Wednesday, February 09, 2011

Quote of the Day: Einhorn on JOE

"With the company trading at more than three times its value, it is easy to see why the Board wants to sell, but hard to fathom why anyone would buy. The lack of cash flow creates a particular challenge for any financial buyer," a spokesman for Einhorn's Greenlight Capital said in an e-mailed statement on Tuesday.  -Reuters


disclosure: no positions in JOE

Equal Weight Index Funds and the Sin of Portfolio Management

Josh Brown pointed his readers toward an intelligent WSJ article about the trend toward equal weighted index funds.  As a refresher - indices like the S&P 500 are market cap weighted - indexers own shares in proportion to the market caps of the companies.  This obviously results in index performance that is dominated by the performance of the larger companies, which have larger component weights.

As a "remedy" to this phenomenon, index providers are starting to roll out "equal weight" versions of these same indices.  In the NDX - Nasdaq 100 - for example, which is a modified cap-weighted index, the top handful of components dominate the index (rough weights as of today):

AAPL: 20%
GOOG: 4.7%
QCOM 4.5%
MSFT 4.1%
ORCL 3.1%
AMZN: 2.5%
CSCO: 2.4%
INTC: 2%
TEVA: 2%

That's roughly 47% of the index made up of only the top 10 names.

In an equal weighted Nasdaq-100 basket, however, each component would get a 1% weight, and the smaller companies have a significantly higher impact than they do in the modified cap weighted (ie, "regular") NDX.  The top 10 names would make up 10% of the index (after a rebalancing).

The thing that strikes me as most unsavory about the equal weighted indices, though, is their rebalancing schedule.  The funds generally rebalance quarterly to get back to the equal weightings - selling the stocks that have appreciated, and buying more of the stocks that have depreciated.  To me, that reeks of one of the cardinal portfolio management mistakes that every new trader learns at some point - hopefully as quickly as possible:  you don't want to sell your winners and let your losers run, and you don't want to sell your winners and increase positions in your losers. 

That's not to say that equal weight indices will perform worse than their market cap weighted counterparts - I'll get to that in a minute - but rather, that I'd prefer it if the equal weight funds rebalanced less frequently.  If the rebalancings occurred annually, or even bi-annually, it would give the winners a chance to run a little bit, while at the same time making sure that the weights don't get so out of whack that a few big boys dominate the index.   In other words, I think that an improvement to equal weight funds could be "slow rebalance equal weight funds" that don't constantly trim their winners and re-load on their losers.

So how do the equal weights perform vs. the cap weights? It shouldn't be hard to deduce that when smaller cap stocks are outperforming, the equal weight indices will do better - since they give larger relative weightings to the smaller capitalization companies.  Similarly, when large caps are outperforming, the market cap weighted ("regular") indices should do better.

We'll keep an eye on the equal-weight fund sector and watch how their assets grow.  As the WSJ article notes, the $40B in ETFs tracking alternative indices is a small fraction of the $1.8 Trillion in traditional index products.

ps - to my Grammar Ninjas - do you prefer the word "indexes" or "indices?"  I have always used "indices" - is one more correct that the other?

What Would You Ask Ben Bernanke?

I returned home from my soccer game at 11:30pm last night, and found an interesting email.  A friend of a friend is involved with the Bernanke testimony today, and had asked "If you could ask Ben Bernanke any 2-5 questions under oath, what would they be?"

Unfortunately, I didn't have time to come up with anything thoughtful, although two of my friends came up with what I thought were pretty good sets of questions.
from one:

1.       Do you believe that a sustained period of low (short-term) interest rates can create asset-bubbles, and does the Fed see any evidence of such bubble forming as we approach 2.5 years of near zero short-term rates?  If "no" to evidence, how are you monitoring this risk and what would signal to you the early stages of such bubble?  If "yes"to evidence, how does the Fed identify such bubbles?
2.       If inflation stays muted, at what level of unemployment would the Fed start raising its target overnight rates?
3.       What fiscal policies would he recommend to the Congress to maximize short and long-term economic recovery? 

