overinvestment $$ Aug 07, 2013
  • House Democrat introduces bill to end mandatory arbitration http://t.co/2VHm4qXeK3 Costs of court cases vs crooked playing field of arb $$ Aug 07, 2013
  • Mortgage Debt Rejected by Banks Facing New Rules http://t.co/GCCoZvINkt Fewer want 2 hold mtge debts b/c of changes in capital rules $$ Aug 07, 2013
  • Many Can’t Pay Student Loans http://t.co/PgxJqtBtYT Some 8% of Borrowers in a New Federal Program Have Defaulted; avoid student loans $$ Aug 06, 2013

 

Companies & Industries

 

  • Hurricane forecast may have traders on edge http://t.co/2mRSgZvuXZ Hurricane forecasting has not been very accurate over the last decade $$ Aug 10, 2013
  • Warren Buffett Trains ‘Elephant Gun’ on Smaller Prey http://t.co/G4l4fxVtOZ No surprise. Buffett lets his managers buy good prospects $$ Aug 09, 2013
  • Remodeling Rebounds in US With Contractors http://t.co/TqOVgTh9Wa Deferred projects r finally getting done, as ppl more willing 2 spend $$ Aug 08, 2013
  • Loeb?s Reinsurer With No US Staff Gains From Jobs Act http://t.co/jnBqNMgucG Just b/c u list on US exchange doesn’t mean u will hire here $$ Aug 08, 2013
  • Goldman sees ‘creative destruction’ in these businesses http://t.co/BkgQSb1wsk Don’t agree on reinsurance; underwriting takes expertise $$ Aug 08, 2013
  • Xerox’s Ursula Burns on Her Career Path and Changing Company Strategy http://t.co/z3kFlsSOKU Xerox is interesting turnaround FD: + $XRX $$ Aug 08, 2013
  • 27,900 Reasons For Amazon’s Loss http://t.co/lQ41dRZfuu Ordinarily, good corporate growth comes w/profits. $AMZN hires 28K over past year $$ Aug 08, 2013
  • CBS-Time Warner Cable Dispute Shows an Industry Unaware of Reality http://t.co/ZSNNOPstzV Internet may reshape economics of televison 2 $$ Aug 07, 2013
  • Jeff Bezos’s Tool Kit for Washington Post http://t.co/Yib1yt6k7Y Bezos is a bright guy, but making $$ off of newspapers tough w/internet Aug 07, 2013
  • Ride a Painted Pony, Let the Spinning Wheel Fly http://t.co/vG89yC4ooJ The word flywheel is popular 2 use, c here: http://t.co/vxc8d0fofQ $$ Aug 07, 2013
  • The 40 cheapest stocks, according to Goldman Sachs http://t.co/XADhLHVD4G $GS tells u2 buy cyclicals. I own 4 on the list. Seems risky $$ Aug 07, 2013
  • IBM Furloughs US Hardware Employees to Reduce Costs http://t.co/bQWk3BtgD3 2me, this seems kind of gimmicky; I would lean bearish $$ $IBM Aug 07, 2013
  • Hidden Billionaire Found With Food Fortune in California http://t.co/w2yUPsx86D Uses zoning laws to keep potential competitors at bay $$ Aug 06, 2013
  • We’re In 4A Long Bottom http://t.co/NtMxx5hIzj Barring strong inflation, gold miners have slashed exploration, mining best deposits only $$ Aug 06, 2013
  • For Twitter, Free Speech Is a High-Wire Act http://t.co/Yx80PIwfQ1 Twitter tries 2 chart a middle course in censorship in diff countries $$ Aug 05, 2013
  • Hidden Billionaire Cohen Hauls Fortune in Unmarked Trucks http://t.co/YpXAmxlo3F C&S Wholesale Grocers, biggest company u never heard of $$ Aug 05, 2013

 

Politics & Policy

?

