And yet when the Fed decreases its debt holdings, it is not somehow magically paying off the debt but only selling it to someone else. If that is the case, then won't the lovely future GD predicts depend on Secretary Mnuchin finding an extra $400B from somewhere other than Aunt Janet's piggy bank?
George Zachar writes:
That's right…when the Fed stops rolling over its debt holdings to shrink its balance sheet, the debt will need 'fresh money' buyers.
The bear story is more debt on the market pushing up yields. The bull story is the presence of "natural" buyers needing "risk free" assets…a category that conveniently includes US financial institutions forced to buy them due to increasingly rigorous regulations.
June 8, 2014 | 1 Comment
What do you call it when one of your friends pretends that he's criticizing you while really praising and exonerating you. It's not "your own man". It's a variant of "the perfect lie". You pretend you're blaming your friend while really praising him. "We called silver top at 950 but it really went to 10 before cratering so we were wrong." As Harry Browne said, "Well, if this guy considers himself wrong when he misses by just 5%, he must be incredibly accurate. I better sign up now."
Gary Rogan writes:
I have seen Woodward do it a number of times. Some may remember "the threat" to Woodward from the White House a little over a year ago after "Inarguably, Woodward has had greater access to the White House than any other journalist in town."
Kathleen Parker: The Obama White House 'threat' to Bob Woodward matters
Now Woodward is somehow sure (from the Newsmax article) that "Obama didn't intend to do something dumb… He just wanted to do the humanitarian thing and get Bergdahl released, "and then they failed to manage it."
I mean what else can it be? In the olden day the King never knew all the bad things that happened to the simple people, he was always deceived. But he always meant well.
And those who watched last Sunday's Fox's morning program saw how Woodward gently (well OK, snidely) made fun of a conservative talk show host because she just can't forget about Benghazi. What's a man to do if he has to maintain access? Or maybe this is about more than maintaining access. There is no reason to anthropomorphize these animals.
Russ Sears writes:
In track it's called "missing his seeded time". The only thing I have personally experienced that comes close to the lies traders to themselves and others is runners and their training and Personal Record. If you don't believe me talk to some fat person who has been to jogging for over a year and hasn't lost any visible weight, how their training been going.
A PR in most big races that have entry times now must be validated. Often in a race like Boston, the NCAA Track Championships or the Olympic trials, the times are so stringent that the racer often peaks before the race and then race day conditions are never as perfect as they were on PR day.
But in track, in minor races, coaches must give a "seed time" for the race officials to pick the lane and the heat that often are unverified. A seed time is suppose to be from a recent race, but rarely are they verified. The good coach will whittle his best runners times down to give him the best lane/heat. Then of course after his race, when his times are higher than seeded, "it wasn't his day".
Its unspoken but understood if he had the best time on the team, why he missed his seeded time.
George Zachar writes:
This seems like a first cousin of the "humblebrag", which is when you, usually consciously, try to get away with bragging about yourself by couching it in a phony show of humility, like "your inflatable inner-tube is way cooler than my 80-foot yacht. You get to be so much closer to the water and to nature. I envy you, I really do."
Perhaps it should be called "humblepraise".
The good one forbid that all the money saved by the shut down should be disseminated to the public in form of lowered service rates. No politician would even dare to suggest that the moneys of all the furloughed employees not paid should be given to public. But one group that is truly hurt by the shut down is the Exchanges. Now the releases of the random government numbers like claims, and CPI, and durable goods and housing will not be released so the public won't be able to do the wrong thing and churn their accounts, and the flexions will not get the information first and be able to front run the public. It isn't cricket. There should be a law.
George Zachar writes:
Due to a technical seam in the funding mechanisms, the claims number IS being released every week.
October 7, 2013 | Leave a Comment
I see the following t-bill rates on my screen. The date is the t-bill maturity. The yield is the bloomberg conventional yield:
What is going on here? Let's assume that the government "defaults" (whatever that means) and the holders of the t-bills maturing on 10/17 and 10/24 cannot get their money back for a while. The market has priced "normalcy" (whatever that means) into the market with about a month.
Yet, the extra yield being paid for the 10/24 t-bills equates to about 3-4 month's worth of yield. And the Fed is going to be doing their usual system repos during that period.
Question for GZ and the t-bill arbs: Is there something funky going on? Or is this a real arbitrage?
George Zachar writes:
As far as I know it's really there. Large classes of natural t-bill holders can't take ANY risk of not getting par on dates certain.
Cool! So I was all excited about backing up the truck and buying some … until I realized that for every $5,000 invested, I make $0.50. ($100 per million.)
I think this anomaly may be good to watch since it's the only objective market signal for assessing the probability. And so we have a baseline unfolding. But not worth the effort to trade (yet) — since if they really do default, there will likely be much lower prices in other stuff. I'll go so far as to predict that an actual default will be worth between a 3% and 7% panic haircut on the S&P. Don't ask for historical, quantitative proof. They ain't any. But you heard it here first….
February 24, 2012 | Leave a Comment
Here's an interesting Schilling article that Real Estate has 20% down to go due to unlisted foreclosures, separation from investing/ownership, and 40% underwater with another 20% drop in price.
However, the real estate cycle is notoriously fast when it takes off, so trying to time it is hard to do.
Victor Niederhoffer comments:
If, if, if. I've seen this reasoning on bonds from a million sources over the last 5 years. If bond yields go up, or go back, it would cause this destruction or that catastrophe. But people in the bond field know as much about the course of the yield curve as anything in the world, indeed they're much more versed than the stock market people. And it just takes a few Grosses or Soroses or DeRosas or dozens of others to set prices exactly where they should be taking account of all future contingencies. In short, the yield curves today provide an extremely accurate forecast of future fixed income yields. The experts, the DeRosas take account of the likely change from easing to tightening and when, and what a impact that will have on everything in their current forecasts. To predicate a trade on the idea that bond yields at 3% or 2% are ridiculously low is to go against the greatest experts in a field the world has ever known, et al.
George Zachar writes:
Unfortunately, the bond mavens today are forced to gauge not the real economic context of the forward curve, but the internal dialogues of Bernanke and Dudley. With the Fed manhandling the yield curve from tip to tip (and TIPS too), the price signaling attribute of the treasury market has vanished.
We are likely years away from private capital allocators fully resuming their role as impartial price setters for money. And there's a real risk the cronies will never be pried loose.
Ken Drees writes:
I heard one of my mood of real estate indicators loud and clear the other day, ironically on the am radio. The banter back and forth was why renting is better than owning, even though the price may be higher to rent.
radio person a: Why should I tie myself down with a house, if I lose my job I can't move?
person b: Right, its easier to just rent and move.
The job environment needs to bottom and improve before housing can turn–Rocky's 2014 guess is as good as any for a bottom based on soaked up supply.
Fred Crossman writes:
We are in an unprecedented period where the world central banks, instead of suggesting work and saving as a remedy to excessive debt, offer the effortless remedy of federal programs, massive printing, and more debt. Is it ironic, as we reach new market highs, that the biggest per cent mover today (not SHLD, which is up on worse than expected earnings but a shot at more creative financing) is a diet drug that eschews exercise and dieting but instead offers a pill for the same result?
MF Global “was felled by over-the-top leverage and bad derivative bets on debt-weakened European countries.”.
-New York Times.
(Quoted by ISDA)
The main issue is that some segregated funds are apparently missing. Complex economies rely on trust. If actors cannot trust counterparties, intermediaries or legal constructs, the scope and pace of activity will decline, and all actors will suffer.
The Lehman debacle's aftermath concentrated the commanding heights of US finance into a menagerie of TBTF above-the-law cronies.
The control frauds at the GSEs, AIG, and others have gone conspicuously unpunished.
A broad sustainable ramp up in living standards and asset values requires capital allocators to have faith laws and regs and rules and norms will be honored. (For some recent research on this see for example, Zingales: Measuring Trust ).
So don't blame the highly leveraged players. First they came for the highly leveraged specs, and I said nothing…..
James Lackey writes:
JPM could have said we have a couple billion here on Monday night, or on Tuesday Open; or even Tuesday at 3 would have been nice.. Wednesday goes by, Thursday, Friday.. Oh Friday how nice.. That was no, let's wait to report we have a few billion from MF here.. Let's imply it was lost or stolen. Of course this doesn't bother hedged unleveraged fee-collectors.
Would everyone agree that the employment numbers serve the same purpose today that the money supply did 15 years ago. Merely a number to make people weak and to flexionisize so that more money to the cronies will be paid. How can the ADP numbers be up while the BLS numbers are down when they both take the same sample. Surely the seasonal adjustments and hedonistic adjustments can't be that different. There must be immense horsetrading going on with the numbers being vetted back and forth, and heads up to the various cronies going this way and that way before the final meaningless tweaks are given. Depends on how close to an election also one would think. Do you feel this is all wrong on my part and I am much too cynical?
George R. Zachar comments:
One can't be too cynical in this environment.
The ADP and BLS samples do overlap, but they are not identical, the former being literally just the businesses serviced by ADP.
Also the massaging is rather different, with ADP's count subjected to secret sauce by Larry Meyer's firm in St. Louis. And g-d knows what manipulations BLS performs in its bowels.
How odd ADP reported +91 today, having reported
+91 last time, and Blankfein's shop touting a
+91 topline forecast just now on CNBC. Bloomberg
reports +90 is consensus for private payrolls.
The clustering and repetition could be a coincidence, but that's hardly the way to bet these days.
The attached is a plot of log SPX vs contemporaneous yield curve (10Y-2Y), monthly 1976-August 2011. Dates are not shown, but the plot is a continuous (albeit mathematically not one-to-one) and shows various regimes between log SPX and 10Y-2Y.