From the other:
1) We have had near zero interest rates for 2 1/2 years and there is no sign that will change in the near-term.  What are the repercussions of near zero interest rates for 3+ years?

2) What is the new level of "full" employment?  How long will it take us to get there?

3) You are only charge in monetary policy, but what would you suggest if you had any influence on fiscal policy to maximize the economic health of our nation?

What would you have asked BB?

Tuesday, February 08, 2011

Gold Collateral and "42 Wild Italians"

Remember, folks, bad information can spread around the internet just as quickly as good information can.  Did anyone see the Super Bowl ad last night for the Chevy Cruze?

The hard-of-hearing misunderstand "42 miles per gallon" As "42 wild Italians."  They quickly get off track, and start babbling about random stuff, blissfully ignorant of the facts of the situation.  I couldn't help but think of this as I read GoldCore's piece yesterday about JP Morgan's new collateral process. GoldCore writes:

"JP Morgan announced today that from now on they will accept physical gold bullion as collateral. This is a sign of gold’s further remonetisation in the global financial and monetary system. It may signal that JP Morgan is having difficulty in securing gold bullion in volume. JP Morgan is the custodian for many of the gold and silver exchange traded funds. They will not accept ETF trust gold as collateral. "

Now, there is fact, speculation, and error in this short paragraph.  The fact is that JP Morgan announced that they will accept physical gold bullion as collateral. - that is exactly what JP Morgan announced, and interested parties should read the press release here.  The speculation is that this could have impacts on how the world views gold as money, etc etc, and that JP Morgan is desperate to get their hands on bullion.  The error is the statement "They will not accept ETF trust gold as collateral,"  hyped up of course, with the preceding sentence reminding readers that JP Morgan is the custodian for many metals ETFs.  The readers on the other end of the internet telephone then start screaming "OMG!  JPM won't accept gold ETFs as collateral because they know that there's no actual gold in them!" Unfortunately for the hypesters, that is not correct.

In fact, if you read the JP Morgan press release:

"Gold can now be used as collateral to satisfy securities lending, repo, pledge and other
obligations with counterparties. As the only tri-party agent able to offer this innovative,
integrated solution, J.P. Morgan combines its market-leading commodities, vault and collateral management capabilities to extend the range of collateral types available to tri-party clients."
followed by a list of the benefits of using gold as collateral, and then the concluding paragraph:

"Additional precious metals and commodities will become available for use as collateral. The ability to support any collateral type, settlement platform or region is a key component of J.P. Morgan’s Global Collateral Engine initiative. Designed to be asset and obligation neutral, Global Collateral Engine offers clients greater flexibility in how they mobilise collateral to extract maximum value."

You'll notice that JP Morgan certainly did not say anything about refusal to accept ETFs or "ETF trust gold" as collateral.  This is a press release about a new collateral type.  Thus, JP Morgan did not go into detail about each type of collateral which they already accept, and GoldCore misread this as "they didn't say that they accept gold ETFs, so therefore they don't!"  However, the press release clearly notes other types of collateral accepted in the right sidebar:

Broad range of collateral types
-Corporate Bonds
-Government Bonds
-Convertible Bonds
-Asset Backed Securities
-Exchange Traded Funds

ETFs are already accepted as collateral, that's why this press release didn't say "We are now accepting GLD as collateral" - because it's already accepted.  Similarly, the press release also didn't say "We are accepting 10 year Treasuries as collateral" - they are already accepted.   Now, stepping back a moment, what GoldCore actually wrote in their post is "They will not accept ETF trust gold as collateral."  Although it looks like readers interpreted that as "They will not accept Gold ETFs as collateral," (which we already know is false), perhaps GoldCore was trying to say something else, like "JP Morgan will not allow the GLD ETF Trust to pledge its gold bullion as collateral."  That would be a good thing, of course, although irrelevant, since the GLD Trust doesn't pledge its gold as collateral anyway - they have no reason to - their mandate is to own only gold bullion.  GLD holders certainly wouldn't want the GLD Trust to pledge their gold bullion as collateral to speculate in other instruments or asset classes, but the GLD prospectus prohibits that anyway, so it's a moot point.

note: I confirmed with a contact at JP Morgan that GLD can absolutely be used as collateral in tri-party repo settlements.

