On Game Theory and Politics

On Game Theory and Politics

Game theory has always been relevant to American politics, and politics generally.? The basic rule in a multiple player game is “create a coalition that has a majority of the voting interest,” and you win.? Because of division of powers, in the US, this is more complex than in a parliamentary setting.? But let’s take as an example the US House of Representatives.

Imagine for a moment that the House has the following breakdown:

  • 45% Democrats
  • 45% Republicans
  • 10% t-party Republicans

I don’t think that set-up is far from the truth, but how would anyone get a majority there?? In this stylized example, there are only three ways to do it:

  • Democrats ally with Republicans, and the center rules. “La grande coalition”
  • Democrats ally with the?t-party — good luck with that.
  • Republicans ally with the t-party. (And any proposal gets shot down by Obama, if not the Senate.)

The fourth possibility is that nothing happens, which has been my default view for some time, and we go over the cliff and hit the debt ceiling.

This is why a small part of our legislators can play such a big role.? One can argue that it is unfair, but they are playing by the rules, and the results are not all that different from what European countries with multiple parties experience.? You have to assemble a coalition in order to govern.? Often it is one small party near the center or the edges that holds the balance of power.

Thus, in? situation like this, how could it get resolved? Obama needs to talk to the Tea Party and agree to something mutually acceptable.? Ronald Reagan reached across the aisle to Democrats.? Bill Clinton did deals with Republicans.? Obama needs to do a deal with the t-party, or strike a deal that non t-party Republicans and Democrats could accept.

My view here is different than most, but in my view there are two more intransigent parties here: Obama and the t-party.? If the the non-t-party Republicans and Democrats in the House could agree, that proposal could go through the Senate, and be signed by the President.? Boehner should not negotiate with Obama, but Pelosi.

The alternative is going over the fiscal cliff, which I have argued for a longish amount of time might not be so bad, though Congress will regret ceding control of spending to he Executive Branch.? At least the budget will be balanced, and we will have more certainty on economic policy.? Also, it will force a better negotiation, and sharpen the concerns of voters.

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If we really want to improve our nation, we need to take action to remove the entrenched powers of the Republicans and Democrats, so that other parties can get some representation.? We need to have laws such that anyone can submit a redistricting map, and so long as the map meets the test of other laws, the map with the shortest amount of internal boundaries wins.? Maryland, which is a poster child for corruption, would be far better governed if the power was taken out of the hands of entrenched political interests, and given back to the people.? Or at least a computer, which can be neutral.

Governments mostly reflect cultures, leaving aside gerrymanders and such. If we want to improve the US, we need to improve our own moral nature individually.? If we are weak and lazy as individuals, so will our government be, and it will be our fault collectively that we let a great nation fail.? If a culture fails, the nation will not be far behind.

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Macroeconomics

 

  • Here’s my plan for reducing the deficit: http://t.co/XJPjf8A5 #mydeficitplan via @wsj Draconian, I know, but the budget shoould b balanced Dec 21, 2012
  • Canada?s exports crucial as sluggish growth continues: IMF http://t.co/iIOJ6PoF Bank of Canada should raise rates 2 reduce excessive debt $$ Dec 21, 2012
  • Everything You Need To Know About the Economy in 2012, in 34 Charts http://t.co/aXnjSkR0 Good stuff; could have been formatted better $$ Dec 21, 2012
  • Fiscal Cliff’s Dirty Secret: It’s Not About Taxes At All, But Too Much Spending http://t.co/UY8rKW9h We need 2 deal w/SS, Medicare & Defense Dec 20, 2012
  • We?ve Nationalized the Home Mortgage Market. Now What? http://t.co/YSCrvVmK Congress loves 2 have cows around that they can milk for $$ Dec 20, 2012
  • EU Banking Re-Unions http://t.co/khSA0co0 The lack of a timetable indicates that things aren’t really finalized; not sure this will fly $$ Dec 20, 2012
  • ?Spending Cuts? Lose Something in Translation http://t.co/DYFxVMno Only in DC is reducing planned growth in spending called a cut $$ Dec 20, 2012
  • Money Funds Brace for Flood http://t.co/4J7VWuxx MMFs r between a rock & a hard place: loose Fed policy & regulatory over-reach $$ Dec 20, 2012
  • Wall Street’s Biggest Geniuses Reveal Their Favorite Charts Of 2012 http://t.co/at12mMsV Very long, but lots of good stuff $$ Dec 20, 2012
  • My forward estimates, derived from TIPS are rising, 2014 inflation, and 2018-2022 inflation. The latter has… http://t.co/tgrGfiDG Dec 19, 2012
  • Estimated 2018-2022 inflation rate continues to rise: http://t.co/ebqeM5KJ Stagflation may be coming. cc: @federalreserve #stagflation $$ Dec 19, 2012
  • Estimated 2014 inflation rate continues to rise: http://t.co/ZrvIc5Nk Stagflation may be coming. cc: @federalreserve #stagflation Dec 19, 2012
  • Economics may be dismal, but it is not a science http://t.co/I6B9LbSw No universal economic theory, & new economic thinking must be eclectic Dec 18, 2012
  • Fisher: Fed Risks ‘Hotel California’ Monetary Policy http://t.co/fRKOYl9d When the Fed starts 2 tighten, it will b hard 2 do $$ Dec 17, 2012
  • FDIC Guarantee Program Set to Expire After Senate Block http://t.co/qPdQNWQF Will squeeze the short end of the yield curve further $$ Dec 17, 2012
  • US Banks Lack Liquidity to Withstand Crisis, Study Says http://t.co/psmQEP1z Liquidity mismatches r pernicious; key risk gets ignored $$ Dec 17, 2012
  • Mkts r discounting mechanisms. Temporary events like bond ratings, debt ceiling & fiscal cliff should not affect market much $$ Dec 17, 2012
  • So, as an example, if the govt runs a deficit, it should not stimulate much b/c people discount future econ adjustment b/c of more debt $$ Dec 17, 2012
  • Same 4 monetary policy; the Fed can “stimulate” as much as it likes; mkt players discount the future removal of policy, inflation, etc. $$ Dec 17, 2012
  • Cliff? What Cliff? http://t.co/QEvklDQU Or maybe, just maybe investors don’t care whether we go over the “fiscal cliff” or not. $$ Dec 17, 2012

 

Stocks & Sectors

 

  • There are 272 gold & silver companies trading on US exchanges or OTC. 59 of them have mkt caps > $100M. 22 of them have mkt caps > $1B $$ Dec 21, 2012
  • Aviva Sells US Life Business to Apollo for $1.8B http://t.co/UqM2kqyr When Aviva bot Amerus, I said that they overpaid massively. Proof $$ Dec 21, 2012
  • Value Investing In Practice: A Conversation About Oaktree Capital http://t.co/4FVok5wz Good value investing does not hyper-diversify $$ Dec 20, 2012
  • ICE in Deal to Buy NYSE http://t.co/ik348vsZ New era; expect 2c more deals like this. As an aside average holders of $NYX stock lost $$ Dec 20, 2012
  • Buffett’s Leading The Corporate Buyback Surge http://t.co/U3piJgDv He has the $$, & 1.2x BV is a defensible floor ||| FD: + $BRK.B Dec 19, 2012
  • Investment Fads and Themes by Year, 1996-2012 http://t.co/cvLFKyRE @reformedbroker on what the broad themes this year & back to 1996 $$ Dec 19, 2012
  • Alterra up after deal, analyst positive on Bermuda peers http://t.co/Y5jTB40c Room 4 a new round of consolidation. $MKL buys $ALTE $$ Dec 19, 2012
  • $ALL Bets on Home Insurance as Stock Rally Withstands Sandy http://t.co/XBQOOSB5 Insured damages (excl flood) low4 Sandy; premratesflat $$ Dec 19, 2012
  • Stocks Held Hostage as CEOs Plan Spending Cuts http://t.co/5c7nBKAS It is difficult to avoid deflation; so much uncertainty presently $$ Dec 18, 2012