The series starts in 1976 at the red dot near the bottom. Stocks (vertical axis) made little headway while 10Y-2Y varied above and below zero, making a series low about -2 in 1980. From the early 1980's to 1990's, stocks moved sharply upward, with 10Y-2Y varying between slightly negative and +1.5. From 1990 to 1992 (~Iraq I), stocks moved up while 10Y-2Y widened. From 1992-94, stocks went up while 10Y-2Y narrowed. From 1994-2000, stocks rose strongly while 10Y-2Y remained in a tight range (activist FED?), and 10Y-2Y went negative when stocks peaked in 2000. From 2000 - 2011 (green dot), 10Y-2Y varied considerably from -0.4 to +2.8 while log SPX was range-bound with considerable variation.
The recent picture - range-bound stocks with varying yield curve - resembles the late 1970's, and the overall pattern suggests no consistent relationship between stock levels and 10Y-2Y.
Steve Ellison writes:
Attached is a regression graph of 1981-2010 S&P 500 annual returns vs. the difference between the 10-year yield and 3-month yield at the beginning of the year. N0, t=1.06, p=0.30, Rsq=0.04
The results I posted earlier that showed significance were the second year's S&P 500 returns regressed against the 10-year/3-month yield differential. That result seems suspicious–why should year-old data be more predictive than current data? 2011 so far is not going according to form.
George Zachar adds:
Because between Volcker's rise and Lehman's fall, the main way the curve steepened was when the Fed lowered rates in the front end, stimulating the economy and stocks, months down the road.
He is one of the flexionic sub-species of political flexions, nominally Republican, but rotten to core.
George Zachar replies:
Sounds like the character known only as the Major in the dystopian books of Daniel Suarez.
In a survey of doctors on a website I follow, 80% of responding doctors answered no way would they allow their patients to email them.
This was the response I posted:
To the 80% of responding docs who say "No way": If you wonder why many patients develop major hostility to doctors' office procedures and to doctors themselves, and why the public is happy to stay silently on the sidelines while the government and insurance companies take over control of doctors' working lives, could it be that doctors (who for 100 years had control of their practices and refused to make them patient-friendly and efficient) have failed to enter into the 21st century? And regard it as perfectly acceptable to impose inefficiency, frustration and wasted time on patients by not letting them communicate with the doctor but requiring them to make an office appointment (probably 3 or 4 hours with travel to and fro, long office waits, etc) for every question or matter?
I see nothing wrong with a doc charging for email or telephone time. Those patients wishing to use email or telephone should be willing to pay the time charge, regardless of whether such charge is covered by insurance. But if our profession continues to lord it over patients by refusing to allow them what every other profession and all of modern life does, doctors will deserve what they get in the way of government and insurance oversight and regulation.
Charles Pennington writes:
Chiming in, that is a pet peeve of mine. What other profession won't take email? Lawyers, dentists, accountants, etc. all communicate by email, of course. Doctors make it even worse by making you communicate with them only via a voice-mail maze that begins with "If you are a physician, press 1; otherwise, your call is very important to us so please remain on the line…"
Russ Herrold comments:
I'm with the doc's here.
When the tears are flowing, everyone says they are willing to pay, but without getting into the business of FIRST AND AT THE ONSET, having a Retainer Agreement, unilateral right to draw it down upon presentation of statement, Mandatory Arbitration clause, deposit for fees in the Trust Account, all one does is lay a background for a fee dispute complaint or malpractice counterclaim to a suit to collect those fees. It's not gonna happen as a general practice. The doc is caught between the rocks of patient desire for immediacy and convenience; the professional obligation 'not to miss' something that in hindsight seemed obvious; and the fact that insurer reimbursement for web and email oriented 'treatment' lag.
Having had poor service (breaches of patient confidentiality, outright prevarication by nursing staff, and failures of delivery of test results repeatedly and after specific instruction) in the care of a wound, all since May of this year, from the standpoint of the patient, I want there to be a formal paper trail (not email; not call center notes in some database, forgotten and closed; not some other ephemeral media) … a well drafted letter explaining the issue, a file CC, and a cc to the supervising agency (hospital system privacy officer, nursing board, 'authorized provider' certification entity), and an equally formal response (or in its absence, proper escalation on my part).
Unreasonable, I know, but progress is made on the backs of unreasonable people.
The same goes for lawyering. If a client cannot keep and will not pay for an office visit, or meeting at other venue of their choice, to permit the open-ended probing that proper representation requires, they won't be MY client very much longer, as I cannot properly represent them.
Alex Forshaw writes:
The fact stands that interacting with doctors is a pain in the ass from the second you enter the door. They do not face nearly enough competition. There is no bigger beneficiary of protectionism in the entire country. The lack of competition has meant they face no evolutionary pressure. I hate "socialized medicine" as much as anyone but US doctors are as much culprits in their own demise as the tort bar and all of doctors' other favorite bogeymen.
George Zachar adds:
In my conversations with doctors, I've been told the potential legal and regulatory liabilities risked by patient email contact are vague and large, leading them to simply shun the practice.
Phil McDonnell writes:
Regular email is not a secure medium. Privacy regs hamper a Doc's ability to use email. Most will call you on the phone and/or write a letter with results. That is why expensive software with encryption is required that often the smaller practices cannot afford.
Gordan Haave responds:
Sure that's what they say. But it's BS. How is the fax or telephone somehow more secure than email?
If the issue is confidentiality, why is it that Lawyers will email you but not Doctors?
There is one other group that won't send emails: The IRS.
I am in the middle of a personal and business audit, and you can't email the IRS. It's very inefficient.
To me this is just further proof that Dr's collectively are not the saints they claim to be, but rather just a cartel that uses wildly inefficient systems to extract rent's from consumers.
Dan Grossman writes:
I am surprised that a few otherwise highly astute Speclisters so easily accept doctors' excuses for refusing to permit email. As a service to the medical profession and to our country (and in time for inclusion in the President's speech tonight as a new regulation under the Patient Protection and Affordable Care Act), I have drafted and present below a few simple groundrules that a doctor can require a patient to accept as a prerequisite for emailing him.
"A Patient wishing to email Doctor must indicate his acceptance of the following:
1. Complex or detailed matters require an office visit. This email is for minor procedural, scheduling and prescription renewal matters.
2. Doctor will attempt to look at reasonable numbers of emails as time permits but because of his busy schedule cannot commit to read or deal with every email. Any information Patient wishes to convey with certainty must be conveyed by other means.
3. Emails are not secure and should not include sensitive personal information. They will not necessarily be presevered or included in Patient's medical file or record.
4. Patient agrees to pay $20.00 for each ten minutes or part thereof Doctor spends reading or dealing with emails from Patient, regardless of whether the amount is reimbursable to Patient by his insurer. Medicare and Medicaid Patients unfortunately are not eligible to use this email since such programs do not permit email charges. (Doctor regrets this and asks that you please take up such inefficiency with the Government rather than with him.)"
With regard to 3, doctors or their office assistants can instead spend 15 minutes setting up free encryption, as others on the List have already pointed out.
August 29, 2011 | 1 Comment
Not to say anything that I don't know anything about. But you have to hand it to Perry. He forced Bernanke to not go with an overt QE3. And that has to be very bullish as how many resources can they take from the little man and give to their former, current or future friends, employees, bosses, wives, and relatives.
A Proverbialist writes:
There is no modern era precedent for the Fed facing credible political opposition from within the established governing elite framework. Perry's statement had to be a game-changer for Bernanke and the Fed, as it opened an entire new attack vector on the institution's legitimacy, which is its sole true power base.
For now, I assume the threat is not being evaluated formally, generating a paper trail.
But it's a damn good bet that after the first bourbon-and-branch of the afternoon, Bernanke's inner circle wargames this.
It has been interesting to see in the course of these negotiations how every dodge and feint from the Zacharian and Remusian play book has been used so frequently. We have seen "Your own man" and "don't throw me in the briar patch" many times, and "you're the one that broke it up" and "You're taking care of your interests much better than I'm taking care of my interests" and "here's a gift to star the negotiations (the golf game)" et al.
I haven't seen commented or named by Zachar however, "I'd like to go through with your deal but my sister in law is opposed to it". By this I mean, that "Rand Paul and the tea party boys will not vote for any deal that has a tax increase" or "Nancy Pelosi and the Women Senators will not agree to any reduction in social security".
What we need is a systematic classification of all these negotiation techniques so we can catalogue them as they come out. At the head of the list is "what will happen in Asia if we don't agree to increase the service rates?" Or "what we need is another 500 point drop before the service rates go up". The stock market plays a role, and I also like "the bond market went down for the first time in 3 weeks amid fears that a deal (a service rate increase) was not reached." Forget about the fact that it's within a point of a yearly high.
The Goddesses of the market look down upon us and have a belly laugh at our foolishness as we sway. That's for sure. But can money be made by seeing through all these snares and delusions?
Well in retrospect, we know that the stock market when it's down much is merely being used as a tool. But how to withstand the 20% drop of oct 2008, as it is used for its evil purposes?
George Zachar writes:
Negotiation tactic taxonomy appears to be a developed field. Check out these articles.
Jim Sogi lists some of his own negotiation tactics:
1. Higher authority. The absent person with authority needed to approve(ie the wife, the husband, the underwriter, the supervisor at the car lot, the rank and file in Congress. Classic negotiation gambit. I'm on your side, and I'm with you on this, but I have to convince etc etc.
2. You're really killing me on this deal. I'm losing my shorts on this. My kids are going to go hungry.
3. I really like you. I want to help you make this deal. You look like a good guy.
4. Ok we have a deal, but there is one last detail I'd like to discuss…
5. A really good one is when you have a deal, but then the negotiations just start . Oh we'll have to change delivery, the supplier just called and there's a strike, oh there's a slight problem with that model, oh the bank just called on the financing and…etc etc
6. First or second round….I'm laying all my cards on the table here, and here is my absolute maximum authority.
7. The nuclear option: if you don't accept this deal the sky will fall down.
8. Make him an offer he can't refuse. The Godfather.
9. Stall stall stall when time is asymmetrical making one party ("O") look really bad.
10. Your mother would be ashamed of you. The voters will be ashamed of you. Your boss will fire you.
11. Listen I just got fired, my cat died, my pick up truck just broke down and my mother died. Can you pleeeeze give me a little slack here?
