Search Results for: Education of a corporate bond manager

The Rules, Part LXXII

Picture Credit: Kailash Gyawali || There are times when despair is rational

“There are two hard things in trading — buying higher, and selling lower.”

Currently I am selling out my position in an illiquid stock. I am patient, but I can tell that my selling is having an impact on the market.

Back when I was a corporate bond manager, I quickly learned that I had to scale in and out of positions. Even for the most commonly traded bonds, the market isn’t that liquid. While not lying to the brokers, learning to disguise your intentions, or at least frame them properly took some effort. One method I commonly used worked like this: “We need some cash. If you have someone wanting to buy $2-5 million, we will offer these at the 10-year Treasury + 150 basis points, $6-10 million T10 + 140 bps, and if they want to buy the whole wad (say 20-30 million), T10 + 125 basis points. Prices would ascend with size in selling. Prices would descend with size in buying, particularly for troubled bonds that we liked.

Usually the brokers appreciated the supply or demand curves that I gave them. Frequently I ended up selling the “the wad,” which we were usually selling because our credit analyst had a reason.

But life is not always so happy. Sometimes you have an asset that either you or the organization has concluded is a dud. Many people think it is a dud. How do you sell it? Should you sell it?

There are options: you could hold an auction, but I will tell you if you do that, play it straight. Your reputation is worth far more than if the auction succeeds or not. You can set a reservation price but if the auction doesn’t sell, you will lose some face.

Or you can test the market, selling in onesies an twosies ($1-2 million) seeing if there is any demand, and expand from there if you can.

What I tended to do was go to my most trusted broker on a given bond and say, “I don’t have to sell this, but we need cash. Could you sound out those who own the bonds and see what they might like to buy a few million?” If we get an interested party, we can sound them out on buying more a an attractive price.

But life can be worse, imagine trying to sell the bonds of Enron post default. Yes, I had to do that. And I had to sell them at lower and lower prices. (Kind of like the time I got trapped with a wad of Disney 30-year bonds.)

And there is the opposite. You want to have a position in an attractive company, and you can’t get them at any reasonable price. You could give up. You could “do half.” Or you could chase it and get the full position, only to regret it.

If you invest with an eye toward valuations, this will always be a challenge. All that said, if you focus on quality, these issues probably won’t hurt you as much.

In any case, do what must be done. If something must be bought, buy it as cheaply as possible. If something must be sold, sell it as dearly as you can. Hide your intentions, while offering deals. In doing so, you may very well realize the most value.

The Balance: Considering Event-Driven Investing

The Balance: Considering Event-Driven Investing

Photo credit: miltarymark2007

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I published another article at The Balance:?Considering Event-Driven Investing.? This is one place where writing in the third person leaves a lot out.? I’ve done a lot with some types of event-driven investing.

  • Speculating on hurricanes — I did that successfully at the hedge fund 2004, 2005 and 2006.? 2006 because I thought the risk of another strong hurricane year was overplayed.? 2004 and 2005 because I had a good idea of who was underreporting claims after disasters.? That was the only time in my life that I went from long a company to short without stopping, and I covered on the day the CEO resigned, and caught the bottom tick.
  • Bond deal arbitrage — well, sort of.? I would buy target company bonds and sell the bonds of the parent.? I had to be certain that the deal would go through, but it was a tremendous yield enhancement is the right situations.
  • From the prior article, speculating on Lula’s non-impact on Brazil qualifies as event-driven.
  • Stock arbitrage — did a lot with it when I was younger.? Didn’t do so well.
  • Index arbitrage — did a neutral trade where we shorted one company out of the Russell 2000, and bought another one in.? Made no money on the trade.? We had a good fundamental justification for the trade, but it just goes to show you that this isn’t as easy as it looks.
  • I buy a decent number of spinoffs.? Most succeeded as investments for me.

Now, all that said, most areas where there are simple arbitrages typically boil down to a simple credit risk: will the deal get completed? Will the company not take an action that changes its capital structure in a way that hurts me?

Since these are relatively simple trades, the returns are relatively low like that on a short-term junk bond — at present, like the yield on T-bills plus 2-3%.? It’s not very compelling given the risks involved.? Most of the mutual funds that do that type of arbitrage have not done so well.

Thus, aside from spinoffs, at present, I don’t do that much with event-driven investing.? Many of the forms of it are too crowded, and I prefer simplicity in investing.

The Best of the Aleph Blog, Part 27

The Best of the Aleph Blog, Part 27

In my view, these were my best posts written between August?and October?2013:

I completed the last of my “Manager” series, on being an investment risk manager:

The Education of an Investment Risk Manager, Part VI

This is the bizarre story of how I pulled a win out of an impossible situation against my own management, and a major life insurer.

The Education of an Investment Risk Manager, Part VII

On the time that I correctly modeled a complex structured security, and the client wouldn’t listen to reason

The Education of an Investment Risk Manager, Part VIII

The time that I?did a competitive study of the most aggressive life insurers, and how it did not dissuade my client’s management team from trying to imitate them.

The Education of an Investment Risk Manager, Part IX (The End)

A bevy of little tales about odd investment tasks that I succeeded with, and how many of them did no good for my clients.

Ben Graham Did Not Give Up on Value Investing in Theory

With quotations and links to the source documents, I show what Ben Graham really said in the article commonly cited to say that he gave up on value investing.

On Avoiding Con Men

A summary article of many of my prior articles on how to avoid being defrauded.

On Alternative Investments

Alternative investments are like regular investments, but they are less liquid, more opaque, and have higher fees.

Should You Buy Shares of Stock or Not?

Where I answer Mark Cuban the one time he tweeted to me. ?Really!

Quiet Companies Are Better

Why companies should let their filings with the SEC speak for them, and abandon the media.

Two is Company, Three is a Crowd

On game theory, and how it affects politics and civil wars.

It Works, But It Doesn?t Work All The Time

On how good investment theories fail for periods of time, and then come roaring back when most people know they will never work again.

Value Investing when Debt Levels are High

On seeking a margin of safety, when very little seems safe

A New Look at Endowment Investing

I interact with a groundbreaking paper on endowment investing — a very good paper, and I give some ways that it could be improved.

Less is More

Do you want to do better in investing? ?Make fewer decisions, and make them count.

Taleb Versus Reality

In which I take on Nassim Taleb’s views on how to reduce risk in investing, and show which half of his valid, and which half are fantasy.

To Young Analysts

What I contributed to Tom Brakke’s project for young investment analysts — what do I think they should know?

The Rules, Part XLIX

In institutional portfolio management, the two hardest things to do are to buy higher than your last buy, and sell lower than your last sale.

The Rules, Part L

Countries are firms that produce claims on assets and goods

The Rules, Part LI

65% of the time, the rules work.? 30% of the time, the rules don?t work. 5% of the time, the opposite of the rules works.

