Thursday, December 31, 2009

New Year's Eve Links

A friend of mine is getting married on January 2nd in Maine, about 75 minutes from my house in New Hampshire, which has resulted in 6 of my good friends and their wives coming to party with me and the Missus on New Year's Eve in my house in the woods.  I am, needless to say, looking forward to it - hopefully the snow that just started falling won't effect anyone's travel plans.

Here's a final batch of links for 2009:

Felix Salmon with the last word on Synthetic CDOs. A great point,  succinctly:

"Now that we’ve pilloried Merrill Lynch for being so stupid as to get synthetic CDOs spectacularly wrong, we’re moving on to pillorying Goldman Sachs for the equal and opposite crime."

MISH brings us a Christmas Eve letter from the Governor of Arizona:
"We face a state fiscal crisis of unparalleled dimension – one that is going to sweep over every single person in this state as well as every business and every family..."  

"We must solve these problems and we must solve them now. More than calling for cooperation, today I had state government implement various emergency measures meant to ensure Arizona’s fiscal solvency. Among them:

  • I ordered the Arizona Department of Corrections to return to the custody of U.S. Immigration and Customs Enforcement (“ICE”) -- as soon as possible -- all non-violent criminal aliens as is allowed under existing law. These inmates are the responsibility of the federal government (as is securing our border with Mexico). Arizona should not have to bear this cost.
  • I am restating my Arizonans-only directives to state agencies to ensure that public benefits are provided only to those who are legally in this country and who reside in this state.
  • Effective immediately, I have ordered all state agencies who benefits to citizens to implement means testing and sliding fee schedules. While the government safety net must stay in place, we need to secure help only for the neediest among us."
Also from MISH, an interview with Kevin Duffy of Bearing Asset Management

"As a country we've become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on "capitalism."

"When I hear kids playing music today, I ask them when the overdrive kicks in.  Even so-called “alternative” stuff sounds like pop.  When the biggest rock groups cite the Pet Shop Boys as a major influence, something’s gone terribly awry.

Nobody rages against the machine anymore.  Instead, the angst of the modern male is expressed through perpetual bedhead and incessant whines directed toward dominant girlfriends who insist on swiping their guyliner.  Ecstasy is now the drug of choice amongst today’s musical youth, and it shows.  Goodbye Screaming Trees and Soundgarden — hello Killers, Fallout Boy, and Panic at the Disco.  For Christ’s sake, I’m actually starting to miss Creed."

If you're pissed off at the bank bailouts, there's something you can do about it.  Move your money elsewhere!

From Calulcated Risk:  The NY General Fund will end the year in the red for the first time.

The Reformed Broker: In 2009 In Learned That....

my favorites:

Trader Mark (Fund My Mutual Fund): Ben Bernanke can remain irrational far longer than I can remain solvent.

Leigh Drogen (Surfview Capital): there is a real meaning to "don't fight the fed".

Wade Slome (Sidoxia Capital): $14 trillion in debt, 10% unemployment, and approval of socialized healthcare can lead to an +80% move in the NASDAQ Composite over a 10 month period....also Tiger Woods prefers eating out at the buffet rather than at home, even though it’s cheaper to eat at home and having Swedish meatballs every night ain’t so bad.

Saving the best for last, a picture of Oscar, from the 2009 Dynamite Family Holiday Card.

I hope to have a few more 2009 recap posts in the next week, but until then - thanks to all my readers for your feedback and support.  Wishing you all the best in 2010.

-Kid Dynamite

Wednesday, December 30, 2009

Tip Jar and Oscar's Bum

So yeah, I finally set up a tip jar (link is on the sidebar).  I spend a lot of time working on this blog, and I appreciate anyone who wants to throw me a bone for my efforts.  Thanks to Ravi, Bones and Fabrizio for their generosity in this regard so far.  Having the tip jar enables me to avoid cluttering the blog with advertising.  If you don't care about me, do it for Oscar:

His dooker is still driving him crazy.  Today at the vet we got some doggie ass cream that I have to rub onto his pooper by hand.  FML.  The worst part is that Oscar knows the words "ice cream," and now the poor guys is so confused when I say "ass cream" and he ends up with a tail full of doggie Preparation H instead of a mouthful of Ben & Jerry's.

If you haven't read my two posts this week on buyer responsibility and the victim mindset in financial markets, please do.  I thought the first piece was good until I wrote the second piece, which I think highlights some essential market dynamics, and I think came out very well. 


Monday, December 28, 2009

Synthetic CDO's, Spanish 21 and Sports Betting

As expected, my last post, "Fiduciary Duty and the Victim Mindset" sparked a lot of discussion.  There are several intelligent comments on both my site, and on the republished version at Seeking Alpha, most of which I've done my best to respond to with clarifications of why I think my post is reasonable and accurate.

I had the epiphany this morning that the proper analogy with these CDO's lies in sports betting. I left the following comment (edited slightly here) on another blog this morning:

"To me, financial markets are not unlike sports bookmaking. In the bookie world, you have the "Squares" who are analogous to the retail investors. These are the guys who say things like "oh man - Tom Brady is wicked pissah - the Pats are SO totally gonna cover the 7 point spread," with little or no reasoning or analysis to back up their decision. They also might be guys who pay someone else (like a newsletter writer) to pick games for them (of course, these newsletters are almost always scams)

Then there are the professionals - I actually know a guy who was one of the biggest NFL bettors in the 80's. He still handicaps NFL games - he spends 30 hours+ a week analyzing the different matchups, weather, psychology, etc.  Some weeks he finds several good bets, some weeks he finds none.

Now, in the investing world, pension fund managers need to be the PROFESSIONALS - they can't be in the "square" camp, and just say "hey - I paid the newsletter (ratings agency!!!) for the picks, if they lose, it's not my fault." That's amateur (square) thinking, and I could possibly be convinced that it's an acceptable excuse for RETAIL, amateur investors (but note, again, the culpability lies with the RATINGS agency here).   Professionals, however, can't be allowed to make such excuses, or the system will never change!  Similarly, you can't blame the bookie when you lose for having offered you an unfair bet.

Both sports betting markets and financial markets are efficient ENOUGH that you have to do your own work - and LOTS of it - if you expect to generate alpha.

Some people will deride me for making the analogy of markets to a casino or bookmaking operation - but I'm reasonably certain that most traders (myself, and everyone I know at least) do expected value calculation on their trades just like you'd do in the casino or in the sports book. It's not "Kid Dynamite is a naive immature gambler" - it's the realization that in both financial markets and in gambling markets, it's not a crime to have more information than the guy on the other side of the trade/bet."