12. Nibbling. Oh can you throw in gas, free trip, delivery, warranty, extra this that etc etc.
14. Negotiating against yourself. You'll have to do better than that.
15. The hypothetical. If I was to offer you x, would you consider that a good offer?
16. Bracketing. I'm not going to give you a penny more than x. That's the beginning and bottom of the scale.
17. The red herring. I'll give you x and y for z, but would be willing to give you just x for z-1. (form of bracketing)
18. Reluctant seller. (Brer Rabbit).
19. That offer is an insult, a slap in the face.
20. Keep 'em waiting. Soften them up at bit. Let the salesman sit in the waiting room for about an hour. Let the car buyer sit for about a half hour while the salesman and manger talk about golf.
Is it perhaps an indication of the media's solicitude for the current President that every poor economic report is termed "unexpected"?
While poor economic results under the prior President were somehow not so surprising since he was such an incompetent boob?
Kim Zussman adds:
As with many time series this month was similar to the prior month, which was different from the month before.
Victor Niederhoffer adds:
All are part of the regression fallacy.
Ken Drees writes:
So now we wander into "needed and now expected qe3" type thinking and should not the market go up due to this stimulus?
Sam Marx adds:
Three Thoughts on the Reported Unemployment Rate.
1) The Unemployment Rate is probably higher than the government reported.
2) Compared to the Reagan Recovery this Administration's economic plan is a failure
3) With Socialistic Policies you have high employment rates and I don't see much hope for great improvement.
George Zachar writes:
As luck would have it, Bernanke delivers one of his regular reports to Congress next week.
No doubt, this report will put that question high up on the agenda, and he'll be spending the weekend formulating his response.
Let us augment the Zacharian situation which I used to call a Finnegan where you look at the screen and a price is too terrible to contemplate because it's ruinous to you, and then you realize to your utter delight that the price was a misprint on the screen, and you're whole, and not losing at all, but …. by the end of the day or week, the price you feared actually turns out to be worse than you feared and you lose even more. Such a situation occurred in conjunction with the flash crash of May 6 when the price of 1060, which was ruinous for individual stocks and S&P was there for a second, but then it rose 8% in a day, and then Zachar predicted it would go bak there after it rose 100 points.
Okay, two other situations deserve a name.
You look at the screen, and you smile. Your market or stock is way up you think. But then– "Oh no," you were looking at the wrong market. And your thing is the only one that's not good or up if your long. That happened to me with my Rimm and Vix today. I see a market way up. I smile. Oh no. It's not Rimm, it's Vix that's way up.
What should this be called. And what about the variant where you have a price in mind to get out, and then you go to shave or take a call from a non-agenarian, and the price is realized, but by the time you can enter the order it's not there any more. And it never gets back.
A related situation is that you're out of office for a second, and you hear an announcement. The economy is very strong. However, bonds are down because of the crazy idea that a strong economy is inflationary. But that's causing stocks to go down. Okay, you're losing money on your longs. The market is crazy right? You grit your teeth and go back to take a look. Amazingly the bonds are way up however. WHY? Because stocks are way down. In other words, you lost on stocks because bonds were going to be down, but they actually went up when stocks went down, so you lost for an opposite reason.
What are the proper names for all these? And what variants of these type of things deserve a name?
Peter Earle writes:
The one where you look at the screen and smile– perhaps that moment is best termed an "Eastwood", a "Harry", or a "Dirty Harry", or being struck with/by (a) "Sudden Impact", as demonstrated by the relevant portion of this scene: first from 0:18 to 0:51…and then from approximately 1:05 to 1:13.
Chris Tucker writes:
The last situation could be referred to as a "Cyclone", not for the storm, but in honor of the Chair and the iconic roller coaster of his youthful digs at Coney Island. The Cyclone is terrifying, filled with thrills, dips, lunges and jerks. And people keep coming back to plunk down there hard earned cash for more.
Very nice short history of the park at Coney Island here.
Vince Fulco writes:
The Cyclone seems most apropos. What is it about Mr. Market's ability, esp. with these leveraged ETFs to give you a nice gain but not hit your target price and then revert back to your cost in an instant (many multiple percent away and seemingly not to be seen again in the near future with the new info) then turn within pennies and return you back to profit mode testing your temperament so mightily? The silver ETFs have acted like scalded dogs the last few days.
George Zachar comments:
The Coney Island Cyclone was the signature thrill ride of my youth. I've ridden it well over 100 times.
What's always fascinated me about it, is how the experience varied with one's position in the 12 rows of seats.
In the very front, with the center of gravity many feet behind you, the visual danger signs led the acceleration by a couple of seconds, giving you the sensation of hanging over a cliff.
In the very back, my favorite spot, the acceleration came before you could see the rails dip, so it would catch you unawares and whip you sooner/faster than your mind anticipated.
Also, at the start of the right turn off the NW corner, the right-front wheels would leave the track for an instant, making first-time riders wonder if they were destined to die on Surf Avenue, in the shadow of the D train.
Alston Mabry writes:
The one where you're out of the office for a second, and hear an announcement– It's called "duck season".
The followup is too good to leave out: "Pronoun trouble".
Craig Mee writes:
About the one where "it's even worse than the mistaken price you mistakenly thought was your" :
I thought you were going to say, Victor, if after getting heart palpitations at the first incorrect reading, just by the fact you had done this, it's better to get out of your said stock now anyway, as you've brought bad karma to the trade.
Concerning Gross Vs. Van Hoisington, don't listen to what they say. Listen to what they do. Or more precisely, how they've done for their customers during bull and bear bond markets:
Hoisington has one public bond mutual fund which is named the Hoisington US Treasury Fund (and he has the discretion to move his duration from 0 to 25+ years) but only owns US Treasuries. His performance is shown here.
His 1year/5year/10year returns are: 4.42%/4.77%/6.31% versus the Lehman Agg Index of 4.93/5.8/5.61. .
Pimco's Total Return Fund can invest in all sorts of fixed income, but they keep their duration at 4.30 years +/- 2 years. Gross' 1year/5year/10year return are 7.31%/8.12%/7.16%
So — Gross has outperformed VH substantially over the past 1 and 5 years. And over the past ten years, Gross outperformed VH by about 85 basis points/year. Most importantly, Hoisington LOST 22.6% in 2009 while Gross made 13.8% in 2009. Which superficially makes Hoisington look like a one-trick bull-market pony….
George Zachar writes:
There's an apples-oranges element to this analysis. VH has only one risk parameter to play: treasury duration. Gross can play that AND sector/credit rich/cheap. The ability to play in spread product is easily worth dozens of bp in annual performance pickup.
Both men are arguably brilliant…but they do different things with different toolkits.
February 17, 2011 | Leave a Comment
I just finished browsing the 2012 Federal Budget Proposal. If you believe the Economic Assumptions, Dow 36,000 is a no-brainer. But see my comments at the bottom.
Here's the link. see Table 2-1
Here's the meat:
2012 Real GDP = 4.0%
2013 Real GDP = 4.5%
2014 Real GDP = 4.2
2015 Real GDP = 3.6%
2012 CPI = 1.8%
2013 CPI = 1.9%
2014 CPI = 2.0%
Wages & Salaries:
2012 Growth rate YOY= 5.8%
2013 Growth rate YOY= 6.5%
2014 Growth rate YOY = 6.5%
2015 Growth rate YOY= 6.2%
Average Tbill rate:
2015 = 4.0%
Average 10 year rate:
2012 = 3.6%
2013 = 4.2%
2014 = 4.6%
2015 = 5.0%
I don't have a crystal ball. And it's certainly possible to have nominal GDP growth of 6-ish percent. However, the historical anamoly would then be in the interest rate forecasts. Since the 1950's, and except for two very brief recessionary periods, the 10 year Treasury yield has ALWAYS exceeded the year-over-year change in real GDP — with the average (eliminating the 1975-85 inflation) — being about 200 basis points. So, if you accept their real GDP forecast, the interest rate forecast is implausible. And if you accept their interest rate forecast, their GDP forecast is implausible.
BUT IF YOU ACCEPT THEIR ENTIRE FORECAST, YOU SHOULD BUY STOCKS NOW!
Ralph Vince writes:
Out of curiosity, maybe George Z can chime in, are these GDP assumptions typically unrealistically rosy?
George Zachar obliges:
Well, since you asked…
2013 Real GDP = 4.5%
2013 CPI = 1.9%
That gives us NOMINAL GDP of 6.4%, which happens to be the high end of the range going back two full decades.
Not bloody likely given the current configuration of economic, demographic and political forces.
Wages & Salaries:
2013 Growth rate YOY= 6.5%
With existing slack/low participation rates? No way.
I think these figures were calculated by guesstimating what they could publish without folks bursting out laughing…and then multiplying by 1.2.
Rocky Humbert comments:
Might I suggest that the interesting reactions to my post regarding the 2012 Budget/Economic Projections should cause some introspection.
As I noted, the projections seem historically improbable and incredibly optimistic — but just like that Goldman Sachs economist who projected the outlier of 6% or 7% growth this year — they are NOT impossible. And if they turn out to be even close to correct, the upside in the stock market could be mind-boggling. That was my point. And for the umpteenth day in a row, Mr. Market is again voting for the improbably bullish outcome even though GZ's helpful comments have much better odds!!. See this old post.