The Rules, Part LII

ge + E/P > ilongest bond

The Rules, Part LIII

The tech market washes out about every eight years or so.? The broad market, which is a more robust beast, washes out far less frequently.? My question: are these variants of the same phenomenon?

The Rules, Part LIV

When do employee and corporate incentives line up?? Ideally, incentive schemes should reward people with a fraction of the additional profitability that resulted from the additional work that they did.? Difficulties: measurement impossible in many cases, people could receive a bonus when the firm is not profitable, neglects synergies (both positive and negative).

The Rules, Part LV

Financial intermediation reduces volatility.? In bull markets, demand for financial intermediaries drops.

The Rules, Part LVI

Leverage and risk eventually transfer to the least regulated

The Rules, Part LVII

The more that markets are united through derivatives, the more systemic risk is created.

A Few Investment Notes

A Few Investment Notes

Just a few notes for this evening:

1) I’ve been a bull on the long end of the Treasury curve for a while. ?It’s been a winning bet, and the drumbeat of “interest rates have nowhere to go but up” continues. ?Here’s an argument from Jeffrey Gundlach on why long rates should remain low, and maybe go lower:

Gundlach, however, was one of the very few people?who believed rates would stay low, especially with the Federal Reserve committed to keeping rates low with its loose monetary policy.

It’s important to note that U.S. Treasuries don’t have the lowest yields in the world. French and?German government bonds have yields?that are about 100 basis points lower than those of Treasuries. In other words, those European bonds actually make U.S. bonds look cheap, meaning that yields have room to go lower.

This will trend toward lower rates will eventually have to end, but neither GDP growth, inflation, or business lending justifies it at present.

2) From Josh Brown, he notes that correlations went up considerably with all risk assets in the last bitty panic. ?Worth a read. ?My two cents on the matter comes from my recent article, On the Recent Anxiety in High Yield Bonds, where I noted how much yieldy stocks got hit — much more than expected. ?I suspect that some asset allocators with short-dated or small stop-loss trading rules began selling into the bitty panic, but that is just a guess.

3) That would help to explain the loss of liquidity in the bond market during the bitty panic. ?This article from Tracy Alloway at the FT explores that topic. ?One commenter asked:

Isn’t it a bit odd to say lots of people sold quickly *and* that there isn’t enough liquidity??

Liquidity means a number of things. ?In this situation, spreads widened enough that parties that wanted to sell had to give up price to do so, allowing the brokers more room to sell them to skittish buyers willing to commit funds. ?Sellers were able to get trades done at unfavorable levels, but they were determined to get the trades done, and so they were done, and a lot of them. ?Buyers probably had some spread target that they could easily achieve during the bitty panic, and so were willing to take on the bonds. ?Having a balance sheet with slack is a great thing when others need liquidity now.

One other thing to note from the article is that it mentioned that retail investors now own 37%?of credit, versus?29% in 2007, according to RBS. Also that?investment funds has been able to buy?all?of the new corporate debt sold since 2008.

There’s more good stuff in the article including how “matrix pricing” may have influenced the selloff. ?When spreads were so tight, it may not have taken a very large initial sale to make the estimated prices of other bonds trade down, particularly if the sales were of lower-rated, less-traded bonds. ?Again, worth a read.

4) Regarding credit scores, three articles:

From the WSJ article:

Fair Isaac?Corp.?said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.

I think there is less here than meets the eye. ?This only affects those borrowing from lenders using the particular FICO scores that were modified. ?Not all lenders use that particular score, and many use FICO data disaggregated to create their own score, or ask FICO to give them a custom score that they use. ?Again, from the WSJ article:

Fair Isaac releases new scoring models every few years, and it is up to lenders to choose which ones to use. The new score will likely be adopted by credit-card and auto lenders first, says John Ulzheimer, president of consumer education at CreditSesame.com and a former Fair Isaac manager.

Mortgages are likely to lag, since the FICO scores used by most mortgage lenders are two versions old.

The?impact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers’ credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points, said Mr. Ulzheimer.

The lower weight given to unpaid medical debt could increase some affected borrowers’ FICO scores by 25 points, said Mr. Sprauve.

But lowering the FICO score by itself doesn’t do anything. ?Some lenders don’t adjust their hurdles to reflect the scores, if they think the score is a better measure of credit for their time-horizon, and they want more loan volume. ?Others adjust their hurdles up, because they want only a certain volume of loans to be made, and they want better quality loans at existing pricing.

Megan McArdle at Bloomberg View asks a different question as to whether it is good to extend more credit to marginal borrowers? ?Didn’t things go wrong doing that before? ?Her conclusion:

That in itself [DM: pushing for more loans to marginal borrowers as a matter of policy] is an interesting development. Ten years ago, politicians were pressing hard for banks to extend the precious boon of homeownership to every man, woman and shell corporation in America. Five years ago, when people were pushing for something like the CFPB, the focus of the public debate had dramatically shifted toward protecting people from credit. Oh, there were complaints about the cost of subprime loans, but ultimately, on most of those loans, the problem?wasn?t the interest rate but the principal: Too many people had taken out loans that they could not realistically afford to pay, especially if anything at all went wrong in their lives, from a job loss to a divorce to an unexpected illness. And so you heard a lot of complaints about predatory lenders who gave people more credit than they could handle.

Credit has tightened considerably since then, and now, it appears, we?re unhappy with that. We want cheaper, easier credit for everyone, and particularly for the kind of financially struggling people who have seen their credit scores pummeled over the last decade. And so we see the CFPB pressing FICO to go easier on people with satisfied collections.

That?s not to say that the CFPB is wrong; I don?t know what the ideal amount of credit is in a society, or whether we are undershooting the mark. What I do think is that the U.S. political system — and, for that matter, the U.S. financial system — seems to have a pretty heavy bias toward credit expansion. Which explains a lot about the last 10 years.

Personally, I look at this, and I think we don’t learn. ?Credit pulls demand into the present, which is fine if it doesn’t push losses and heartache into the future. ?We are better off with a slower, less indebted economy for a time, and in the end, the economy as a whole will be better off, with people saving to buy in the future, rather than running the risk of defaults, and a very punk economy while we work through the financial losses.

Post 2500: What is the Aleph Blog About?

Post 2500: What is the Aleph Blog About?

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

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

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

What Does the Aleph Blog Care About?