 

Credit & Fixed Income

 

  • Swaps ?Armageddon? Lingers as New Rules Concentrate Risk http://t.co/QK3s19Hz Clearinghouses r not a panacea; it is possible 4 them 2 fail Dec 21, 2012
  • Americans Hacked Don?t Know Chamber Left Them Alone http://t.co/DSBDUijq Common programs place yr computr @ risk; CoC defends SW makers $$ Dec 21, 2012
  • The Indianapolis 500 of Corporate Bonds Yields http://t.co/dCamXED3 Too much $$ flowing into corporate credit; feels like 2006 Dec 20, 2012
  • India Cash-for-Gold Loans Hide Shadow-Banking Risks http://t.co/BGnO4YWI 2much lending creates a mess; 2much secured lending creates a panic Dec 20, 2012
  • Pimco Sees Spreading Slowdown Boosting [Australian] Bonds http://t.co/oDFSkGoF Pimco buying the debt of fringe developed nations $$ Dec 19, 2012
  • CAB Legislation Expected in January http://t.co/TSuxBmM4 California legislation proposed 2 limit issuance of Capital Appreciation Bonds $$ Dec 19, 2012
  • Why China May Be Facing US-Style Credit Crunch http://t.co/99xMzC3M “To some extent, this is fundamentally a Ponzi scheme,” [Xiao] said. $$ Dec 19, 2012
  • Pimco’s Gross Cuts Back on MBS http://t.co/4FaxLTKq Lightening up on MBS & Corporates, buying developed fringe, sticking w/TIPS $$ Dec 19, 2012
  • Mind the rate risk http://t.co/nVqjlWW9 Rates may stay low 4 a while, but when they run up, total returns could b worse than 1994 $$ Dec 19, 2012
  • Spain House Prices – Deconstructing Spain http://t.co/7ARRPZqS Housing prices continue 2fall, more foreclosures, setting up bad bank fund $$ Dec 17, 2012

 

Energy

 

  • Valero Received Approval 2 Ship US Crude 2 Quebec Refinery http://t.co/ojABCqu1 Could b start of something big: US exports oil FD:+ $VLO Dec 20, 2012
  • Extracting shale oil from a Dead Cow http://t.co/bok4bNE7 Interesting: after the expropriation of Repsol that oil majors line up4more $$ Dec 20, 2012
  • Gasoline at US Pumps Drops to Lowest in a Year on Supply Gain http://t.co/4pI5SXiV Good news coming to users of refined fuel products $$ Dec 19, 2012
  • California refiners dreamin’ of shale oil face hurdles http://t.co/vJgiW4rm Many efforts t get cheap oil 2 CA; $24/bbl price difference $$ Dec 17, 2012

 

Other

 

  • CEOs Concerned about the Time and Cost of Implementing Predictive Analytics http://t.co/QcABrcFH Big data facilitates cluster pricing $$ Dec 20, 2012
  • In the Flesh: The Embedded Dangers of Untested Stem Cell Cosmetics http://t.co/de2aio1V Adult stem cells can do as much harm as good $$ Dec 19, 2012
  • The First Time Tech Ruined the Music Business http://t.co/d0RE4002 As technologies improve all manner of “rights” issues crop up $$ Dec 18, 2012
  • Advisers Question Modern Portfolio Theory http://t.co/lLbCVvgL Look through the security 2 the underlying economics of the investment $$ Dec 17, 2012
  • Twitter has started rolling out the option to download all your tweets http://t.co/IIOVO6mJ Not common yet, but may b coming soon $$ Dec 17, 2012
  • Schools Safer Than 1990s as Educators Anticipate Killers http://t.co/aQaB6G6Q Students r far less likely2b killed in school than elsewhere Dec 17, 2012
  • Highest-Paid California Trooper Is Chief Banking $484,000 http://t.co/JwgYWfg2 Giving officers comp time rather than $$ 4 unused vacation Dec 17, 2012
  • ‘Followers for sale’: Twitter’s very own black market http://t.co/HKCqo074 Fake Follower Check will estimate how many followers r real $$ Dec 17, 2012
  • SEC Says Asset Firm Manipulated Trades to Enrich Some Clients http://t.co/L8IJQ77k I remember their ads, proclaiming their track record $$ Dec 17, 2012

 

Wrong

  • Bad idea: Africa Dreams of Building Telescopes to Study Space http://t.co/gSwkKIBs Would make more sense 4 Africa to fix agriculture $$ Dec 20, 2012
  • Wrong: US should intervene in Nagorno-Karabakh process at the highest level http://t.co/2tJTKtht We should stick 2r own business $$ Dec 18, 2012
  • Wrong: This is why I generally don’t like Quartz; pretending to be smart $$ RT Our favorite charts of 2012 http://t.co/w2bvLDvX Dec 18, 2012

 

Replies & Comments

  • “This would have been a better article if you had put separators between each graph/explanation.” ? David_Merkel http://t.co/uoMy61H1 $$ Dec 21, 2012
  • @EddyElfenbein Thanks, Eddy. Dec 19, 2012
  • @geekpryde Hey, thanks for the kind words, I appreciate that you follow me. Dec 19, 2012
  • @VIXandMore Ludwig is letting us down, and 3 days after his birthday. Call Schroeder 😉 Dec 19, 2012
  • @Alea_ Cool new avatar, I like it Dec 19, 2012
  • @Money_in_Stereo Well said, though I am not an expert there. Thanks for sharing that. Dec 18, 2012
  • @BarbarianCap Hint: if company is offering u a nice buyout, they r offering less than its worth, unless u no more about when u will die $$ Dec 18, 2012
  • @volatilitysmile @carney I knew a close adviser of Mozillo; he told me stories of how disconnected Angelo was w/reality in 2009 $$ Dec 17, 2012
  • @nicster There have been many changes, but they are all local, and don’t make the news. US Govt was stupid on the shoe bomb. Local better $$ Dec 15, 2012

Retweets

  • Amazing RT @moorehn: “the average lifespan of American musical superstars in the pop, rock and rap genre is only 45.” http://t.co/uXVNuStF Dec 20, 2012
  • Practically. Old bond mgr rule: underweight the most rapidly growing debt class $$ RT @ToddSullivan: didn’t they already do student loan? Dec 20, 2012
  • Remember deriving formula when younger $$ RT @munilass: Twelve Days of Christmas and tetrahedral numbers http://t.co/VVNnyU2V (via @ptak) Dec 20, 2012
  • You can say that again $$ RT @japhychron: @AlephBlog Always funny the way they call economics a science. Studying people is anything but. Dec 18, 2012
  • Banks are insolvent & w/large & rapidly growing budget deficit $$ RT @FGoria: DJ: Cyprus May Be Days Away From Default — Fin Min Official Dec 17, 2012
  • Sad & dumb $$ RT @carney: You’d never guess who has a completely self-serving & bonkers theory of the financial crisis. http://t.co/LIAd8WqB Dec 17, 2012

 

Twitter Summary

  • My week on twitter: 72 retweets received, 1 new listings, 85 new followers, 132 mentions. Via: http://t.co/SPrAWil0 Dec 20, 2012

 

Book Review: The Snowball, Part Three

Book Review: The Snowball, Part Three

Compounding

If you have to make it simple, Warren Buffett is in the compounding business. That is what he has done since he was a young boy. He started with selling gum. He moved on to working inside the family firm.