  • A User?s Guide to Obama?s Inside-Out Economics http://t.co/5dHZasczfL Obama long on rhetoric, & short on reason; doesn’t understand econ $$ Aug 09, 2013
  • Fed Belongs to Everybody as Public Says It?s Our Money in Crisis http://t.co/YYy7dXkY3r Level of lobbying 4 Fed Chair is unprecedented $$ Aug 08, 2013
  • We Are All Going to Pension Hell http://t.co/SoGeWiryxV @asymmetricinfo points out hopelessness of the pensions crisis, only Q is when $$ Aug 08, 2013
  • Heroin Makes a Comeback, Especially in Small Towns http://t.co/Uwrh97QwU3 Small towns gain big city problems; drugs know no boundaries $$ Aug 08, 2013
  • Ted Koppel: America’s Chronic Overreaction to Terrorism http://t.co/4ueqew4oB9 The War on Terror has done more harm to the US than good $$ Aug 07, 2013
  • Deficit Shrinks to 5.7% of GDP as Debt Ceiling No Vote Risks All http://t.co/NaWdRcTzlf Maybe the deficit will disappear by accident? $$ Aug 07, 2013
  • Obama’s False History of Public Investment http://t.co/X8Lx8za8CW Planned 2b an investment, ended up being an expense. Happens in biz 2 $$ Aug 06, 2013
  • Insider-Trading Probe Caught in a Washington Knot http://t.co/ykIYLNNgvL Investigation of Health-Policy Leak Muddled by Congress’ rules $$ Aug 05, 2013
  • Central Bank Needs to Untangle ?Monetary Gordian Knot? http://t.co/IkNfB8X2sh Fisher says little help 2 job growth from $$ Trillions of QE Aug 05, 2013
  • US Growth comes Mostly from Inventories http://t.co/nEUK3zyDTY “Mostly” overstates it, but 40% does put a significant dent in GDP growth $$ Aug 05, 2013
  • US July Non-Farm Payrolls: The Hidden Weaknesses http://t.co/Cb8OyzJAMQ Number of hours worked decreased a lot & lower participation rate $$ Aug 05, 2013
  • Newt Gingrich sees major Mideast mistakes, rethinks his neocon views on intervention http://t.co/n27U4QpgxN Not as big a change as stated $$ Aug 05, 2013
  • Republicans Don’t Need to Sabotage Obamacare http://t.co/Eu9z62ITjz Obamacare, badly designed, is its own worst enemy $$ Aug 05, 2013
  • Summers After Government Saw Wealth Surge to $17M http://t.co/M0MgH8TUco “Consulting” can make up 4a lot of lost revenue post-govt $$ Aug 05, 2013

Rest of the World

 

  • In China, a New City Attracts Few http://t.co/QYyhVJPzx6 CIties r organic things; they grow a little at a time, not all at once $$ Aug 10, 2013
  • India?s Fear of Growth http://t.co/K2A7QTDruR Socialism in India is deep, as deep as corruption. Corrupt countries do not grow. $$ #simple Aug 09, 2013
  • Germany displaces China as US Treasury’s currency villain http://t.co/3JDudxN7yE Low labor costs, strong exports, weak consumer demand $$ Aug 08, 2013
  • Terrorist Tungsten in Colombia Taints Global Phone-to-Car Sales http://t.co/jgZr8fDbA6 Long piece regarding FARC smuggling tungsten $$ Aug 08, 2013
  • Vietnam Banking Fix Starts With $474M of Bad Debt http://t.co/Zt0YG7Mx0x Credit bust in Vietnam may b absorbed by central bank sub $$ Aug 07, 2013
  • Obama Snubs, Russia Laughs, Putin Wins http://t.co/ROvRuwFBDm Russia policy is ticklish 4 any US president, little 2 gain either way $$ Aug 07, 2013
  • The $4M Teacher http://t.co/onnV3kvClQ South Korea’s students rank among the best in the world, and its top teachers can make a fortune. $$ Aug 07, 2013
  • Islamists Seize Airbase Near Aleppo http://t.co/eNBrMdgDVu This feels like a long bloody stalemate; a warning to all who favor war $$ Aug 07, 2013
  • Toyota $37B Cash Program Shows Effect of Abenomics http://t.co/87YHXM0CkL No: Toyota has no profitable places 2 reinvest in Japan $$ $TM Aug 07, 2013
  • China?s Debt Surge Pressures Xi-Li to Avert Lost Decade http://t.co/tJp4pEDLKB The time to avert a lost decade is when the boom is strong $$ Aug 07, 2013
  • Mexico Leader Said to Seek Changes to Break Oil Monopoly http://t.co/Fqi9oJTj4U Never thought Mexico would change its position on oil $$ Aug 06, 2013
  • India Names Rajan Central Bank Governor as Rupee Plunges http://t.co/UOeo9Ah4Tg Good choice; 1 economist who understands financial crisis $$ Aug 06, 2013
  • South Africa?s Post-Apartheid Failure in Shantytowns http://t.co/o4CARCmq4L South Africa merely traded one group of cronies for another. $$ Aug 06, 2013
  • Will Portugal Bring Down the Spanish Banking Sector? http://t.co/TKEe5MfAil Spanish banks lent 2 Portugal credits. Tough 2 do Pt haircuts $$ Aug 06, 2013
  • Ex-Soros Adviser Fujimaki Sees JGB Bust From Tax Delay, Fed http://t.co/T2Ktp1lHFF Many difficulties afflicting Japan w/the weak yen $$ Aug 06, 2013
  • Baguette Hopes Fade for Some French Farmers on Wheat Quality http://t.co/a5JiNJAV4S Just 1 more economic difficulty 4 weak man of Europe $$ Aug 06, 2013
  • Stagnant South Korea Property Drags on Growth Rebound http://t.co/bHwUW59ard Add South Korea to property bubble club, underweight stocks $$ Aug 06, 2013
  • Bond Salesman Who Wasn?t Reveals RBS Human Errors http://t.co/5vU3u6pWfq Very senior managers fooled in2thinking janitor was top salesman $$ Aug 05, 2013