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

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

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

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

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

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

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

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

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

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

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

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Rest of the World

 

  • Crunch Escalates as Money Funds Rival Shadow Banks http://t.co/JVU1w5ipZc Money funds in China suck liquidity away from wealth mgmt prods $$ Jan 20, 2014
  • Spain?s Worst Year for Work Leaves Rajoy Counting Cost http://t.co/KlaAGab4kY Private debts r not economically neutral. Large -> unstable $$ Jan 20, 2014
  • Richest Scandinavian Nation Extends Its Junk Boom http://t.co/ZVwwxEAdIa Norwegian financial institutions have hunger for yield in kronor $$ Jan 20, 2014
  • Bird Flu Kills Health Worker, Stokes Transmission Concern http://t.co/FVcxVhaH4L Would not b concerned, seems difficult to transmit virus $$ Jan 20, 2014
  • Rise of ‘Common Man’ in India Threatens Stability of Government Coalition http://t.co/vke6lnqM3s Things get squishy if no majority win $$ Jan 20, 2014
  • German Economic Growth Fails to Gain Impetus http://t.co/g9EQLN5HNg Depends on on the strength of those that import German goods $$ $SPY Jan 20, 2014
  • French First Lady Leaves Hospital http://t.co/hnnrYJwE2q At least *one* person cared about the behavior of Francois Hollande $$ #sad Jan 20, 2014
  • Solar Beats Gas Unlocking Middle East?s Heavy Oil, Report Says http://t.co/dmyDla2t7R Fascinating, using cheap solar energy 2 produce oil $$ Jan 20, 2014
  • Hot Demand for Emerging-Market Bonds http://t.co/LLZPDt4iyT This is puzzling , I don’t get how emerging markets r well financed $$ Jan 19, 2014
  • China encroaching on U.S. military dominance in Pacific, says top admiral http://t.co/h152VrhcEg So we can’t be global cop, good thing $$ Jan 19, 2014
  • Mobius Placing Biggest Wagers on Nigeria for Frontier Rally http://t.co/dsxt8Fft6e It is difficult to make $$ when there is a quiet war Jan 19, 2014
  • BENGHAZI WAS PREVENTABLE: Hillary Clinton cited for major security lapses http://t.co/5oCpBVlbdK Hillary will have a lot to answer for $$ Jan 19, 2014
  • Saudi King Sees Egypt Too Big to Fail Under Friendly General http://t.co/oIHo5fae5s Saudi Arabia gets pragmatic, supports Egyptian Army $$ Jan 19, 2014
  • The West Is Losing Ukraine http://t.co/GWCNb322Ss Ukraine is losing the West, as its leader strips freedoms, & fights protesters $$ $SPY Jan 19, 2014
  • Hollande?s Tryst and the End of Marriage http://t.co/EUGztMAKnq Secretly, even the French care about the stability of their leaders $$ $FXE Jan 19, 2014
  • Baltic Homes That Singed Scandinavia Banks Heating Up: Mortgages http://t.co/3KHcPllcKZ Beware large increases in indebtedness $$ $TLT $SPY Jan 19, 2014
  • China’s Indie Rockers Get Boost From Online Music Platforms http://t.co/MSbdnGFzRI Note the prominence of our friend Michael Pettis $$ $FXI Jan 19, 2014
  • Venezuela Post-Ch?vez: Hustlers’ Paradise http://t.co/ROstARpBkc Thugs run govt. Some people get cheap goods, while others get shortages $$ Jan 19, 2014

 

US Politics & Policy

 

  • Stop Obamacare?s Outrageous Bailouts http://t.co/uHYJvyRcM7 Once losses exceed 8% of premiums, taxpayers pay for 75% of excess losses $$ Jan 20, 2014
  • Questionable: Robert Gates?s Dishonorable Act http://t.co/bIEGf7o57k There r too many bad secrets in DC that we ought to know about $$ $SPY Jan 20, 2014
  • Which Fed Guidance Should We Believe? http://t.co/yqjOZX5AX6 As FOMC uses more & more words 2explain what they r doing we understand less $$ Jan 20, 2014
  • When Low Unemployment Is Bad News http://t.co/QLiWV8ocV5 Labor force participation rate continues 2 fall as punk economy creates few jobs $$ Jan 20, 2014
  • NSA Data Have No Impact on Terrorism: Report http://t.co/ug8GtnLjqz NSA is not worth the privacy risk, nor what we pay to employ them $$ Jan 20, 2014
  • Ari Fleischer: How to Fight Income Inequality: Get Married http://t.co/zz6lbDWiku Poverty rate falls 4 those who can make a marriage work $$ Jan 20, 2014
  • Obama’s Constitutional Education http://t.co/bH4jfr1rro & http://t.co/hdzNe1Blo4 Should consider unilateral actions modifying PPACA also $$ Jan 20, 2014
  • How the crash of safe assets fueled the financial crisis http://t.co/4Vlfxp7PUj When “safe” assets r found to have credit risk -> bust $$ Jan 20, 2014
  • Congress split over NSA’s domestic spying program, could just let laws expire http://t.co/mCD2pIbSl1 Divisive: left & right vs center $$ Jan 20, 2014
  • Young enrollees of Obamacare fall well short of goal http://t.co/VokUg0XFP6 When premiums rise as a result, people will b unhappy $$ $SPY Jan 20, 2014
  • Spy court judge slams proposed privacy advocate http://t.co/vkz4SyY5li We need someone arguing against spying on average people $$ $SPY $TLT Jan 19, 2014
  • What?s Net Neutrality? What Happened to Net Neutrality Yesterday? What Happens Next? A Q&A for the Rest of Us. http://t.co/xQACJvW8UC Read Jan 19, 2014
  • Volcker Rule Fix Will Aid Large and Small Banks http://t.co/nGv1TXtLT5 This is a lousy rule that allows banks to bury Trup CDO losses $$ Jan 19, 2014
  • Hillary Clinton’s political hit list of top betrayers includes Kerry, Kennedy http://t.co/33RFv63nKz This reminds me of the Nixon enemies $$ Jan 19, 2014
  • Judge Disallows Plan by Detroit to Pay Off Banks http://t.co/XQ6f1E2EZM Detroit should aim for the bast long-run outcome $$ $MUB $SPY $TLT Jan 19, 2014
  • Is Your Abortion My Free Speech?? http://t.co/kUA2XLRPB9 This is where constitutions fall apart, b/c they are limited documents $$ Jan 19, 2014
  • Reid Gives Landrieu VIP Treatment to Tip Election Odds http://t.co/UhQFIcPVt9 Democrats desperate to retain power, aid marginal members $$ Jan 19, 2014
  • Where Are the U.S.?s Millionaires? http://t.co/c8fXDEPD5S Alas, but Maryland sucks the blood of America, & creates millionaires $$ $SPY $TLT Jan 19, 2014
  • I Spent Two Hours Talking With the NSA’s Bigwigs. Here’s What Has Them Mad http://t.co/UrXexYR07k They hate Snowden’s guts $$ $thatsimple Jan 19, 2014
  • How the NSA Almost Killed the Internet | Threat Level http://t.co/1SLDuNq93O Sowing distrust in major internet utilities on privacy $$ $GOOG Jan 19, 2014
  • To enforce net neutrality, the FCC has to decide that Verizon is a common carrier http://t.co/WRb6VestAF Simple idea, simple solution $$ $VZ Jan 19, 2014
  • Student Loans, the Next Big Threat to the US Economy? http://t.co/5hXsK5SIFn Rule of Thumb: avoid lending in area w/greatest debt growth $$ Jan 19, 2014
  • ISS Open to Activists Paying Bonuses to Directors http://t.co/R1nNEkokg4 Carl Icahn wins a small victory; broader implications unclear $$ Jan 19, 2014
  • ?Wolf of Wall Street? Offspring Never Quite Die http://t.co/oXkGDZQ1Ml It’s a revolving door & FINRA doesn’t provide real access 2 data $$ Jan 19, 2014

