Pensions – Page 4 – The Aleph Blog

Book Review: Kentucky Fried Pensions

Posted on 17 December 2013 by David Merkel

This book takes you through the corruption in the Kentucky Retirement System. ?It has the dubious distinction of being the worst-funded municipal pension system in the US, leaving aside Puerto Rico.

This book is very well-researched for three?reasons:

1) The author served one four-year term on the board of the Kentucky Retirement System, so he has insider knowledge.

2) The author is an expert on pensions — he has worked in this area for over 25 years. ?He also holds a CFA Charter, which demonstrates his knowledge in investments, and his commitment to ethics in investing.

3) The author extensively cites his findings, giving nearly 600 endnotes in an otherwise 256-page book.

The Kentucky Retirement System is not a victim of incompetence alone, but of fraud, political favoritism, and structured neglect. ?The structured neglect is probably the most serious matter.

For years, Kentucky would not pay its full actuarially required contribution to the retirement system. ?Now, you can’t argue with the math, though you can argue with assumptions. ?Not making the full payment persistently will leave a pension plan weakly funded. ? As the author points out, it is a quiet means of borrowing against the future, and at a far higher rate than Kentucky could borrow in the municipal bond market.

This is the product of a broken political culture that only cared about the present:

1) Keeping current taxes low

2) Spending more than taxes

3) Politicians accepting ~~bribes~~ campaign contributions from those gaining pension business from the State of Kentucky.

4) Board members that would not enforce thorough audits.

5) Board members that would not seek out investment experts for their board.

6) Politicians that would appoint weak board members that were political cronies.

7) Awarding investment mandates to political cronies, where placement agents would earn disproportionate sums.

8 ) And more…

If you read this, you will wonder how a municipal pension plan could get screwed up so badly. ?My answer is this — the political culture of the state tolerates corruption, so it grows like a weed in obscure places like the Kentucky Retirement System.

On the Rating Agencies, Etc.

The book asks the question as to why the rating agencies were complicit on municipal pensions, waking up late to the problems. ?My answer is simple. ?The rating agencies have never hired many actuaries, and as such did not consider what is obvious to any actuary that I know. ?They came to the game late, and that is normal for the rating agencies — if there has not been a failure from a given factor, their models will not have that factor. ?That’s normal for most of us, because few of us can envision failures that have never happened before.

Few are like Buffett, who said, “We’re paid to think about things that can’t happen.” ?That is the sound of one hand clapping, and few can hear it.

Never allege conspiracy, when mere incompetence will do. ?Few saw the housing bubble, and many denied it, including the present and incoming Fed Chairmen. ?Incompetence is pervasive; we should be surprised when things go well.

On Pension Obligation Bonds, we should note that they are a dumb idea, and that every municipality that has tried it ended up regretting it. ?It is hard enough to fund pensions without borrowing money; it is much harder to do after borrowing money.

Quibbles

The main problem with the book is that it needed a better editor. ?It reads like a series of essays that are self-contained, because much material is repeated that could have been eliminated.

Secondarily, the book takes a position that pension benefits can’t be cut. ?That is not true. ?It may take constitutional changes to do so, but in a democracy, anything can be done. ?We could repeal the prohibition against ex post facto laws on a basis limited to pensions.

I say this because many municipal unions pressed for pensions far beyond what was warranted, in exchange for lower salary increases. ?It appealed to venal politicians, because increasing pensions usually had no current cash cost.

Eventually, municipalities will be forced to cut pensions, even for those that have retired. ?There will be no other choice.

Who would benefit from this book:?If you want to know the depths of depravity in municipal pensions, this is the book for you. ?If you want to, you can buy it here:?Kentucky Fried Pensions: Worse Than Detroit Edition.

Full disclosure: The author sent me the book after I asked for a review copy.

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

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

Book Review: Retirement GPS

Posted on 4 December 2013 by David Merkel

This book encourages you to invest most of your savings abroad, away from the imperfect but good protections offered by US law.? I wrote a piece on this idea a few years ago that pointed out the problems with this idea.? (Note to those reading this at Amazon.com, Google “Aleph In Defense of Home Bias” and you will find my article.)

Now don’t get me wrong — I invest in foreign companies.? One-third of the assets that I run are invested abroad, in both developed and emerging markets.? International investment is good, but it is not a panacea.? There is no inherent advantage to investing abroad versus investing in the US.? Even if emerging markets are growing more rapidly, that doesn’t mean they are better to buy. because valuations are higher, and government policies are more fickle.

This book is rather facile about problems in emerging markets.? Problems with Brazil led me to sell my stocks when Dilma Rousseff was elected President.? Lula promoted markets, Dilma did not.

I found this book to be long on cliches, and short on sharp ideas.? If you try to take the advice as an amateur, you will have a hard time doing it.? If you decide to hire an advisor other then the authors, you won’t get what the book offers.? Thus I can tell you that the book is merely a marketing pitch for their services, and so I tell you to avoid it.

Quibbles

Already expressed, though I would also add that the book didn’t feel right.? Too casual in the way that it treated topics.

Who would benefit from this book: Few would benefit from the book; the theory is flawed.? If you want to, you can buy it here: Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

The Municipal Pension Payment Curve

Posted on 31 October 2013 by David Merkel

This article was originally going to be titled, “Dying Cities, Dying States, Dying….”? I thought that would be correct but too pointy.? The key to thinking about pensions is to look at the likely cash flows for current and former employees.

Here’s my scenario: a municipality decides to terminate its overly generous defined benefit [DB] plan, and though it is 30% underfunded, they agree to not let underfunding get greater than 30%.? Sadly, the discount rate on the pension cash flows is 8%/yr, but the likely investment earnings rate is 6%/year.

Here’s the graph of pension payments to beneficiaries, and contributions to the plan:

At the beginning of this scenario, pension payments were 10% of the municipality’s budget.? Assuming taxes only grow at the rate of 2%/year,? contributions to pensions are not less than 10% of the municipality’s budget until 2049.? As a share of the budget, it peaks out at 32% from 2032 to 2035.? It’s over 20% from 2022 to 2043.

30% underfunding isn’t that uncommon, and discount rate assumptions of 8% aren’t that uncommon either.? Would that all municipalities were at discount rates of 6%, or at my more likely view, 4%.

But it doesn’t matter.? We can argue over assumptions.? The cash flows actually paid to beneficiaries do not rely on assumptions.? The assumptions exist to try to allow pre-funding, so that municipalities fund their plans to the same degree that benefits are accrued.? Some municipalities have done that with pensions, almost none have done it with retiree healthcare, but the retiree healthcare promise is much weaker one.? You can turn it from a Cadillac plan to hospice care, in many cases.? In this case the state constitution matters a great deal, so do your own homework here.

Part of my advice to you is to watch weaker states and municipalities, like Puerto Rico, Illinois, Chicago, Pittsburgh, and many others.? I don’t have all of the data in front of me.? This is one of those cases where relative standing is important.? People will migrate out of areas with low funding, and high expected payments, and into municipalities with higher funding, and lower expected payments in relative terms.

You will see municipalities depopulate, because the taxes are disproportionate to the increasingly slim services rendered, because much of the revenue pays for the overly generous past promises to retirees.? As a result, you will see more municipal bankruptcies.? I would expect that you would see most of the bankruptcies in the 2020s.

I know that’s vague, but I think it is more defensible than Meredith Whitney’s notable statement a few years ago.? The pension cost curve is inexorable, and I suspect most municipalities can bear it for the next six years, but will have a hard time with it as the tail end of the Baby Boomers retires in the 2020s.

Advice

1) If you are in an area under pension stress, if you at all can, not harming your existing earnings, move to an area not under that stress.? Remember, as other people move, it will become increasingly difficult to maintain existing services.? Think of the slow police response times in Detroit, and packs of stray dogs that roam the city.