 

?

Bond Market

 

  • Pimco?s Gross Vows to Win Bond ?War? After Redemptions http://t.co/yrmdUeVeo4 Maybe the total AUM has gotten too great 4 outperformance $$ Aug 08, 2013
  • Bond Share Tumbles as Morgan Stanley Says Sell: Credit Markets http://t.co/uq4QFGxYAD Another “interest rates can only go up” piece $$ Aug 08, 2013
  • For Bond Investors, a ‘Generational’ Chance to Sell http://t.co/PtV9OOW7Ok W/a weakening economy, this is not a done deal, 2many leaning $$ Aug 08, 2013
  • Private-Equity Payout Debt Surges http://t.co/PWslmEr7YU Borrowing to pay dividends to their sponsors; PIK toggles and other risky bonds $$ Aug 06, 2013
  • Get Ready for the Next Round of Bond Pain http://t.co/rMvYV3Op0b Pain won’t come if economy keeps weakening, but be wary on credit risk $$ Aug 06, 2013
  • US Credit Markets: My US Lite Rita Covenant: Freshness without Protection? http://t.co/N8lbbYEpvz Cov-lite loans larger % now than 2007 $$ Aug 05, 2013

 

 

Market Impact

?

  • How to Teach Teenagers About Investing in the Stock Market http://t.co/eL7BC7rqtQ I learned from my Mom; most of my kids aren’t interested $$ Aug 10, 2013
  • What if the Stock Market Were a Bond? http://t.co/3LJEhCwym3 @eddyelfenbein gives a tool 2 analyze stock prices: http://t.co/Wwu3q5t2kf $$ Aug 10, 2013
  • Confessions of an Institutional Investor http://t.co/Cu5OT0vxVw @reformedbroker prints a saga of high expenses, negative alpha & hopeless $$ Aug 08, 2013
  • Spot the Outlier http://t.co/BDfN1ms7t8 @ritholtz notes the considerable outperformance of US equities in 2013. When does the party end? $$ Aug 08, 2013
  • Mind the (Expectations) Gap: Demographic Trends and GDP http://t.co/5LyZkROeyl Because of low pop growth GDP growth resets 3% -> 1%/year $$ Aug 07, 2013
  • Advisers don’t have a firm grasp of ETF liquidity, Cerulli finds http://t.co/b5gnuEKTi4 ETFs do not create liquidity, but shift liquidity $$ Aug 06, 2013

?