Once his father moved onto DC as an idealistic Congressman, Buffett had a paper route, and as his assets began to grow, he bought a farm and other assets.? He was always trying to grow his net worth.? That is a constant with Buffett ? he has always tried to grow his net worth.

By the time he linked up with Ben Graham, there were still a lot of ?cigar butts? to pick up and puff.? In that era compounding was easy because the post-depression competition was so low in stock-picking.

But by the late 1960s almost all of the ?cigar butts? had been picked up and smoked.? Easy pickings were gone, and Buffett was saddled with an unproductive textile company ? Berkshire Hathaway, and a mediocre-to-bad department store in Baltimore.

He decreased the activities of the textile company, and reinvested the free cash flows predominantly into insurance, including buying half of GEICO.

(As an aside, Buffett was not a great manager of insurance companies at the beginning, and even the middle.? His early companies had their issues.? Jack Byrne did well running GEICO, followed by Tony Nicely.? Buying Gen Re was a mistake, at least initially ? he bought something so complex, and he assumed that all would be fine, setting himself up for losses in the derivative book, and also in the casualty book, where they were reinsuring losses to avoid accounting issues.)

Then came the era of investing permanent capital, where he bought the ?sainted seven,? and they produced profits for him.? He made more money off his public equity investments in the era of the 80s & 90s, but in short order thereafter it shifted.? Berkshire Hathaway was no longer an investment company akin to a closed end fund or a business development company ? it was a full-fledged conglomerate.? That?s how we should think of it today.? Berkshire Hathaway is a conglomerate that gets a lot of its funding from insurance premiums.

He occupies a unique niche in business.? He will acquire entire firms that are attractive to him, does not change their underlying culture, and rarely if ever sells them.? This appeals to entrepreneurs who built a unique culture, and love their employees.? They will sell to Buffett, because alternative acquirers very likely would destroy the employees and culture for the sake of short-term gain.? Buffett is focused on the long run, and is willing to let a subsidiary underperform for a while, before he sends in additional management to sort things out.

On Buffett?s Wisdom

Buffett has a tremendous memory. He knows all manner of statistics regarding industry, which informs him in his investment decisions.? That is one reason why he makes so many wise decisions.

But another area of Buffett?s wisdom was against the Efficient Markets Hypothesis.? Whether in his debate against Michael Jensen in 1984, which helped to produce the article, ?The Superinvestors of Graham and Doddsville [PDF, 13 pages],? or in his annual shareholder letters, that risk is not volatility ? risk is the permanent impairment of capital.

If you work with a margin of safety, and buy companies that will produce free cash flow, and can grow free cash flow, you will be safer than most investors, and probably more successful as well.

I?ll finish up this review tomorrow.

Blog Notes

Blog Notes

Once again, I have an article the Baltimore Business Review.? You can download it here.? My article is on page 40 of the PDF.

The Baltimore Business Review is unique, a collaboration between Towson University, and the Baltimore CFA Society.? The CFA Institute highlighted it in the past year, though I can’t find the link.

My article deals with what drives residential housing prices, and sadly, it comes to rather ordinary conclusions.? I hate it when I get a normal? conclusion.

Have a read, and tell me what you think.

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Second note: I will be the conference blogger for the NYSSA International Financial Reporting Conference taking place on January 10th.? There is a discount code for Aleph Blog readers: Aleph10, where you save 10%.? Note to CFAs: there is another code where you can save 20%, but I don’t remember what it is.

Accounting is important, and if you are a fundamental investor, it pays to understand it well.? I write this as one who had to learn a lot after becoming an actuary.? I might not know the nuances of all accounting, but I had to learn a lot as I did life insurance accounting, which is more complex than the accounting of most industries.

This is a conference worth attending, though many will ignorantly sneer at accounting conferences.

Sincerely,

David

Book Review: The Snowball, Part Two

Book Review: The Snowball, Part Two

According to the book, his wife Susie approached Astrid Menks to care for Warren with food, and other aspects of personal care.? But for a man to have his wife abandon him, with no prospect of return, a pretty 30-year old woman with few requirements would test most men in terms of their fidelity.? According to the book, Susie was surprised that Astrid moved in with Warren.? I think that was naive on her part.? If you want to be a wife, be a wife.? Make up your own mind on what you want, and fault yourself for bad decisions.? Adultery is a bad thing, but Susie is the most to blame by leaving Warren.

Warren is/was a simple guy.? If Susie never left, he would have been happy.? Indeed, he was depressed when she left.? But she got tired of the neglect, and abandoned her marriage vows to him.? She should have borne the neglect, and stayed with him — marriage vows are permanent.? Marry in haste, repent at leisure.? We have no idea of how much Susie may have pleaded with Warren to be connected to her and the family, but the eventual result was a virtual divorce from Susie, which led to another relationship, even though the legal fiction was maintained.

Buffett also had many friends and mentors in the value investing community, most of whom learned from Ben Graham.? In the early years, there was a “Graham Group” that would get together to discuss the principles of Ben Graham.? Bit-by-bit, the group slowly became the “Buffett Group,” because Warren was Graham’s most apt disciple.

But there was one peer who got him thinking more broadly, Charlie Munger.? There were a number of people who thought they would benefit from knowing each other.? They were right; at the very first meeting they hit it off, and found it hard to end the conversation.

Warren received a lot of respect from men in his early years.? They looked at the returns and said, “Wow.”? But his abilities suffered a bit in the late sixties, as “cigar butt” investments disappeared, there was some uncertainty, as to whether Warren would continue to invest.? Fortunately for him, Charlie Munger had given him a new paradigm, which I call “growth at a reasonable price.”

Buffett became very good at estimating opportunities, particularly opportunities that will last.? It is only under such conditions that growth investments will work.

But there are two more entities that shaped him — The Sun Valley Conferences and Bill Gates.? Gates is the more important influence, because his knowledge of the tech sector helped to refine Buffett’s view of moats, because an attractive technology that gets a large market share is its own moat.

The Sun Valley conferences had two aspects.? Buffett presented at a number of them, and during the tech bubble, he drew quiet derision from attendees.? That said, he was a sponge for information, and he understood tech.? What he did not understand was how you could get reliable free cash flow from tech businesses, where obsolescence was such a threat.

Part 3 will come tomorrow.? Stay tuned.

Book Review: The Snowball, Part One

Book Review: The Snowball, Part One

I had wanted to read this book for a long time, and I asked the publisher for a copy of the book.? No copy came, and I asked years ago.

Recently, Alice Schroeder came to speak to the Baltimore CFA Society, and after hearing her good talk, I decided to get a copy from the local library (12 copies available in the system).

This book is complex.? It’s a great book, but you have to appreciate why it was designed the way it was.? Buffett is a complex guy, as you might expect from the only man to become ultra-rich from investing alone.

That’s why the book is long.? I did not mind that; I even read the footnotes to get the nuances on when Alice’s sources did not agree.

Those that criticize Alice Schroeder as not being capable to be a biographer, neglect her significant abilities understanding investment, insurance, and from what I can gather, how a complex man ticks.

She spent years with him, and had access to all of the major sources still living.? Other authors did not have that.