2)? If you work for a municipality, consult your state constitution to see what you are guaranteed.? In many cases, healthcare will not be covered.? Even existing pension benefits in payment now may be under threat in a default.? Be aware.

This is one of those cases where the rich will get richer, and the poor will get poorer — better to be on the rich side of the line, and sooner.

Final Note

All that said, we face the same issues with Social Security and Medicare, though both are unfunded.? At present, Social Security’s payments will be cut by 25% or so in 2026, unless some adjustment is made to the system.? Medicare is another issue, and the question is what will it cover.? It could be stripped back a great deal when the US realizes it can’t fund a generous system that extends life a few years at high cost.

My main point to all of my readers is to be aware of the imbalances in the existing systems, and be ready for the coming adjustments, because the US economy will not be willing to make all of the payments that have been promised to oldsters who have served the public.

Pursue Generational Accounting

Posted on 25 October 2013 by David Merkel

I am one of the endorsers of the INFORM Act.? I have believed for over 25 years that younger people need to understand the costs that they are undertaking for the comfort of older people.? The government has resisted such clarifying measures because they don’t want younger people to know how badly they are getting hosed.? Since the creation of Social Security and Medicare, each succeeding decade of people has gotten w progressively worse deal.? Young people should know that they are going to get a decidedly negative return out of Medicare, so that they can be politically active to reduce their losses.

I encourage you to support the INFORM Act — after all, what should be the problem with telling the American people the truth?

Traveling with David

Posted on 25 October 2013 by David Merkel

Sometimes I over-commit my time.? That’s been the last few days.? Recently I went to visit a friend who had lost his job at a large company, to look over his severance papers, and advise him.? He is older, a “minority,” and only been with the firm 5-6 years.

Severance agreements have gotten a lot tighter since the two that I have personally experienced.? Corporations dangle some compensation to eliminate possible future legal costs.? I pointed out to my friend the most likely reasons he might sue, but added two things:

The company has a large number of sharp lawyers, so you had better have an open-and-shut case.
We’re Christians, so we don’t go to court over small matters.

But what impressed me in reading the agreement was how airtight it was — can’t sue over Federal, State, Local, or common law offenses, or anything else.? Which made me think about another thing… the connection between entrance and exit doors.

In investing, people are more wiling to invest if they can have their money back at any time.? With employment, it is the same — employers are more willing to employ if they can fire people for any reason.

Every protection for those employed makes it harder for those without work to be employed.? This also forces jobs to go underground — if advertising them publicly subjects them to regulation, then the good jobs will be filled via “word-of-mouth.”

This takes me back to the early days of the Reagan Administration.? They deregulated a lot of things, and the economy grew far more rapidly.? We could do the same now, starting with labor and healthcare.

My friend may do fine, but the things that “protected” him at his last job now hinder him in seeking another job.? Better to eliminate the protections, and let people compete based on skill and assiduousness.

Part Two

Then I was a judge in a financial analysis competition at a local college.? The analysis involved a stock that faced a large investment decision, larger than the current enterprise value of the junk-rated company.? Should the hedge fund buy, sell short, or do nothing with the stock?? The simple part of the case study was working through the intricacies of the discounted cash flow model, together with changes to the assumptions about cash flows and the weighted average cost of capital.

What I found interesting was the lack of attention to:

Details of the case study — did you even read it?
Common sense — we are sorry, but a stock can’t lose 113%.? Perhaps you would like to tell us to short the bonds?
Limitations of complex techniques in finance.? Yes, there’s many nifty formulas available to you, but do you understand what they really mean, and what limitations they imply?? When are they not valid?
What markets can and can’t do.? No, you can’t do an public issuance of junk debt at the level of current debt.? You can’t do an issuance longer than ten years.? You can’t do one that is really big without changing market pricing (and the answers from the case study had this wrong as well).? Same applies to large secondary IPOs for equity.

Now, I know these are students.? They can’t know what an experienced market professional does.? To their credit, they dug up many bits of useful data that the case study did not contemplate.? But the case study itself should have noted these things, and to that degree I fault Darden for writing up a subpar case study.

The main thing I would say again to the students is to ignore the academic models with their false certainty, and try to understand the qualitative aspects of the business, out of which the quantitative modeling will grow.

When we were done, each of the judges gave comments to the students.? I started off with, “Sorry for being such a hard-nose.”? I got a decent laugh from the students, and then explained to them what I have said to you.

Part Three

That evening I went to a talk by CareFirst on the PPACA/Obamacare.? It was a genuinely useful 20-minute presentation, with one annoying thing: all of the pictures in the slide deck were of healthy smiling people.? If you are healthy, you will pay more, unless you are really poor.? A realistic presentation would have had people that are stoic, sad, or crying, if they are healthy and not poor.

The best part of what CareFirst gave me was premium rates for PPACA.? The lowest level plan would increase my premiums by 50%, and would increase the areas in which I would have to pay.? More expensive in every way.

It is only an affordable care act to those who were previously uninsurable; to those who were insurable it is a tax on your health and income.? In 2016, we will rip it out by its roots, and have people pay for healthcare directly, with no tax deduction for employer-provided healthcare.? That will reduce healthcare spending, and shrink healthcare to a more reasonable part of the economy.

If you want healthcare to be affordable, get the government out of it in entire.

Part Four

Dr. Kathryn Crecelius spoke to the Baltimore CFA Society on Thursday.? She is the Chief Investment Officer of my alma mater, The Johns Hopkins University.? She talked to us about endowment investing.? Very common sense stuff, very well said, and much like you would hear from me.? I found myself nodding through the whole talk.? It was all very much like my last piece on endowment investing.? I learned a lot, which makes me happy, because I always like to learn.

My travels are done for a while.? I like that too, because being home is a happy place.

On Liabilities in Asset Allocation

Posted on 17 October 2013 by David Merkel

From an e-mail from one of my readers:

I?m not sure if you have the time to respond to this, but figured I?d send to you and just see!…

(Just FYI, I?m not an investment professional of any sort, so I don?t have any ?skin in the game? as they say, just a geek who follows the markets and DIY financial-planning issues and long-time reader of the Aleph blog)

I recently read an FP article by a guy I?ve read a lot (Alan Roth).? He suggested that, when your analyzing an investment portfolio and making asset-allocation decisions, you need to treat mortgage debt as an ?inverse-bond? or an ?anti-bond??such that any mortgage debt held would dollar-for-dollar negate or reduce your actual bond investment holdings.? And the result is that this made the investor?s actual portfolio risker than they realized, since their ?true? bond allocation was smaller than they had considered.

I thought it was a novel concept, but I found some problems with that approach, within the context of asset-allocation.? My main point was that the primary purpose of analyzing a portfolio?s asset allocation is to manage risk through diversification of assets (generalizing here in interests of being concise).?? The pinnacle of diversification is non-correlation: generally in economic environments where equities soar, bonds will underperform, and vice versa.? However, classifying a debt as an ?anti-bond? doesn?t actually provide any portfolio diversification, or introduce any non-correlation.? It won?t actually negate the amount that your bonds would rise, and it won?t actually offset the amount your bonds would fall, in those respective market environments.? And even if you consider that the real value of the debt is decreased if inflation rises (as the NPV calculation would be using a greater discount rate), that doesn?t have any real-world effect on the portfolio and it?s risk and return behavior.? Since borrowers aren?t allowed to ?mark-to-market? their mortgages, that debt holding value does not fluctuate?it is fixed, and amortized from its historical cost, regardless of any market conditions or any theoretical NPV/DCF changes. ?Therefore, the inverse- or anti- bond holding in the portfolio has zero impact on the portfolio?s actual risk/return behavior, and so it seems to me it doesn?t add any functional value to frame debt as an ?anti? portfolio holding of some sort.