Detroit

 

  • Detroit Losing $1 Million Check Bares Hobbling Processes http://t.co/X0R0QpE9an Real question is why didn’t Detroit go bankrupt sooner? $$ Aug 10, 2013
  • Foodies Fight to Save Detroit With Job Hopes Pinned on Arugula http://t.co/s2WZuTYPql Cities die slowly 2, as multiplier effect reverses $$ Aug 10, 2013
  • Michigan’s Saginaw County Postpones Debt Sale http://t.co/N1dbcUamXE Wait. U r in Michigan. They let munis default. We will not lend 2u $$ Aug 09, 2013
  • Steve Malanga: The Real Reason the Once Great City of Detroit Came to Ruin http://t.co/aWSmiIHyK3 Chase out middle class taxpayers $$ #boom Aug 06, 2013

 

Energy

 

  • Growth in crude oil shipped by rail slows http://t.co/Jw3f1KxVFc Price differentials narrow 4 feedstocks & it does not pay 2ship by train $$ Aug 10, 2013
  • US refiners eye shale butane to cut gasoline costs http://t.co/qsfuoOapYr Fracking producing cheap butane, alkylation can make it octane $$ Aug 10, 2013
  • Europe’s gas-fired power plants attract opportunistic investors http://t.co/ShLtiMicQY Idea counts on electric rates rising; uncertain $$ Aug 07, 2013
  • US becoming ‘refiner to the world’ as diesel demand grows http://t.co/8KG3qn4lJY Adds2 GDP growth w/rest of world short refining capacity $$ Aug 07, 2013

 

Replies, Comments & Retweets

  • RT @trengriffin: The spectacle of journalists giving Jeff Bezos advice on how to make a newspaper profitable is like watching a Three Stoog? Aug 09, 2013
  • “If I were running a significant endowment, I would invest in people rather than external firms, and?” ? David_Merkel http://t.co/kC5gAHHEl7 Aug 08, 2013
  • @BarbarianCap move along, nothing to see here… Aug 08, 2013
  • . @Contra_Invest Try this: http://t.co/WplgPsxjkL Wisdom from Howard Marks, with help from Seth Klarman in the last two pages $$ Aug 07, 2013

 

Best of the Aleph Blog, Part 22

Best of the Aleph Blog, Part 22

Posted on by David Merkel

These articles appeared between May 2012 and July 2012:

On Distribution Formulas

Most formulas for distributing income from an endowment or a a savings/investment fund are too liberal.? If you want the purchasing power to last, distribute less.

Correlating Risky Assets

How do correlations come into existence with risky assets.? This piece explains.

Simple Stock Valuation

An exploration of Eddy Elfenbein’s simple stock valuation model.

Don?t Become the Market

When any firm becomes the dominant provider of a good or service, it should ask whether it has mispriced.? A veiled critique of JPM’s whale trade in the credit markets.

In Defense of Nothing

Manufacturing is overrated.? We’ve got enough things, now we need services to make our lives richer.

Little Things are Important

When leverage is high, little things failing can lead to large and bad results.

High Profits

Labor is not scarce, so profit margins are high.? Will that last forever?? No, but it might be a while.

23,401 Auctions

391 Auctions

A pair of pieces suggesting that the markets could be better off if we held auctions once a second, or once a minute.

The Rules, Part XXXII

Dynamic hedging only has the potential of working on deep markets.

Arbitrage pricing can reveal proper prices in smaller less liquid markets if there are larger, more liquid markets to compare against.? The process cannot work in reverse, except by accident

The Rules, Part XXXIII

When politicians don?t have answers, they blame speculators, financiers (Wall Street), or foreigners.? They do anything to take the spotlight off their culpability or ineptitude.

Aim for the Middle

Very basic advice that tells you that the best returns come from taking moderate risk.

Works if Small, Fails if Large

Another bogus theory of asset allocation that works today, because markets favor it, and not enough people are using it.

Strong Hands

On the value of long-term investors holding stocks that you hold.

Logical Links

If there are a lot of links in a chain of reasoning, it is likely to be wrong.

Modified Glass-Steagall

I suggest a number of reforms that would be more effective than reinstating Glass-Steagall.

Don?t Blame Money Market Funds

On the hypocrisy of the SEC and the banking regulators

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

The answer is probably, but not certainly.? Really, it is a mess.