 

Market Impact

 

  • Investor Animal Spirits Spread to Companies Worldwide http://t.co/e8pKcudzhR No such thing as animal spirits, only pursuing opportunity $$ Jan 20, 2014
  • JPMorgan Says BVG Owes $200 Million Over ?Unfortunate? CDS http://t.co/coJQm6dpD5 What’s worse is trifling yield prompting BVG’s greed $$ Jan 20, 2014
  • Hedge Funds Raise Gold Wagers as Goldman Sees Drop http://t.co/7dc9dGCUCA Hedge funds 2short-term could b forced sellers on weakness $$ $GLD Jan 20, 2014
  • Even money market funds in a crisis would have a hard time delivering a >2% loss, which would b borne by investors, & not systemic $$ Jan 20, 2014
  • How You Can Survive a New Era in the Bond Market http://t.co/BvSkibWANR Too many people banging the drum 4 higher interest rates $$ $IEF Jan 20, 2014
  • From the prior tweet, Central Bankers have drawn wrong conclusion: You can fix a bust by issuing lots of credit. $$ Jan 20, 2014
  • The correct answer is that you can avoid a bust by not running loose monetary policy as in the ’20s & ’00s. We still have pain to come $$ Jan 20, 2014
  • Where Have All the Star Fund Managers Gone? http://t.co/qwbpDyDlkU Focus on low fees, long track record, low assets & not index-like $$ $SPY Jan 20, 2014
  • Reinsurers face ratings cuts, S&P warns http://t.co/70dK590OCG Too much surplus chasing reinsurance biz; I’ve been lightening the boat $$ Jan 20, 2014
  • Interest rates don’t matter? Federal Reserve paper says so http://t.co/guAPSQ05II Sad but true, monetary policy is weaker than most think $$ Jan 19, 2014
  • Professor Puts Ideas in Practice as Reverse-Mortgage CEO http://t.co/T3Kt0cNQtc As w/most complex financial agreements, this will fail $$ Jan 19, 2014
  • Metals, Currency Rigging Is Worse Than Libor, Bafin Says http://t.co/KjDNrRVR7m Impossible 2 create benchmarks free of human gaming $$ $SPY Jan 19, 2014
  • Nobody Likes Bonds!: by @ritholtz http://t.co/FuYachZ58I But *I* like bonds, particularly short corporates, loans, & $TLT FD: + $TLT $$ Jan 18, 2014

 

Other

 

  • Comet-Chasing Spacecraft Sends First Signal in 31 Months http://t.co/mZB62QnIYm Satellite to hitch ride on Churyumov-Gerasimenko comet $$ Jan 20, 2014
  • The ‘Sharing Economy’ and Its Enemies http://t.co/Qnc4YyZrOh How Airbnb steps on the toes of hoteliers, regulators & the tax man $$ $SPY Jan 20, 2014
  • Device Thefts Fueling Rise In Larcenies http://t.co/ohZZt8q2Qh NYC larcenies fall if you exclude theft of Apple-branded devices $$ $AAPL Jan 20, 2014
  • The Right Way to Go After Big Clients http://t.co/J6hoSbcHVX Can waste a lot of time & find margins squeezed in the end $$ Jan 20, 2014
  • What Secrets Your Phone Is Sharing About You http://t.co/u7wv29tyMG Many hack your phone datato get insights into how you shop $$ $SPY $TLT Jan 19, 2014
  • Moms in ?Survival Mode? as US Trails World on Benefits http://t.co/uSPuVZztqV We can argue over any benefit, but what when US is broke $$ Jan 19, 2014
  • Tennis Quant?s System Doubles Money Without Knowing Players http://t.co/sAS5Xug7DN Small markets r often inefficient, allow 4 small wins $$ Jan 19, 2014
  • Miners Chopping $10B Search Bodes Next Price Boom http://t.co/6X7H0KAivX Miners cut exploration budgets, should lead to higher prices $$ Jan 19, 2014
  • How the Target Hackers Did It http://t.co/Z8Jc5WuBQQ Scraped RAM in POS machines grabbing all manner of data on card users $$ $TGT $SPY $TLT Jan 19, 2014
  • Another Bad Year for Religious Freedom http://t.co/3C3C5lrjCo Religion by its nature tends to invite constraint as it is a threat 2 govts $$ Jan 19, 2014
  • If Google Is a Guy, DuckDuckGo Is a Ghost http://t.co/rk9o0I3Uwx Want privacy for your searches? Consider DuckDuckGo $$ Jan 19, 2014
  • http://t.co/uPsFzsm1Tn How an intelligent lady managed to wrongfoot & destroy a website engaged in “revenge porn.” $$ Jan 19, 2014

 

Wrong

?

  • Likely Wrong: A New Asset-Allocation Strategy for Investing in Retirement http://t.co/eDqaDxhFuH Stocks r risky over intermediate periods $$ Jan 20, 2014
  • Wrong: Bonds Captivate $16T of Pensions http://t.co/NEpJSjCD7p Bonds have 2 go somewhere & defined benefit pensions have long liabilities $$ Jan 20, 2014
  • Wrong: Bailout Risk, Far Beyond the Banks http://t.co/iv5eT6lhea! Asset mgmt companies can go bust, & they pose no systemic risk $$ Jan 20, 2014
  • Wrong: Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the US http://t.co/CPMUggr3CA $$ $TLT Jan 20, 2014
  • Wrong: Ten quotes on the question of financial bubbles http://t.co/MNwr543Vsf No one focuses on the effect of borrowing money in bubbles $$ Jan 19, 2014
  • Wrong: Wealthy CEO Is Deeply Concerned About Budget Deficits http://t.co/gTGUwSF3hS Biased article doesn’t factor in entitlements $$ $TLT Jan 19, 2014

?