Also, if you were going to do that, to be fair and complete, you must apply that same principle to every single debt the client has (otherwise, it would be rather arbitrary just selecting the mortgage debt).? This adds unnecessary complexity in the asset allocation analysis.

Instead, the appropriate (and only) way to analyze debt is, separate from investable portfolio assets, on the cash-flow side of things.? Simply asking what is the ?optimal? use of the available capital; i.e. what net ?return? do you earn by using capital to eliminate debt, versus what net return could you earn if you kept the debt and employed the capital elsewhere (this will be different for each investor and their unique situations).? This is the way to analyze and evaluate debt, not to mingle it in with your invested assets and classify it as an ?anti-bond? holding within your portfolio.

I was just curious your take on this, and if I am misunderstanding or missing something.? Do you ever consider client?s debt as ?inverse-? or ?anti-? bonds in the context of asset allocation?

Thanks!

When you manage money financial firms, if you do it right, you consider the promises that your firm needs to fulfill.? When will cash be needed to pay obligations?? That helps drive asset allocation, because assets should broadly match liabilities.

Now, I am not a financial planner.? That said, the same principles apply to personal asset allocation.? If someone has a large mortgage or other debts, and he can’t invest his fixed income assets at levels that exceed the yields on those debts with reasonable risk, he should not invest in bonds — he should pay down his debt.? In the case of 401(k)s or IRAs, where there might be matches or tax advantages, the calculation becomes more complicated.? You have to weigh the match and tax deferral vs the negative arb on bond yields vs the mortgage and personal debts.

There is another factor here — how stable is your job?? If stable, it is bond-like, and you can take more equity risk with investments.? If your job has payoffs that vary a great deal with the market — commissions, bonuses, etc., it is stock-like, and you should take less risk in your investing — take excess earnings and pay down the mortgage.? I did that when I went from being a bond manager inside an insurance company, to being an equity analyst inside a hedge fund.? I paid off my mortgage in full, so that I would be free to take risks for my new employer.

As for the article, the concept is not novel.? It is well-known and practiced by institutional asset managers who manage money to the horizons needed by their clients.? As an example, the cash flows of a pension plan are relatively determinate, and the discount rate calculates the value of the liability.? The portfolio should throw off cash when needed in order to minimize risk.

In some cases, where bonds don’t offer enough yield, and equity prices are depressed, it might make sense to tactically mismatch, betting that equities will offer better returns versus the liabilities than bonds would on a risk-adjusted basis.

This argument has made its rounds for the last 20 years in insurance and pension management?? Do we match asset and liability cash flows, or do we trust in the equity premium, and invest in risk assets?? The correct answer is hybrid.? In general, match assets and liabilities, but if there is a significant tactical advantage to not match, then do that.? Think of buying junk bonds in late 1998.? Time to throw matching out the window.? And then in mid-1999, buy equities.

Now, not all clients will allow for that much risk-taking.? Many institutional investors will not let the asset manager take advantage of temporary dislocations.

In general, I think Mr. Roth is correct, but with an adjustment.

In extraordinary times, where bonds yield more than the earnings yields of stocks (think 1987 & 2000), buy bonds heavily, even if you have mortgage and other debts.
In extraordinary times, where stocks earnings yields are much higher than bonds, mismatch and own more stocks relative to bonds.? Just beware deflation, with falling future earnings.
In normal times, an indebted investor should not add to his leverage, but should invest in bonds, or better, pay down his debt.? Being debt-free is an excellent thing, and allows the investor to take more risks when the market is offering bargains.

Debt is either something to be funded by bond assets, or funds a margin account where you outperform the yield, or die.? All of this depends on where the market is in its risk cycle.? Only take risk where it is rewarded.

Sorted Weekly Tweets

Posted on 5 October 2013 by David Merkel

US Government Shutdown

To Lead Is to Negotiate http://t.co/AJTjPESgiI Elements of an interview w/James Baker describing Reagan the pragmatic dealmaker $$ Oct 04, 2013
Pig Sales Fly Blind as Data Cut by Shutdown Hampers Firms http://t.co/MHHnn29XXH Guess what? That’s the way most markets operate $$ Oct 04, 2013
Troops Forage for Food While Golfers Play On in Shutdown http://t.co/Y9HV5IpF3A “the appropriations process has completely failed” $$ Oct 04, 2013
Obama Rewrites Debt-Limit History http://t.co/BIRNHLH7Pm D&R Congresses have used the borrowing limit as political leverage w/a president $$ Oct 04, 2013
US banks fearing default stock up on cash http://t.co/tYXMlQXcIe If money markets freeze, currency will be needed to mediate exchange $$ Oct 04, 2013
Loose monetary policy needed to counter Washington gridlock: Fed officials http://t.co/AmJqqcMQPQ Fed enables intransigence of congress $$ Oct 04, 2013
Republicans Are No Longer the Party of Business http://t.co/Vwa5U0pENS Case not proven; as if the Democrats think of any biz but big biz $$ Oct 04, 2013
Frustrated Republicans Pressure Boehner to End Shutdown http://t.co/m6eSEtXQ5n Likely endgame: Democrats & liberal GOP ally in House $$ Oct 03, 2013
US Stocks Rise as Investors See Limited Shutdown Impact http://t.co/nB5WCCcsd4 Will they say the same thing today off neg mkt action? $$ Oct 02, 2013
Behind the Noise, Entitlement Reform http://t.co/Ed2ug8HoCN This is the elephant in the room; the economic problem behind all the rest $$ Oct 02, 2013
More Than 800,000 Federal Workers Are Furloughed http://t.co/GP0XdAxugH Oddly, this helps point out what true priorities of the govt r $$ Oct 01, 2013
In Government Shutdown, Few Parallels With Most Recent One http://t.co/RmJ7X3iL0Q Maybe shutdown is an alternative mode of running govt? $$ Oct 01, 2013

Companies & Industries

Twitter Look-Alike Ticker Triggers 684% Advance in Penny Stock http://t.co/hLf2VRP6Hs Big difference btw Twitter $TWTR & Tweeter $TWTRQ $$ Oct 04, 2013
Mars Repays $4.4B of Berkshire Bonds Tied to Wrigley Deal http://t.co/U5uSgTXBd8 Now Buffett has tough job of redeploying capital $$ #cash Oct 04, 2013
Twitter Sends Different Message Than Facebook in Filing http://t.co/azMDDPHVwz 32 pages of risk factors, no classified stock, refreshing $$ Oct 04, 2013
Blackstone Opens Europe Spigot as Distressed Deals Surge http://t.co/yYQl2dwhzS As EU banks get reasonable, $BX sees opportunity 4 deals $$ Oct 04, 2013
Alcoa on ?low risk financiers? and parallel metal markets http://t.co/ganjSH2aZg With low interest rates, cheaper to store metal $$ Oct 03, 2013
Beanie Baby Creator Pleads Guilty to Swiss Bank Tax Dodge http://t.co/V8PrsbKEAO He’ll make up the $$ w/a line of Ty the Jailbird dolls Oct 03, 2013
We Are Googling the New York Times to Death http://t.co/OLJ0XsSCRA Use Google 2get free access to the $NYT – broken media revenue model $$ Oct 02, 2013
OGX Upheaval Portends Deeper Bond Loss for Pimco http://t.co/m9Do3MALyM BK is tough on creditors in Brazil; long process, low recoveries $$ Oct 02, 2013
How BlackBerry blew it:The inside story http://t.co/4K7Kw4Y5bL Long article as $BBRY focuses on core biz, misses threat from new entrants $$ Oct 01, 2013
Schwarzman Says Selling BlackRock Was ?Heroic? Mistake http://t.co/G8ZKjxNOZ0 Missed out on 79%/yr returns compounded over 19 years! $$ $BLK Oct 01, 2013
BlackBerry Rare Breakup Fee Seen Deterring Bids http://t.co/uyo9Ra1zzA Watsa gets a free look, while others effectively locked out $$ $BBRY Oct 01, 2013
Why Anglo American Walked Away From Pebble Mine Gold Deposit http://t.co/QwqmjykuD9 Interesting, but only speculations on y $AAUKY left $$ Oct 01, 2013
Commodities ?Super Cycle? Is Seen Enduring by McKinsey http://t.co/Jnj1XwZNKO Marginal costs keep rising as lower costs ores deplete $$ Oct 01, 2013
Storage Wars Seize Metals Market http://t.co/WkX0fsOx3o Aiming 2end games that lock up metal in storage as collateral for loans, I think $$ Oct 01, 2013
Falcone?s Funds Sell Harbinger Group Shares to Leucadia http://t.co/2l8dSyEPKP $HRG funds sell shares 2 $LUK @ a 20% discount 2 mkt price $$ Oct 01, 2013
Of course $LUK has 2 hold onto the shares 4 a while, but still that’s a pretty stiff price 2 pay 4 liquidity $$ $HRG Oct 01, 2013