As such, the book focuses on Buffett the man, and less on Buffett the investor.? That’s not a bad thing.? This is a book about Buffett, not a book about how Buffett did it (and how you can too).

The rest of my review will focus on the grand themes of the book as I see them.? Others may differ, but I see it this way:

Overcoming Insecurity

1. Buffett’s mother was a harsh woman, if the book is correct, and did not love her first two kids, of which Warren was one.? On the Mother’s side of the family, there was a history of mental illness.? In terms of early influences, this is the large one.? His Father was at home less, and Leila Buffett was a large influence.

Buffett was industrious as a child, and even during Great Depression earned money.? He quickly realized the value of reinvesting profits, and the concept of compounding come to the young man.

But as with many young men, he had his challenges in his teenage years.? He was not popular.? He got ripped out of his environment to accompany his family to DC, where his father had become a Congressman.? (Think of Ron Paul, but with more idealism, and less contact with his kids.)

Warren became a bit of a rebel, and his grades suffered.? Still amid all of it, his small businesses did well.? In High School, he eventually focused on his studies, and his grades recovered, such that he was able to go to college at the University of Pennsylvania, before transferring to the University of Nebraska at Lincoln.

2. Warren overcame insecurity through the women who cared for him.? In this sense, initially he was a sponge for love, and later, one who would learn to care for friends.? The main women in his life were Leila Buffett, Susie Buffett (wife), Susie Buffett, Jr. (daughter), Kay Graham (Washington Post), Sharon Osberg (bridge partner), and Astrid Menks (mistress, and current wife).? If I may, let me say that men need women to admire them, or they don’t feel whole.? Because Buffett’s mother was sparing with love, Buffett sought a wife, and against all odds, found one that would care for his emotional needs.

Susie was more complex than that, and with Warren’s significant travel, after two decades, she began to seek activities that rewarded her.? This was the beginning of the end of their marriage in real terms, though not legal terms.

More to come in part two, tomorrow.

Selling Options Cheaply (Did You Know?)

Selling Options Cheaply (Did You Know?)

Tom Brakke, the Research Puzzler, has started up yet another site to display bits of interesting information that he has run across — Research Puzzle Pieces.? His first piece was an interesting one, and I would like to give you my spin on it.

You may remember some of my writings in this area:

One major ploy of Wall Street is to induce people who need to stretch their income to buy a high yielding security that has weak protections.? All of the options are held by the bond seller.? They might think:

  • If things go really bad, we can default.? We’ll start another firm later; thank God for limited liability, and forgetful lenders.
  • If things go neutral-to-bad, and we need to conserve cash, we just pay with more bonds at a slightly higher rate.? In that scenario, there is no way we could borrow more at a similar rate, so we win there as well.
  • If things go okay, and we don’t have cash needs, we pay the coupon and bide our time.? (This is the only good scenario for bondholders.)
  • If things go really well, we call the bonds after the first year, paying off the investors who probably do not have great reinvestment options.

For the bondholder, the upside is capped, and the downside is 100%.? The optimal outcome is that you get paid principal & interest to the stated maturity from this bond that is deep in junk territory, CCC+/Caa1-rated, where the proceeds of the deal don’t increase the value of the firm, but are paid as a dividend to the equity holders.

As I said, the bond issuer holds all of the options here.? And what might you get as yield? 8.5-9.0%?? Given the risks here, that is not enough.

Problems of a Yield-Starved Market

PIK bonds and bonds from dividend deals tend to default with higher frequency and severity than equivalently rated deals lacking PIK and/or dividends.? But people invest, hoping that they will come out okay, even in the face of structural bond weakness.? They need the income, because they don’t have enough capital.

This is not a problem unique to investing.? As for PIK toggle bonds, securities underwriting is not all that much different from insurance underwriting.? In the first part of the bull phase of the cycle, pricing/risk margins decline due to competition.? After that, terms & conditions get weakened before the cycle turns.

It is common to see protections in debt securities decline as we get closer to the end of the credit/equity risk cycle.? We may have months to go here, or maybe two years to the peak at most, but we are living on borrowed time in the debt markets at present.? One more sign: premiums paid for loan participation and junk bond closed-end funds.? Most junk closed-end funds are at a premium, which means that there is an incentive to sell more junk debt.

What a world.? Let Bernanke know that his plan to make people take more risk is working, but when you do, tell him it is working for bad, not good.? As for my clients, we are reducing credit risk.

Sorted Weekly Tweets

Sorted Weekly Tweets

Who to Follow

 

  • #FF @researchpuzzler @newrulesinvest @felixsalmon @interfluidity @Alea_ I go through my follow list twice/yr & highlight those I respect $$ Dec 15, 2012
  • #FF @EddyElfenbein @ReformedBroker @smallcapanalyst @BarbarianCap @abnormalreturns @TheStalwart @The_Analyst @mickwe @marketfolly @bondscoop Dec 15, 2012

 

Stupid political things I have said

 

  • @jpgriffard When I say great, I mean “large.” I hate them both. Dec 15, 2012
  • @JoshForde Me too, thanks 4 interacting w/me Dec 15, 2012
  • @JoshForde Wrong time of year, and Congress is tied up with the budget, so I guess no. NYC mayor provoked me, demanding immediate action Dec 15, 2012
  • ‘ @JoshForde Yes. Unintended consequences. 9-11 and the wars it engendered r my leading exhibits there. The US messed up badly. Dec 15, 2012
  • @Borderscrossed No they don’t, have a good night. Dec 15, 2012
  • @JoshForde That I can agree with as well, w/rights come responsibilities, bigtime. Dec 15, 2012
  • @JoshForde Second-order effects; our policy usually omits those. Example: the Fed & Central Bank freedom; what if they act irresponsibly? Dec 15, 2012
  • @trmcloughlin I would agree with that also Dec 15, 2012
  • @incakolanews I would agree w/that Dec 15, 2012
  • @JoshForde Okay, but I’ve said that before on other topics… this has been a general position of mine on a wide # of issues, not just guns Dec 15, 2012
  • Auughh! Blam! Drones r another ethical issue that I hate $$ RT @Borderscrossed: @AlephBlog NSA has logged our tweets. Drones on the way. Dec 15, 2012
  • ‘ @jpgriffard He has two great achievements PPACA & Dodd-Frank Dec 15, 2012
  • @Borderscrossed Wait, you said “Obama” & “do something” in the same tweet. Isn’t that illegal? 😉 Dec 15, 2012
  • @JoshForde I’m willing to consider… what was insensitive? Dec 15, 2012
  • ‘ @ross_marketment I agree, freedom requires some laws, and here’s one to consider… liability for not securing your gun. Dec 15, 2012
  • Behind every economic view there is a political view. Unavoidable. All I know is that I get more grief from writing on politics. $$ Dec 15, 2012
  • @laGiocondaVinci That’s fine hope u do well Dec 15, 2012
  • My politics r complex; I am mostly a libertarian: I was against Iraq 1 & 2, Afghanistan. I did not like Bush 43, don’t like Obama either $$ Dec 15, 2012
  • RT @dpinsen: @AlephBlog The same people who now regret the TSA, the PATRIOT Act, etc. rushed through after 9/11 want to rush through mor … Dec 15, 2012
  • ‘ @Borderscrossed I am just saying 4 all legislation consider the second order effects; never act in heated emotion, consider all effects $$ Dec 15, 2012
  • ‘ @ross_marketment Again, 9/11 is my best example. It has harmed Americans more than our enemies. I have been against all our recent wars $$ Dec 15, 2012
  • @streetbrief Take care Dec 15, 2012
  • @ross_marketment Not sure. I am saying is consider wide range of effects from policy change; we do not typically do that & we get bad policy Dec 15, 2012
  • I’m willing 2c intelligent limits on firearms & some degree of liability 4 those that don’t secure them, but rushed policy is bad policy $$ Dec 15, 2012
  • @ross_marketment Problem: there may be fewer murders, but in the UK they have more “hot robberies” than we do; robbers have more 2fear in US Dec 15, 2012
  • ‘ @trmcloughlin What we don’t know is how many lives have been saved by firearms. We don’t hear the sound of one hand clapping. #2ndorder Dec 15, 2012
  • No doubt; I have 8 kids; 5 adopted – I feel sorry 4 the parents; grief RT @ross_marketment: and for the minority as well. 26 today Dec 15, 2012
  • And we get salvation through a plethora of ineffective statutes RT @JamesMarsh79: our society demands intervention $$ Dec 15, 2012
  • ‘ @ross_marketment I don’t own a gun, probably nevr will. I serve the Prince of Peace. I know that a few people ruin freedom 4 the majority Dec 15, 2012
  • So after a really ugly event like the killing of 6-7 year olds, we need to mourn, leave policy decisions 4 a calmer time, weighing +s/-s $$ Dec 15, 2012
  • 2 many people react 2 an ugly event saying, “This must never, Never, NEVER HAPPEN AGAIN!!” w/o considering what 2nd order effects will b $$ Dec 15, 2012
  • After 9/11, we made many policy decisions in haste that left us less free. Part of being a free culture –> we must accept some disasters $$ Dec 15, 2012