 

Replies, Retweets, and Comments

 

  • @DavidBCollum Look here: http://t.co/VaqQESCdCu Value Line has a chart that goes back to the 20s though… Jan 17, 2014
  • RT @cate_long: Please add http://t.co/QHQiCxYopc RT @researchpuzzler: a guide to finding data on the cheap from @AlephBlog http://t.co/mb? Jan 15, 2014
  • RT @Pawelmorski: Great spot @toby_n : DB’s Slok quantifies how difficult the Fed finds explaining itself. http://t.co/1quahXrnJD Jan 14, 2014
Sorted Weekly Tweets

Sorted Weekly Tweets

Rest of the World

 

  • Catalonia Wants ECB Seat After Referendum http://t.co/Dbggf0LOWs So Catalonians want to be free? Guess what, the EU does not want that $$ Oct 12, 2013
  • French State?s Bluster Belies Alcatel?s Job-Cutting Reality http://t.co/kzmpjKDNTC France will lose; companies will leave, so will jobs $$ Oct 12, 2013
  • Danes With World-Beating Debt Loads Prepare 2 Dig Deeper http://t.co/Vgx0fqqf9N This will eventually blow up; it is only a matter of time $$ Oct 12, 2013
  • Tepco Gets Japan?s First LNG Spot Cargo From Angola at Futtsu http://t.co/A3OnIzAFJH Future of energy is more efficient hydrocarbon use $$ Oct 11, 2013
  • France Calls for Alcatel-Lucent to Revise Job Cuts Plan http://t.co/KySqRhGqvN France won’t b happy until every large business leaves $$ Oct 10, 2013
  • Korean Banks? Margins Seen at 4-Year Low on Rate Decline http://t.co/bWhpoYhs6g High pread loans mature, low spread loans originated $$ Oct 10, 2013
  • Icelanders Run Out of Cash to Repay Foreign Debts http://t.co/RdCFa8jRl4 Perhaps they can default on these debts as well $$ #externaldefault Oct 09, 2013
  • Swedish Bubble Concern Grows With Soaring Home Prices http://t.co/VwiAVbm1wD What happens when monetary/financial policy is too loose $$ Oct 09, 2013
  • Algerians Cry Currency as Euro Black Market Thrives http://t.co/ftRHUXwF3q Really bad currencies attract competition from betr currencies $$ Oct 08, 2013
  • Finns Foraging for Cheap Food Shows Price of AAA Obsession http://t.co/kuPKb8g3KQ Really, it’s being in the E-Zone, not having own curncy $$ Oct 07, 2013

 

US Politics

 

  • 7 doomsday default scenarios http://t.co/sDgNpzRCSU There is nothing good here, particularly banks and money market funds blowing up $$ Oct 12, 2013
  • Budget Battle Ends Soon With Tea Party Loss: King, Corker http://t.co/Dk6XVMUPRo Discharge petition coming as liberal GOP teams w/Dems $$ Oct 11, 2013
  • Now Is the Time to Delay ObamaCare http://t.co/Dklp65OWnJ Make case off of lack of technical readiness of computer systems $$ Oct 11, 2013
  • EPA may reduce ethanol blending volumes for 2014 -sources http://t.co/Ve4DU5AaV2 End the RIN-sanity & watch refiner stock prices fly $$ Oct 10, 2013
  • Legislative History of Sec 4 of 14th Amndmnt http://t.co/JCEmr9SnHZ Must Executive prioritize payments? Must Congress raise debt ceiling? $$ Oct 10, 2013
  • Justice Kennedy Offers Views on Shutdown, Congress, Gay Marriage http://t.co/Nq9VcPtbNn Love him, hate him, you have to understand him $$ Oct 10, 2013
  • Obama Seems 2Think Presidency Gives Him Absolute Power http://t.co/IhFwBRTcYn Scotus has ruled presidents can’t delay, amend or repeal laws Oct 09, 2013
  • Surplus to Cost Uncle Sugar Up to $300M http://t.co/vl4QNMq2Vb Environmentalists & free marketers can agree: Eliminate sugar subsidies $$ Oct 09, 2013
  • Once the budget is balanced, businessmen will have greater certainty over sustainable tax policy, & will become more aggressive $$ Oct 09, 2013
  • Ryan: Here’s How We Can End This Stalemate http://t.co/QePY6Y3XWd Behind every economic debate in DC, entitlements is the hidden issue $$ Oct 09, 2013
  • President Obama Might Ask Who Benefits from US Debt Default http://t.co/F8mzQQQSUU Anybody know how big total notional amt on CDS on US? $$ Oct 09, 2013
  • White House Backs Temporary Debt-Ceiling Fix http://t.co/moMSWfLKab This may be how agreement is reached, w/some budget compromise also $$ Oct 08, 2013
  • Meltdowns Hobble NSA Data Center http://t.co/NpnnX0eyPy Investigators Stumped by What’s Causing Power Surges That Destroy Equipment $$ Oct 08, 2013
  • USDA Buyers Stuck in Limbo as Shutdown Hurts Housing http://t.co/M0LvI019Ye USDA should not be in the lending business. Ag is doing well $$ Oct 08, 2013
  • He Beat Us in War but Never in Battle http://t.co/Gixl0Fm9mt John McCain writes on recently deceased N. Vietnamese Gen. Vo Nguyen Giap $$ Oct 08, 2013
  • Americans are more conservative than they have been in decades http://t.co/GQrkq0ZHg5 I find this difficult 2 believe, would b more chg $$ Oct 07, 2013

 

Market Impact

 

  • Better Beta Is No Monkey Business http://t.co/UrSmi7Ql3h High dividend stocks are overvalued; dividends are not the best proxy for value $$ Oct 12, 2013
  • The BIGGEST Problem with Buy and Hold http://t.co/lIb3cQpqgY Biggest companies, bot&held do not have the same room to grow vs smaller cos $$ Oct 12, 2013
  • How Investors Lose 89% of Gains from Futures Funds http://t.co/inEYR2xDgi Long article on how managed futures doesn’t make $$ 4retail invtrs Oct 08, 2013
  • Worst Stocks to Reverse With Commodity Profits Rising 18% http://t.co/ImKtQ5KXPi A contrarian idea w/precious metals doing poorly of late $$ Oct 08, 2013
  • Finra to Consider Requiring Brokerages to Carry Arbitration Insurance http://t.co/qjxeVp89b7 A very good idea; mkt would weed out the bad $$ Oct 06, 2013

 

Companies & Industries

 

  • Boeing’s New 777X Could Make the Largest Jumbo Jets Obsolete http://t.co/VnBflpZ6dr Efficient engines, folding wings end the 747 era $$ $BA Oct 11, 2013
  • US eyes cutting ethanol usage http://t.co/d7r88Z2hA8 This should be a no-brainer, aside from corn farmers, $ADM, & ethanol refiners $$ Oct 11, 2013
  • Jeff Bezos and the Age of Amazon: ‘The Everything Store? http://t.co/EtF1QvWcqg Looong & interesting about Amazon & its founder’s origins $$ Oct 10, 2013
  • Costco Stands Behind Its Cheap Rotisserie Chicken Strategy http://t.co/aptxcuyH8u $5 for a Rotisserie Chicken? Can’t buy raw that cheap $$ Oct 10, 2013
  • Verizon and Vodafone Talks Took Four International Cities and Eight Months http://t.co/GmR1XjxTgl Patient $VOD wins against needy $VZ $$ Oct 09, 2013
  • US Banks Margin Under Tremendous Pressure http://t.co/EQVHiLmKWr Funding costs can’t get much lower, while old high-yielding loans mature $$ Oct 09, 2013
  • Ohio Smelter Faces Shutdown Without Utility Rate Relief http://t.co/O87iyfFdNQ & aluminum is in oversupply; why should we subsidize this? Oct 06, 2013