Finance, Pensions, Etc.

More Than 5,000 Stockbrokers From Expelled Firms Still Selling Securities http://t.co/E5lczvdLJP Don’t buy what someone wants 2 sell 2u $$ Oct 04, 2013
How to Look Under a Hedge Fund’s Hood http://t.co/oKy6ZQWo1q There’s more 2ask than this, but these 7 questions r a good start $$ Oct 04, 2013
Hedge Funds Used Obscure Bond Bet to Win in GM Bankruptcy http://t.co/SaLKh7sg9Q They did hard work with their brains, & won $$ #distressed Oct 04, 2013
8 Incredible Shares On StockTwits About Hedge Fund Market Wizard Ray Dalio http://t.co/tjQ9ecAF1A I added two more resources $$ Oct 04, 2013
Time to Ditch the Yale Endowment Model?http://t.co/aYWfleXE7R Similar to an article I wrote 4 years ago http://t.co/2ox3Zzdaac $$ @M_C_Klein Oct 04, 2013
S&P 500 Pension Status Continues to Improve in September http://t.co/tyL1fqCivB Rising prices for risky assets & more contributions help $$ Oct 03, 2013
Peak-population investing http://t.co/0I5s49iBBC Demographics affect inflation – goods inflation w/many young asset inflation w/many old $$ Oct 03, 2013
10 Terms Investment Pros Use to Raise Money @Reformedbroker http://t.co/cHivwK8uvh Points @ 10 buzzwords w/fuzzy meanings & little truth $$ Oct 02, 2013
Option-Selling Is Not Income http://t.co/zdiP91nKsK Well written,& it needs 2b said. Option “income” vs capital losses & opportunity costs $$ Oct 02, 2013
Eric Schneiderman, Wall Street Time-Machine Sheriff http://t.co/trSBh80ObO Dig deep enough in2 any multiparty trnsctn & u will find dirt $$ Oct 02, 2013
In multiparty transactions, u have 2b careful. Who has more info than u? How r incentives aligned? Y r u lucky one invited 2play w/them? $$ Oct 02, 2013
Student-Loan Straitjacket http://t.co/1keTvDykpV They should look at income-based repayment plans; in many cases they would pay far less $$ Oct 02, 2013
Fab Tourre Wants Another Chance to Explain http://t.co/X4H8b70hVi Did Tourre withhold mind-chging information deal players were entitled2 $$ Oct 02, 2013
Inter-dealer brokers? inside information @FelixSalmon http://t.co/cCcVMM3foF What is fraud vs making/arbing a mkt? http://t.co/6aKN6t0Abw $$ Oct 02, 2013
Top 20 Films about Finance: From Crisis to Con Men http://t.co/nDv0Rz4P4P I added on the film “The Billion Dollar Bubble” Equity Funding $$ Oct 01, 2013
Gibraltar Seen as Europe-Beater for Finance Professionals http://t.co/YzHgQRv82A Perhaps more money per hectare than any other place $$ Oct 01, 2013
Commodity Trader Didn’t Really Believe in Market Prices http://t.co/qVEC4lQB8u Citi mismarked illiquid exchange-traded ethanol contracts $$ Oct 01, 2013
This Sociological Theory Explains Why Wall Street Is Rigged 4 Crisis http://t.co/ff6NWs1GOO Technological efficient w/odd feedback loops $$ Oct 01, 2013

PPACA / Obamacare

Overwhelming Demand 4 Obamacare Shows Potential Success http://t.co/4i3Kb6P8SN Success?? Show you what happened 2me http://t.co/vlrqUxFXzr Oct 04, 2013
How ObamaCare Wrecks the Work Ethic http://t.co/3U2z8PKPwR Saw this a month ago, subsidies raise marginal tax rates 4 lower middle class $$ Oct 03, 2013
The Republicans Fighting Obamacare Aren?t Crazy http://t.co/A61poB4ArU PPACA *can* b repealed, but would take a GOP swing in 2016 2do it $$ Oct 01, 2013
Why must the American people suffer when even so many Democrats don’t want Obamacare? http://t.co/uJfncEetS7 Congress exempts itself $$ Sep 28, 2013

Civil Liberties in Cyberspace

NSA chief admits misleading numbers, adds to Obama administration blunders http://t.co/wsS2qrIW74 Politicians overstate metadata value $$ Oct 04, 2013
NSA Involvement in NIST Encryption Standards Could Make Companies Less Competitive http://t.co/RzRVSYVtiv Does NSA demand backdoors? $$ Oct 03, 2013
On NSA’s encryption defeating efforts: Trust no 1 http://t.co/afq1Fjngzv Big companies r in cahoots w/NSA, can’t b trusted, r lying 2us $$ Oct 02, 2013
NSA Gathers Data on Social Connections of U.S. Citizens http://t.co/oVIYLWdHFi The NSA endangers our civil liberties; we need to end it $$ Sep 30, 2013

Monetary Policy

Will Unconventional Monetary Policy Be the New Normal? http://t.co/nN00ta4UIM Fed is hopeless; they don’t get they r inflating assets $$ Oct 04, 2013
Aluminum Prices: Blame It on the Fed http://t.co/kgjOTbNeqd Low interest rates lead to loans collateralized by aluminum $$ Oct 03, 2013
Don?t Cry for Me, Ben Bernanke http://t.co/unN01G8N8K Developing Countries should get ready for the eventual Fed tightening, if they can $$ Oct 01, 2013

Banking

The Bailout That Never Came http://t.co/cROhzGqjYB Bailout for homeowners was half-hearted at best; 4 banks it was a warm friendly hug $$ Oct 04, 2013
Banks abandon mortgage preapprovals http://t.co/ro6NE8T5Yb Makes the purchases of homes more complex b/c likelihood of financing down $$ Oct 03, 2013
Are Banks Forward-Looking in Their Loan Loss Provisioning? http://t.co/1V6ytChwB2 I would be more inclined to think it is a “cookie jar” $$ Oct 02, 2013
The JP Morgan apologists of CNBC http://t.co/HJgOH3NGvT Media often panders 2 power or they lose access to the powerful people $$ Oct 01, 2013