People keep throwing the word "fraud" around here.  As the NY Times article which prompted my original post explained, Goldman was creating these synthetic CDOs as far back as 2004.  It took YEARS for them to blow up.  I find it hard to use the fraud label there - it's just another case of most of the investing world being totally ignorant to the risks involved.   There were few who saw the risks, and they positioned themselves accordingly - GS was in this camp on these synthetic CDOs, it seems.  Sellers of synthetic CDOs didn't have to, as Tommy Boy so eloquently put it, "Take a dump in a box and mark it guaranteed," and coerce investors into buying them.  Investors were screaming for yield- they were begging to buy these products.  Blame it on the system, blame it on the ratings agencies, blame it on the investors - but don't put the lion's share of the blame on the virtual bookies - the sellers of the CDOs.

When you bet the Patriots, the bookie doesn't have to tell you that Tom Brady is out with a bad shoulder - you have to do that research yourself.  Similarly, when you buy a synthetic CDO, which you can't do if you're a retail rube, you shouldn't expect the seller to tell you why he thinks you're on the wrong side of the trade.

Felix Salmon summed it up nicely when he said
"It’s just that if you’re making a bet and Goldman is your bookmaker, don’t be surprised if you end up losing."

Commenter Patrick Harden on my Seeking Alpha post came up with a similar conclusion:
"It's just common sense that when dealing with the Vampire Squid you are likely going to get the short end of the stick...Bottom line - don't make deals with the devil. You're not going to win."

My friend, "The Dude" emailed me:

"Blaming Goldman for creating or making markets in these derivs is akin to blaming Steve Wynn for allowing an Asian billionaire to split tens all night long while downing tequila shots at the blacjack table losing the 'whale' millions in the process"

Which brings me to my next analogy.  I was walking through a casino many years ago when I saw a "Spanish 21" table.  Spanish 21 is like regular blackjack, except there are a whole bunch of rules added that favor the player.  These rules are listed boldly on a little placard at the table.    I pondered these rules, and was amazed that the casino was offering such a game.  Of course, there has to be a reason, so I asked the dealer "I don't get it - what's the catch?"  "There are no tens in the deck," he replied (a disadvantage for the player that negates all the other slight advantages).   I smiled and walked away.   Had I decided to sit and play, assuming I had an edge, I would have been an idiot.  It would have been my own fault.

So, is everyone who trades on the buy side (money managers, that is) an idiot?  Of course not - but there is a theme that should be in the back of every investor's mind at all times, especially in trades (bets) like synthetic CDO's where there is exactly one person on the other side of every trade who will benefit from the exact opposite scenario you are looking for.  

This brings me back to a concept I laughed at about 11 years ago when I was interviewing at Susquehanna.  Susquehanna was a pioneer in the options trading world, and has a rigorous training program where they teach all new employees poker theory.  The decisions one makes in poker in terms of expected value, having seen similar situations before, making quick calculations of the value of a bet, and being able to figure out what the person on the other side of the table is trying to do all have analogies to the trading world, which is why Susquehanna found it valuable to teach their employees this skill set.

Anyway, the interviews with Susquehanna were the most mathematically rigorous of any I've ever encountered.  While most firms seemed content that as a math major from MIT I probably had some chops, Susquehanna wanted to see them.  I'll never forget the first question in the interview, where the interviewer asked "what is the expected value of the number of heads if I flip a coin 1000 times."  DYKWTFIA ?!?!?   "500,"  I replied confidently.  "And what's the standard deviation?"  He handed me a pencil and paper and told me to take my time.  I managed to grind out the answer (nope, I couldn't do it right now, 11 years later, but I can look up the methodology online  (SQRT (n*p*(1-p)) and find that it's about 16).  He then asked me for a 95% confidence interval of the number of heads one could expect in extended repetitions of 1000 flips - easy - 2 standard deviations, or a range of 468 - 532.  Finally, he offered me even money on a series of coin flips where he'd bet that the total number of heads would be more than 532.    Layup, right?  I just did the math and knew it was a 40-1 prop.  "Ok, I'll take it," I told him confidently.  

The interviewer proceeded to explain to me that I knew the math - and that he KNEW that I knew the math, after all, he'd just watched me derive it.  Why then, would I expect him to be offering me such a great wager?  "Because you were testing me?"  I hoped.  No - it was because he had a guy on the floor of the CBOT who had trained himself to flip coins with a much better than 50% success rate for a desired outcome.  The moral of the story was that you should always assume that the person on the other side of the trade thinks THEY have an edge too.   The interviewer then asked me, and I swear this happened, although not in these exact words, "So let's say you calculate the fair value of an option to be $1.50, and you're in the crowd trying to buy 10,000.  The market is relatively thin, and you are buying a few hundred options at a time.  Suddenly, Goldman Sachs walks in and offers you 10,000.  What do you do?" 

"Take 'em!"  The young, confident, and soon to be Kid Dynamite in me replied, "I know they're worth more, I've done the math."  The interviewer shook his head, and said that GS wouldn't be selling them to me out of their generousity - that GS clearly had a different view, and that I should try to think of where my analysis could be wrong.  Did I miss a dividend?  Was there an imminent earnings event?  Had news come out?  This annoyed me greatly.  "How can you ever trade then, if every time you trade you think that you might be on the wrong side of the trade or that your counterparty has more information than you do?"  I was perplexed.   The interviewer explained that it's not every time, and it's not every trade, but you should certainly be wary of eager and smart counterparties willing to put up sizable trades, and you should make darn sure you've triple checked your work. 

I had speed chess listed on my resume, and the interviewer then told me that he had a guy who would play me in chess.  He'd spot me a rook and a queen - a simply massive spot.  I told him I would love to play the guy for money.  "You shouldn't, " the interviewer told me, "you have no idea how good this guy is."   This is where I basically made the decision that I wouldn't be working for Susquehanna, as I retorted, "But you have no idea how good I am - I am making the assumption that I could beat Bobby Fischer if he gave me that spot."    Still, the point is important - always try to know what you don't know, and think about the other side of the trade.

There's an old moral from Guys and Dolls, frequently quoted in poker prop betting circles:

"One of these days in your travels a guy is going to come to you and show you a nice brand-new deck of cards on which the seal is not yet broken, and this guy is going to offer to bet you that he can make the Jack of Spades jump out of the deck and squirt cider in your ear. But son, do not bet this man, for as sure as you stand there you are going to wind up with an earful of cider."

Bringing it back to synthetic CDOs:  buyers of these products needed and still need to realize that there is someone on the other side of the trade taking the opposite view and expecting to profit from it.    It's absolutely not about simply saying "buyer beware,"  but I think that in the case of synthetic CDOs, the buyers were grossly negligent, and need to be held accountable.