Healthcare

  • Mapping America?s Coronary Stent Hot Spots http://t.co/EFfUjfbjHD Check & c whether u live in an area that over-installs stents $$ #savelife Oct 10, 2013
  • Mother Dies Amid Abuses in $110B US Stent Assembly Line http://t.co/Nag1UCiqfi Sad tale of medicine done 4 profit 2 the harm of patients $$ Oct 10, 2013
  • Micro Businesses Find Health-Care Rollout Is Slow http://t.co/1hhcfPlCfX State Small-Business Exchanges Still Aren’t Ready $$ #gigo Oct 08, 2013
  • Republicans Didn’t Sabotage Health Exchanges, Obama Did http://t.co/OkGA7HEBVw Very difficult 2get complex programming projects done fast $$ Oct 08, 2013
  • Robot Surgery Damaging Patients Rises With Marketing http://t.co/fFe29Nesdp Check out track record of any doctor doing robotic surgery $$ Oct 08, 2013
  • Exchanges Will Raise US Healthcare Costs http://t.co/8UhQm58INQ Removing economic incentives has always raised healthcare costs $$ Oct 07, 2013
  • IT experts question architecture of Obamacare website http://t.co/hvfjKXp5Rt System architecture flaws caused problems, not traffic alone $$ Oct 07, 2013

 

US Local Economics

 

  • GED Faces New Rivals for High School Dropouts http://t.co/SG0UQ1wqzT Passing the GED doesn’t mean much, but if you pass a tougher test? $$ Oct 12, 2013
  • Machines Gauging Your Star Potential Automate HR Hiring http://t.co/MOcnq8Hd5E Can playing games well reveal u better than your resume? $$ Oct 11, 2013
  • Montana Towns Struggle With Oil Boom Cost as Dollars Flee http://t.co/3Wz5aUCc2p Small town’s budget can’t keep up w/Infrastructure needs $$ Oct 10, 2013
  • Housing Boom Bigger in Texas as Home Bidding Wars Erupt http://t.co/GyOZGL1fgC the Texas economy very strong & the builders can?t keep up $$ Oct 09, 2013
  • Puerto Rico Debt Troubles Regulators http://t.co/s3b54N9UsT Check your muni bond fund, b/c even single state funds bot PR 4extra yield $$ Oct 07, 2013
  • Pay Raises for Teachers With Master’s Under Fire http://t.co/N3ogmAntdZ The next study should b whether education BAs harm teaching skill $$ Oct 07, 2013

 

Other

 

  • Colleges Try Cutting Tuition?& Aid Packages http://t.co/6MWuklxikq Unlikely 2 work; higher sticker w/greater aid helps selectivity/cachet $$ Oct 11, 2013
  • Snowden Says He Has No Regrets http://t.co/KFVhXMW7Fu satisfied his actions had an impact; Sam Adams Award 4Integrity in Intelligence $$ Oct 11, 2013
  • Baseball Battling Dominican Drug Use While Grappling With A-Rod http://t.co/kU2zOHvECu Doping begins in the minors, w/many from DR league $$ Oct 11, 2013
  • Light Point Security: A Software ‘Jail’ 4 Malware? http://t.co/s1cPTtwlD6 Clever idea: browse in the cloud, image relayed 2local browser $$ Oct 10, 2013
  • Chemistry Nobel Goes to Three for Computer Program Work http://t.co/GBZA3RtgcB Interesting. Didn’t know u could do chemistry w/computers $$ Oct 09, 2013
  • Sudden Collapse of Cloud Provider Rattled IAC http://t.co/ilhmBtahWe If cloud provider announces shutdown, act fast 2preserve your data $$ Oct 08, 2013
  • New York Bans Harbinger’s Falcone From Insurance Role http://t.co/IFfrBHv9Xq Interesting how the NY Commish got Falcone out of MD ins sub $$ Oct 08, 2013
  • Gold Befuddles Bernanke as Central Banks? Losses at $545B http://t.co/lgtX56v0Oq Central Banks r not immune from the fear/greed cycle $$ Oct 08, 2013
  • Younger Americans Fare Poorly on Skills Against International Peers http://t.co/c5dL26lXPM But Americans r more flexible & creative $$ Oct 08, 2013
  • Finance People To Follow On Twitter http://t.co/Q6jBZWGtkg A great list, at least for those that I know, should u have time 2follow 106 $$ Oct 08, 2013
  • Humans Trump Robots at the Grocery Store http://t.co/atazmQ8R5h Cashiers Trump Self-Checkout Machines at the Grocery Store $$ Oct 07, 2013

?

Janet Yellen

  • When Yellen Speaks World Listens as Fed Plans US Course http://t.co/iRO9Fg6JMf More hagiography as media/acdmics overestimate her ability $$ Oct 11, 2013
  • Senate Confirmation Hearing 2Test Yellen’s Skills of Communication http://t.co/3lQVrH3zXh Can she think on her feet w/hostile questioners $$ Oct 10, 2013
  • The Yellen Difference http://t.co/Wgeop65jct How Yellen is different than Bernanke: Tobin Keynesians will b in charge at Federal Reserve $$ Oct 10, 2013
  • Janet Yellen: 5 Things You Should Know About Obama?s Fed Chair Nominee http://t.co/52Ie5o9nkk Wealthy, apolitical, Akerlof, forecasting $$ Oct 09, 2013
  • Yellen 2b Named Fed Chairman, First Female Chief http://t.co/DSsky1sDgM What’s done is done; someone has 2b the fall guy/gal $$ #glasscliff Oct 09, 2013

?

Tower Group

  • Commented on StockTwits: It’s a question of probabilities. Clearly the odds are higher now than a week ago, much h… http://t.co/XPlzWLxvy9 Oct 10, 2013
  • Commented on StockTwits: I used 2b a corporate bond manager. When u c a 1-yr obligation trading below $95, solven… http://t.co/AugmpPF1Ib Oct 10, 2013
  • Risky equities should be priced to earn 20%+. The bonds of $TWGP yield 20%+. Makes me think bonds r the true equity & stock a call option $$ Oct 10, 2013
  • 20%+ yield = panic $$ RT $TWGP just watch the bonds they are $88 and B-. Off lows they do not reveal panic. HOLD. http://t.co/VMc0Rih0bT Oct 10, 2013

?

Wrong

  • Wrong: Obamacare Foes Using Shutdown Echo South?s Nullifiers http://t.co/js120efIId Not a fair portrayal. Obamacare was badly thought out $$ Oct 12, 2013
  • Dubious: How Yellen Will Shape Fed’s Banking Regulation http://t.co/DHGcgEOqmb Surprise me if much happens; Fed rarely strong regulator $$ Oct 10, 2013
  • Uncertain: Recession Looms If Treasury Uses Tools to Prevent a Default http://t.co/FY39fp90eQ Not so sure it would create a recession $$ Oct 09, 2013
  • Wrong: Detroiters Living Amid Ruins Resist Moving as City Reorganizes http://t.co/MuaBzAfVbm Article purely anecdotal, population shrinks $$ Oct 07, 2013

?