Other

Duke to NYU Missteps Abroad Lead Colleges to Reassess Expansion http://t.co/1ZoHGD2CeP Have 2 make sure of a good cultural fit first $$ Oct 04, 2013
Freak Grape-Razing Hail Crushes Burgundy Winemakers? Dreams http://t.co/rxSiKaRpvl 2years of hailstorms destroy the prospects of vintners $$ Oct 04, 2013
Migrant Ship Sinks Off Italian Island, Killing Dozens http://t.co/KCYgVt0Bx8 Europe is Elysium 4 these migrants; US is the same 4 others $$ Oct 03, 2013
NFL Free-Agent Lawyer to Unlock $16B in NCAA Athletes http://t.co/nfitchpsSt Free student labor may disappear; may hit big programs hard $$ Oct 03, 2013
Moon walker demo lets wannabe astronauts feel 0.17G http://t.co/BsenBrl8ck Cool. Could b used 4physical therapy after severe leg injuries $$ Oct 02, 2013
Educators in the art of life must have chance of their own http://t.co/HxiCZUOyP3 Certain college depts survive on low paid p/t academics $$ Oct 02, 2013
Worried About Cancer? Get Married http://t.co/PQFp8Q67SD A man & a woman who get & stay married tend to take care of each other $$ #healthy Oct 01, 2013
Gangnam-Style Nip and Tuck Draws Tourists to Seoul?s Beauty Belt http://t.co/2nC182RWtV Plastic surgery becomes a tourist draw 2 Seoul $$ Oct 01, 2013

US Politics & Policy

Small town, big impact: Supreme Court case could define religion’s role in public http://t.co/oD09WqaOaT Govt Ceremonial deism may end $$ Oct 04, 2013
Who Do You Believe: The White House and Wall Street ? or the American People? http://t.co/ZIRZDU1i5p Economic Confidence continues 2drop $$ Oct 03, 2013
Bankrupt Stockton Plan Favors Retirees Over Creditors http://t.co/yZ80M5s5lz Will b difficult 2get thru BK city, unless emplyee benes cut $$ Oct 01, 2013
‘Strings Attached’ Co-Author Offers Solutions for Education http://t.co/BMF9zPqMU6 I learned the most from teachers that were hard on me $$ Oct 01, 2013
Panel Finds Planes Can Handle Use of Electronic Devices http://t.co/hCnZNFfR98 At last, the bad science crumbles & freedom increases $$ Oct 01, 2013
The most predictable economic crisis? http://t.co/XAqVj9QZ9S Implicitly, entitlement reform lies behind almost all our problems in DC $$ Oct 01, 2013
Why I Am Cancelling My Documentary on Hillary Clinton http://t.co/oKxLjUwRDZ No openness from the Clintons dooms a documentary from CNN $$ Oct 01, 2013

Replies, Retweets & Comments

2 all who follow me on Twitter, my account was hacked, & someone sent out a bunch of spam tweets & DMs that I would never send. My apologies Oct 01, 2013

@kltblom when the amount of range for premium variation is only three, it is not a workable system. Anti-selection will occur. Oct 05, 2013
@M_C_Klein I started out as an Asset-Liability Management actuary, and I have traded in illiquid securities, makes me think differently Oct 05, 2013
@kltblom Removed deduction for employer-paid healthcare. Encouraged HSAs, and try to move to predominantly first-party payer model Oct 05, 2013
@TheUncorrelated I willprobably write an article on this next week. Will sound like the one I cited b4 & like: http://t.co/Y8CA0LX9Qi Oct 05, 2013
@kltblom I’m an actuary; since the PPACA was proposed, the health actuaries I have talked with have said tht PPACA won’t work Oct 04, 2013
‘ @JonathanWeil Say run rate EBITDA for 2013 is $50M. If Market Cap of $TWTR is $12B, that is an astounding EV/EBITDA of 240 $$ #nosebleed Oct 04, 2013
@_DM0_ I can confirm that, they have taken down the slides. Pity, quickest way to absorb the material Oct 04, 2013
@Kitsune808 It is not infrequent that @BloombergNews Headlines are misleading, or quirky. They march to the beat of a different drummer Oct 04, 2013
@PlanMaestro I know, but given attention to the video, I thought I would show the PDF that better fleshes out his position. and the slides Oct 04, 2013
Thanks @onlineawards @TightTalk @valuetakes for being top new followers in my community this week (insight via http://t.co/sern3wLA13) Oct 04, 2013
“”Spain?s public debt in 2014 is expected to be the equivalent of 98.9 percent of total economic?” ? David_Merkel http://t.co/HPR50Rjijp $$ Oct 04, 2013
“Two more: 9) And for those that want to read Ray Dalio’s economic template book, it is free here:” ? David_Merkel http://t.co/QLWdRs1odG $$ Oct 04, 2013
@ToddSullivan A computer could do it anywhere by minimizing the distance of internal boundaries subject to equal popoulations. Not hard. Oct 04, 2013
@ToddSullivan We need structural reform 2 end that given gerrymandered districts. A lot of people want change, but districts not competitive Oct 04, 2013
@kltblom If PPACA were mere risk pooling, I might agree. It is a messy ugly law that ignores basic actuarial principles & will not work well Oct 04, 2013
@volatilitysmile They give us different pieces of the puzzle (insight by http://t.co/sern3wLA13) Oct 04, 2013
#FollowFriday Thanks @ReformedBroker @pelias01 @researchpuzzler for being top influencers in my community this week 🙂 Oct 04, 2013
@ReformedBroker The Baby Boomers gray, and money socked away, let finance guys play, make dough every day. Thus so many wealthy $$ managers. Oct 04, 2013
Thanks @ToddSullivan @ReformedBroker for being top engaged members in my community this week (insight via http://t.co/sern3wLA13) Oct 03, 2013
Thanks @TightTalk @BabyFreshNuggz @X9T_Trading for being top new followers in my community this week (insight via http://t.co/sern3wLA13) Oct 01, 2013
Thanks @moneyscience @TopInvestBlogs for being top engaged members in my community this week (insight via http://t.co/sern3wLA13) Sep 30, 2013
@RexHuppke You are a real man, unlike many today. You may be stupid, but at least you are taking action, rather than compromising w/losers Sep 28, 2013

Sorted Weekly Tweets

Posted on 28 September 2013 by David Merkel

China

Chinese Cities Hooked on Land Revenue Fuel Housing Costs http://t.co/8SXwubzUjk Ppl invest in what they think they ctrl; no alternatives $$ Sep 28, 2013
Amway Bankrolls Harvard Course?For Chinese Cadres http://t.co/XVk5MXV2eh May not b pyramid, but successful sellers mostly recruit sellers $$ Sep 26, 2013
Chanos Undeterred by China Growth as O?Neill Bullish http://t.co/xwvC9mOFHa China will become the biggest windshield bugsplat ever seen $$ Sep 25, 2013
Party Will Pay the Price for China?s Rebalancing http://t.co/inQ5BHYMdn The Day has arrived: Michael Pettis is on Bloomberg. Go Michael! $$ Sep 25, 2013
China?s Generation Winnebago Avoids Traffic in RVs http://t.co/Q8z41qGv1j New Chinese status symbol: RVs. Rest while your driver works $$ Sep 24, 2013
China + Gold = 9 Million iPhones Sold http://t.co/DfIAopLDLV Gold may do nothing, but it is beautiful, & beauty drives much marketing $$ Sep 24, 2013
Michael Pettis, in his current newsletter, reminds us that loan growth outstrips ability to repay in China, recent “growth” is a fake-out $$ Sep 24, 2013