Friday, December 25, 2009

Fiduciary Duty and The Victim Mindset

I wanted to avoid writing this post because anytime you write a story defending Goldman Sachs you have to deal with uneducated, moronic criticism from members of the Ignorati spouting what they've read on the internet about vampire squid. 

This post is not a defense of Goldman Sachs, it's a defense of Capitalism.  However, it is certainly not advocating a license to say "Caveat Emptor"   as an excuse allowing any seller or provider of goods and services to plug the buyer of said services with crappy quality.  I'm not advocating a society or fiscal system where it's the Wild West in terms of justifying all behavior with "Hey - buyer beware, you should have known"  when the consumer buys a faulty good or an investment that loses money.  I'm not pushing for an Ayn-Randian pure capitalist free for all (not in this post at least!) where the strong devour the weak and leave them to wither and die.

However, what I am advocating, as I've been advocating all along, is a return to the era of personal responsibility - a return to the realization that mortgage holders are not victims, that consumers are not victims, and that we can't just continue to castigate the Big Bad Banks as the cause of all our financial woes if we want to have any hope at all of righting our sinking fiscal ship.

The story of the week, that prompted this post, is the NY Times missive titled "Banks That Bundled Bad Debt Bet Against It, And Won."    Your assignment as the reader is to first read the Times article in its entirety.  Then read Barry Ritholtz's post on the subject, which is pretty neutral, although chooses to use some quotes which are very critical of GS's behavior.  After that, read Felix Salmon's post on the subject, which I agree largely with, and focuses on the point I've been trying to make yet again: that the buyers of these synthetic CDO's that GS sold were sophisticated investors, not retail rubes who didn't know any better.   

What I find frustrating is that the overwhelming response to the article in the comments on the NY Times site, Ritholtz's site, and even Salmon's site is of the "GS is the devil, hang these a-holes by their ankles" populist variety.  I find the well reasoned, logical responses to be the ones that point out that the buyers of these assets that went bad, or ANY assets that go bad, are acting under their own free will, and need not be thought of as victims.  This is NOT the same as saying "Caveat Emptor."  It's important to understand that the buyers we're talking about here are sophisticated, professional money managers.  They have responsibilities to their clients that go far beyond being able to use the excuse "but I bought it from Goldmans Sachs, it must be good,"  or "Goldman Sachs told me it was good, so it must be good." 

I'll quote myself, as I wrote on Barry's thread:

"I’ll leave you with this thought: again, it seems we’re putting the burden back on the Big Bad Banks and absolving the clients as innocent victims. It was the CLIENTS – the pension fund managers who bought this crap – the municipalities – who failed miserably in their fiduciary duties, and we need to stop holding them up as victims."

Felix Salmon expands on this point:

"The 30,000-foot view of what happened here is that there was an enormous amount of mortgage paper flooding the market over the course of the 2000s. Goldman Sachs, as a sell-side institution which manages its risk book on a daily basis and doesn’t want to take long-term directional bets, hedged its mortgage exposure with short positions it created by structuring synthetic CDOs. The buy-side, by contrast, had an enormous amount of appetite for long positions in mortgages, and it was the job of banks like Goldman to feed that appetite: again by structuring synthetic CDOs. Goldman was killing two birds with one stone: no wonder Jonathan Egol, who was in charge of these deals, did so well there.

When the mortgage market started to turn, Goldman was smart and nimble enough to realize that it could make money on the way down as well as on the way up. That’s what traders do, and Goldman is the world’s largest and most successful trading shop.

The real lesson here isn’t that Goldman did anything scandalous. It’s just that if you’re making a bet and Goldman is your bookmaker, don’t be surprised if you end up losing."

Goldman sold these complicated structured products to investors because investors DEMANDED them - pension fund managers were CLAMORING for more exposure to the mortgage market - for more yield.  These synthetic CDO's that GS was selling have the characteristic that for every buyer there is a matching seller.  GS happened to be that seller, but Felix, quoting himself from over two years ago, explains,
"If I’m an investor and I buy a stock from a broker, then I’m buying it because I think the total amount of money I’m paying is a fair amount for that security. I’m completely agnostic about whom, exactly, I’m buying the stock from: if a different broker has the same security for a lower price, I’ll go there instead. And I’m certainly not trusting the broker to assure me that my security will go up rather than down in value. In fact, at the margin I actually like it if my broker is shorting that stock and thinks it will go down in value – because that just means that I get to buy it at a slightly cheaper level."

"If an investor buys any kind of financial security, he’s deliberately buying a risk product. He gets all the upside if that security rises in value. But he also gets all the downside if that security falls in value. It’s not the job of any securities firm to bail him out."

I also think the comment from "fixedincome" on Felix's post really nails the aspect of GS's fiduciary responsibility - or lack thereof - in this situation:
"Many of you are coming at this from the perspective of what one might refer to as a “retail” rather than institutional or at least, qualified, client.

Differentiation between the two is critical because the latter are generally considered to be both sophisticated and sufficiently capitalized to assume whatever risks they’re taking by–knowingly–purchasing securities that are not registered with the SEC and that do not come to market with regulated disclosure requirements. That includes just about every CDO ever built. It is illegal to otherwise sell such securities directly to “retail” investors.

I’m not certain that GS is entirely without guilt, but not for most of the reasons mentioned here.

It’s also critical to differentiate between a broker/dealer (the arm of an i-bank responsible for distributing securities) and a registered investment advisor. The former, in fact, owes no fiduciary duty to its clients (though for retail purposes this is a hotly contested issue in the industry), while the latter decidedly does.
And while GS does have arms of its business that function as RIAs (Goldman Sachs Asset Mgmt, which manages mutual funds, for example) the investment bank and broker/dealer elements responsible for building and selling CDOs do not operate under those registrations and their institutional clients absolutely, positively know that."

Goldman Sachs was not managing money for these clients.  They do have an arm that manages money (GSAM), but that's totally separate and distinct from the branch we're talking about that created these synthetic CDO's and sold them to investors. 

I keep getting brought back to my own summary of the situation.  Any time someone comes up with an argument that places the burden on the banks selling bad assets, I think this quote is applicable.  I'll quote it again, because I think it's simple and concise:

"I’ll leave you with this thought: again, it seems we’re putting the burden back on the Big Bad Banks and absolving the clients as innocent victims. It was the CLIENTS – the pension fund managers who bought this crap – the municipalities – who failed miserably in their fiduciary duties, and we need to stop holding them up as victims."

Once we end the victim mindset, we can start holding the proper people accountable. In this case, the pension fund managers who failed miserably to identify the risks in the assets they bought are certainly responsible, among others, and should be removed from their roles as money managers.  Then we can work on repairing the system to prevent future occurrences.  If we continue to just say "hey - it's the Big Bad Banks' fault, there was nothing we could do," well then, we're guaranteeing that we'll repeat our same mistakes again.