Replies, Retweets, & Comments

  • @SilentMachinery I wondered about that also. There may be something there. Oct 12, 2013
  • I need 2brighten my mood. Ah, @AARP has sent me membership cards. Snip, snip, snip. Much better. Old people suck the blood of the young $$ Oct 10, 2013
  • Luck seems to even out for me. I miss gains & losses evenly. I usually don’t spend much time on a stock after I sell it $$ @merrillmatter Oct 10, 2013
  • RT @researchpuzzler: on endowment investing ~ 1) @AlephBlog: http://t.co/UrctMBjW9R ~ 2) @advperspectives: http://t.co/AlhZQgPGnw Oct 09, 2013
  • To @TheUncorrelated : my article on your whitepaper, with my advice to endowment investment managers is here: http://t.co/dQlapwbWqO $$ Oct 08, 2013
  • @rishad Beautiful, but it follows the footsteps of Detroit. One poet said, “Chicago is a pompous Milwaukee.” The skylines don’t compare tho. Oct 08, 2013

 

The Rules, Part XLIX

The Rules, Part XLIX

In institutional portfolio management, the two hardest things to do are to buy higher than your last buy, and sell lower than your last sale.

I’ll tell you about two former bosses that I had.? They are both good men, and I respect them both.? The first one taught me about bond management.? He had a difficulty though.? Typically, he did not like to trade.? When I stepped into his role, but with far less experience, I traded a lot more than he did.? Because I traded more, and liquidity in the bond market is sporadic, I came up with the rule listed above.

The boss had an interesting insight, though: he suggested when you get to large sizes, stocks and bonds are equally illiquid.? I tend to agree.? In my days, I have traded stocks and bonds where I was a disproportionate holder of them, more so with bonds than with stocks.? If you want to learn the microstructure of markets, there is no better training ground than with illiquid securities.? And if you hold a lot of any security, the position is illiquid.

Once you are big, it is hard to trade in and out of positions rapidly.? You have to scale in and scale out, and do it in such a way that you don’t tip your hand to the market, which would then move against you.? Now, it would be easy if you had a fixed estimate of value for the securities, so that you knew whether a proposed buy or sell made sense, but corporate bonds and stocks improve and deteriorate.

Imagine for a moment that you hold five percent of a company’s bonds, and to your surprise, the situation is deteriorating.? Bid prices are falling.? What do you do?? First question: are the bonds money good?? Will they pay off, with high likelihood?? If so, bide your time, and maybe add some more if you have room.? If not, the second question: so what are the bonds worth?? If less than the current price, start selling, but avoid the appearance that you are desperate.? You have a lot of bonds to sell.? For the market to absorb them all will be a challenge.? I would say to brokers, that I was willing to sell small amounts of bonds at the current market, but if someone wanted to buy my full position, I might be willing to compromise a little.? Then you can have negotiations.

More often, in a deteriorating situation, you sell in dribs and drabs as the price of the asset falls.? There is psychological pain as you sell lower, but a good manager dismisses it, forgetting the past and focusing on the future.

Then there was the other boss.? At the interview he asked me, “What is one of the hardest lessons you have learned?”? I said, “In institutional portfolio management, the two hardest things to do are to buy higher than your last buy, and sell lower than your last sale.”

He appreciated the answer, though he had a hard time applying it personally.? He had a tendency to look to the past more than me.? Over the years I have learned to be forward-looking and try to analyze what securities will do the best, regardless of my cost basis.

I got the largest allocation of the Prudential “C” bonds when the deal was done. but I bought an equal amount 10% higher in price terms when it was a great deal in relative terms.? It was tough to buy more at a higher price, but it was still a great yield on a misunderstood bond.

Regret is native to mankind, but you can’t change the past.? You can try to estimate the future.? Don’t think about your cost bases.? Rather, think about what an asset is truly worth, and its trajectory, and manage your buys and sells relative to that.

Forward-looking management wins.? Look forward, and avoid regret.

PS — On Scottish Re (spit, spit) we went through this process.? We bought and bought more as it went down.? I erred in my judgment.? Had I looked at the taxable income, I would have realized that a lot of the profits weren’t real.

Before the company announced its reorganization plan, we doubled our position at a very low price, but then sold the whole thing into an astounding rally when the company announced its plans.? That cut our losses considerably, and we didn’t buy it back.? Eventually, it was worth nothing.? Focus on the future; ignore the past.

The Rules, Part XLII

The Rules, Part XLII

During a panic, it is useful to reflect on the degree to which the real economy has been driven by the financial economy.? In the Great Depression, the degree was heavy; in the seventies, it was light.? Today, my guess is that it is in-between, which makes it difficult to figure out the right strategy.

Again, this was written in 2002 or so.? As I posted last night, the banks were in relatively good shape then.? I made a lot of money for my clients buying bank floating rate trust preferred securities at ~$80.? There was no security that we did not clear at least $10 on, and most cleared $20 within a year.? One even went from $68 to $100, plus a healthy coupon.? In bond terms those were a series of home runs.? As an aside, as a bond investor, I focused more on net capital gains than most, and that helped us in a rocky era.? I often gave up current income to gain the potential for capital gains, which was the opposite of most of my competitors.

So in 2002 it was reasonable to buy banks as the willingness to supply of credit grew.? But there are limits to how much credit you can have in an economy without things getting screwy.? An economy with too many promises to pay becomes inflexible; far better to finance more of the economy with equity, but that requires a Fed that works properly, like it was under Eccles, Martin and Volcker.? Under men of less courage, like Bernanke, Greenspan, Burns, Miller, Crissinger, and Young, it simply paves the way for asset bubbles and price inflation.

In 1929 and 2008, though, it was relatively easy to know that the financial economy had grown too large for the real economy.? Total debt to GDP levels were at records.

Or think of it from this angle: in 2004, I was recruited by another financial hedge fund to be their insurance analyst.? I talked with them, but ultimately I refused, because I felt the boss was probably less competent than my current boss.? A major part of his presentation was how amazing the outperformance of financial stocks had been over the prior 10 years, implying that it would be the same over the next 10.? That outperformance was not repeatable because the capital of the banking and shadow banking industries had gotten so large that there was no longer any way that they could extract a high return out of the rest of the economy.? As it was, the effort to do so made them take on asset risks that killed many companies, and should have killed many, many more, had economic policy been handled properly.

This is one reason why my long only portfolio was so light on financials, excluding insurers, going into 2008.? I sold the last of my banks in 2007, realizing Europe would be no safe haven.? I retained one mortgage REIT that cratered as repo fell apart, teaching me a valuable lesson that I had bought something cheap, but not safe.? That was my only significant loss during the crisis starting in 2007-2008.? Repo funding is not a safe funding source during crises, and this is something that is not fixed from the last crisis, along with portfolio margining, and a few other weak liability structures.