Companies & Industries

Meet Hummingbird: Google Just Revamped Search To Answer Your Long Questions Better http://t.co/mtAf5pxGIA Improved Search Engine $$ $GOOG Sep 28, 2013
JC Penney Is on the Brink http://t.co/UtMX5sa3ZT Now $JCP has liquidity, @ a cost, but can they transform their business model? $$ #unlikely Sep 28, 2013
Penney’s Share Offering Prices at a Discount http://t.co/CWVp8dOKln $JCP Danger Will Robinson! Stock price does not hold secondary level $$ Sep 27, 2013
Kat Cole, Former Hooters Waitress, Runs Cinnabon’s $1B Empire http://t.co/sOe9WKUB1v Ppl go gaga 4 Classic Roll. 60% more cals vs Big Mac $$ Sep 27, 2013
Oaktree group to sell US foreclosed homes http://t.co/dUuGn768TI Too many investors chasing residential RE vs owner occupiers $$ #badsign Sep 24, 2013
Meet Prem Watsa: The Man Riding to BlackBerry?s Rescue http://t.co/flg4xn1MkX A case of regret, throwing good $$ after bad $BBRY Sep 24, 2013
Banks Prove Safer Than Industrials in Bond Rally http://t.co/B2t3pbaNGd I would b willing 2 overweight industrials now; they r safer $$ Sep 24, 2013
Do Amazon’s Lockers Help Retailers? Depends on What They Sell http://t.co/Pbd2cPK6zl Works if $AMZN doesn’t sell what u sell, &vice-versa $$ Sep 23, 2013
FireEye Takes Off as Shares Rise 80% in IPO Debut http://t.co/fnY1YkvvD1 Score processes on weirdness, share info globally 2 stop malware $$ Sep 23, 2013

Rest of the World

Irish Billionaire Has ?Boatload? of Customers for Spanish http://t.co/GhyDzrhkhk Get your own Spanish Villa while supplies last! $$ Sep 27, 2013
Debt Disaster Seen Unless VAT Rises to 20% by 2020 http://t.co/fXyeptRNJZ Japan is a bug in search of a windshield; 20% would kill econ $$ Sep 26, 2013
Merkel?s Cold Embrace Leaves SPD Wary of Coalition Talks http://t.co/6pCmU9KgCf If SPD doesn’t compromise, cud a minority government form $$ Sep 24, 2013
Believing Data Not Required W/GDP Warrants http://t.co/36SKEKLcha Do u think Argentina is fudging GDP #s up? Buy Argentine GDP Warrants $$ Sep 23, 2013
For Migrants, New Land of Opportunity Is Mexico http://t.co/jy3XaZeRCA Immigrants r moving to Mexico as the economy deregulates a little $$ Sep 23, 2013
Czechs Yearning for Growth Set to Abandon Merkel Path http://t.co/sU8mxocTL7 No natural political coalition 4 austerity, even when right $$ Sep 23, 2013
Greece Plans Foreclosures to Meet Bailout Demands http://t.co/W7Ryxvv6J6 Inability 2 foreclose gums up Greece’s financial system $$ Sep 23, 2013

Central Banking

Richard Koo says ‘vicious cycle’ taking hold as Fed faces ‘QE trap’ http://t.co/se3uPY5eP1 Similar to my arguments in Easy in, Hard out $$ Sep 27, 2013
Constitutional Money by Richard Timberlake http://t.co/iipZBfnFqm “Treaties may become inapplicable because of changes in circumstances” $$ Sep 25, 2013
US Fed Shouldn’t Give Forward Guidance, Former Bank of Israel Head Fischer Says http://t.co/ZzbTLqTEU9 Correct. Fischer 4 Fed Chair $$ Sep 24, 2013
Why we listen to former FOMC members who r partisans of the Fed, rather than skeptics of central banking, like James Grant, amazes me $$ Sep 24, 2013
Yellen Would Bring Tougher Tone to Fed http://t.co/xoNY2kKWqa Academic economists, like Yellen, do not understand how the economy works $$ Sep 24, 2013

Housing/Mortgages

Mortgage Bonds Without Government Backing Face Tough Time http://t.co/MrtGxmynes Tough 2 mkt private label RMBS, not enough excess spread $$ Sep 28, 2013
Subprime bond bounces back, leaving behind a subprime borrower http://t.co/x7KRB8Rp9n Long article about a deadbeat & his subprime loan $$ Sep 27, 2013
There have been a scad of articles like this, but the guy did not do “due diligence” on the loan, and did not have to buy the house $$ Sep 27, 2013
Home gold rush is over http://t.co/AASXbe14zc Too many investors vs owner occupiers creates an imbalance as smarter players start 2 sell $$ Sep 26, 2013
FHA, Facing Losses, Likely to Tap Treasury http://t.co/Hdpqqdplri Shortfall for Fiscal Year Could b at Least $1B, Early Projection Shows $$ Sep 26, 2013

Financial Sector

BATS Prepares to Take On Big Bell Ringers http://t.co/x8PjU05xE9 NYSE + Arca > BATS + Direct Edge > NASDAQ $$ Graph: http://t.co/rDV3hY7uzf Sep 28, 2013
Shine a Light on Repo http://t.co/KrF4MtaA7Y Did u know that repos r 96 years old? Learn about obscure corner of the fixed income market $$ Sep 27, 2013
The bank that rejects the most mortgages http://t.co/JxD3xhvlY4 $JPM highest rejection rate, $STI lowest, $WFC biggest lender, avg 20.6% $$ Sep 27, 2013
Covenant-Lite Loans Need Uniform Definition http://t.co/RbEywreAEC It would help, but there is always nonstandard data in securitizations $$ Sep 26, 2013
Wells Fargo: New CLO Regulations May Lead to Issuance Slump http://t.co/FcK5NLQvba Forcing securitizers 2 take first losses ruins profits $$ Sep 24, 2013
The VC Secret: 3 Out of 4 Start-Ups Fail http://t.co/jjFrQc9JNP Ratio sounds high, but when VC-backed firm wins, it pays 4a lot of losers $$ Sep 24, 2013
That’s the way 2 manage pension assets if u r big enough. In-source, build up expertise, & keep adding smart people 2 addl asset classes $$ Sep 23, 2013
In-Sourced, Fully Funded, Public, and American http://t.co/ISUDgDvGhC! South Dakota Retirement System manages 65%-70% of assets in-house $$ Sep 23, 2013
America’s latest financial crisis? It’s incredibly personal. http://t.co/yHLcIm7xuR People do NOT understand how to save or handle cash $$ Sep 23, 2013
Value Investor Charles de Vaulx On China, Gold, Apple And Berkshire Hathaway http://t.co/4LgwGyzI7g Longish good interview. $$ $STUDY $BRK.B Sep 23, 2013
Fidelity sued by employees over its own 401(k) plan http://t.co/yo5h32QQD6 Biting hand that feeds them, they object 2 high fees 4 funds $$ Sep 23, 2013
Inside Nasdaq’s succession planning process http://t.co/6uOUsgrpuQ $NDAQ trades at a discount 2 peers; it needs a merger or better mgmt $$ Sep 22, 2013

Other

Billionaires Battle as Bezos-Musk Companies Vie for Launch Pad http://t.co/jEOhw4xXac Fight over a launchpad @ Kennedy Space Center $$ Sep 28, 2013
Supersonic Drones Can Outmaneuver Humans. So Why Do We Still Need Pilots? http://t.co/J5N9FhDVbH Pilots fly better in complex situations $$ Sep 28, 2013
Postal rate hike proposal faces Senate scrutiny http://t.co/aq7gKcDnm1 First Class would go to 49 cents, as internet slowly eats USPS $$ Sep 26, 2013
This Year’s SAT Scores Are Out, and They’re Grim http://t.co/04jtzUJMtL <50% of 2013 graduating seniors got “college-ready” SAT scores $$ Sep 26, 2013
Little GAAP Could Drive Accounting Simplification http://t.co/Ti24zRMFY2 If the acctg is 2 complex, biz is probably 2 complex as well $$ Sep 26, 2013
Work is not waiting for a job. If you don’t have a job, start your own business. http://t.co/pkUXupCOJg Sep 25, 2013
Investors Are Buying High, Yet Again http://t.co/PaTcowZvk8 Opportunities are fewer now, listen to Buffett & Klarman & trim back risk $$ Sep 25, 2013
Tweet tips: Most effective calls to action on Twitter http://t.co/PrcHMiNDMc! U could also ask them to favorite your tweet $$ $TWTR Sep 24, 2013
Death Dinners at Baby Boomers? Tables Take on Dying Taboo http://t.co/68nxd534eB Good 2 talk about death, but r u ready 4 the afterlife? $$ Sep 24, 2013
Here Are The Best Fundamental Investors To Follow On StockTwits http://t.co/a72aV98KUo A good list of resources & teachers; I’m listed #5 $$ Sep 23, 2013
A Backdoor Roth IRA for a High-Income Couple http://t.co/79fYNIF5d6 Invest in regular IRA, convert 2 Roth, repeat process annually $$ Sep 23, 2013