I cannot overlook that Mr. Rogan in his replies, yet again, mistakes ZeroTruth (excuse me, Zero Hedge) to be a source of wisdom. It's particularly ironic when Mr. Rogan writes "to be an intelligent liberal today is to actively promote lies" when in fact, actively promoting lies is the essence of Zero Truth's business model. A question for Mr. Rogan: Why is the propaganda on the White House Website more troubling to you than the propaganda on Zero Truth website? Perhaps you only object to "lies" when they are from someone who doesn't share your idealogy?
One of these days the stock market will decline. And cotton will go down. And we'll have another recession. I only wish that I was smarter so I could know when that will happen. I don't know. And that's why I always hedge my bets. And that's not just bearish hedging. It's bullish hedging too. And I'm glad I'm hedged bullishly right now!!
I hypothesize that one reason for the well documented dry spell of every new york sports team is that it takes a coach of much rodomontade and swagger to land and keep a job in new york, witness the Knicks and jets, and they generate let downs and revulsion in their teams on the rare occasions they win, or more to the point their teams can be ground into oblivion in close games.
George R. Zachar comments:
The Knicks and Rangers reap monopoly rents in the largest US market regardless of merit. Their owner's indifference to quality is legendary among fans.
The Yankees and Mets both spend top dollar for talent, but one organization is competent, and the other isn't.
"the bottom is always 20% below my bleakest worst case scenario". Author Unknown.
I am thinking of this saying and I am gazing at some metal stocks at the moment.
George R. Zachar comments:
I was explaining short selling to my teenage son last night, and had difficulty communicating the idea of asymmetrical risk. I settled on this: a long stock position can only go to zero. A short position can go to whatever your capital can withstand…plus 10%.
Craig Mee writes:
I was too considering quotes today, and feel that there is no better quote for markets , trading , p and l, the whole spectrum of speculating then the fairly well worn ..'the darkest hour is just before the dawn".
It seems to cover every area that needs to be covered.
The English theologian and historian Thomas Fuller appears to be the first person to commit the notion that 'the darkest hour is just before the dawn' to print. His religious travelogue A Pisgah-Sight Of Palestine And The Confines Thereof, 1650, contains this view:
It is always darkest just before the Day dawneth.
The source of the proverb isn't known. It may be Fuller himself, or he may have been recording a piece of folk wisdom. In 1858, much later than Fuller of course, Samuel Lover attributed the notion to the Irish, in Songs and Ballads:
There is a beautiful saying amongst the Irish peasantry to inspire hope under adverse circumstances:- "Remember," they say,
"that the darkest hour of all is the hour before day."
T.K. Marks writes:
Back in the pit trading days they can recall at times not being entirely above resorting to such folklore logic when the clearinghouse's margin call police came a'callin' about a half-hour or so before the open.
Ken Drees comments:
darkest before dawn always good–agreed.
I like the x% below the worst estimate because it illustrates that the market usually over punishes and it also amplifies the fact that markets have the ability to humilate my best and well thought out assumptions of value—knocking me off kilter. In this flash crash world –the markets can now pulverize any stock, anywhere, anytime.
Maybe an updated version would be:
"The bottom is usually a jaw dropping amount below my worst case scenario, intraday"
From today's WSJ:
"One portfolio manager observed that California 6% bonds of November 2039 were quoted at levels cheaper than similar-maturity dollar-denominated debt of Mexico and Columbia."
Noting that these are Dollar-denominated bonds of Mexico and Columbia — I believe that anyone who has a historical perspective sees that Mr Market is in the process of creating an opportunity — which may become even more extreme as the market disciplines profligate muni issuers.
Lastly, and this IS a prediction, should California or any State actually default or restructure their debt, the US stock market and financial companies will not be happy. Furthermore, should a diversified portfolio of muni's yield more than a similar portfolio of corporate bonds, it will attract an entirely new class of investor. We are approaching that point, but are not quite there yet.
Gary Rogan writes:
Meanwhile while the SEC is probing muni prospectuses.
Bill Gross is already well positioned in munis.
This has now become an ugly bailout play where the most well-connected win.
George Zachar writes:
Buying long-dated munis is specifically outside the Fed's black letter authority, as Bernanke noted in his recent Hill appearance.
And with Red State Republicans ruling the roost in the House, any Fed move to bail-out Blue State profligates would be political suicide.
Bernanke has shown himself to be an excellent politician. It's very unlikely he'd make an unforced error of that kind.
The economic equivalent of Hockey plus or minus might be thought of as quantifying hoodoo-ism, with the highest minus readings belonging to the bringers of doom.
January 8, 2011 | Leave a Comment
Mr. Greenspan said the risk of a bond-market crisis is so great that he favors raising taxes immediately.
Only 59 private jets at the fixed base. Mostly big ones. There were 120 before the crash.
George Zachar writes:
Aspen airport private jet parking inventory down roundly the same %, if not a bit more. Empty storefronts during the busiest week of the year here, and real estate blather has an unseemly pleading tone.
Hunting for a lead to the current Atlas Shrugged film, I came upon this vintage 2:39 youtuber of Ayn Rand on the Phil Donahue show, talking about Israel.
Stefan Jovanovich comments:
The best part of the video is Phil Donahue's suggesting that Ms. Rand is being ill-mannered in her description of the Arabs. Surely, the cultural gaps can be bridged if only people will sit down together and discuss the matter. It is very much like Lackey's gentleman, Robert E. Lee, discussing a gentleman's ability to forget. Lee's greatest admirers wanted the Unionists to forget that they had won the Civil War and everyone - North and South, East and West– to forget that minor cultural difference called slavery. If only those pesky Jews would stop remembering what those nice Arab people keep saying about them, everything would be just fine.
An article that would suggest the Knicks have less skilled players and team winning % will not be helped by mean reversion. Given Tversky, Gould, Buffett, and Graham are all mentioned I wonder if all the conclusions reached by M have validity:
"Professional basketball in the U.S. certainly stands out as the sport where skill plays the largest role in shaping results. One intriguing explanation for the NBA's strong skill contribution is the height of the players. In most sports, the most skillful players within a wide range of heights can make it to the pros. But a relatively small percentage of the population is tall enough to play in the NBA. In their book, only about 3 percent of the male population in America is 6' 3" or taller, and a tiny percentage is above 6' 10" (about four standard deviations from the average). Yet almost 30 percent of NBA players are at least 6' 10". They conclude that a "short supply of tall people" contribute to the talent disparity and hence the greater relative role of skill. The right tail of the height distribution does not overlap completely with the right tail of the skill distribution. The Wages of Wins, David Berri, Martin Schmidt, and Stacey Brook note that…"
George Zachar comments:
Occam's razor: The Knicks' owner, James Dolan, is a hoodoo.
It's become popular in this community to bash the Fed's QE– and most recently, the story championed by some is that the Fed is "giving away taxpayer money" to the primary dealers with the mechanics of its open market purchases. This hysteria reached an embarrassing climax when the Chair chose to post a Daily Spec Website link to Zero Hedge's entirely wrong article on the subject entitled "Is QE2 a Stealthy $90 Billion Gifting Scheme to The Primary Dealers?"
I am not a fan of QE, however, the facts are quite different from the conspiracy theorists' allegation regarding the costs and mechanics.
Here is a link to today's open market operations.
An objective observer notes that the largest purchases were in securities that were between 2 and 5 basis points CHEAP on the curve. An objective observer further notes that there were no purchases in quite a few securities — and on balance, those securities were rich spots on the yield curve. Furthermore, anyone with a Cantor-Fitz broker screen can see that all of these securities trade with a 1 to 2/32 bid-ask spread.
My conclusion is that the open market desk today did a fairly good job at buying securities that represented relative value on the yield curve. And even if the NY Fed pays the offer side on its entire 600 Billion QE, that bid/ask spread totals about $187 million. That isn't chump change, but it is materially smaller than the savings which they can achieve by picking "cheap" points on the yield curve.
If the community wants to debate the philosophical and economic issues at stake, that seems productive. But I hope these facts will put to rest the baloney that the NY Fed has handed a $90 Billion gift to the dealer community — as Zero Hedge wrote — and which Mr. Rogan and the Chair gullibly accepted.
George Zachar writes:
It's been known all along that Goldman's branch at Liberty Street tends to buy the "cheap" parts of the targeted curve segment. It's childsplay for dealers knowing in advance the outlines of the NY Fed buyback program to accumulate the "right" securities, certain they'll face a forced buyer in the near future. The size of this "edge" is only known by the P/L clerks around the street.
Even if it's "only" a few hundred million dollars, it's becoming increasingly hard to view the current matrix of finance/govt interlocks as anything but a brazen conspiracy to loot a defenseless public.
Tim Melvin writes:
Of course there is NO chance the dealers bought those securities a couple of days ago and sold them "cheap on the curve" today. Such a thing would be unheard of on Wall Street.
Rocky Humbert replies:
In the event that some members of the community have never run a treasury arbitrage book, I'll let you all in on the dirty little secret of how it works: (1) buy the stuff that's CHEAP. (2) short the stuff that's EXPENSIVE. (3) Pray that the repo-clerk doesn't screw you on the financing. (4) Wait for a real money (i.e. Pimco, Fidelity, OR THE NY FED) account to close the arbitrage. It's always nice as a broker dealer to avoid paying the bid/ask spread, however, if even LTCM (a non-broker-dealer) had stuck to this strategy, they'd still be in business.
Mr. Zachar seems "shocked - just shocked" that Goldman might buy the cheap part of the yield curve in the course of its market operations. But that is the job of a treasury trader — QE or no-QE. I'd also remind him that primary dealers are REQUIRED to provide a bid and offer to the NY Fed — whether or not they have inventory. I feel some sympathy for the hapless mid-curve trader who had to make an offer on $2 Billion of the 9%'s of 11/18 — since that issue is probably held by a bunch of widows and orphans, and the dealer would have been stuck paying a reverse rate for god-knows-how-long.