Merry Christmas,


Tuesday, December 22, 2009

KD's Year In Review: Part 1: Isaac Newton, Mean Reversion, and Momentum

I can't stop thinking about how Newton's First Law applies to the big momentum move we've seen in the market this year:

"An object at rest tends to stay at rest and an object in motion tends to stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force."

I worked on the sell side of Wall Street for 5 years, culminating in my shift to the buy side in May, 2005.  Although I traded, literally, tens of billions of shares of stock on the sell side, it was a presentation early on in my stint on the buy side that made the most lasting impression on me.  (quick side note:  sell side = Wall Street broker/dealers, buy side = money managers: sometimes internalized at those same Wall Street broker/dealers, like in my case)

The presentation was from Jeff Degraaf, who was at that time the head technical analyst at Lehman Brothers.  While my sell side trading desk had basically made the bulk of our profits off of mean reversion - exploiting small inefficiencies in the market that resulted in deviations from the norm, Degraaf explained the key difference between mean reversion strategies (think: buy low, sell high) and momentum strategies (think: buy stocks making new highs, sell stocks making new lows).  If a stock has already rallied strongly, we fear we might have missed the move already, and are generally pre-disposed to want to sell it.

First of all, it's important to realize that by nature, almost EVERYONE is a mean reverter - we're hard wired to want to buy bargains, such as stocks that have been walloped by the market, and sell spikes - stocks that have recently rallied heartily.  Now, don't be intimidated by mathematical terms, none of this is rocket science, but the conclusion is enlightening.

In a basic mean reversion strategy, one would sell stocks that have rallied a given amount in a certain time frame - say, stocks that have rallied 5% in the last 30 days.  In a momentum based strategy, on the other hand, your model would have you buy stocks that are already moving up - it might not be buying the same stocks that the mean reversion strategy tells you to sell, but you're not buying stocks that are falling - you're buying stocks that are already showing upward momentum (and selling stocks that are falling, of course).

Now, Degraaf's presentation illustrated distribution curves showing return profiles for each strategy.  Each curve looked nearly normal in shape (a bell curve), but there were two key differences.  First - in the mean reversion strategy, the mode (most common result - the peak of the bell curve) of the return distribution was slightly positive - mostly your trades make a little bit of money.   On the momentum strategy, the mode of the return distribution was slightly negative - the bell curve was centered slightly to the left of zero - most of your trades actually lose a little bit of money.

The key, however, came in the tails of the distribution - the multi-sigma events - the Black Swans so to speak.  In the mean reversion method, the upside tails were basically nonexistant, which is understandable.  If you're selling stocks that rally, and buying stocks that are falling, the only way you have a massive positive return is when you make the one trade at the turning point of a bull or bear market:  ie, when you short at the top, or buy at the bottom.  Unfortunately, these trades only happen once - you only buy the bottom once, and in the mean reversion strategy, you probably sell far too early, once you've captured some kind of rally - because you expect a reversion to the mean! You expect the rally you've captured to end.

The momentum strategy, on the other hand, has fat positive tails - there is a much larger than expected frequency of large positive returns than you'd expect under a normal distribution.  Any time there is a big trend in the market, you capture the vast majority of it with the momentum model.  Most of the time, when the market churns around (as it has for the last several weeks), you're losing money, slowly, on each and every trade - but when the market establishes a trend (like it did for 6 months earlier this year) you're on board and profiting from the entire move.

That's it - it's not a difficult concept, but it goes against most people's trading instincts - we don't like to buy stocks that have already rallied, and we don't like to sell stocks that have already fallen - our instinct is to do the opposite - buy low, sell high.

So that's why I mentioned Newton's First Law of Motion to describe the big move in stocks this year.  An object in motion tends to stay in motion - like the stock market since the march lows - until an outside force acts on it.  I've been thinking that the outside force will be "reality" - the reality that things are not really getting better - that we (As a country) have pretty much spent all the money we have and all the money we borrowed already.  The reality that unemployment overrides existing home sales in terms of importance in the economy, and that you can't tax and spend your way back to prosperity.  Perhaps the outside force will be the eventual inevitable Federal Reserve interest rate hike needed to remove the massive fiscal stimulus that's been enacted.

I currently have very little idea of where the stock market is going.  My brain tells me that reality is clearly lower, but if the SPX breaks out of its recently established trading range, I'll have the words of Jeff Degraaf and Isaac Newton screaming in my ears: this object is in motion, and objects in motion remain in motion...


Today In "I'm Not Making This Up"

Darth Vader and a band of stormtroopers rang the opening bell today on the NYSE (h/t Dealbreaker):

I mean - what else can you say about this?  Come to the Dark Side Luuuuuuke... Ignore reality - drink the Kool-Aid - get long and be happy....

As one of the commenters on Dealbreaker astutely quipped: "I've got a bad feeling about this..."


Why Didn't I Think of That?

There are lots of innovative technology products being developed every day, but this one struck me in its simplicity and simple "how come no one thought of that before?" nature.

Samsung has a digital camera (TL255) with two LCD screens - one used as a viewfinder on the back of the camera, and one on the front of the camera so that when you're taking pictures of yourself, you can see if you have the angle right.

Simple.  Functional.  Surprising to me that no one else developed this in the last 15 years.


Q3 GDP Revised Lower Again - But No One Cares

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis." 

I continue to be amazed by the market's non-reaction to these revisions.  Initial Q3 GDP was expected to be around +3.2%.  When it was reported at 3.5% on October 29th, it set off a 70 point rally in the S&P 500 - from 1040 to 1110.  Yeah! Our economic rebound is taking hold!  Things are getting better!  Green shoots!  (imagine those last few quips were written in sarcasm font).  On November 24th, the first revision to the report came out, "in line with consensus estimates"  at +2.8%, and stocks didn't care.  Somehow, the consensus estimates had managed to be lowered to 2.8% without anyone noticing or repricing the market to account for the downward revisions in estimates.

Today, the GDP growth rate was further slashed to +2.2% - but again, stocks don't seem to care, as futures are still above fair value, indicating a higher open for the market!

What would have happened if the initial GDP report came in a 2.2% instead of 3.5%?  I'd have to think the effects on the stock market would have been dire - as it would have showed that our "strong rebound" wasn't so strong after all.   Somehow though, nearly two months later, the market is content to ignore the actual data, having happily digested the incorrect preliminary data.  Said differently, by initially reporting the Q3 GDP growth rate at +3.5% instead of +2.2%, the growth rate was overstated by nearly sixty percent!