On Life Insurance and Life Reinsurance

Explains why I like the life reinsurance oligopoly

On Bond Ladders

The most robust strategy for interest rates; always second-best, and never the worst.

On Internal Indexes, like LIBOR

An Analysis of Three-Month LIBOR 2005-2008

On Floating Rates

In most scandals, not enough attention is paid to those who should have been questioning the situation and did not.? There were parties angling for higher LIBOR and lower LIBOR.? Anytime you borrow or lend using an index, you assent to the method of the index.? What, you didn’t analyze it?

The Failure of Government-Provided Prosperity

The government has almost no control over prosperity, and yet it tries to take credit for it, and ends up ruining prosperity through deficits and loose monetary policy.

Grow Embedded Value

The main idea in investing is finding investments that will compound your money at an above average rate, with a margin of safety.

The Education of a Mortgage Bond Manager, Part I

The Education of a Mortgage Bond Manager, Part II

The beginning of my eight-part series on mortgage bonds.? I did it well for three years.

Packages! Packages!

A tale of my younger investing days, when I would mail companies for data.

Missing Earnings Estimates

Why occasional earnings misses are desirable.

Forget Your Cost Basis

All good investment decision-making is forward looking.? Whether you are buying or selling, it doesn?t matter where prices have been in the past.

Concentrated Interest

This piece generated a lot of heat, but I still stand behind it.? The concentrated interest of a profit motive is a good thing, and all of the government services do not affect what you have done at all.? The entrepreneur is a hero, whether in business, government, or elsewhere.

Advice to Two Readers

Advice to Two Readers

Posted on by David Merkel

I get a lot of requests for advice.? Here are two of them.

David,

?I really appreciate you discussing your trading/haggling strategies in the Education of a Corporate Bond Manager. ?It’s definitely given me new ideas and helped me get better pricing in my purchases the last couple of years. ?I still refer to them every few months or so.

I have a question about changing jobs in the fixed income industry – I work in a treasury division, managing my company’s cash and short-term investments. ?I’ve done well, but we use yield-based benchmarks, as part of the portfolio is used to immunize short term liabilities. ?When I interview with asset management shops, they want previous total return portfolio management experience. ? ?

Do you know any particular types of firms or sub-industries that use yield-based benchmarks? ?Does managing to a yield benchmark stunt my learning growth compared to a total return mandate?

 

Yield-based benchmarks exist when:

  • The liability structure being invested against is short (We could need this cash at any moment for business use!)
  • The liability structure is long, but well-defined, such as a bank or insurer that wants predictable income versus their liabilities, and so the game becomes maximize spread net of default costs, subject to matching asset and liability durations (and maybe partial durations if the liability stream is long).

You are doing the first of these.? Truth, what you are doing could be measured on a total return basis, but it wouldn?t make a lot of difference.

The second one applies to banks and insurers, and can be done on either basis as well.? The difficulty comes with trying to calculate the total return of the liabilities. ??If that it too hard to do, they create a bond benchmark that they think represents when they think the liabilities may pay out.? If the liabilities possess some degree of optionality, like that of residential mortgage prepayment, the benchmark could include bond options (long or short).

The yield on the bond benchmark is easy to calculate, as is the total return.?? Thus relative performance can be calculated either way.? I had to do this for an insurance client once who insisted that our performance was poor when we had returned more than 0.70% year more than single-A corporate, which was quite good.

Thus, one place you could try working is for is an insurer, bank, or other financial intermediary.? But what of those that manage funds for retail.? What then?

Aside from unconstrained funds, even a mutual fund has a liability to invest against ? the expectations of the client.? In that sense, most mutual fund managers aren?t doing full total return either ? they have to stay within a certain range for interest rate sensitivity. They also could be evaluated on the basis of yield realized versus that of a generic portfolio meeting their interest rate sensitivity targets.? More commonly, they would be ranked against their competitors on a total return basis.

In closing, it you don?t want to manage money for a bank or insurer, you?ll have to try to wedge your way into work in a total return environment ? taking a junior level position, and showing competence.? Believe me, most firms would love to promote from inside, if possible.