I am skeptic about the efficacy of QE — for a variety of macro-economic and feedback-loop reasons, but I refuse to stoop to unconvincing hyperbole such as "looting a defenseless public." Whatever happened to the ballyhoo deflation and the scientific method?
George Zachar recovers:
I traded on-the-run mortgage-backed securities at primary dealers for a decade…"shocked" is not exactly how I feel.
The "dirty little secret" of primary dealer flow trading is that front-running inflexible counter-parties is a central strategy. Not news.
One problem with QE2 is that the primary dealers have sympathetic decision-makers on the other side of the trade who are not trading their own capital, or even client capital that is accountable. The dealers are blissfully front-running the taxpayers of the US, with their own pals facilitating the trade.
As someone who owns high-end real estate in NYC, it is very much in my interest for the local swells to fleece the broad public, keeping a bid under my assets.
That doesn't alter the nature of what's happening to the nation's taxpayers. One man's clever arbitrage P/L is another's "looting the tax payer".
Vince Fulco writes:
On the eve of the GM deal and near the holiday season, a fine American like Rattner reminds us of all WE have to be thankful for w.r.t. the actions taken by the Bush and Obama admins. Reminds me of the recurring historical magazine cover which keeps popping into my head…anyone remember the line from National Lampoon in the 1970s, "Buy the magazine or we'll shoot this dog!"
I am still looking for the proper expression for pretending that you are economical when you are a spendthrift, for pretending to have the public's interest at heart , when you are giving money to your friends and clients, for pretending that you're giving someone a good deal when you're setting up a big con. Where is Zachar when you need him?
George Zachar responds:
I'm so depressed about all this, my fingers are scraping the bottom of my bon mot bucket. The classic definition of a demagogue is someone who deliberately tells lies to people he believes to be fools, so the fed chair certainly falls into that category. But there's also an element of affinity fraud, as he evokes the cool, disinterested, public servant technocrat. It's an awful, criminal deceit being perpetrated on the whole world, given that the dollar is/was the basis for the planet's financial system. Ben Strong and Norman Montague escaped the verdict of history for engineering the 1929 stock bubble/crash and the awful decade that followed. i don't think Bernanke will have such luck.
• World population will grow 2.3 billion by 2050, to over 9 billion
• Nearly all this growth will come in developing countries
• This population growth will require a 70% increase in global food production
• In developing countries, production will need to nearly double
• Making this happen will require annual investment averaging $209 billion.
Jeff Watson writes:
With our productivity in agriculture, the population increase will be great for our exports and great for business. With science being applied to agriculture, yields/acre have been steadily increasing for the past 300 years. There's no need to think we've hit the maximum in production either. 40 years ago, Erlich, in The Population Bomb sounded alarms about the population doubling by 2010 and he laid out a doomsday scenario. We're here and none of Erlich's predictions have been realized.
Michael Ott writes:
Jeff makes great points. Additionally, yields for commodity crops are surging and seed companies are investing in growing crops in suboptimal soil.
This year's decline in yields is an aberration due to late season flooding. Farmers that I have talked to are getting 190-200 bushels of corn per acre or 120 if they were flooded. It's netting out to an average of 168 or so with a leptokurtotic distribution. I expect next year to average 180+, given reasonable weather. Combined with new crops designed to grow in arid and sandy soil, we should be swimming in excess.
Seed companies are scrambling to find uses for extra corn, so famine and starvation not an issue for those who are actually paid to grow the food.
George Zachar writes:
Alternatively wealth is caused by (low) birthrate.
Kim Zussman comments:
GZ's excellent link sheds light on a prior study sent to the list, showing high positive correlation between national per capita GDP and distance from the equator ( abs (latitude) ). Fertility rate is generally higher in countries closer to the equator, which on average are poorer.
1. It is warmer and women wear less
2. There is little work and more idle time
3. Indoors + outdoors vs just indoors
4. Mountain movement necessitates more Mohammeds
"Liberals come in three varieties: evil, stupid, naive?"–Bill O'Reilly
The statement is factual IF one believes contemporary "liberalism", as defined by the American mainstream, is merely the gauzy smiling mask hiding those who yearn to be the next Stalin.
Axelrod, Rahm, & the dr0me, arguably fit in the first bucket.
Those who do not know what comes after "social democracy", to wit, socialism (where all political conversations end at the point of a gun) and finally communism (where all political conversations start at the point of gun), go into the third bucket.
The second bucket is populated by those who who've been shown the historical arcs of the 1930s and believe their would-be masters are intrinsically benevolent and that the examples of the past are not relevant. "It's different with us. We're good guys, really."
Jeff Sasmor writes:
It's interesting that most liberals also think the same thing about conservatives: evil, stupid, and/or naive. If this is true on both sides then are there any altruistic, bright, and informed (?) persons at all?
And what happens to R's if they go against R orthodoxy? They're RINOs, correct?
Exactly what's the difference (aside from each side believing they're right). It's a remarkable situation…
Is it possible for disagreement without contempt?
To be clear, I think what NPR did to Williams was wrong.
Frank Norris, author of The Pit, wrote this short story in the early 1900s. It's critical of the grain trade as it paints the farmers and consumers as victims. Still, the story is a very quick and easy read. Also attached to this link are some other great stories of the old and new west.
Many valuable trading lessons here.
George Zachar writes:
The Pit is a true classic. It's one of my favorite books of any genre. I can see my copy from where where I'm sitting now.
October 14, 2010 | 6 Comments
"Market sell order at close" is one of those concepts from quantum mechanics where it seems to exist until you use it, but when it doesn't seem to exist, it's actually there. It's a very subtle point, especially during the day.
George Zachar comments:
Call it Schrodinger's Stop.
Rocky Humbert writes:
You must mean Heisenberg.
Forgetting about the slippage, I think a lot of this stuff turns on time frames, slippage, and the underlying economic and trading nuances of different asset classes. I brought this paper up because I find the conclusions appealing and it says it addresses some issues not previously studied. Not because their conclusions are achievable.
Furthermore, if a market participant believes that they have actually achieved "lower risk", they may be inclined to use more leverage, which arguably is much more risky! (Which is why pure VaR trading desks seem to blow up every several years.)
It's just food for thought….and the Big Question for an investor such as myself is: when do I know that I'm wrong????
October 14, 2010 | Leave a Comment
Speclist members debate the pros and cons of stop-losses from time-to-time. Don Fishback's blog mentioned this paper, Lei & Li (2009) … which I had not previously read about the use of stop-losses for stock market investors….which may be of interest to people.
Full download is here.
The jist from the abstract:
The results indicate that traditional and trailing stop loss strategies neither reduce nor increase investors' losses relative to the buy-and-hold strategy. These findings are in sharp contrast to the common belief that using stop loss strategies can improve investment returns, and the results are robust whether future returns are independent, autocorrelated, or from momentum samples, and whether we consider transaction costs or use alternative data intervals. These results also confirm our previous finding that trailing stop loss strategies can help investors to reduce investment risk. For instance, we document a risk reduction effect ranging from 28.66% to 47.08% for median and high-volatility stocks and for median and high-past return stocks under the SP strategy, when the trailing stop price is initially set at 5 daily return standard deviations below the purchase price. Collectively these findings suggest that realizing losses sooner by certain stop loss strategies can be of value to investors. This value, however, may come largely from risk reduction rather than return improvement.
Our results show that stop loss strategies do not hurt investors on their investment performance. There is no identifiable efficiency loss on the realized returns or the investment risk under these stop loss strategies. Since these strategies may provide investors with disciplines and the potential to reduce investment risk, our findings suggest a possible explanation for the widespread use of stop loss strategies in practice.
Victor Niederhoffer comments:
One wonders whether the academic paper on stops takes proper account of discountinuities in price, i..e moves that go through stop where you wouldn't be able to get out at the stop. One would need tick data for that. Also, one would state that whatever results one achieves from using stops on paper, are not valid for many reasons including the point that you never know whether a stop price has been triggered until the end of day– (a very subtle point), and less subtle, the stop price has a gravitational impact on prices making it infinitely more likely that it will be elected to ones cost than if it hadn't been elected. Usually the election is such that the price would not be hit if the stop weren't there.
One would point out that continuous tick data would be necessary to do this properly because often the price goes through the stop and then back to a non-stop level even with 1 minute tick data, thereby making all studies using non-continuous every single tick price totally vitiable, and falsely alluring.
One was not critiquing Mr. Humbert's summary (one knows better than to do that even if one had that in mind which one didn't) but merely pointing out a very subtle point that often prices move through the stop in continuous time, but not in time with say 1 minute tick data, and you never know whether a stop has been hit vis a vis the close until the open of the day following when the price achieved is very different from the price at the stop level or market at close level. It's so subtle I cant even explain it properly.
Rocky Humbert replies:
And I agree with The Chair's observation. The problem is reminiscent of being short (too many) options on a stock that is pinned at it's strike price on Friday option-expiry 4pm. One knows that if one hedges, it won't be assigned. And if one doesn't hedge, it will be assigned and will gap Monday morning. Kind of like carrying an umbrella– and it never rains.
George Zachar writes:
If I may, a Schrodinger Stop is one that you place with your broker, as the physicist places the cat in the box.
But, regardless the prices you're quoted, you don't know if the stop was executed or what the fill price was, until after the session has ended….just as one doesn't know if the cat is alive or dead until you open the box.
The average correlation between SPY and its main sector etf's (xle, xlf, xlk, xlp, xly, xli, xlb, xlv) has been very high recently. I wanted to see how volatility tracks with correlation (correlations go to 1 in a panic). I regressed the 60-day volatility of SPY on the average 60-day correlation between SPY and the sector etf's from Sep 2005.
sectorCor = .77 + .04*spyStd
spyStd t-stat 19
Then I updated the regression for 2010 and found
sectorCor = .78 + .10*spyStd
spyStd t-stat 38
Any thoughts on the rising correlations or the relationship to volatility levels?