 

Wrong

 

  • Wrong: Former HP CEO Shifts Blame for Autonomy Deal to Chairman http://t.co/p8xH0BoR No deal can get done w/o sponsorship of the CEO $$ Dec 14, 2012
  • Wrong: As Dollar Loses Reserve Status Central Banks Diversify http://t.co/lfq2UGNW Bad as the $$ is, no other currency is as investable $$ Dec 14, 2012
  • Wrong: Canadian Exceptionalism in Compensation http://t.co/Q6VDqm5P France is no exemplar in paying bureaucrats a lot of $$ a % of GDP Dec 14, 2012
  • Wrong: Our Hero, Ben Bernanke: Why Central Bankers (Not Politicians) Are Saving the Global Economy http://t.co/BawbK79N First do no harm $$ Dec 14, 2012
  • Wrong: Mozilo Unbowed Says Countrywide Was ?World-Class Company? http://t.co/6pzQQyos Big, yes, but horrible underwriting, 2much debt $$ Dec 14, 2012
  • Wrong: Bernanke Wields New Tools to Reduce Unemployment Rate http://t.co/M3GXZomh No new tools, only wishful thinking $$ Dec 13, 2012
  • Wrong: Oil at $60 or $120 Doesn?t Prevent US Supplanting Saudi Arabia http://t.co/sWB1CqEa Decay curve 4 fracking means short advantage $$ Dec 13, 2012
  • Wrong: Krugman, Krauthammer and Their Implied Authors http://t.co/seOKbPdg U r what u write; Just another aspect of your personality $$ Dec 11, 2012

 

Companies

 

  • And with that, I sign off Twitter 4 the evening (aside from robotic posts). One note b4 I go, $HPQ has not filed its 10-K @ its due date. $$ Dec 15, 2012
  • Apple Falls as UBS Projects Growth Slowdown http://t.co/f7Gi1Wwm Size is an enemy of growth. Channel check indicates slowdown 4 $AAPL $$ Dec 14, 2012
  • Hurd was an accounting manipulator; he boosted asset accrual items to paper over flagging profitability. $$ http://t.co/ubjkmR9C $HPQ Dec 14, 2012

 

Energy

 

  • Alberta-Quebec Oil Pipeline Reversal Study Done by June http://t.co/CkqBZul2 Let Quebec find its own oil then $$ Dec 14, 2012
  • Refiner Phillips 66 would support U.S. crude oil exports-CEO http://t.co/lvKXNlcg More important: infrastructure 4 LNG exports FD: + $PSX Dec 14, 2012
  • Tokyo Steel Shifts Output as Power Costs Rise Post-Fukushima http://t.co/jYPrhUDA There r real costs to doing w/o nuclear power $$ Dec 14, 2012

 

Federal Reserve & Central Banks

 

  • We would b better off in the long run if the central banks of the world stopped QE & low rates & let us work out bad debts 4 a decade $$ Dec 14, 2012
  • Houston We Have a Problem – The Abe Approach http://t.co/V9XlZ7pw Fed adopts an approach similar 2 the proposals of Shinzo Abe $$ #FTL Dec 13, 2012
  • Inside the Risky Bets of Central Banks http://t.co/rKRwTgb9 They talk together, but the central bankers of the world share ignorance $$ Dec 13, 2012
  • Biggest Opportunity Will Be Shorting the Bond Market: Dalio http://t.co/GdGIGNkQ Shorting bonds is tough b/c of negative carry $$ Dec 13, 2012
  • RAY DALIO: The US Economy Is Facing A Rare Set Of Circumstances That Will Be Bad For Markets http://t.co/7lgVsmRR Bull mkt 4 cash & gold $$ Dec 13, 2012
  • BoE’s King warns of growing currency competition http://t.co/zTsohWHT “Beggar thy neighbor” characterizes Central Bank policies globally $$ Dec 13, 2012
  • “Economists at the BIS, meanwhile, have grown more skeptical about the central bank tilt.” http://t.co/Fje7WTFI All lean the same way $$ Dec 13, 2012
  • “There is a lot we don’t understand,” said Donald Kohn, the Fed’s former vice chairman. http://t.co/Fje7WTFI You can say that again $$ Dec 13, 2012
  • Most interesting move of the day was watching long Tsy bonds sell off after Fed said it would buy more http://t.co/wk4ZFhAR “Et tu, QE?” $$ Dec 12, 2012
  • PS: long a little bit of $TLT 4 me & bond clients, short a little bit of $SPY for hedged clients Dec 12, 2012
  • Love the DJ reporter asking about Fed forecast accuracy. The answer is they missed financial crisis, & have been shocked by slow recovery $$ Dec 12, 2012
  • Love those reporters who assume monetary policy can do anything, & that monetary policy can change unemployment w/a snap of the fingers $$ Dec 12, 2012
  • Change since September in Central tendency of Fed funds Fed forecasts 2013-2015 & longer run: 0.01%, -0.20%, -0.32%, -0.15% $$ Dec 12, 2012
  • Change since September in Central tendency of PCE inflation Fed forecasts 2013-2015: -0.08% -0.08% -0.05% $$ Dec 12, 2012
  • Change since September in Central tendency of Unemployment Fed forecasts 2013-2015: -0.27% -0.18% -0.05% $$ Dec 12, 2012
  • Long Treasuries not liking the Fed Statement, even w/the promise of additional buying FD: long $TLT Dec 12, 2012
  • Change in Central tendency of GDP Fed forecasts since September 2013-2015: -0.07%, -0.16%, 0.08% $$ Dec 12, 2012
  • Steve Liesman actually asks a decent question, wow. Dec 12, 2012
  • Here’s one year forward, one year inflation implied from TIPS over the last 40 days: http://t.co/dmzjrO9W moving up, currently @ 2.01% $$ Dec 12, 2012
  • Using TIPS, the figure for inflation between one and two years ahead is already 2.01%. Fed did not do its homework, again. $$ Dec 12, 2012
  • Fed Seen Pumping Up Assets to $4 Trillion in New Buying http://t.co/YkZo23sl Doing same thing over & over & expecting different result $$ Dec 11, 2012