PPACA / Obamacare

Will Obamacare hurt job creation and marriage? http://t.co/n7h7BEkrXK Belief in Obamacare is akin 2 belief in magic; resources r free $$ Sep 27, 2013
Prices Set for New Health-Care Exchanges http://t.co/J4VFjvF5HR Younger Buyers May Face Higher Insurance Premiums $$ Obamacare #FTL Sep 26, 2013
Best of the Web Today: The Young and the Clueless http://t.co/3GbWYOqipM ObamaCare may work, provided no one responds to its incentives. $$ Sep 26, 2013
Young Invincibles Caught in Crossfire Over Obamacare Cost http://t.co/hgyCGtZMaj Note how Obama packs the gallery w/young people $$ Sep 24, 2013

Municipal Debt / Detroit

Stockton to Unveil Plan Including Cuts for Creditors http://t.co/zBj3ngCXMz Trying to preserve pensions may draw lawsuit from bondholders $$ Sep 28, 2013
Detroit spent billions extra from pensions http://t.co/UBdb3GaqtI That’s what u get 4 having 1-party rule, w/no 1 to look over shoulder $$ Sep 27, 2013
Orr proposes freeze for Detroit pension funds http://t.co/sSFtqADV23 Unions don’t get that they destroyed the finances of Detroit $$ Sep 27, 2013
Judge Rules Retiree Health Protected Like Pension http://t.co/xg7bcR28oM! Loopy ruling sets Los Angeles on a course 2 bankruptcy $$ Sep 25, 2013
Hands off DIA, pensions, Detroiters say in poll http://t.co/dHmp2qjc5n! Detroit is an example of a complex system self-destructing $$ #dying Sep 23, 2013

Energy

Pipeline Billionaire Ready for Next Round of Deal Making http://t.co/KhTwsdBDRs $ETP CEO thinks there is room to consolidate pipelines $$ Sep 28, 2013
Six Myths About Renewable Energy http://t.co/G0dB1SJ2aU Balanced article. 3 myths pro, 3 myths con. It will b a minority of total energy $$ Sep 23, 2013

The Economic views of Ray Dalio

One more note, this slideshow put together from BI moves a lot faster than Dalio’s video or the… http://t.co/ytGIHQEaxP Sep 24, 2013
And for those that want to read Ray Dalio’s economic template book, it is free here: http://bwater… http://t.co/f1AVlDufxo Sep 24, 2013

US Politics & Policy

Texas Counties Lead in Job Growth, Lag in Wage Gains http://t.co/XdyNF4ZEJt No surprise, but biz leaves CA & there is high unemployment 2 $$ Sep 27, 2013
CHRISTIE KEEPS PENSION PROBE RECORDS FROM PUBLIC VIEW AS GOVERNOR EYES 2ND TERM http://t.co/NmnbLRxRwd! Running mate has pension scandal $$ Sep 24, 2013
Open-Government Laws Fuel Hedge-Fund Profits http://t.co/P5vZBpkiDq Hedge funds file FOIA requests 2get FDA reports on drugs, etc. $$ Sep 23, 2013
At 77 He Prepares Burgers Earning in Week His Former Hourly Wage http://t.co/jQJaWTiQd3 Example of “failed 2 save” Don’t let it happen 2u $$ Sep 23, 2013
Self-Driving Vehicles Progress Faster Than Rules of Road http://t.co/1lFAmdlJKz Regulations, laws, insurance all need 2b revised 4 this $$ Sep 23, 2013
The Hidden Classified Briefing Most of Congress Missed http://t.co/eSBnz0uPxd How intelligence gets disseminated w/o getting disseminated $$ Sep 23, 2013
How the NFL Fleeces Taxpayers http://t.co/OeG5kRTM2O Longish article on how they get free stadiums, pay no federal or state taxes, etc. $$ Sep 23, 2013
Facebook ?Likes? Are Now Legally Protected Speech http://t.co/Oi7XQkYVlB Political speech is protected by the 1st Amendment even “like” $$ Sep 22, 2013

Wrong

Over the Top: Jordan R. VanOort Earns Prestigious CFA Designation http://t.co/jRMcdyRq1R CFA designation is good, but prestigious? $$ Sep 28, 2013
& really, when there are over 100,000 of us, does receiving your CFA Charter really rate a press release? Tougher to become an Actuary $$ Sep 28, 2013
Wrong:Pimco shook hands with Fed – & made a killing http://t.co/gBlELQ6U7p 2 notes: agency MBS r easy 2 understand, & TBA mkt not obscure $$ Sep 27, 2013
Point: Fed could have easily done this internally. What! They can’t find any among their 1000s of Ph.D. economists to get simple mkts? $$ Sep 27, 2013
It is probable that enough data on what the Fed would do escaped over the transom 2 give PIMCO & the other firms insider info. $$ Sep 27, 2013
Wrong: New idiots, same as the? actually these idiots might be worse http://t.co/Xa5jGmbQII US economy grew faster under balanced budgets $$ Sep 27, 2013
Wrong: Reduce working week to 30 hours, say economists http://t.co/HiI7Zmhimo More work means more production means more GDP, Consumption $$ Sep 27, 2013
Loony: Detroit Union Seeks 2 Revive `13th’ Pension Check Policy http://t.co/Lf5YMVBKxW Practice that continues 4 28Y is a tacit agreement $$ Sep 27, 2013
Wishful thinking: Let ObamaCare Collapse http://t.co/n3yNizNAfP Until the US itself fails, no entitlement has ever been eliminated $$ Sep 26, 2013
Wrong:Shinzo Abe: Unleashing the Power of ‘Womenomics’ http://t.co/R00AN5pUEH This comes from nation w/a shrinking population. Ridiculous $$ Sep 26, 2013
Wrong: How Sensitive Is Public Pension Funding to Investment Returns? http://t.co/hSeoOLsvrc! Should use mkt-based assmptns not historic $$ Sep 25, 2013
Wrong: US city, county public pension levels sank in 2012 http://t.co/o2JUwsi5JF! 2 optimistic, b/c risk assets bottomed in late 2002 $$ Sep 25, 2013
Wrong: Don?t Be Alarmed by Obamacare?s Failures http://t.co/fS63xQpaaP PPACA doesn’t make actuarial sense, young people won’t participate $$ Sep 24, 2013
Wrong: Yellen Isn?t a ?Knee-Jerk Dove,? Kroszner Says http://t.co/0aeTM6BIiB Favoring negative interest rates == ?Knee-Jerk Dove? $$ Sep 24, 2013