Sincerely,

David

Dear Mr. David Merkel,

I really appreciate your hard work you are putting in your site and I am an avid reader of it. I would like to seek your advice regarding a decision I am facing. My goal is become a value investor and establish my own asset management firm to manage my own money and other people’s money. Right now, I have the opportunity to pursue partnership in my family business and be able to run it along with my father. I am 23 years old, and I am a freshman student at the _+_+_+_+_.? If I am to be a partner in my family business, I have to drop out from the university and travel to +_+_+_+_+_+_+_, where the business is. I am still a freshman student because when I was 19 years old, I dropped out to establish my own business in the same industry as my family in +_+_+_+_+_. I had an experience running a business and I had the opportunity to sell my business after two years of operation to my cousins, and, thankfully, it was a profitable venture.

My family business is somehow facing sales shrinkage and cash flow problem due to low capital (my family made terrible mistakes in managing it) and economic downturn. They are specialty contractors and manufacturers of fenestration products (windows, doors, kitchens, curtain walls, and rolling shutters). If I am to work with them, I can be able to help them in reorganizing the company. It might be risky for me, but if everything worked out well enough, I will have earnings that I believe is better than being an employee.

I am facing a decision that I need to make. You might not be able to advice me, but whatever advice you give me, I appreciate it. If my goal is to manage my own money and other people’s money by establishing my own asset management firm, is it helpful to have a university degree or the experience of having ran a business? Shall I drop out and pursue my family business opportunity? If I am to continue studying, I will incur student loan debt which I won’t prefer. But, alas, I will do it if it need be to accomplish my goal. Thank you a lot.

You have my sympathies on two fronts:

1) Choosing between family obligations and personal goals is never easy.? I have had to face that in deciding what jobs I could take while raising my family.? I was recruited for a managing director position in an investment bank in the mid-90s, but passed it up because I could not peel away that much time from my family and church.? It took a lot of time for me to become an institutional investor as a result.? I became an investment actuary at the age of 31, started working in an investment department at age 37, started work at a hedge fund at age 42, and started my own firm at age 49.? By 49, I had more than enough assets to care for my family if my business failed, at least to put the kids through college.?? After that, I could be stretched.

2) Good operational businessmen can be very good investors.? There are synergies between the ability to operate a business, and the ability to make good investment decisions.? Don?t think that building another business is a waste of your time.? It will sharpen you in ways that most institutional investors never grasp.? I benefited a great deal from building profitable business within insurance companies, and it sharpened my knowledge on how to invest.

Now, all that said, if you take time out to rebuild your family?s business, don?t neglect your education.? Read good books on value investing, and study those who have been great.? I?m not saying that college is useless, but I am saying that much of the knowledge that academics teach on economics is deficient.? In some ways, it is better to be a clever businessman than an academically trained man.? The latter will not gain much insight into how to invest.? The businessman has a better chance.

Perhaps a good compromise would be to study for the CFA credential in your spare time.? I did that.? Along with that, invest some of your money in ideas that you think are worthy.? I did that from 1992-2003, before I began investing in stocks professionally, and I did very well.

You need to find out whether you have significant insights versus the rest of the markets.? Academic learning will not help that.? Operational business experience *might* help that.

Don?t give up your goal of managing your own value investing firm, but realize that there are many paths to getting there, and the most important thing is trying to develop insight into the markets that others don?t have.? Typically, academic study does not develop that.

I hope things work out for you.? Let me know how you do.

Sincerely,

David

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

US Politics & Policy

 

