Wednesday, September 15, 2010

Odds and Ends - Wednesday

I have a handful of odds and ends to address today.

First of all, perhaps someone familiar with the vagaries of SPAM can tell me why this specific post of mine generates the most SPAM comments?  I can't figure it out. Is there some combination of desirable keywords in that post?  I don't think it gets a lot of traffic at all - I can't understand why spammers love it.

Thanks to my readers for all the flashlight recommendations in the last thread.  I ended up getting the Streamlight 88850 Polytac LED (via Amazon PRIME).

I'll let you know how it works.

Now - One big story you'll read this morning is "PIMCO Makes $8.1B Bet Against Lost Decade of Deflation"  First let's pull some snippets from the Bloomberg story:

" Bill Gross’s Pacific Investment Management Co. made an $8.1 billion wager that the U.S. won’t suffer a decade of deflation like the one that crippled Japan starting in the 1990s. That’s the notional value of long-term derivative contracts tied to the U.S. consumer price index that Pimco’s mutual funds entered into during the first half of this year, according to a regulatory filing. The funds received $70.5 million in up-front premiums under these contracts, known as inflation floors, in return for agreeing to pay investors should prices decline in the 10 years ending in 2020"

"Pimco disclosed in a June filing that its funds began writing 10-year inflation floors during March and reported last month that they issued additional contracts in April. According to the Aug. 27 filing with the U.S. Securities and Exchange Commission, 25 Pimco funds entered into these inflation floors during this year’s first half, with Gross’s $247.9 billion Pimco Total Return fund accounting for $6.57 billion of the $8.1 billion total."

"Premiums from the contracts help boost fund income as yields on government bonds are near record lows. Potential losses are limited because the fixed-income securities that account for a majority of the $1.1 trillion the Newport Beach, California, firm oversees would probably gain in value if consumer prices had a protracted decline."

So there are a few things to notice:  the contracts Pimco sold are analogous in their payout profile to options - Pimco collected premium and will pay out if deflation rears its head.  It's not a swap where Pimco profits on the other side if there is sizable inflation.   As the third paragraph I excerpted above notes, this seems like a perfectly reasonable trade for Pimco's portfolio:  they already own a metric crap-ton of bonds which will gain in value if we see deflation.  Thus, I would view the trade less as a "bet against a lost decade of deflation," and more as selling covered calls on a teeny tiny portion of their bond portfolio.  But hey - spin is clearly very important these days, and Bloomberg chose to paint this story as Pimco making a statement against deflation.

I want to highlight some other links:

1) Felix Salmon is one of the few mainstream media writers who understood that FINRA's Trillium fine was not about "quote stuffing."  If you hear someone refer to Trillium's activities as "quote stuffing," you can file them in the "don't know what they're talking about" camp.

2) Stock Rabbi is a new blog I'm following.  He writes about modern financial stories with a humorous little Jewish/Yiddish slant in each post.

3) Economics of Contempt, on the two year anniversary of "Lehman Week,"  bring us major newspaper front pages from that week in 2008.



Greycap said...

You are right on, KD - this trade is best viewed as monetizing an existing short inflation position, rather than putting on an anti-deflation bet. The attractiveness of the trade depends mostly on the richness of the floors, aka demand.

See, we don't really disagree about the mechanics :-)

Kid Dynamite said...

Greycap - I was thinking about you and Nemo this morning as I read the Pimco story. Isn't this exactly what I was talking about before in the Nemo thread? Inflation expectation pricing is being understated (deflation overstated) by The Market, and that's why Pimco is taking the other side... in their own words, "“The options were priced at rich levels to the underlying” risk,"

said differently, the Inflation Floors are pricing in too much deflation (which is the same as too little inflation, right?).

Daniel said...

Channel check time because I know, KD, that you loves some of that there channel checking. We are remodeling two of our bathrooms. Buying various stuff like vanities, lights, plumbing fixtures etc. I'm blown away by how much of it is "backordered." We are buying relatively high end but not exorbitant, Axor for example. What this tells me is that demand is not where it needs to be for businesses to stock inventory. Or, businesses are still having trouble with working capital lines to be able to stock. FWIW.