My point is simply this: when markets reprice based on data beating expectations, it would seem reasonable to expect them to reprice (lower this time) again when that same data turns out to have not beat expectations.
Odd indeed - it tells me that this market continues to act irrationally. 


Monday, December 21, 2009

More Ignorant Consumers - Symptoms of the Same Problem

A NY Times article titled "In New York, Paying More to Send U.S. Mail at UPS Stores,"  has me fired up.  Now, I know that sarcasm doesn't come across well on the internet sometimes, so I'll try to be explicit.

"Posing as customers, reporters for The New York Times visited several U.P.S. stores last week looking to mail an item by Priority Mail — one of the postal service’s signature offerings. In nearly every instance, they were quoted prices well above the government postal rate, and only one of them was told they were paying a premium for the convenience of using a U.P.S. Store."

and then:

"“I think there’s a natural assumption on the part of the consumer that if you’re sending something through the U.S. Postal Service, even when it’s from another store, you’re not paying more, and if you are paying more, it’s just a pittance,” said Tod Marks, a senior editor at Consumer Reports."

Well guess what, Tod Marks, the consumer is a dipshit, and these sorts of "assumptions" are exactly why we're economically hosed as a country - because our consumers make too many assumptions and don't educate themselves enough about the rules, realities and fine print.

There's an old saying:  "Assume makes an ASS out of U and ME."

In this case, I can't understand why anyone thinks that UPS would let you mail something at USPS (US Postal Service) rates. Can you go into McDonalds and send a USPS package?  Can you go into your real estate office and send a USPS package?  No - but you actually can go to UPS and send a USPS package, so you should be thankful for having the opportunity to have that convenience, and guess what - THEY WILL CHARGE YOU FOR THE SERVICE!  SHOCKER!   Do they have a duty to tell you how much it would cost to mail the item at the post office?  Maybe, maybe not - if you want to know how much it costs to mail at the post office, then, ... wait for it... GO TO THE POST OFFICE!

When I lived in New York City, I didn't have a doorman, so I had my packages shipped to a store around the corner called "Your Neighborhood Office."  I paid a fee for each package received, and they'd notify me so I could come pick up the packages.  It was a terrific service, and, I judged, well worth the $3 a package.   If I wanted to send a package, I could either go to the post office and pay the USPS rates, or I could go to my package store and pay a premium for them to handle it for me!  I certainly never expected them to send a package via USPS at USPS rates - and since I'm a frugal (cheap bastard) consumer, I'd  choose to walk to the post office  if I had to send a package.

What is it with this sense of ignorant entitlement on the part of the U.S. consumer?  Such ignorance is a large part of why we have a financial crisis - because the evil greedy bankers (note: if I had a sarcasm font I'd be using it right now!) took advantage of us by giving us loans we couldn't afford, or by not making it clear that these mortage payments would eventually change, or by telling me I'd just be able to refinance in a few years.  Because my greedy evil bank charges me when I spend more money than I have in my account - or because I have to pay an unfairly high interest rate on all the money I've spent that I don't actually have.

Responsibility. Education.  Common Sense.     Read the fine print - don't make assumptions.  And for goodness sake - don't think the UPS store owes you the right to ship USPS packages at USPS prices.


Sunday, December 20, 2009

The Market Machine

Must read today from the Brett Arends in the Wall Street Journal (hat tip Abnormal Returns)  titled "Hot Stocks For a New Decade."   Arends talks about the well known theme of consensus "top picks" resulting in sub par performance, but hits on a few other key points:

"Much of the stock-market community is still just a marketing machine that happens to sell investments, the way, say, a drugstore like CVS sells pills."

This is a key, key realization that I feel most people don't understand  All the talking heads you see on tv are constantly telling you the market is going higher, because simply, if you pull your money from the market they are out of a job.  Their JOB is to manage, trade, and trade against the money you have in the market.

Arends then touches on a topic I have discussed previously - how it's ok to be wrong as part of the consensus and lose money, but it's not ok to go against the consensus and make 10% if the herd makes 25%

"It's easy and safe for most "investment professionals" to stick together and recommend the same things, no matter how foolish. It's better -- for them, though perhaps not for the clients -- to be wrong in a crowd than risk standing alone. Few things are more dangerous to investors than a consensus.
And there is, of course, generally a strong bullish bias on Wall Street. Even today, as usual, most stock recommendations are positive. Never mind that the market is already nine months into a recovery that has seen the S&P 500 rise more than 63% and the Nasdaq jump over 70%. (And all the while, 17% of the country is unemployed, underemployed or has stopped looking for work.)"

I think we will see another example of the market machine spin job when the retail sales data comes out for next month.  While the data would have likely been weak anyway, due to the tepid economic situation, you can bet that this batch of bad data will be written off to the blizzard that blanketed the East Coast on the last weekend before Christmas.  The snow will be spun into another market excuse to write off the poor results!  Keep the machine churning...


Thursday, December 17, 2009

Bernanke Redux

It's too bad I've had reason to write so many posts about Ben Bernanke... First, he was named Foreign Policy's "Top Global Thinker."    Then he was named Time Magazine's "Person of the Year."   In the Time interview, he produced the no-it's-not-from-the-Onion-he-really-said-it quote "We had to do it because we had an adjustable rate mortgage and it exploded, so we had to," while explaining why he refinanced into a 30 year fixed (although something smells fishy with that answer - as some commenters pointed out - since interest rates are still low on most ARMs... Did Big Ben have some sort of negative amortizing loan where he had to actually start to make payments?  How else could an ARM "blow up" with such low interest rates?).

Also in the last week, he took time to answer Senator Jim Bunning's lengthy question list.  If you're interested in reading critiques of Bernanke's answers, check out Yves Smith's in depth challenges here, and Karl Denninger's few points here.  But wait - as the informercials say... THERE'S MORE!

Today, Clusterstock highlighted another come-on-there-is-no-way-the-Fed-chairman-could-have-said-that-you-must-be-making-it-up-for-financial-satire quote, but sadly, it's NOT from The Onion - Bernanke really said it:

"Pressed by Committee chairman Chris Dodd on the matter of the carry trade, the cheap dollar being used to buy higher-returning assets, Bernanke responded that it’s only a problem for the U.S. if you think the economy is going down again, which is not the Fed’s view."

WOWZA!  REALLY?!??  So, since it's not the Fed's view, it can't happen!?? Marty up!  Ponziiiiiiiiiiiiiiiii.  It's almost as if Bernanke is having a "let me see if I can put my foot any deeper inside my own mouth" contest with himself!  Doesn't he know that he and the Fed have had a less than stellar record forecasting the impact of the economic crisis thus far?