Vince Fulco comments:
Ex. the most recent vol decline, which we'll see how long it lasts, it is my contention that as spreads have come down, for quite some time, the Street have been manufacturers of vol & opacity in new fangled products and facilitators of fake 'information' for its own sake. What kind of system allows for the trading of 300MM shares of C with a penny spread and the rebate boys still go home big winners? Leveraged and branded ETFs provide more vig for dealers to trade within and sucks in the naive who can't or won't trade the futs space and don't understand the derivatives underlying the products. As we've seen time and again, liquidity which everyone seems to expect and demand esp. when it disappears, would seem to be the defining issue as increasing correlations demolish old theories of portfolio creation. Lack of diversity would seem to badly endanger the system as it does in nature. Perhaps I will be wrong if the tail sellers in this phase overwhelm the vol creators…Or maybe both sides win with enough switches.
George Zachar agrees:
I agree with what you said about how lack of diversity would seem to badly endanger the system as it does in nature. The investing monoculture gives the illusion of stability and reason, while in fact offering a brittle alogical ecosystem.Street research now is heavily biased toward encouraging carry whoring, which is of course vol selling.
Gary Rogan comments:
This is also an indication that those who attempt to trade on the fundamentals have exited the building. It's not clear exactly why, but my guess is it's a combination of the lack of trust in any published accounting data related to the out-in-the-open distortions in the financials' balance sheets, the uncertainty about the future and what the fundamentals imply about the future, and the self-reinforcing relative rise in the volumes due to algorithmic trading. When the robots trade based on the algorithms that evolved in the presence of fundamental investors after they are no longer there, sooner or later the results will resemble what would happen to the surface of the earth if gravity were to suddenly disappear.
Rocky Humbert writes:
Gary: I would be interested in your basis for making this case. One could argue that it was in the late 1990's when those who invest on fundamentals were forced to leave the building. Unlike Elvis, we've now re-entered.
Intel at 11x earnings (now) makes more sense than at 70x earnings. (then). Pfizer at 10x earnings (now) makes more sense than at 55x earning (then). Coke at 14x (now) versus 50x (then) … Internet stocks etc etc …
Gary Rogan responds:
Rocky, first of all we are talking about slightly different time frames. Certainly the late '90s were a unique period when even the most stubborn fundamentalists had their believes tested I'm talking more of what transpire say between 2003 and 2007, after the "buy on the dips" fully died down and before the full force of the credit crunch was appreciated vs. today. While I don't have a scientific basis for this, what I wrote was based on reading literally hundreds if not thousands of comments on financial blogs, some serious, where the writers expressed disgust at the market reaction to (a) some piece of negative macro news (b) another "stress test" (c) another major bank's quarterly release claiming a great rise in profits immediately deconstructed on that same blog to be (supposedly) completely fake. So many claimed to have given up looking at the fundamentals and expressed so much suspicion, I thought that perhaps there IS something to what they are writing and it's not all a conspiracy to confuse someone. I have also read several articles about the relative rise of machine-generated volume vs. retail investors, as well as the reasons for the market rise in the presence of mutual fund outflows.
I'm not sure that P/E compression by itself signifies trading on the fundamentals. Certainly SOMEBODY does when that happens, like our good friend the sage in the early/mid '70s doing his "oversexed guy in a harem" impersonation. But overall I think it's more indicative of the lack of confidence. I guess what I was referring to is some "typical" market where momentum traders are driving various stock and sectors in all kinds of directions (but not as far as the in the '90s) and some Gabelli-like or Lynch-like character gleefully commenting on the kind of opportunities those idiots gave them in the value space. I'm not sure some space cowboys riding C and BAC like wild mustangs on unbelievable volumes quite gets you there.
By now, after Zero Hedge has been demonstrating for about a year, even the kitchen sink is aware that cross-asset correlations between stocks, bonds, FX, and commodities is at or near all time highs, which in itself is a very deplorable situation simply because it eliminates virtually all long/short hedging opportunities, courtesy of the Synthetic CDO redux boom whereby most of the trading in stock is conducted via ETFs, as both high beta and low beta, or quality and crap assets all trade as one. But few if anyone was aware of peculiar intraday correlation patterns which may be an eye opener to some readers who believe that stocks are uniformly broken during the day. That is not true: in fact, stocks are only untradeable for the rational investor during the times when the market is most active, around open and close. In fact, in a paper by Michael Bommarito II, "Intraday Correlation Patterns Between the S&P 500 and Sector Indices", we discover that average return correlations have a very distinct U-shape, whereby correlations are near their highs (0.75) just after the open, and before close, while dropping to a statistically significant 0.6 at 1 pm, when volume is the lowest. This merely confirms that increasingly more market participants, read - electronic traders and algos, trade exactly the same strategies at the time when volume is at its peak, indicating that most strategies have nothing to do with actual fundamental investing and all to do with gaming market structure, and hoping to capture some idiot who thinks they can beat the machine. And as we demonstrated recently, many traders no longer trade during the hours between 10am and 3pm. Which means that this is actually a very interesting arb opportunity, for those who wish to take advantage of the machines' downtime, but shorting correlation at open and close, and bidding it up during the day. In fact the trade can be structured as a pair trade with almost no capital downside opportunity.
Are Kindles good for kids?
George Zachar answers:
My 11 year old daughter was a reluctant reader until we got her a kindle. Now we can't get her to stop reading.
My 15 year old son seems to have his kindle surgically attached. He reads while doing yoga.
I recommend an iPod touch with the free kindle app. It fits in any pocket and lacks many of the distracting attributes of the iPad.
July 16, 2010 | 2 Comments
Greenspan Says Lawmakers Should Let All Bush's Tax Cuts Lapse
July 15 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan, whose endorsement of George W. Bush's 2001 tax cuts helped persuade Congress to pass them, said lawmakers should allow the cuts to expire at the end of the year.
I will stand up and predict a retest of the Flash Crash low, making it the Ultimate Milstein.
Kim Zussman adds:
Last week's events remind us that:
1. The probability of zero for a stock is not zero
2. The probability of SP00 zero is not zero but much closer to zero than #1 above
3. The probability of SP500 660 is less when it is 1100 than when it is 670, at least for time periods you care most about
I recently did a very crude estimate of the value of Warren Buffett's puts betting that the price of the S&P would be above, relative to their price at trade entry. Conservatively, they're roughly up 3.5-fold, using Bloomberg analytics.
Phil McDonnell writes:
A similar back of the envelope estimate shows that his short puts are up by at least 1.5 fold using current volatility estimates. Given the rise in volatility the puts are more likely up something like 4 fold. Thus the write-off should be something like $5.5B * 1.5 = $8.5B (at a minimum).
In a Yahoo article yesterday it was reported that Buffet received $8B for the puts he sold. So on the higher end the exposure might be $8B * 4 = $32B. In any event the current write off clearly seems to be understated.
The Oracle espouses such virtues as clean accounting and a preference for mark to market accounting. And yet, the companies he owns are not marked to market for the most part because they are not publicly traded. Thus they continue to be carried on the books at a valuation determined by the Oracle. If we use the S&P as a reference, the market value of the typical company has fallen by something like 50%. BRK carries something like $250B in operating assets (excluding cash). Thus it is reasonable to estimate that if his portfolio of companies was marked to market that it has declined by about $125B in current market value. If this loss was taken today it would more than wipe out the $120B of equity that the company claims.
There are other hidden gems on the balance sheet. For example one wonders what $4B in deferred long term asset charges are. The $34B in Goodwill basically represents what the Oracle over paid to buy his companies. In the current environment one wonders if any of that is left. The $17B in deferred liabilities remains another mystery.
Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008
Michael Cohn comments:
The sale of puts was hardly free — just look at Berkshire's stock performance. However, what makes this strategy tenable for Berkshire was that he does not have to post margin, unlike 99.97 percent of counterparties on this trade. This is the major advantage that allows him to play long term nominal drift and benefit from survivorship bias. Had anyone else sold those puts they already would have been downgraded by rating agencies.
A salutary warning to all quants who take the computerized databases from the big vendors as the immutable objective truth, in an academic paper by Ljungqvist, Malloy and Marston:
We document widespread changes to the historical I/B/E/S analyst stock recommendations database. Across seven I/B/E/S downloads, obtained between 2000 and 2007, we find that between 6,580 (1.6%) and 97,582 (21.7%) of matched observations are different from one download to the next. The changes include alterations of recommendations, additions and deletions of records, and removal of analyst names.
These changes are nonrandom, clustering by analyst reputation, broker size and status, and recommendation boldness, and affect trading signal classifications and back-tests of three stylized facts: profitability of trading signals, profitability of consensus recommendation changes, and persistence in individual analyst stock-picking ability.
I trade mostly spot forex, so my comments are limited to that market. Also, my trading is moderately high-frequency.
From my perspective, there has been a pretty big change since mid-2008. Liquidity has dried up, and spreads have increased. That makes it more difficult to be profitable. For example, one year ago a typical spread in a currency pair might have been 2 pips, and now it is 3 or 4 pips. Furthermore, it is hard to get filled at a decent price for larger orders…it seems like market reactions to your order are a little more sensitive.
Not surprisingly in a time of such turbulence in all financial markets, volatility has increased. I'm seeing more breakouts, which I attribute to greater uncertainty and thus sensitivity to market-impacting news. Or, perhaps it is just that the news recently has been of greater "amplitude".
I think there has been a gradual trend to return to what I would, with my limited experience, consider "normal". That process will likely require many more months. As you may know, liquidity in the forex markets is primarily supplied by banks, and to the extent that they become more risk-averse, the market will continue to suffer.