If you're trading gold based on the incorrect "news" that JP Morgan is refusing to accept the GLD ETF as collateral, then you're trading on bad information.


disclosures: no position in GLD, long SLV

Sunday, February 06, 2011

Doritos - The Best Part!

I have a feeling this Doritos Super Bowl Ad is destined to go down as an all-time classic:

The finger licking is classic.


Thursday, February 03, 2011

It's Super Bowl Prop Betting Time!

Dov brought the massive list of Bodog Super Bowl Props to my attention.  In his professional handicapping style, Dov writes:

"The bookmakers have really taken the breadth of props to a new level. Check out my early faves and then click the link at the bottom to see some outrageous new props.

Some early hedged trades I've just drawn up:

"Melisma's Last Stand"
C. Aguilera national anthem OVER 1 minute 54 seconds (-130)
C. Aguilera to hold the word "brave" UNDER 6 seconds (Even, Ties push)

The O/U line has finally caught up to the long performances; this could be the last time we cash the OVER for a while...  I think she has it in her, but I'd look for most of the heavy lifting to be done around "banner yet of the free", then close it out clean. This pair is live to go 2-0...

"BMOC Straddle"
Aaron Rodgers to win SB MVP (3:2), equates to 40%
Big Ben to win SB MVP (7:2), equates to 22%

This gets one short the field at 38%, I like that.  In this era of player safety, it's a QB's world.  If Ben's box score from last week has you spooked, you can try pairing Rodgers with the PIT Moneyline (+120)...but I'm going all in on the BMOC.

For those who want to further handicap the BMOC (Big Man on Campus) straddle, the MVP award has been won by QBs 23 times  and by other position players 22 times, leaving the QBs at roughly 51%.  As Dov notes, you're paying 62% with the BMOC straddle, but he believes that times have changed and that we're living in a QB-centric world.

I noticed a ton of other interesting props myself.  As a reminder,  -120 means you have to bet $120 to win $100.  Likewise, +130 means you bet $100 to win $130:

"How Many Times will FOX show Jerry Jones on TV during the Game?"
(Wager is on the number of times Jerry Jones will appear on TV during the Game (from kick off until final whistle). Live pictures only, Any Taped Pictures or Past Video does not count towards wager. Bodog's decisionis final.)

I like UNDER 2 1/2  -105     Jones will be all over the pregame, but he's unlikely to get much game footage unless someone punts the ball into the scoreboard or the roof gets stuck or something like that.  Perhaps there will be an interview at some point, but I doubt he'll pop up three times.

" How Many Times will FOX mention “Lockout” on TV during the Game? "
(Wager is on the number of times“Lockout”will be mentioned on TV during the Game (from kick off until final whistle). Live commentary only, Any Taped or Past Video does not count towards wager, must say“Lockout”exactly. Bodog's decision is final.)
Take UNDER 1 1/2 - 130.   The NFL probably has a shock collar around Joe Buck's neck that will zap him if he even thinks about mentioning the word "lockout."

"Who will the FOX announcers say has better hair on TV during the Game? 
Must be a direct reference on TV during the Game comparing the 2 players hair or wagers will be graded as No Action (from kick off until final whistle). Live commentary only, Any Taped or Past Video does not count towards wager. Bodog's decision is final.
Troy Polamalu -120
Clay Matthews -120

Stay away from this one, even though it's likely to end in No Action - the announcers aren't supposed to pick favorites and won't step on this one.  The halftime crew might make a comment - it's unclear from the terms of the wager if that would be included.