Finally, Felix Salmon gave me a shout out today, suggesting that perhaps I was the "blogger" who Senator Bunning was quoting in Bernanke's confirmation hearing when he compared Bernanke to the captain of the Titanic.  As a believer in righteous attribution for blog work, I must mention that I certainly didn't create that analogy - I believe it was Dean Baker who I first heard using it.  I would be honored if Bunning read this blog, but that analogy has been widely used.


A Triple Shot of Citibank: Taxes, the Prince, and the Government

Citibank made news yesterday with three very interesting stories.

First, I woke up to the Washinton Post's: "U.S. Gave Up Billions in Tax Money In Deal For Citigroup's Bailout Repayment."  Here are the details:  Companies, like people, can accumulate tax loss carry forwards.  If you as an individual, lose $100k trading next year, you can carry that loss forward to next year, so that if you make $100k trading next year, you can use your prior loss to offset the gain.  Companies to the same thing, but it's with income too, along with capital gains.  Citi had $38B in tax loss carry forwards, but there is a provision in the tax code that nullifies these future tax benefits when there is a change of control at the company - this provision exists so that companies don't buy the "losses" of other companies just to get tax benefits.

The Treasury's stake in Citi fell under this provision, so Citi was going to lose its tax loss carry forwards, until, that is, the government changed the rules.   Now, Treasury spokeswoman Nayyera Haq makes a reasonable point in saying "This rule was designed to stop corporate raiders from using loss corporations to evade taxes, and was never intended to address the unprecedented situation where the government owned shares in banks."  Also, as a fiscal conservative, I'm aware of hypocrisy - generally, me and my kind are not in favor of higher taxes, and wouldn't really be screaming and yelling about companies being able to keep tax loss carry forwards.   So why is it different here?  Because Citi exists only due to a government  (taxpayer!) bailout, and thus they should not be given any tax breaks at all.  It is important to clarify that the value of this tax break is not $38B - it's the TAXES on $38B, which, assuming a roughly 35% tax rate for Citibank comes to about $13B.  (see Ritholtz and Denninger for more on this story)

The next major Citibank story yesterday was that the Abu Dhabi Investment Authority (ADIA) is suing Citi over some mandatory convertibles (which required ADIA to pay a certain price for Citibank stock) that ADIA bought a few years ago.

"Citigroup said on Tuesday the Abu Dhabi Investment Authority filed an arbitration claim against it, accusing the U.S. lender of misrepresentation over a $7.5 billion investment by the sovereign wealth fund.
The sovereign wealth fund, considered by some the largest in the world, bought securities from the U.S. bank in 2007. In the original deal, the Citigroup bonds must be converted into common stock at a price between $31.83 and $37.24 a share between March 2010 and September 2011."

Obviously, with Citi stock hovering above $3, ADIA is, to put it gently, PEEVED at the prospect of having to pay more than $30 for the stock.  The irony here is palpable - as Citi has been on the lender side of the table many times in similar situations:   as we've seen in the past few years, Citi held many bad mortgages where the borrower (homeowner) misstated their income or the value of the home was incorrectly assessed.  Now, Citi is the borrower, and their lender, ADIA, is asserting that Citi made fraudulent misrepresenations.    Further complicating the matters, ADIA is a huge client of Citi's, and investors from the  Middle East have been instrumental in Citibank's health and survival over the past 15 years (see: The Prince!)

The final story was Citibank issuing shares to raise capital and repay TARP funds.    Never mind that this decision is an absolute disaster for shareholders and seems designed primarily to free up the bank from government compensation restrictions (see James Kwak's take here, and I actually agree with Dick Bove for once!)  - I want to focus on the fact that the government decided not to sell shares on the offering.

The government planned to sell $5B of its Citi stock (a portion of the common stock that the government owns as a result of converting its preferred stock position) alongside Citi's $17B of new issuance.  However, when the price of the deal came in at $3.15, the story was that the government decided not to sell.  Now, let's consider what really happened:  CNBC last night said that they heard that the deal was 17 times oversubscribed.  We can pretty much write that off as total bs, as a deal with massive demand would not price at such a huge discount.  My colleagues this morning confirmed that there is no way the deal was massively oversubscribed.  Then, we must consider, is the government really playing the role of Joe Stocktrader?  Should the government be saying "we think Citibank is worth more - we're going to hold it for the long term?"

The answer to that question may be debatable, but to me the answer is a resounding "no."  Never mind the conflicts of interest present with the largest shareholder being the fiscal policy maker too, it's simply not the Treasury's job to play portfolio manager here. They should be trying to sell their stake in the least impactful way possible.  Which brings us to what I think really happened:  that the government had to pull their share sale because no one wanted to buy the stock!  That explains the steep discount, which was exacerbated by the problems mentioned above with ADIA.    I can only hope that the truth is that the government pulled out because there was no demand, and not because either 1) the government didn't want to sell the stock below its $3.25 cost basis as the Bloomberg article mentioned, or because 2) the government is playing portfolio manager.

Lending further evidence to the theory that there was a dearth of buyers is the fact that the Treasury agreed to a 90 day further lockup on its shares, and their statement that they will be disposing of the shares over the next 12 months.  It seems to me that investors were worried about buying Citi shares and getting steamrolled by the government selling more shares in the near future (you don't want to buy shares if you know there is still a big seller who needs to sell more!) - so the government had to abort its sale and make the lockup concessions just to attract enough buyers for Citi's share issuance.


Wednesday, December 16, 2009

You Can't Make This Stuff Up

Calculated Risk reported this gem, from the Time Magazine Person of the Year extended interview with Ben Bernanke, which I couldn't read because I wasn't drunk from drinking the Kool-Aid:

"What's your interest rate?
That I'm earning?
No, on your house. Do you have a mortgage?
Oh, yes, we refinanced.
Oh, perfect. When?
About 5%. A couple of months ago.
Good time.
We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."

ummm.... cricket...   Let me recap:

"We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."

That's from Time Magazine Person of The Year Ben Bernanke, Chairman of the United States Federal Reserve, who has bought roughly a TRILLION dollars worth of mortgage backed securities to keep mortgage rates artificially low, and has kept short term interest rates at zero in an effort to continue to stimulate the economy and the housing markets.  

WTF is going to happen when these subsidies stop???   To the bomb shelter!!!! The ARMs are exploding!!!

Interesting times indeed...


Bizarro World - Time Names Bernanke "Person of the Year"

I think I've already covered why Ben "Person of the Year" Bernanke should not be lauded for helping to abate (note: abate - not eliminate or solve!)  the pain from the crisis he helped create, so I'll simply say that our society has become a satire of itself.  If some alien race were watching us right now, they'd surely be laughing.