Jim Sogi's question was:
Have you noticed a change in the markets due to the changes in the large investment banks such as GS, Leh, Bear Stearns or other large funds? I can't really quantify it or pinpoint it in a meaningful way yet, but it just seems different, more rhythmical, less jerky, and easier in some ways. It seems more large crowd oriented, fewer huge orders in the pipe or ts.
Stefan Jovanovich adds:
In the days when boxing was THE American sport and New York City was its Mecca (when, according to the promoters for the old, old Madison Square Garden at least one of the fighters had to be or pretend to be Jewish if you wanted to draw a decent crowd), fighters would work a whole round to set up one punch. George just won the prize for champion of the List for January with a knockout right cross at the bell.
George Zachar writes:
The few pools of liquid discretionary capital remaining face the prospect of Barney Frank acting as a Caligulan Nero overseer.
Transient calms of nostalgic transactional ease only remind us of the wreckage on the seabed, and capriciousness of our new masters.
The fixed income market, once the most comely of mistresses, is now a Frankenstein's bride; a halting, disfigured, spastic wreck.
Back when I was a freshman in college, I had to take a course in University Physics. I found the course to be most practical, and helpful in the development of my thinking. One phenomenon that we studied in that class was the concept of Parallax. A quick Wiki definition of parallax is:
"Parallax is an apparent displacement or difference of orientation of an object viewed along two different lines of sight, and is measured by the angle or semi-angle of inclination between those two lines. The term is derived from the Greek parallaxis, meaning 'alteration.'"
A person can observe in real life the effect of the parallax by measuring something, using a ruler and not looking directly over the scale. By looking at an angle other than directly over the scale will cause a measurement error due to the parallax. That error can be measured and corrected by knowing the distance from the object and the angle. One's measure of the market might be affected by an internal, mental parallax. This parallax might be a function of the time frame, or might be something else… what else I don't know. It would be interesting to see if anyone has studied or quantified this concept as related to markets.
George Zachar adds:
Greybeard camera buffs have studied this, using twin-lens reflex (TLR) cameras. One of my prize possessions is the Voigtlander TLR my dad took with him, fleeing Europe in 1949.
Lots of info on this phenomenon in photographyland.
Don Chu writes:
“The stars are the apexes of what wonderful triangles! What distant and different beings in the various mansions of the universe are contemplating the same one at the same moment!” (H.D. Thoureau)
Thoreau probably did not have in mind stellar parallax in relation towards distance computation, and his imagined use of triangulation is more a heartfelt outreach to find resonance with another, be it of this world or otherwise. Still, there may be something in Thoreau’s words that transcends their initial appearance and speaks more directly to Mr Watson’s musings.
Thoreau continues from the above: “Nature and human life are as various as our several constitutions. Who shall say what prospect life offers to another? Could a greater miracle take place than for us to look through each other’s eyes for an instant? We should live in all the ages of the world in an hour; ay, in all the worlds of the ages. History, Poetry, Mythology! — I know of no reading of another’s experience so startling and informing as this would be.”
Paraphrasing and taking enormous license with the inimitable Thoreau and one contemporary other, perhaps the inspiring lines above may be reduced to the more familiar and definitely modern - “a latticework of mental models.”
Mr Watson rightly postulated “internal, mental” parallaxes predicated upon by any number of possible variables. But one fears that trying to elucidate error terms in any single mental construct may necessitate recourse to never-ending phenomenological reduction and render any resulting “cognition” and perceived derivative error to be indeed, in doubt.
The unkindest and yet most impersonal a priori parallax may come from the observer himself, delivered through the remorselessly agnostic Observer Effect. In the context of the markets, presupposing that the state of a market system exists independently of its observer/participant will surely be unwise and inevitably, loss-making.
But here is a naive yet hopeful thought — perhaps singular errors from any one mental construct matters less from the perspective of the whole. If every man holds in his mind (and inherently all men do, to a greater or lesser degree), a “latticework of mental models”, then in a mind where the structural tensions and forces remain basically stable, it follows that individual mental disjoints/errors have mitigated and largely damped themselves out.
Perhaps a healthy dose of History, Poetry, Mythology! shall prove to be rather profitable…
Henry Gifford comments:
Older meters of the type used to measure electronic circuits have a speedometer type needle that moves across a numerical scale. To eliminate parallax there was a mirror mounted just above or below the numbers scale, which allowed a user who was not viewing the instrument from directly ahead to look at both the needle and its reflection, and use the reading that appeared midway between the two.
It reminds me of looking at currency values relative to other things instead of just each other.
Perhaps some prices of seemingly unrelated markets which have predictive value that could be used to trade in one or both of the seemingly unrelated markets.
From this morning's WSJ item "Stepping Up to the Fed's Window":
The Fed is lending $95 for every $100 in securities that dealers bring to it, regardless of the type of collateral. In other words, the Fed requires the same amount of additional collateral whether a dealer is borrowing against a Triple A-rated corporate bond or a Triple B-minus subprime-backed bond.
Yes, those are termites you hear, gnawing at the Fed's balance sheet…
Adi Schnytzer concurs:
It's time the world learnt how data collection functions. These numbers are produced by turkeys who never ask whether their numbers make sense. And to think that markets respond to them!
Bill Rafter adds:
Lots of the data put out are also seasonally adjusted. One of my big peeves is that the data monkeys who work for the gummint do not know how to properly do the seasonally adjustment. As a result there are a lot of bad data out there. The real problem comes when the bad data are released, and everyone follows them. In other words, perception becomes reality. You (having the good data) have to follow the bad data also, at least until some time elapses and the whole thing gets corrected. So you have to watch against being too clever for your own good.
Jason Thompson reveals:
I've developed a localized index of inflation that is actually reflective of folks' consumption baskets. It includes taxes, insurance, education, and healthcare in more accurate weights. It has shown me how far off the CPI has been versus reality since at least 2002. The spread has consistently grown! This local inflation measure focuses on prices in the Chicagoland area and so would be best compared with CPI-U. Further, the resolution is quarterly not monthly. The inflation measure for Q1 2008 will likely show an increase of 8.6% YoY.
March 13, 2008 | Leave a Comment
A letter I received today:
I'm doing some back of the envelope. Real 10y rates went from 1.7% at year end to 0.9% now. Do you have any idea what a move in real 10y rates like that does to the discounted value of cash flows, i.e. the fair valuation of stocks? incredible?
This is not the Fed Model, which is clearly wrong because it uses nominal rates, and compares apples to oranges — Cliff Asness is definitely right on that — but looking at changes in the discounted cash flow valuation using changes in real rates is simply correct.
What say you?
I responded that I don't believe anything is wrong with the the Fed Model, and that the real rate according to the TIPS has not gone down as much as he says. But I agree with the conclusion anyway.
George Zachar remarks:
The declining relative weight of Treasuries in the debt universe, along with their well-known pricing distortions, make them a poor benchmark for such studies these days.
Five year interest rate swaps for current work, or, say, Baa 5 year corporate yields for historical studies, make more sense.
Ever so slight, but upward, revisions in the price series.
By the way, the uptick in initial claims seems to have been due to funky seasonals around the President's Day holiday.
Steve Ellison asks:
Silver is approaching $20. Can $1000 gold be far behind to complete the markets' inflationary grand slam (after $100 oil, $1.50 euro)?
The flagged series are core-core for the boffins, and decidedly soft as Bernanke chooses his tie for today's hearings.
From today's economic release:
The median sales price of a single family house printed with a 1 handle for the first time since 2/2005.
in New York. Artsy, but lacks
The monsters invade
Manhattan. How did they know
not to touch Brooklyn?
This morning's inflation surveys give succor to our monetary scientists. They can straight-face the microphones, intoning the "inflation expectations are well anchored" catechism, and roll their eyes at the mention of moral hazard.
This brief smackdown of Keynes's 1936 "General Theory" by Garet Garrett is well worth reading. Recall Garrett wrote the wonderful novel Satan's Bushel.
Upon it has been founded a new economic church, completely furnished with all the properties proper to a church, such as a revelation of its own, a rigid doctrine, a symbolic language, a propaganda, a priestcraft, and a demonology.
To the socialist planners, it offered a set of algebraic tools, which, if used according to the manual of instructions, were guaranteed to produce full employment, economic equilibrium, and a redistribution of wealth with justice, all three at once and with a kind of slide-rule precision — provided only that society really wanted to be saved. And the same theory by virtue of its logical implications delivered welfare government from the threat of insolvency.
That word — insolvency — was to have no longer any meaning for a sovereign government. The balanced budget was a capitalist bogey. Deficit spending was not what it seemed. It was in fact investment; and the use of it was to fill an investment void — a void created by the chronic and incorrigible propensity of people to save too much.
NOVA just rebroadcast their episode called Deadly Ascent which explores the difficulties of climbing Denali (Mt McKinley). The show highlighted some intriguing parallels between mountaineering and trading.
Experienced climbers describe Denali as not a technically daunting mountain. Climbers can make the ascent without having to scale huge rock faces or ice falls, the kinds of things you see when they do the Eiger or K2. The thing about Denali is the environment: That beautiful massif pushes up into the sky, and the volatility is the weather combined with the altitude.
A local guide talks about the deceptive qualities of Denali in particular, about how a group of climbers will make the ascent safely in good weather, come back down and tell their friends how easy it was, and the friends will put together a team, make the attempt and die.
The NOVA team was composed of a man and woman, both experienced mountain guides, and an astronaut, John Grunsfeld. One of the technologies they used to explore the effects of altitude and cold was a "thermister" pill, a small thermometer that is swallowed and then transmits data on the subject's core body temperature. An important part of the data-gathering effort was to track external weather conditions, as well as the internal body temperature of the climbers making the ascent.