"Will B.J.Raji be on the field for at least 1offensive play? "
Must play for action. Special Teams do not count towards wager.
This is a slam dunk at YES  -185.  The line opened at -180, so someone is already pounding the YES.

"What will happen with the Dow Jones the day after the Super Bowl? "

Are you kidding me?  UP -140 is like free money.  The market goes up every Monday! Buy the F'n Dip!  This is probably the best bet on the entire board.  I would actually bet this if I had a Bodog account.

"Will a Steelers player do the Aaron Rodgers Championship Belt Celebration during the game?"
Must clearly appear on TV during the Game (from kick off until final whistle). Live pictures only, Any Taped Pictures or Past Video does not count towards wager. Bodog's decision is final.
I think that the YES +115 is a smart play - and I think I know who it will be - James Harrison, after delivering a brutal unnecessary roughness hit!

"If there is a picture of someone holding the Lombardi Trophy on the Cover of the USA Today on Monday February 7th, who will it be? "
If 2 or more people are holding trophy all wagers will be No Action. Must be a clear picture of 1 person holding the trophy or wagers will be No Action. Bodog's decision is final.
This is a variation of Dov's BMOC bet - I like Rodgers at 3/2 paired with Roethlisberger at 3/1.  Those two combine for a slightly worse payoff than the BMOC bet, but you get the benefit of the QB being the face of the team anyway even if he doesn't win the MVP

"What will be the Outcome of the Opening Kickoff? "

I love "Touchback" at 15/2.  Amped up kickers + indoor stadium = potential for an unreturnable kick.  Of course, amped up players mean anything less than 5 yards deep in the endzone is going to be taken out by the return team.

"Longest Touchdown Scored in the Game (Yardage)"
Offensive, Defensive and Special Teams touchdowns count towards wager. Game must go 55 minutes for action. Overtime counts towards wager. Touchdown must be scored for wagers to have action.
Under 43 1/2 -115.  

"Will both teams make a field goal of 33 yards or more in the game "

Yes: +145

"Will either team successfully convert a 4th down attempt? "
Game must go 55 minutes for action. Overtime counts towards wager.
Yes -215.  Count on it.

There you have it - Kid Dynamite's prop handicapping.  As usual, my record is better as a contrarian indicator than a "follow" indicator, so if you actually make these bets because I said so you should have your head examined.


Wednesday, February 02, 2011

Dear Penthouse? Or The New York Times? Keisel's Beard

It's time once again for everyone's favorite game - I give you an excerpt, and you have to decide if it's from a Dear Penthouse letter, or from the New York Times.

Today's snippet:

"Or, more specifically, the two-toned tangle of tonsorial madness hanging off of Keisel’s face.

“It is raw and it is real and it is healthy,” Passion said. “It is like the coat of a wolf.”"

Yowza,  I have no idea what "tonsorial madness" is, but it sure sounds like some sort of sexual frenzy.  And anything that is described as "raw," "real," "healthy," and "like the coat of a wolf," quoted by someone named "Passion"  reeks of Penthouse Letters, right?

Au contraire, my friends - this one is from the NY Times, about Pittsburgh Steeler Defensive End Brett Keisel's beard.  But wait - it gets even better - almost as if the NY Times authors are TRYING to get featured in "Dear Penthouse? Or the New York Times?"

"It has curl and body and heft. Keisel’s lips and teeth are buried deep inside the fur. (“The worst part is hairballs,” Keisel said.)"

"Buried deep inside the fur?"  Are you serious?!?!  I'm just going to leave that quote alone and let it stand on its own literary eloquence.


Groundhog Day - Bernanke Saw His Shadow - 6 More Months of QE3?

How does this Groundhog Day thing work again?

If Ben Bernanke smells deflation, we get 6 more months of quantitative easing?

If Bernanke pokes his head out in front of a Congressional committee we get 60 more pages of academic papers?  Or 6 more months of financial crisis investigations?