Bernanke analogies include: Rewarding the Captain of the Titanic for getting everyone off the sinking ship after he rammed it into an iceberg.    Rewarding a doctor for sewing your leg back on after he accidentally amputated it.   Rewarding someone for putting out a fire in your burning house after they set it.  Rewarding someone for cleaning up a pile of crap on your floor after they took it.

Leave your own favorite Bernanke analogy in the comments.


Monday, December 14, 2009

Damned If You Do, Damned If You Don't

We had a major financial crisis because banks made bad loans with high leverage.  We yelled at the banks for causing all these problems, and we yelled at them for not exercising sound risk management.  Now, they're trying to be prudent and not lend money to people who won't be able to easily pay it back, but the American economy is like a crack addict in need of a fix - so we're yelling at the banks for not lending enough - for being TOO prudent.

We've become addicted to easy credit - but people forget that the current, tighter credit situation is not abnormal - it's the reversion to the mean!  The orgy of credit and appetite for risk that fueled the growth of the last 10 years is what was abnormal.  This is the single most important realization for policymakers to wake up to.  It shouldn't be a shocking epiphany, when you consider the paragraph above  -   the people who can most readily payback loans are, by definition, the ones who don't need the loans.

Today, President Obama "Pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others," according to the NY Times.  Remember, this is a day after he blamed the same "fat cats" for causing the crisis. 

Let's consider a few more soundbites from today:

“America’s banks received extraordinary assistance from American taxpayers to rebuild their industry,” Mr. Obama said in remarks after a midday meeting with bankers at the White House."

That is indubitably true. And then:

“Now that they’re back on their feet we expect an extraordinary commitment from them to help rebuild our economy.”

But what does that mean?  From the start of the bank bailouts, one theme from critics of the policies enacted was that they would result in us ending up with a bunch of zombie banks, like Japan did in the 1980's.  The problem, when you fix damaged banks with duct tape, is that they can't resume normal lending - they become zombies, holding onto their capital and trying to earn enough to cover future writedowns, but unable to take new risk because they are still in a fragile state!  Remarkably, this problem was made even WORSE this week, when C, BAC, and now WFC were allowed to pay back TARP funds.  

US Bancorp CEO Richard David responded:

"Mr. Davis said financial institutions would re-examine small business loans that had been denied, but he cautioned that banks had a responsibility to carefully evaluate the qualifications of each client. “We simply want to assure that we make qualified loans,” he said."

That sums it up. The reason Banks are hoarding money and not making loans is not because they hate America.  They are hoarding money and not making loans because, amongst other reasons,  1) they learned something from their collossal screw ups in risk management 2) the current risk-reward, with consumer purchasing power deflating and a murky economic outlook at best, doesn't favor massive loan origination, and 3) consumers/businesses are unable/unwilling to borrow more - they are maxed out.   Are there small business who want to borrow money?  Of course there are - THERE ALWAYS ARE! That doesn't mean they should be given money though!  Haven't we learned anything?  There are also always people who want to take out mortgages to buy houses - that doesn't mean that writing mortgages to these people is a good risk reward - as we've seen beyond the shadow of a doubt in the last 3 years.

MISH has a piece up today quoting FDIC chair Sheila Bair:

"Federal Deposit Insurance Corp. Chairman Sheila Bair said she’s “concerned” that U.S. banks are making only the safest loans, and encouraged the companies to step up their pace of lending.

“There needs to be well-managed risk-taking to get the economy going again,” Bair said today"

I'm trying to think of proper analogies, and some sports ones are coming to mind.  Imagine a baseball manager telling his cleanup hitter: "I need you to hit more home runs - but don't strike out anymore."  Or perhaps a football coach telling his quarterback: "We need more big plays down the field - big yardage pass plays - but don't throw any interceptions."   Maybe a site-boss tells his construction foreman: "I need this job done today - you have to do it in half the time with the same manpower, but make sure the quality is still perfect and that no one gets hurt."

Or perhaps a politician tells a bank manager "I need you to make more loans - but only good ones that won't default - because we're still trying to recover from the last wave of bad loans you wrote."

Boggles the mind...


Citi and The Prince

In light of Citibank's news today that it's paying back TARP funds, which prompted this story about how Prince Alwaleed Bin Talal will hold onto his Citi stake, I feel the time is right to post this picture of the Prince that BigShow just emailed me:

I love this guy. He's tremendous - a satire of himself.  Look at that 'stache!  And the stallion!  Brilliant.

Of course, this is also a perfect time for one of my favorite videos (potentially NSFW) of all time:  the fake Prince Alwaleed interview:

I've posted it before, but it makes me laugh every time I watch it.





Sunday, December 13, 2009

Vegas, Re-fi's, and Obama

warning: potentially NSFW language below...

Vegas Rex writes a blog about all things Las Vegas from the perspective of a Vegas local - and insider.   He's funny, irreverent, and most importantly, he knows what he's talking about when it comes to Vegas.  While I've been bearish on MGM's imminent City Center for some time, thinking that the additional supply it creates would crush the city, Rex has been a big City Center bull - until lately.  (The bull case for CityCenter is that it will result in a bump in tourism for the ailing city.  The bear case is that it's a zero sum game (mostly) and that City Center will just eat up demand from other existing properties.)

Rex writes about the soon to be opened City Center casino hotel: Aria:

"Allow me an analogy if you will.

When you see a very attractive female, be it in a movie, on TV, or in person, your first reaction is usually to fantasize about seeing her naked.  If she is exceptionally hot, you may even get to the point where there would be no greater joy in life than to see her sans-clothing.

“Wow, Juggs McSnatch is sooo smoking I would pay a million bucks just to be a fly on the wall in her dressing room”, or something of the sort.

Later, you hear that Juggs is posing for Playboy, and when it is released, you immediately run to 7-11 clutching a $20 bill sure that you are about to see the greatest nude female ever.

You get home, open the pages, and find … boobs, an ass, and a vagina.  The kind of boobs, ass, and vagina you have seen a thousand times before.  You may still be excited, but it’s usually at this point that you realize the anticipation and illusion of her nudity was far more interesting than her actual nudity.

Most fake boobs are pretty standard, the airbrushed ass looks almost indistinguishable from that on Miss December, and let’s face it … if you’ve seen one vagina, you’ve more or less seen them all.

I’m starting to worry that Aria will be a vagina."

It's been well documented in these pages that I'm not fan of Matt Taibbi's sensationalistic reporting, but his latest skewering, "Obama's Big Sellout,"  of the Administration's status quo coddling of Wall Street is worth a read.   I liked Taibbi's last paragraph best:

"What's most troubling is that we don't know if Obama has changed, or if the influence of Wall Street is simply a fundamental and ineradicable element of our electoral system. What we do know is that Barack Obama pulled a bait-and-switch on us. If it were any other politician, we wouldn't be surprised. Maybe it's our fault, for thinking he was different."