 

US Politics

 

  • How to Keep All of Huck Finn in the Classroom http://t.co/rPo5syl2 We need 2 eliminate the pseudo-intellectual “common core” standards $$ Dec 14, 2012
  • Dispatches from the public pension wars: http://t.co/rvD9zmAU & http://t.co/oWgfJYGQ & http://t.co/EYvaGTJ2 End pension spiking $$ Dec 14, 2012
  • It really seems stupid to spend $151B to upgrade Acela when it only has revenue of $0.5B/year http://t.co/SNbmuXJW Slow trains r better $$ Dec 14, 2012
  • Whose job is it to stop an asteroid from hitting the Earth? http://t.co/dNFyVjJR Would need at least 2 years of lead time, preferably 5 $$ Dec 13, 2012
  • Big Banks Flunk OCC Risk Tests http://t.co/2f1veBS8 2big2b effectively regulated; left hand doesn’t know what right does, centipede-level $$ Dec 13, 2012
  • Pimco?s Gross Says Fed Policy Means ?Free? Debt for Treasury http://t.co/d7K7wHm1 Ah, seigniorage; it is good 2b king Dec 13, 2012
  • Amtrak Plans to Replace All High-Speed Acela Trains http://t.co/SNbmuXJW I like the Acela, but I can’t see how 2 recoup $151B 4 new trains Dec 13, 2012

 

Rest of the World

 

  • Islam in Egypt’s new constitution http://t.co/0oqRk11B Kind of interesting; gives u a feel 4 different types of Islamic casuistry $$ Dec 13, 2012
  • Assad Losing Syria, Say Russia and NATO http://t.co/rNeKVmhS Could Chavez & Assad lose their power in the same week? $$ Dec 13, 2012
  • EU Reaches Deal on Bank Supervisor http://t.co/YNFGjnjk A lot of the details have 2b worked out; will b interesting 2c it in action $$ Dec 13, 2012
  • China’s Economy – weaker than we think http://t.co/FwbPNviK The math is pretty clear: rebalancing will inevitably require lower growth. $$ Dec 13, 2012
  • What Mario Monti?s Exit Tells Us About Europe?s Debt Crisis http://t.co/Ak8zB6N4 Problems r cultural; politics can’t bring prosperity $$ Dec 13, 2012
  • ?Reckless, Wrong-Headed? Pension Rules Could Savage Europe?s Economy http://t.co/OP7xDSGM Key Q: how large is the equity prem over Tsys? $$ Dec 13, 2012
  • US Schoolchildren Lag Asian Peers on Academic Tests http://t.co/PEJufbTb Phonics & going back to the “old math” would help considerably $$ Dec 11, 2012
  • Argentine mom rescues hundreds of sex slaves http://t.co/9dz9sZw9 In rescuing her kidnapped daughter, gains a quest & rescues hundreds $$ Dec 11, 2012
  • Germany displaces China as US Treasury’s currency villain http://t.co/7giRsoJE Germany > China; biggest source of global trade imbalance $$ Dec 11, 2012
  • BIS: Policy measures and reduced short-term risks buoyed markets http://t.co/M4k5j2Oq True now, but will make eventual tightening harder $$ Dec 11, 2012
  • Honey Laundering http://t.co/x2Dl5sdr No way India is now producing so much honey. Imports from China, escapes duties, exports 2 US $$ Dec 11, 2012
  • Hitler Has a Following in India http://t.co/Mksfyv6R India dislikes the British enough, & desires a strong leader to save them, & thus $$ Dec 11, 2012
  • Sony Loses Science Talent as Student Resumes Go to Dairies http://t.co/dKJsVDIN Can’t obsolete food; shows caution among Japanese youth $$ Dec 10, 2012
  • Carson Block Goes Short Unafraid as Chinese Gangsters Chase http://t.co/QVRFxy1i Trying 2 hide information does not change negative FCF $$ Dec 10, 2012
  • China November factory output jumps to eight-month high http://t.co/Y0HNSoqp And consumer inflation bounced off 33-month lows $$ Dec 10, 2012
  • Chinese Group Buys 80% of AIG Plane Unit for $4.2B http://t.co/7YLMn3ro Good 2c $AIG simplify. I suspect the seller is the winner here $$ Dec 10, 2012
  • Raging Oil Price Will Burn OPEC http://t.co/xRnGN9Pa Suggests downward pressure on oil prices. Sell high-cost E&P, maybe $$ Dec 10, 2012
  • Slowing China Forex Reserves May Spell Trouble http://t.co/Bcy9KnW9 Suggests gold and Singapore $$ off of weakness & capital flight in China Dec 10, 2012

 

Other

 

  • Those Diabolical Anonymous Commenters http://t.co/hl7tGZJ1 If we have to sign our names to what we write, we will b more judicious $$ Dec 14, 2012
  • The five most disruptive technologies of 2012 http://t.co/AbNJyUSF Pretty fascinating, particularly power storage & cheap internet $$ Dec 13, 2012
  • Finally did it. Joined the cult of Warren the Wonderful http://t.co/8p67b2yl Now my clients & I can get a discount @ GEICO. FD: + $BRK.B $$ Dec 12, 2012
  • America’s Milk Business in a ‘Crisis’ http://t.co/ANb8xN6d Maybe if they got rid of the growth hormones, more people would want milk $$ Dec 11, 2012
  • Bloomberg Weighs Making Bid for The Financial Times http://t.co/E2r3t7hw Creating a more powerful Bloomberg, LP piece-by-piece $$ #FTW Dec 11, 2012
  • Green energy will come into existence without subsidies when crude is $200/bbl $$ http://t.co/Ufz0Kig2 Dec 11, 2012
  • They Know What You’re Shopping For http://t.co/MuBloNPi Interesting. Shows how auto dealers get data on you $$ Get “do not track” $$ Dec 08, 2012

 