With respect to the eras starting in 1929 and 2008, the key concept is debt deflation?? When there are too many debts, there will be too many bad debts.? That is the time to only only companies with strong balance sheets that will not need to refinance under any conditions.? That eliminates all banks and shadow banks.

I can’t guarantee that we are past the crisis, because we haven’t seen what will happen to the economy when the Fed starts to lessen policy accommodation, much less tighten.? As it is, for the most part, I not only own companies that are cheap, but primarily companies that are safe.? Value investing is “safe and cheap,” not just cheap.? This applies to financials as well, but many value investors lost a lot of money on financials because they ignored credit quality near the end of a credit boom.? Many credit-sensitive companies looked cheap near the end of the 2007, but they were cheap for a reason — they were about to get pelted by a ton of losses.

As an aside, do you know how hard it is to get a value manager to short something trading at 50% of book value?

I know how tough that is.? I’ve been through it.? He would not bite.

The company had asset risks as well as liability risks.? I extrapolated the liability cash flows to realize the long-term care? policies the company had written would likely bankrupt them.? But when the boss came to me pitching it as a long because one his buddies thought it was dirt-cheap, I uttered, “Gun to the head boss, I would tell you to short it.”? Reply: “But it’s trading at half of book value.” Me: “Book value is misstates true economic value.? Can’t say for certain, but I think this one goes out at zero.”

As it was, we did nothing, and the stock, Penn Treaty, did go out at zero. (There was one small positive out of this, I did convince the private equity arm not to fund a competitor in long-term care.)

Back to the main point.? Have a sense as to the financial economy.? This will probably only happen once in your life, but that time is crucial.? If there is a financial mania going on, move to safety, and reduce exposure to credit-sensitive financials.? It’s that simple, but to most value investors who invest in seemingly cheap financials that is a hard move.? Remember, safe comes before cheap in value investing, and that means questioning asset accrual items.? Financial companies have that in spades.

The Rules, Part XXXVII

The Rules, Part XXXVII

The foolish do the best in a strong market

“The trend is your friend, until the bend at the end.”? So the saying goes for those that blindly follow momentum.? The same is true for some amateur investors that run concentrated portfolios, and happen to get it right for a while, until the cycle plays out and they didn’t have a second idea to jump to.

In a strong bull market, if you knew it was a strong bull market, you would want to take as much risk as you can, assuming you can escape the next bear market which is usually faster and more vicious.? (That post deserves updating.)

Here are four examples, two each from stocks and bonds:

  1. In 1998-2000, tech and internet stocks were the only place to be.? Even my cousins invested in them and lost their shirts.? People looked at me as an idiot as I criticized the mania.? Buffett looked like a dope as well because he could not see how the enterprises could generate free cash reliably at any intermediate time span.
  2. In 2003-2007, there were 3 places to be — owning homebuilders, owning depositary financials or shadow banks, and buying residential real estate directly.? This was not, “Buy what you know,” but “Buy what you assume.”
  3. In 1994 many took Mexican credit risk through Cetes, Mexican short-term government debt.? A number of other clever investors thought they had “cracked the code” regarding residential mortgage prepayment, and using their models, invested in some of the most volatile mortgage securities, thinking that they had eliminated all risk, but gained a high yield.? Both trades went badly.? Mexico devalued the peso, and mortgage prepayments did not behave as expected, slowing down far more than anticipated, leading the most levered players to? blow up, and the least levered to suffer considerable losses.
  4. 2008 was not the only year that CDOs [Collateralized Debt Obligations] blew up.? There were earlier shocks around 2002, and the late ’90s.? Those buying them in 2008 and crying foul neglected the lessons of history.? The underlying collateral possessed no significant diversification.? Put a bunch of junk debt in a trust, and guess what?? When the credit cycle turns, most of those bonds will be under stress, and an above average amount will default, because the originators tend to pick the worst bonds with a rating class to maximize the yield, which allows the originator to make more.? Yes, they had a nice yield in a bull market, when every yield hog was scrambling, but in the bear market, alas, no downside protection.

I could go on about:

  • The go-go years of the ’60s or the ’20s
  • The various times the REIT market has crashed
  • The various times that technology stocks have wiped out
  • And more, like railroads in the late 1800s, or the money lost on aviation stocks, if you leave out Southwest, but you get the point, I hope.

People get beguiled by hot sectors in the stock market, and seemingly safe high yields that aren’t truly safe.? But recently, there has been some discussion of a possible “safety bubble.”? The typical idea is that investors are paying up too much for:

  • Dividend-paying stocks
  • Low-volatility stocks
  • Stable sectors as opposed to cyclical sectors.

A “safety bubble” sound like an oxymoron.? It is possible to have one?? Yes.? Is it likely?? No.? Are we in one now?? Gotta do more research; this would be a lot easier if I were back to being an institutional bond manager, and had a better sense of the bond market pulse.? But I’ll try to explain:

After 9/11/2001, institutional bond investors did a purge of many risky sectors of the bond market; there was a sense that the world had changed dramatically.? At my shop, we didn’t think there would be much change, and we had a monster of a life insurer sending us money, so we started the biggest down-in-credit trade that we ever did.? Within six months, yield starved investors were begging for bonds that we had picked up during the crisis.? They had overpaid for safety — they sold when yield spreads were wide, and bought when they were narrow.

But does this sort of thing translate to stocks?? Tenuously, but yes.? Almost any equity strategy can be overplayed, even the largest and most robust strategies like momentum, value, quality, and low volatility.? In August of 2007, we saw the wipeout of hedge funds playing with quantitative momentum and value strategies, particularly those that were levered.

Those with some knowledge of market? history may remember in the ’60s and ’70s, there was an affinity for dividends, with many companies borrowing to pay the dividend, and others neglecting necessary capital expenditure to pay the dividend.? When some of those companies ran out of tricks, they would cut or eliminate the dividend, and the stock would fall.? Now, earnings coverage of dividends and buybacks seems pretty good today, but watch out if one of the companies you own has a particularly high dividend.? You might even want to look at some of their revenue recognition and other accounting policies to see if the earnings are perhaps somewhat liberal.? You also compare the dividend to what the cash flow from operations is, less cash needed for maintenance capital expenditure.

I don’t know whether we are in a “safety bubble” now for stocks.? I do think there is a “yield craze” in bonds, and I think it will end badly when the credit cycle turns.? But with stocks, I would simply say look forward.? Analyze:

  • Margin of safety
  • Valuation, absolute & relative
  • Return on equity
  • Likely and worst case earnings growth

And then balance margin of safety versus where you have the best opportunities for compounding capital.? If relative valuations have tipped favorably to less common areas for stock investing that considers safety, then you might have to consider investing in industries that are not typically on the “safe list.”? Just don’t? compromise margin of safety in the process.

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