The final must read from this weekend is a NY Times piece titled "Rates Are Low, but Banks Balk at Refinancing."    From the Times article:

"Mark Belvedere bought a condominium in a San Francisco suburb in early 2004 and refinanced it in 2005. He now owes $235,000 on a property that would sell for barely half that today.

Mr. Belvedere said he would be willing to live with all that lost equity if he could refinance his loan from a variable rate, which could eventually go as high as 12 percent, into a 30-year fixed term.

His lender said no, citing the diminished value of the property. “It makes no sense and is so frustrating,” Mr. Belvedere said. “I’m ready and willing to pay the mortgage for the next 30 years, but they act like they’d rather have me walk away.”

Calculated risk does a nice job summing up the problems succinctly:

"Unfortunately  (NY Times author) David Streitfeld doesn't provide any further information on Belvedere's loan. If the loan was held by a bank, then it might make sense for the bank to refinance the loan (this lowers the bank's risk of default). However Belvedere's "lender" might be a servicing company and the loan may have been securitized. Then it is impossible to refinance because the current holders of the note would be paid off, and no new lender would make a loan greater than the value of the collateral.

As Streitfeld notes, the GSEs have a program called Home Affordable Refinance Program (HARP) that will allow lenders to refinance loans upto 125% of the property value. But this is only for loans the GSEs already holds or insures (and because refinancing lowers the risk of default). This wouldn't help Belvedere because he owes almost twice what his property is worth."

In case that doesn't make sense, let me try to re-simplify.   Many mortgages have been collateralized and sold off to investors - that's what allowed people to buy these homes in the first place:  insane appetite for paper (bonds) led to miscalculation of risk by the buyers of the bonds (aka, the real LENDERS) and loose lending standards.  The problem is that if the bank doesn't own your loan, it's impossible to get a new loan, because you don't have adequate collateral:  who in their right mind would lend you $235,000 on a property worth only $125k just because you promise to pay?  Well - don't answer that - it happened hundreds of thousands  (millions?) of times already in the last decade, but NOW lenders seem to have learned their lesson and, sensibly, will not make any more such loans.

However, if the bank DOES own your loan, it seems reasonable that they would allow you to refinance from a loan you will not be able to pay off (and will eventually default on) into one which, at current interest rates, you will be able to pay off.  Remember, the bank doesn't lock up that money lending it to you for 30 years at 5% - they sell the paper off to Fannie and Freddie and other mortgage buyers.  BUT, and this is a big BUT that's been written about extensively elsewhere, many banks are still unwilling to negotiate/refinance in these spots if you are still timely with your payments.  In a perverse paradigm, they generally require you to fall behind on your payments before they will work with you.


Happy Hanukkah!

I almost forgot...  and yes, that's the same Oscar picture I used last year...


Thursday, December 10, 2009

Jack Of All Trades

In the past 10 days, I've managed to get my riding mower jump started, ride it around my lawn and even cut some tall grasses, prune my apple trees, install 3 electronic thermostats, clog my toilet, and shovel 10 inches of snow.  In between, I made a trip back to NYC, and wrote blog posts on a variety of subjects.

I've been posting more frequently lately, so in case you missed anything, here's a recap:

AIG partially paid us (the government, the taxpayers) back by giving us a stake in businesses we already owned.

I went to see Phish on three consecutive nights at MSG in NYC.   The recaps are:

Wednesday: The Hangover

I also brought you an exclusive "straight from the streets" anecdote about how one of Tiger's mistresses, Rachel Uchitel, takes it in the dooker, but surprisingly, no one care about that post.   I guess my new audience is too high brow.

Then there was another piece on high frequency trading and latency arbitrage, which was balanced by a piece on my dog's butt.

In between, there were a few good linkfests, and a "pick which story is fake," composition.

I don't want to toot my own horn, but I'd say that demonstrates some serious diversity:  Phish, finance, people's butts, dog's butts.

Also, I've added Google Adsense to my blog in an attempt to earn a few scheckles for all the time I put into it.  I'm expressly forbidded from urging people to click on the links, so I'll have to resort to jedi mind tricks...


Wednesday, December 09, 2009

MidWeek Readings

-PIMCO hired former assistant to the Secretary of the Treasury, Neel Kashkari.  Bill Gross told us a year ago his strategy was to "shake hands with the government."  I guess he wasn't kidding.

-Morgan Stanley thinks the Fed will raise rates to 1.5% in the second half of 2010
-Goldman says no rate hikes until 2012

I'm with Goldman on this one, especially as Citi/BAC are paying back TARP funds.  Why does that matter? Well, It should be clear that C/BAC are far from financially lush - they are paying back TARP funds hastily because they don't want the government all up in their bid-ness.  The government knows that once it lets these guys pay back TARP, there can be no second bailout - the public would riot in the streets.  THUS, they have to ensure that policy is kept such that C/BAC can continue to print money - via near zero rates.

-MISH: Questions on Inflation Expectations.  MISH raises some great points here (a sampling):

1. When was the last time you bought a computer? Did you expect prices to drop? Did you buy a computer anyway?

2. When was the last time you bought a flat panel monitor or TV? Did you expect prices to drop? Did you buy them anyway?

3. If you expected the price of steaks to keep rising, would you buy a years’ worth? Six months worth? Do you even have a freezer?

4. If you expected the price of milk to keep rising, how much supply would you keep?

5. Do you have a storage tank for gasoline when you expect gas prices to keep rising?

6. If your refrigerator was in good shape would you buy another one if you thought they were going up in price.

7. If your refrigerator, microwave, TV, or even car went out, would you buy them or wait if you thought prices would drop?

8. I keep hearing how inflation expectations will cause people to buy consumer items, or deflation concerns cause people to not buy consumer items, but in light of the above practical test questions doesn’t that seem to be a potty notion?

9. What about asset prices? Would people buy stocks if they thought they were going up? Houses? This one I will answer for you (you bet).

-Michael Panzner "Doesn't Sound V-Shaped to Me."  More anecdotal evidence from the front lines showing that things may not be improving as fast as the spin job would have you believe.

"Assuming a 28% tax bracket, the effective yield on a 4% yield muni is 5.56. 20 year treasuries are yielding about 4%. A lousy 1.5% is all you get for the additional risk that a municipal bond blows up. I hardly see how it can possibly be worth it."

It's return free risk, MISH!   Of course, there's also clearly the widespread belief that the government will not let municipalities default on their debt.