Replies, Retweets & Comments

Thanks @TightTalk @BabyFreshNuggz @X9T_Trading for being top new followers in my community this week (insight via http://t.co/sern3wLA13) Sep 27, 2013
“Here is part of my solution: accounting for repos should be bifurcated, so that is not treated ?” ? David_Merkel http://t.co/caWGlbe3eL $$ Sep 27, 2013
Loonies, Detroit is dead MT @ToddSullivan: RT @AmyResnick: just wow. Detroit Union Seeks to Revive `13th’ #Pension http://t.co/u3XJAER0bi $$ Sep 27, 2013
Believe MT @ReformedBroker: You’re not gonna believe this – but Detroit’s pension doled billions left and right http://t.co/9i5MinpGAX $$ Sep 27, 2013
RT @ezraklein: Perhaps if President Obama makes the House GOP 300 sandwiches, they’ll agree to lift the debt ceiling. Sep 27, 2013
#FollowFriday Thanks @ReformedBroker @pelias01 @researchpuzzler for being top influencers in my community this week 🙂 Sep 27, 2013
‘ @allstarcharts @jfahmy The 1st discipline of investing/trading is humility; even if you know more, the timing/environment can be tough $$ Sep 27, 2013
Commented on StockTwits: I think Watsa can be trusted. Aside from financials in the old days that were dodgy, I th… http://t.co/dJ8g2rVKmK Sep 27, 2013
Thanks @abnormalreturns @dpinsen for being top engaged members in my community this week (insight via http://t.co/sern3wLA13) Sep 26, 2013
“I never directly pay for research… most of it is freely available on the web. What is not, I?” ? David_Merkel http://t.co/EAk37XXNdJ $$ Sep 26, 2013
“This is already known by those that study the statistics. Look at year over year figures, you ?” ? David_Merkel http://t.co/5J46Rm19vo $$ Sep 26, 2013
I just left a comment in “We’ve got bubbles, we’ve got troubles – MarketWatch” http://t.co/P11awJw1KQ Sep 26, 2013
‘ @Reddy Cummings is my gerrymandered rep. He is by far one of the most intellectually underpowered members of the House, & that says a lot Sep 25, 2013
@moorehn @ReformedBroker @SimoneFoxman @SallyPancakes @kensweet @jennablan They r favorites of mine. $$ Sep 25, 2013
Entitlements will have to be reduced; it is only a question of how and when. Druckenmiller’s presentation:… http://t.co/BsA9S78RTI Sep 24, 2013
Thanks @MarshaCollier @EdmundSLee @rwohlner for being top new followers in my community this week (insight via http://t.co/sern3wLA13) Sep 24, 2013
Thanks @researchpuzzler @pelias01 for being top engaged members in my community this week (insight via http://t.co/sern3wLA13) Sep 23, 2013

On Alternative Investments

Posted on 6 September 2013 by David Merkel

What makes an investment alternative?? Typically, it is because not many institutional investors own it.? But why don?t they own alternatives?? What attributes can characterize them?

Lower Liquidity ? this can take the form of long lockups for private equity, liquidity limitations on hedge funds, Real Estate LPs, etc.
Limited market for trying to sell out of limited partnership interests early
Can go both long and short financial instruments, use derivatives
Can hold commodities and collectibles (Art, wine, who knows?)

Typically, the form of the investment is a limited partnership.? The limited partnership can own all manner of assets, and short some of them also.

As with most valid investment ideas, those that get there first do the best.? You don’t want to be the last one to the party — you buy into a saturated market at an overvalued price.? Far better to avoid the market than to be the last one in.

You have to understand, there is nothing truly different about alternative investments.? They may invest in private businesses, and lever them up, but the returns aren’t greater than if we levered up public companies to the same degree.

They may go long and short, but there are so many trying to do it that the limits of arbitrage are tested, which is a major reason for why hedge funds are doing so badly.? When you have a lot of parties trying to make differential bets, the reward to the exercise declines.

Briefly, while working for Finacorp before it liquidated, I had the opportunity to give advice to some large pension plans that were charging into alternative investments in 2009.? I counseled them to stick to more liquid investments, because alternative investments had become common.? Alternatives are not magic — you have to evaluate them like any business, and ask whether the entry price discounts a high return or a low return.? Are the commodities/collectibles in over- or under-supply?? What possibility might you face of needing to raise liquidity at an inopportune time?

There are two matters affecting any investment:

Underlying behavior of the asset in term of its relative value, and
Behavior of those who hold the investment, their perception of relative value, and their need for liquidity.

To give an absurd example, think of Bernie Madoff.? The actual value of the assets never did anything.? But parties owning interests in Madoff’s “fund” needed to raise liquidity when the public equity markets plunged in 2008, which led to the insolvency.

Investor behavior affects asset prices.? Big surprise, not.? This is Ben Graham’s voting machine.? The weighing machine eventually catches up when there are liquidity events where investment vehicles get dissolved for cash or other securities.

This is not to say that there is no superior management talent with respect to alternative investments, but that it is subject to the same limits as public investments.? As more capital is allocated to a manager, he moves down his list and says, “Okay, what’s the next best thing to which I can allocate capital?”? Too much money kills even the best of managers.

Perhaps the best way to go is to focus on the Seth Klarmans and Howard Marks of our world, and be opportunistic.? Hold cash when it makes sense, or send it back to the limited partners, but invite them back and invest heavily when conditions warrant.

My view is this: given the wide level of investing in alternative investments, there is no reason why they should outperform, and no reason why they should be uncorrelated with other risk assets, because the same owners own both.

The Stock Price Matters, Regardless

Posted on 26 July 2013 by David Merkel

I was reading an article at Bloomberg.com yesterday, If Only Everybody Was Paid More.? Okay article, mostly even-handed, then I looked at the comments section, and a writer was kvetching about companies didn?t care about their stock price because management had more than enough money to do what they wanted.? The stock price did not matter, because secondary trading puts no money into the hands of the company.

I started to write a comment, ?You don’t understand the stock market?? but after ten minutes, I realized that I had a blog post, and so I copied it to a file, and am completing it now for my readers, who are far larger, and more intelligent than the comment stream at Bloomberg.com.

The price generated by secondary trading does the following to help a company:

If the price is low relative to net assets or potential earnings, it will attract new shareholders that will angle for change.? Those investors will aim for control, or for certain value-enhancing actions like a special dividend, a spin-off, etc.

If management/board thinks the price of the stock is undervalued, they will be among those buying shares in the secondary market, improving the value of the shares for the remaining shareholders.

If management/board thinks the price of the stock is overvalued, they may look at other companies to buy that are reasonably priced or cheap that will make their firm more useful.? At that point, their stock is a useful currency for acquisitions.

The stock price also serves as a guide to dividends, as it goes higher, often the dividend will go higher.? As the stock price goes lower, the dividend will stay the same, until it is unsustainable.? When it is unsustainable, the dividend will drop precipitously or be eliminated.? When that happens, the stock price will drop more, but the company?s bonds will rally.

A company with a high valuation and excess cash may pay a special dividend to enhance the value, as Microsoft did in the last decade.

Companies with a high valuation may decide to do a secondary offering if they run across an idea that they want to try internally that will require a great degree of investment.

Corporate bond and loan pricing is affected by the stock price.? Typically companies with high valuations get lower rates than those with low valuations.

Note that if stock valuations get too low, investors start to distrust the preferred stock, corporate bonds, and bank debt, in that order.

Also consider the stock options, profit-sharing plans, and any 401(k) match that happens in the corporation.?? They have a significant effect in motivating employees to do better.? As the price rises, so does morale.? Vice-versa when the price falls.

To summarize: the price that a stock trades at is very important to a corporation, even if it is not receiving any money directly as a result.? In general, the higher the stock price in the secondary markets, the greater the number of financial options that management has, and vice-versa.

Corporate Effects

The stock price matters to defined benefit pension plans, endowments, etc., because it affects solvency and ability to spend.? It affects fund managers, because a high market capitalization makes it more painful for them not to own your stock, if they benchmark against an index that the company in question in it.

And, if you get big enough, index inclusion means you get a dedicated bunch of shareholders that aren?t leaving anytime soon.? The rewards get bigger until you get into the Holy Grail, the S&P 500.

Conclusion

So, yes, it does matter what the stock price is to a corporation, even if the company does not receive any money as a result of the trading.