  • U.S. Declassifies Court Order Allowing Record Collection http://t.co/0AOMcCRsGi Perhaps some small step of transparency, we need better $$ Aug 03, 2013
  • Obama Urges Business Tax Rewrite to Help Spur New Jobs http://t.co/DmRwtwHS6r Lousy legislation that panders to power, it will pass $$ Aug 03, 2013
  • The Very Worst Part of Today’s Lousy Jobs Report http://t.co/Tvn2F6mWQ6 Job quality is low, growth is slow, & incomes don’t grow $$ Aug 03, 2013
  • Who Are Worse, Renters or Owners? http://t.co/cHKBfXp210 Govt meddling in housing leads 2 problems favoring old vs young, owners/renters $$ Aug 03, 2013
  • American Dream Slipping as Homeownership at 18-Year Low http://t.co/7b6sYVu8Q6 People need place 2 live, but houses r rarely good invtmts $$ Aug 02, 2013
  • Freshmen GOP Lawmakers Revel in Maverick Power http://t.co/iGaLIjt2qe We want idealistic politicians until we actually get them $$ #maverick Aug 02, 2013
  • Obama open to changes at NSA; intel officials fight to maintain secrecy http://t.co/rZaR9r2aKf Officials task-driven, Constitution blocks $$ Aug 02, 2013
  • Cities Grabbing Houses Won’t Fix the Market http://t.co/AXaCHwuIoP @asymmetricinfo on y using eminent domain on mtges is likely 2 fail $$ Aug 02, 2013
  • Coburn thinks defunding Obamacare is a horrible idea http://t.co/W2jK00gOgZ Truth-teller Tom Coburn aims to fix PPACA rather than destroy $$ Jul 28, 2013

 

Market Impact

 

  • Walsh?s Unconstrained Wins in Bond Rout: Riskless Return http://t.co/W8LNnWE5Kr Unconstrained strategies r easier when u don’t run lotsa $$ Aug 03, 2013
  • Blackstone, Deutsche Bank in Talks to Sell Bond Backed by Home Rentals http://t.co/m3cae6mljQ This would b better killed off when little $$ Aug 03, 2013
  • Search for Muni-Bond Guidepost Sputters http://t.co/zjQHXiWAqi Start w/illiquid collateral u can’t get a liquid benchmark, pricing issues $$ Aug 03, 2013
  • Big Question Hangs Over Small-Caps http://t.co/Ehzm5j9490 Valuations r stretched, but large cap mgrs need a way to beat their benchmarks $$ Aug 03, 2013
  • No, Earnings Have Not Been ‘Good’ http://t.co/kT7dfnbeUN Actual earnings growth has been anemic, which matters more in the long-run $$ Aug 02, 2013
  • Leveraged Loans Pass ?12 Level With Record Ahead http://t.co/Mf7OHWm5kB Quality & pricing r getting sacrificed 4 quantity; bad long-run $$ Aug 02, 2013
  • BlackRock Rolls Out Index 2 Make Inroads in Retirement Market http://t.co/uRpJ6qvfmj How much $$ do u need 4 a decent retirement income $BLK Aug 02, 2013
  • Bank commodity earnings are a mystery http://t.co/TjMkuWTnS9 Neglects financialization of commodities by pension plans & retail investors $$ Aug 02, 2013
  • This is the cost of sitting on cash in a bull market. Different when valuations are stretched, like now. http://t.co/WYC6bAReyt Aug 01, 2013
  • JPMorgan to quit physical commodity trade amid scrutiny http://t.co/VWmtIClYXk Business case: commodities require 2much capital&attention $$ Jul 28, 2013
  • Tourre Tells of Low Status at Goldman in Defense Preview http://t.co/uCc7GWK5LB “I didn’t have any significant authority at GS! I didn’t” $$ Jul 28, 2013

 

Rest of the World

 

  • How Venezuelan Used ?Scrape? to Make Six Times Her Salary http://t.co/L3rUmVK3vB When currencies r manipulated, clever people play games $$ Aug 03, 2013
  • Wheat Costs in Japan to Gain for 3rd Time as Abenomics Bites http://t.co/mPQxXBGAjc Devaluing the yen has negative side-effects $$ #duh Aug 03, 2013
  • Merkel?s Green Shift Backfires as German Pollution Jumps http://t.co/JAXdm53hiT Closing down nuclear plants was an unforced error ->coal $$ Aug 03, 2013
  • How Big Is China?s Debt? The Best Guesses http://t.co/BzY8f7Gzz3 This estimates total governmental debt at all levels, not total debt $$ Aug 02, 2013
  • The $7 Trillion Problem That Could Sink Asia http://t.co/A9y8QzOx54 In the short-run Asians would acquire $$, in long-run it would hurt $$ Aug 02, 2013
  • Japan’s Three-Year Fiscal Plan to Urge Sales Tax Rise http://t.co/jxsYhJc24E Will be difficult 2 execute, w/o a lot of political backlash $$ Aug 02, 2013
  • Ghana?s Dancing Pallbearers, Insurers Lead Funeral Boom http://t.co/GWd4V8xu3g $$ spent for status events is wasted, & keeps people poor. Aug 02, 2013