Tuesday, February 01, 2011

What's In A Name?

The Anal_yst sparked a solid talking point last night when he penned a post asking what people thought of anonymous blogging/tweeting etc.  Felix Salmon expanded on the topic, highlighting the most important issue:  for many pseudonymous bloggers,  especially in finance, their employers would fire them if they published under their real names.  This may seem confusing to some readers, what with "freedom of speech" and all, but my former employer (and I'm guessing most industry peers) have strict policies about communicating with the masses.  If the New York Times called me up at my old trading desk and started asking me questions, I could get fired just for answering them.  There are company spokespeople who do the press interviews, and we have to refer the reporters to such people.  The end result of this is that if you want these pseudonymous financial authors' insights, and you SHOULD want their insights, as they know a crap-ton more than the journalists who write the mainstream media stories do, you have to put up with pseudonymity. (at this point I'll point out that most people who are talking about "anonymous" bloggers really mean "pseudonymous" bloggers.  Anonymous commenters are common, but anonymous bloggers are rare.)

The important point, which I've touched on here multiple times in various forms, is that it's what's being said that matters more than who is saying it.  I've explicitly discussed this mantra previously with respect to the comments of David Einhorn and Steve Eisman.  Critics of Einhorn's and Eisman's ideas quickly snipe "Oh, they're short sellers - that's why they're saying that."  Yes - but what about what they're saying - is there anything wrong with their arguments?  

Critics of pseudonymous speech say things like "Oh, you're hiding behind a pseudonym - you should stand up to what you write."  Let me speak for myself:  Kid Dynamite is, obviously, a pseudonym, but that doesn't mean it's meaningless -  it's my online identity.  It's not as if I can just spout of irreverent nonsense because I'm not writing under my real name -  everything I say goes into the "Kid Dynamite" body of work and reputation, which I very much stand behind and work very hard to establish. As The Epicurean Dealmaker put it: "a PSEUDONYM creates an identity,a distinctive voice which persists thru time.This is OPPOSITE of anonymity"

"But Kid Dynamite," you ask, "You're no longer working at one of the repressive uptight financial firms - why are you still pseudonymous?"   Fair question, and one that I've thought a lot about.  A few colleagues said I should write under my real name, and others advised sticking with the pseudonym.  Personally, I happen to think that there are lots of crazy people out there who I don't need to know my real name.  I don't need to be worrying about them hunting me down just because they don't understand ETF mechanics and are angry that I'm not part of the Physical Silver or Die movement (even though I'm bullish on silver).  I don't need the guy who loses his money day trading coming after me because I explained that high frequency trading wasn't any different philosophically than what he was trying to do.   

My favorite "anonymous" attack came on Seeking Alpha after I wrote the post "Calling out Matt Taibbi on Dark Pools."  The article was a demonstration of Taibbi's misunderstanding of the subject, but that didn't stop a commenter from attacking my "anonymity."  I responded with some snark, including the sentence  "It doesn't matter if my name is Harry Dooker, Stephen Judge, George Washington, Ben Bernanke, or Kid Dynamite - the facts are still the same."

My attacker was satisfied, apparently thinking that Harry Dooker was my real name: "Fair enough Mr. Dooker. You've shown who you are. It's now a call-out. Respect."

What's interesting is if people would respect my blog more if it were written under the pseudonym "James Sturgeon" instead of "Kid Dynamite."  We all have cognitive biases, and it's definitely likely that the name "Anal_yst" or "Kid Dynamite" negatively biases readers from the get-go.  That's an unfortunate side effect of having chosen those monikers, and yet, as I mentioned above, I am my moniker - I have a body of work that has gone into it already, so I don't just want to create a new one.  

James Sturgeon does have a nice ring to it, though.  I mean, the fish theme seems to be working as far as pseudonyms go - right Felix?  "Felix Salmon" is a psedonym, right?  (/sarcasm)