Tuesday, July 07, 2009

Micro Managing - Readings

Lots of talk about new regulations and laws in the last week or so. Here are some pieces worth reading:

1) Barry Ritholtz on new short selling restrictions:
"Of all the anti-free-market proposals out there, turning equities into a one way bet is by far the least defendable (sic), most ignorant, most damaging to the markets we have seen."

2)Yves Smith on the new legislation to allow refinancing for up to 125% of home value (from 105% previously):

"Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes' value under new regulations enacted Wednesday.

The rule changes, part of the government's attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.

Yves here. Huh? This is beyond Orwell, it's patently silly. "Housing affordability" has traditionally meant "let's do things so people can afford to BUY houses." It even once included stuff like Section 8 housing, giving tax breaks for rental housing targeted to lower income people. The intent is to prop up prices by keeping stressed borrowers from selling their houses and possibly also sending an information signal through the 125% figure, that housing really ought to be priced higher. That is anti affordability. And the concept of "affordability" to my knowledge has never before been extended to keeping homeowners in place."

and then...

"in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer."

3) Mish reiterating some points I've been mentioning for the past 18 months - you can't spend your way out of this.

"The problem with Keynesian clowns is they never look ahead to when the stimulus stops. By definition "stimulus must end" and as soon as it does, unless the stimulus created lasting new jobs, there will be nothing to show for it other than debt.

And interest must be paid on that debt. And that interest has to come to come from somewhere, either more taxes, or printing money and cheapening the dollar. That means there is a price to pay down the road for stimulus today. Keynesian clowns act as if there is no price down the road.

Since you cannot spend what you don't have (without long-term negative consequences), the key to a solid recovery comes from a buildup in savings, lower taxes, and letting consumers keep more of their money (as opposed to government deciding how and when it should be spent)."

4) Mish on Cap & Trade legislation and the potential for resulting job losses (quoting the Washington Times):

"Workers who lose their jobs if the pending climate change legislation becomes law could get a weekly paycheck for up to three years, subsidies to find new work and other generous benefits -- all courtesy of Uncle Sam -- under a little-noticed provision of the bill.

Touted by its House Democratic authors as a jobs engine, the bill offers extraordinary compensation for those who would lose their paycheck as a consequence of its passage.

Adversely affected employees in oil, coal and other fossil-fuel sector jobs would qualify for a weekly check worth 70 percent of their current salary for up to three years. In addition, they would get $1,500 for job-search assistance and $1,500 for moving expenses from the bill's "climate change worker adjustment assistance" program, which is expected to cost $4.2 billion from 2011 to 2019.

The bill passed the House a week ago in a hotly contested 219-212 vote, with supporters arguing that a principal reason to support the bill is that it would create millions of new jobs. But analyses from the political left and right argue that potentially millions of jobs in industries tied to traditional fossil fuels would be lost and, at least initially, not enough "green" jobs would be created to replace them.

"Can you name another jobs-creation bill that was so concerned about its potential impact that it preemptively included a benefits' program for the millions of workers it expected to displace?" asked Chris Tucker, a spokesman for the Institute for Energy Research, a pro-oil industry independent think tank."

5) Restricting speculators in the oil and gas market (Bloomberg):
"U.S. regulators say they may clamp down on oil and gas price speculators by limiting the holdings of energy futures traders, including index and exchange-traded funds. "

"Billionaire investor George Soros told a Senate hearing in June 2008 that the oil price increase that year was caused partly by index funds that buy only oil contracts. Index funds and exchange-traded funds, which mimic an index, can hold oil contracts in excess of available supply. "

See, commodities became an asset class. Pension funds and others bought oil (futures) just like they bought stocks, gold, mortgage backed securities and government bonds. I hate the idea that we're going to interfere with market pricing to try to make the price of everything we want low stay low, and everything we want high stay high. We're talking about limiting short sellers of stocks... We're STILL artificially pumping up the price of houses. We're talking about basically preventing people from buying oil futures. We should also outlaw homelessness and unemployment - then we can solve all of our problems. Oh - war too - I forgot - we need to outlaw war.


Finally, ALPS launched a new equal weighted ETF - but someone forgot to tell them about the special sauce: it's not levered at all! Why bother launching a new ETF if it's not at least an Ultra (2x) product?

"The new ALPS Equal Sector Weight ETF (NYSE Arca: EQL) takes an equal-weighted position in each of the nine Select Sector SPDR ETFs and rebalances that position on a quarterly basis. The fund is designed to avoid overinvesting in “bubble” sectors, such as telecom in 1999 or finance in 2007, and thereby achieve higher risk-adjusted returns. Looking backward, the EQL strategy has outperformed the S&P 500 by more than 3% per year over the past 10 years."

Intuitively, I'm very surprised by the claim that an equal weighted portfolio has outperformed the SPX by at least 3% annually for the past 10 years. Essentially, the EQL portfolio is always selling its winners and buying its losers - that means it should underperform during periods when one sector has a big run (like financials did for a few years) and then outperform when bubbles pop.



Anonymous said...

"Intuitively, I'm very surprised by the claim that an equal weighted portfolio has outperformed the SPX by at least 3% annually for the past 10 years."

It makes perfect sense. In 10 years, you have captured two crashes. An equally weighted portfolio, which sells its winners, will have gotten rid of the most overvalued equities before the crash, thus experienced less pain. Since this happened twice in the last 10 years, it is not hard for me to believe in the outsized performance, especially if we are talking about an arithmetic mean.

I bet the results look a little different if you drag it out over 20 years.

Kid Dynamite said...

right - but the claim in the article was not an average - it said at least 3% EACH year...

you definitely outperform during the crash - but you should also underperform during the bubble before the crash.


it's always possible that i misinterpreted the claim - and they meant on AVERAGE at least 3%

Kid Dynamite said...

the folks at index universe forwarded me this:

the outperformance was an AVERAGE of slightly more than 3% per year... which is possible... it's NOT at least 3% each year...

also, over a 20 year period (ending June, 2008) it's 1.5% annualized outperformance.

never mind the problems with the June, 2008 end date...

Anonymous said...

"right - but the claim in the article was not an average - it said at least 3% EACH year..."

That is an average. They are comparing annual averages.

Again, the two crashes are skewing the results (and they were both massive crashes) in favor of the equal weighting. The outperformance of the market cap weighted index in the boom years is not enought to offset the underperformance in the massive crashes.