 

Companies & Industries

  • Tax Shelters, Nebraska Hurricanes And Other Captive Insurance Mistakes http://t.co/V7Xsp1tmek 10 rules 2 keep a captive insurer legit $$ Aug 03, 2013
  • 7-Eleven Adds Bento Rigor to Slurpee Appeal in US Push http://t.co/www8ObGqhL 7-11 went from the US 2 Japan, then goes back w/Japan mgmt $$ Aug 02, 2013
  • Third Point Hedge Fund Targets CF Industries http://t.co/ioIzcPlFlu Thinks that $CF could free up more cash 4 shareholders $$ Aug 02, 2013
  • Uralkali Breaks Potash Accord to Grab Market Share http://t.co/EfyqzqZr8P Amazing the effect a large foreign player can have on US cos $$ Aug 02, 2013
  • Burger Costs Rising With Beef Supply at 21-Year Low http://t.co/nXfFXEECbd Should c higher prices, more births, less slaughter, etc. $$ Aug 02, 2013
  • SAP Invades Silicon Valley via Acquisitions http://t.co/vXOK0YmIb8 Creates room 4 new competitors as acquirers don’t integrate them well $$ Aug 02, 2013
  • Why Are Google Employees So Disloyal? http://t.co/Ye0ZBLADtk Calculate actuarial decrement tables 2 arrive at the truth $$ Avgs don’t work. Jul 30, 2013

 

Central Banking

 

  • When you?re rattled by collateral, do the Fed taper talk http://t.co/lImzjMdmT8 Taper talk forced on the Fed 4 market operational reasons $$ Aug 03, 2013
  • Near-Zero Interest Rate Trap http://t.co/hjoBF5acb6 If long-term rates rise 2 normal levels, banks holding bonds would b de-capitalized $$ Aug 03, 2013
  • Money shot from John Mauldin: “We are watching the Fed employ a trickle-down monetary policy.” Couldn’t have said it better. $$ Jul 28, 2013

 

Other

 

  • Afrikaners Reaping Colorado Wheat Threatened by Visa Cap http://t.co/Cj6pTKm5NG 2nd largest immigrant ag labor group might get restrained $$ Aug 03, 2013
  • Banker Saves 20,000 From Nepal to Uganda With Her Profits http://t.co/c0HURcg3wJ Rather than wait 4 death, pursues charity personally now $$ Aug 03, 2013
  • Pope Signals Openness to Gay Priests http://t.co/t5leZXst4D Jesus said that the sin was not only in the action, but in the thought $$ Matt 5 Aug 02, 2013
  • My Life & Past, as Seen Through Google’s Dashboard http://t.co/LPkviIKHGj Would u like 2 review your history? Would u like 2 delete it? $$ Aug 02, 2013
  • Famous Restaurant Chains That Have All But Disappeared http://t.co/i5yxIighw7 Remember Chi-Chis, Sambo’s, Bennigan’s, Steak & Ale, HoJo? $$ Aug 02, 2013

 

Replies, Retweets & Comments

  • Commented on StockTwits: Thanks, Howard. Coming from you, that is high praise that I hope to live up to. http://t.co/Q5ikvtjzHa Aug 03, 2013
  • @zingfinapp That’s part of the nature of the seasonal adjustment factor: when jobs over/undershoot in current month, they adjust prior same Aug 03, 2013
  • @Kevin_Holloway This is surfacey, but it looks good for all parties except other Japanese insurers… Aug 02, 2013
  • “The keys to merger are keep them small & integrate them well. Does anyone do this consistently?” ? David_Merkel http://t.co/cEGnuBXrYe $$ Aug 02, 2013
  • @ReformedBroker But it lowers volatility, I’m sure… and in a real equity market catastrophe, it will be a home run in relative terms. 😉 Jul 27, 2013
Theme: Overlay by Kaira.