US Politics & Economics

  • When the CPI is up, journos point at the bogus “core” figure. When the CPI is down, journos point at the CPI. Bias http://t.co/ODXMyo1V $$ Dec 14, 2012
  • The Myth Of Cash On The Sidelines Remains A Myth http://t.co/c6UKgvxV Also have 2 count the cash that collateralizes derivative positions $$ Dec 13, 2012
  • Mortgage Rates in the US Drop to Near-Record Lows http://t.co/ciJ8b4rd Attractive credit, if u can get it; hey, rhymes and scans $$ Dec 13, 2012
  • If u r a professional bond investor, researcher would like you 2 take survey on Investor Preferences for Climate Bonds http://t.co/NP4X0iPV Dec 13, 2012
  • Beef in America is plentiful & affordable, spun out in enormous quantities @ high speeds: bonanza w/hidden dangers. http://t.co/ZhYQcleo $$ Dec 13, 2012
  • States Faulted Over Teacher Pension Shortfall http://t.co/bMnCE92x (non) Payback coming to teachers 4 negotiating 2 high pension bfts $$ Dec 13, 2012
  • How Republicans engineered a blow to Michigan’s powerful unions http://t.co/pll6Uo1r Hidden in plain sight; careful planning achieved it $$ Dec 13, 2012
  • For-Sale Signs Sprout in Heartland http://t.co/Fs7sB8b4 Likely sustainable as there are low levels of debt used to effect buys $$ Dec 13, 2012
  • I care more for how a man weighs ideas & opinions than what he weighs. http://t.co/9Cf51G9e Dec 12, 2012
  • “Ferri’s reasoning only looks easy in hindsight. I agree with Barry’s reasoning, though. Consistent w/Q-ratio, etc. $$ http://t.co/I8MPtJlh Dec 12, 2012
  • Before the public pension crisis ends, some states will remove pension protections in their constitutions, & retroactively cut benefits $$ Dec 12, 2012
  • $822,000 Worker Shows California Leads U.S. Pay Giveaway http://t.co/YfcZsCWU People r finally getting how big this problem is $$ Dec 12, 2012
  • Social Security ? 2012 Results http://t.co/GgxzcD4q Social Security & Medicare get worse and worse; US Govt will not b able 2 afford them $$ Dec 13, 2012
  • Hawaii Real Estate Paradise Returns With Goldman Loan http://t.co/eMAJl5IM Japanese & Korean travelers driving hotel visits $$ Dec 11, 2012
  • LOOMING CRISIS: State Budgets Soon to be Under Siege http://t.co/IwGIK90g Cash payments r curving up rapidly 4 public employee benefits $$ Dec 11, 2012
  • Don’t forget the unforced give up of stricter bailout terms, made when $$ was impossible to get; $AIG deal… http://t.co/G9zwHuDV Dec 11, 2012
  • Please ignore special tax benefits given $AIG & unforced renegotiation of original deal. A loss in economic terms http://t.co/gShXtNIq $$ Dec 11, 2012
  • Better Gas Mileage, Thanks to the Pentagon http://t.co/rmVBspJ0 As w/the space program, rarely we get positive spillover from Defense $$ Dec 11, 2012
  • 13 Insights From Paul Tudor Jones http://t.co/BsAnkdgS He is not only a successful hedge fund manager but a very original & clear thinker $$ Dec 11, 2012
  • $GOOG Revenues Sheltered in No-Tax Bermuda Soar 2 $10B http://t.co/az2KrBhI Shock in Hamilton as NATO blockades, seizes shell companies $$ Dec 10, 2012
  • Hostess Maneuver Deprived Pension http://t.co/tyvhsCF2 Multi-employer pension trusts r weak; PBGC coverage is < single-employer plans $$ Dec 10, 2012
  • Climate Treaty Hinges on Obama Making Case: Ex-Aides http://t.co/zIA5j27p Obama doesn’t want 2 waste political capital on low odds win $$ Dec 10, 2012
  • Most Accurate Forecaster Sees Lethargic US Expansion http://t.co/e0nDazST Economic Lethargy girdles the globe, everything slowing $$ Dec 09, 2012
  • SEC’s Aguilar Warms Up to Money-Fund Overhauls http://t.co/mkLQNYAX Will destroy MMFs & won’t significantly help systemic risk $$ Dec 08, 2012

 

Retweets

  • To the main point: High speed rail is a boondoggle. Slow will do. RT @finemrespice: @AlephBlog http://t.co/UKb2A9hO Dec 14, 2012
  • Not indice, index $$ RT @weigu: Shanghai Composite Index is the 2nd-worst performing stock indice in the world this year, just after Spain. Dec 13, 2012
  • RT @randy_cass: Hint #1 that we’ve gotten conditioned to stimulus. Journalist asked question and referenced ‘$45 Billion a month’ as ‘a … Dec 13, 2012
  • Inertia RT @AsifSuria: Why does Best Buy still pay a dividend? $BBY Dec 13, 2012
  • Here’s a graph of it for those who don’t know where 2c it: http://t.co/G2P4kknG RT @TheStalwart: @AlephBlog tanked right at 8 PM ET $$ Dec 13, 2012
  • RT @Convertbond: Scary US Percentage of High Yield Bonds Trading ABOVE next Call Price 2012 40% 2011 30% 2010 22% 2009 0% 2008 5% 2007 … Dec 12, 2012
  • You said it RT @credittrader: umm benny – look at 5y5y fwds! come on man…. Dec 12, 2012
  • He can’t mean that $$ RT @davidgaffen: “I don’t think any policymaker, including the Fed, should respond to markets.” -BB 12/12/12 Dec 12, 2012
  • RT @Kathleen_Hays: CBS news guy asks Bernanke how does tying rate change to 6.5% jobless help economy? Bernanke says better communicatio … Dec 12, 2012
  • RT @LaMonicaBuzz: Where’s Chuck Barris? The Bernanke press conference is approaching the hour-long mark. Time for someone to ring a big … Dec 12, 2012
  • Muted response from $GLD, $TLT down, $SPY up/down since stmt RT @jamessaft: it is not the reporters who scare me, it is the investors $$ Dec 12, 2012
  • I assume we r both “persona non grata” there RT @cabaum1: @AlephBlog Use my name. It’ll get you a seat in the very back. Dec 12, 2012
  • You made me laugh; I applied to be in the press, they didn’t take me RT @cabaum1: @AlephBlog Be nice. He’s playing Helen Thomas. $$ Dec 12, 2012
  • RT @WildestFacts: Only 70% of people will understand the following: 2 + 2 = Fish. 3 + 3 = Eight. 7 + 7 = Triangle. RT if you get it. Dec 12, 2012
  • RT @tracyalloway: So long European aversion? Yankee bonds of European issuers now trading at pre-debt crisis levels, BarCap says: http:/ … Dec 11, 2012
  • Can’t make this up $$ RT @Alea_:[ pictures ]Mayan apocalypse: Chinese farmer builds survival pods in case of a disaster http://t.co/zWWNTWdr Dec 11, 2012
  • RT @MKTWBurton: What if the stock market is rigged? @abnormalreturns @felixsalmon @alephblog @bclund @nastrading: http://t.co/mkaMbNBE … Dec 11, 2012
  • +1 RT @fmanjoo: The University of California’s new logo is just unbelievably bad http://t.co/SFMdC22j Dec 10, 2012
  • Faith too RT @Mctaguej: It’s the growing number of collectivists among us that most concerns me. American individualism is in steep decline Dec 08, 2012

 

Replies

  • @e_d_sanders But once they are set up, most of the costs are incurred already, even the externalized ones. Dec 14, 2012
  • ‘ @JonathanProber My advice to all investors is to be wary of asset accrual items that seem too big relative to assets & profits $$ Dec 14, 2012
  • @JonathanProber I grew up on life insurance acctg, which is probably the most complex acctg of any industry, except investment banking Dec 14, 2012
  • @bundesbank Die Buba ist jetzt auf Twitter. Feiern Sie mit! Holen Sie sich eine Currywurst, Sauerkraut und ein Bier! $$ 😉 Dec 14, 2012
  • @finemrespice Living near Baltimore, idea of turning it in2a toxic nuclear waste dump could b an improvement. Better 40 miles SW, though $$ Dec 14, 2012
  • @quartznews Queen: “At least we don’t have to worry about whether this gold exists. Pity about the colonies & Fort Knox…” Dec 14, 2012
  • @Pedant_Bot This *is* Twitter, u know. Often we use less than optimal words 4 space reasons. Or, r u referrring to a blog post of mine? $$ Dec 14, 2012
  • @ritholtz I’m agreeing w/u, Barry – there is less cash available 2b invested than most think, b/c much of it is encumbered Dec 14, 2012
  • @ReformedBroker Thanks, Josh. You have my respect; it’s tough to put out quality content w/frequency, variety & regularity Dec 13, 2012
  • @SimoneFoxman “At least we don’t have to worry about whether this gold exists. Pity about the colonies & Fort Knox…” Dec 13, 2012
  • @finemrespice Got me to laugh. Yeh, hedge funds r the financial equivalent 2 alchemists. Let them propose alternative math, c who buys it $$ Dec 13, 2012
  • @finemrespice Alas, but mathematics is a tough foe. Let alternative mathematics try to make $$ by outcompeting traditional math 😉 Dec 13, 2012
  • @TheStalwart Not much in today’s trading… why, is something happening in Asia? Dec 13, 2012
  • @LaurenYoung The saints will laugh, the sinners will cry http://t.co/5cwaOtbH Dec 13, 2012
  • ‘ @Healey_trades I think the market is adjusting to the idea of higher future inflation, the Fed will not be able to maintain its policy $$ Dec 13, 2012
  • @OVVOFinancial I’ve never agreed with that — that would be why median CPI or trimmed mean CPI would be preferred Dec 12, 2012
  • @OVVOFinancial And if you use chained CPI vs chained PCE, they are virtually the same over the last 10 years Dec 12, 2012
  • @OVVOFinancial Over the last 10 years that would shave 0.2% off CPI inflation Dec 12, 2012
  • @OVVOFinancial I understand that Fed uses PCE $ TIPS r CPI-based, but there are no objective forward measures for PCE Dec 12, 2012
  • @cate_long Here’s 1-yr forward, 1-yr inflation implied from TIPS over the last 40 days: http://t.co/dmzjrO9W moving up, currently @ 2.01% $$ Dec 12, 2012
  • @cate_long Here’s a graph for that: http://t.co/dmzjrO9W Dec 12, 2012
  • @TheStalwart Ready at the criticism turret! Dec 12, 2012
  • ‘ @Kevin_Holloway As the market has run, $$ has grown, approaching max cash limit; 1.2x BV $BRK.B is below; well-run, difficult to replicate Dec 12, 2012
  • @WildestFacts 70% sounds high, but the process is simple, flip one and paste over the other for a picture Dec 12, 2012
  • “4 of 6 companies graphed are housing related. $CLGX is not an insurer. Maybe you need to revise?” ? David_Merkel http://t.co/vTGZv3i2 $$ Dec 10, 2012
  • Many thanks to my 6000th Twitter follower @syedasyraf4 . Wherever you are, I pray things go well for you. Dec 09, 2012
  • ‘ @muffiehbs05 @carney I guess you’re right, Muffie, much more than a fund http://t.co/78kXw5Rf A home 4 student & alumni moral decay $$ Dec 08, 2012
  • .@historysquared The slow corruption of the last set of strong balance sheets in the US. Leverage is being substituted for organic growth $$ Dec 08, 2012

FWIW

 

  • My week on twitter: 57 retweets received, 1 new listings, 54 new followers, 65 mentions. Via: http://t.co/SPrAWil0 Dec 13, 2012

 

Book Review: Think, Act, and Invest Like Warren Buffett

Book Review: Think, Act, and Invest Like Warren Buffett

This is a tough book to review, because I generally respect the author, but there are many things I don’t like about the book.? Let’s start with the main one:

My friend Alice Schroeder came to speak to the Baltimore CFA Society early in November.? It was a great talk, and afterward, I took her back to the Amtrak station.? What was our main topic of conversation?? The many authors with limited or no dealings with Warren Buffett who invoke his name in order to get better sales.? I won’t name names.? I have relationships with a number of them.

I will review “The Snowball” soon.? Alice Schroeder spent around five years creating that lengthy book, and I can see why she would be upset over those that use Buffett for their own personal gain.

This book is another example of that.? Only chapters 1 and 2 have anything to do with Buffett, and there he is quoted extensively to the point where he should be listed as a secondary author, and get a cut of the royalties.? But in the next nine sections have almost nothing from Buffett; it is all the philosophy of Larry Swedroe.

Don’t get me wrong.? Larry Swedroe is a very bright guy, and worthy of being read.? But his philosophy is not that of Buffett.? Yes, Buffett said a number of things stressing that average investors should invest passively, because they have no information edge.? But that’s not what Buffett does himself.

I have written elsewhere that Buffett cannot be imitated by the rest of us (Part one, part two).? (For those reading me at Amazon, please come to Aleph Blog to get links.)? Buffett buys whole companies.? Few of us can do that.? Buffett has a holding company that produces the ability to fund investments cheaply.? None of us have that, and this book by Larry Swedroe, does not even touch on the most powerful and distinct things that Buffett does to earn returns.

Chapters three and beyond are really basic stuff that average people should do to manage their investments wisely.? Larry Swedroe is great with that sort of thing. But it has nothing to do with Buffett.

That’s the main thing that irritates me here.? Don’t put Buffett in the title if the book is not about Buffett.? This book is not about Buffett, it is about how average people should manage what excess assets they have.

Now, all that said, if you read the personal finance section of my blog (which is free) you won’t gain any additional insights from this book, and you won’t pay any money either.? That said, giving a book like this to a friend who doesn’t get the management of assets could be very good for him.? Show a man a website, and he ignores it.? But a physical book — he might read it.

Quibbles

Swedroe does not get corporate bonds.? They are valuable during the bull phase of the credit cycle.? Those of us that follow the credit cycle make excess returns as a result.? You have to be opportunistic and disciplined to do this.? Yes, corporate bonds are hybrid investments — part equity, part guarantee.? But intelligent investors can do well with corporate bonds — it is much less efficient than the stock market.

Also, he overestimates the number of stocks needed to diversify a portfolio on page 68.

On page 77, he engages in data-mining to show what would have worked best in the past, which has no relevance to what will work well in the future.

On page 113, he tells a story from “Time Management for Dummies,” without attribution.

On pages 126-7, he errs, because risk and reward are not correlated.? Also, high yields usually portend risk, but that is not always true.

Finally, on page 131, he is too absolutist on corporate bonds.? Most of the time, it might be better to hold stocks and Treasury bonds, but there are times when corporate bonds are mispriced in a panic, and it is time to buy them.

Who would benefit from this book: ? If you want basic book on asset allocation for average people, this could have value.? If you want to imitate Buffett, this book will not help you in the slightest. If you want to, you can buy it here:Think, Act, and Invest Like Warren Buffett.

Full disclosure: I asked the publisher for the book, and he sent it.

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.

Considering Selling the Long End

Considering Selling the Long End

This will not be a long post.? My bond strategy has always included longer bonds from LQD, and very long bonds from TLT.? They have made money for me & my bond clients.? But now I am thinking of selling them.? Why?

Let’s consider the history of QE:

Action Date TLT Return
QE4

12/12/2012

-1.16%

QE3

9/13/2012

-0.39%

Operation Twist

9/21/2011

3.31%

QE2

11/3/2010

-2.04%

QE1

11/25/2008

2.94%

Now, QE2 was kind of wimpy, and disappointed the markets.? All the other actions qualified as bold, but bold actions are not moving the needle at present.? Why?

I suspect that bond investors are embedding higher inflation forecasts into their prices, and that the balance has tipped. Inflation is coming, and I am likely to trade away longer nominal bonds for short bonds, and inflation-adjusted bonds.

The market is responding differently to loose monetary policy than it used to respond.? Time to adjust; the illusions of the Fed are finally failing, I think, and markets may be about to discipline them with stagflation.

Full disclosure: long TLT & LQD, but might be moving for cover.

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