There was an interesting comparison between the astronaut, Grunsfeld, and one of the experienced guides, Caitlin Palmer. The thermister readings showed that when Grunsfeld was climbing, his core body temperature would spike to as high as the 103-104 range. Then, when he stopped and rested, his core temp would plunge rapdily to as low as 95, near hypothermia. Caitlin Palmer, on the other hand, maintained a narrower range of 100-96, with slower changes of temperature. She was able to function more effectively in the extreme conditions. Grunsfeld eventually had difficulty at their camp at 17,200 and descended with Palmer, without making the summit.
George Zachar adds:
Thinking of volatility, and of the markets in the last two weeks, I enjoyed looking at these photos of a monster roller coaster at Cedar Point.
The Fed's upcoming liquidity swaps will be keyed off the OIS rate for one month funds, which I mistakenly assumed was roughly the rate for a term loan of the duration.
I have since learned that the OIS is effectively the same as the rate on the second Fed Funds future, which is currently ~4.20%, a modest discount from the spot target rate of 4.25% and substantially lower than the 4.75% discount rate.
This makes the upcoming set of auctions a one-off discount rate cut, albeit in relatively small size. The two day window between bid submission and auction award announcements further muddies the program's value.
Alex Castaldo remarks:
I have the impression that the Fed is experimenting with a view to a permanent auction mechanism for supplying liquidity, based on this paragraph in the news release:
Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve’s current monetary policy tools–open market operations and the primary credit facility–with a permanent facility for auctioning term discount window credit.
This mechanism would be similar to the weekly auctions that the ECB holds (the so called main refinancing operations). From ECB web site:
Main refinancing operations are regular liquidity-providing reverse transactions with a frequency and maturity of one week. They are executed by the [National Central Banks of the Eurosystem] on the basis of standard tenders and according to a pre-specified [weekly] calendar. The main refinancing operations play a pivotal role in fulfilling the aims of the Eurosystem's open market operations and provide the bulk of refinancing to the financial sector.
European fashions in Central Banking coming to the U.S. ? We shall see.
December 1, 2007 | 1 Comment
and lots of cringes.
November 24, 2007 | 1 Comment
It's good to remember that stocks are valued based on an infinite stream of cash flows. And any balance sheet losses on assets held just affect the book value temporarily and are lost in the fullness of the sweep of payments for risk and innovations and entrepreneurial ability . Same for whether earnings growth is going to be 1 % or 5% next year. The earnings yield versus bond yield is now at close to an all time high. The yield on risky loans has risen and the cost of debt capital has eased. Presumably if the default rate on subprimes is 10% , it is more than compensated by the increase in yield that such loans would now carry . All this comes to a head with the disruptive move at the close on Wed, down 1.5% in 30 minutes. This reminds one of the breaking in of horses featured in such novels as Monte Walsh where the unbroken horse gives a final leap into the corral fence before shuffling off with the owner paying the debt to Monte.
Phil McDonnell runs some numbers:
Recently the rate on 30 year Treasuries has fallen from about 5.3% to about 4.45%. This is a decline of about 17%. So if the long term earnings are discounted at the long term rate then a very simplistic back of the envelope calculation shows that the value of stocks should rise by something like 17%. However the reality is that stocks have fallen about 8% from when the rate was 5.3%. Together the 17% increase in value plus the 8% should combine for something like a 25% increase in stock values. Some might argue that a more sophisticated model would use the one year rate to discount expected one year out earnings and a two year rate for two year earnings and so on. That is true. But it is worth noting that all the shorter term rates have fallen even more percentage wise than the long term rate.
Bruno Ombreux extends:
Another exercise is to look at what happens when earnings are changing over time. In the discount formula, the denominator is a power. As a result, early years are heavily weighted and later years much less so.
Let's value the stream of discounting earnings as a perpetuity, because it is easy. It is earnings/interets rate. Let's use 8% which is reasonnable for a risky asset and in line with drift.
Assuming constant $10 earnings, the stock is worth 10/0.08 = 125.
Now let's assume that earnings are going to take a hit for the next 5 years.
If earnings are 0 for the next five years and then 10 in perpetuity, the company is now worth 125/(1.08)^5 = 85
This a a 85/125 = 32% drop in the value of the company.
The next few years are very important in valuing a company. It is not surprising that stocks drop on the slightest hint that they could experience troubled times ahead, even if in the long term they are profitable.
George Zachar cautions:
Notional interest rates are only one factor to consider in calculating the appropriate discount. In the current era of (relatively) low and stable rates, perhaps other variables play a increased role.
What tax rate will those future earnings bear? What is the forward trajectory of the regulatory ratchet? Are currency preferences an issue? Finally, should one use real or nominal rates to discount? That would imply the need to forecast inflation too.
While notional rates remain important, the growing/shifting burdens imposed by Washington, and the increased role of international capital pools, means yields are now one discounting factor among many.
Alston Mabry concurs:
To extend George's argument: What about projections for forex rates? Liquid capital flows across borders, and many investment equations now must contain a forex conversion factor. Must not non-domestic investors evaluate future cash flow discounted by both rates and currency fluctuations?
Gregory Van Kipnis raises an interesting point:
There has been always been a dichotomy in market valuation between the earnings discount model approach and the book value approach. If we reduce the current discussion to a P/BV versus a P=PV(E,g,i) model for assessing the market outlook, the following additional point may be important to consider. Is there a relationship between BV, on the one hand, and E and g, on the other? If BV (book value) losses were simply a drop in the net value of bricks and mortar there might not be much of a connection to future reductions in E (earnings) and g (growth in earnings). If on the other hand, much of the loss of BV is the destruction of income earning assets (mortgages and their related derivatives) then E and g are proportionately reduced as well. Since such a large proportion of the S&P earnings is related to the financial services industry the current 'neutron bombing' of the housing sector, and the associated loss of financial BVs, it is likely to translate into a more protracted bear market, I fear.
November 19, 2007
Camel barbecue bids for record
A French chef is claiming a record for the world's largest barbecue, right, after spit-roasting a 550 kilo (1,213 lb) camel for 15 hours at a seaside Moroccan town south of Rabat. Christian Falco, 63, from Perpignan, Southwest France, said he was recreating a centuries-old tradition begun when a Moroccan king offered a roast camel to his people.
You can buy a car with a diesel engine and use vegetable oil . I heard some people are able to run a car on a 15% diesel / 85% vegetable oil mix. It is great if you live in the countryside. You can grow your own untaxed fuel.
George Zachar notices:
Decatur resident Dave Wetzel may be in hot cooking oil with the Illinois Department of Revenue, who claim he needs to pay $244 in back taxes for the gallons of vegetable oil he has been running his Volkswagon car on for the past 5 years.
Wetzel uses recycled vegetable oil, which he picks up weekly from an organization that uses it for frying food at its dining facility.
"They told me I am required to have a license and am obligated to pay a motor fuel tax," David Wetzel recalled. "Mr. May also told me the tax would be retroactive."
Michael Ott explains:
If you do make your own biodiesel from free used vegetable oil, the cost per gallon for materials is around $.60. if you pay someone minimum wage to do all the work, the cost is about $5 per gallon. Therefore if you enjoy the work and do it as a hobby, it's a good deal. It's not a money saver.
Some in the biofuels industry are against road taxes on their fuel, but I think they're necessary because infrastructure is already underfunded. Plus, once we're making a large share of the fuel in the country, it would be noticeable.
The money quote from Fed mouthpiece Ip in this morning's WSJ…
"…for policy makers, the decision is between the quarter-point reduction and no cut at all. A half-point cut is unlikely to get serious consideration from Fed officials…Ordinarily, meeting market expectations isn't a goal in itself for the Fed…"
…has drawn a universal <snort> <roll eyes> from the professional Fed-watching community. With financial stability JobOne at the Eccles Building, November Fed Fund futures putting a 94% probability on a 25 bp cut, and America's highest profile broker fielding retail phone calls about its financial stability, the notion that the Fed is seriously thinking of not moving rates is just laughable. In September, it was UK Northern Rock's bank run on page one that cemented the Fed's panic half-point cut. Think Bernanke will sit still with MER on the ropes? Neither do the currency traders.
October 17, 2007 | Leave a Comment
I've recently switched to an index trading strategy using QQQQ options which I now want to broaden, spreading my risk into similarly priced very liquid option-based instruments which are not very correlated with the main market indices, or each other, and am looking to maintain four such positions. However I'm having trouble finding low-correlation instruments with liquid options that I can use in the same way as I treat the QQQQ. Do Daily Spec readers know of ETFs with highly liquid options, or some other similar instruments?
George Zachar mentions:
The Select Sector SPDR correlation tool might be of value to you.
Phil McDonnell warns:
Careful! Before you rely on it, you want to make sure their correlations are based on net changes — weekly, daily or whatever. Correlations based on price levels are spurious. I did not see any mention of their methodology on their page so it would be good to check.
This graph shows moonshot one-year growth of Money of Zero Maturity, a proxy for money supply.
Jeremy Smith adds:
In contrast to this, the year-over-year change in the real Monetary Base has been negative lately.
Bill Rafter explains:
Yes, Monetary Base growth is still hugely negative. But George is also correct that MZM growth is hugely positive. The missing connection is lag. MZM significantly leads Monetary Base.
Alan Greenspan's autobiography "The Age of Turbulence" provides a snapshot of establishmentarian economic thinking, including a panoramic view of of how we got here, what "here" is, and how one very clever man prospered in a variety of challenging settings.
We hear the well-known story of Greenspan's rags-to-knighthood ascent from Washington Heights to Washington's heights. Students of the Beltway memoir genre will recognize the name and venue dropping.
The latter portion of the book, Greenspan's critique of the current economic/political landscape, would be familiar to anyone who has followed his work, and kept up with the musings of bien penseurs.
1) "Forecasting is simply a projection of how current imbalances will ultimately resolve." (p. 48)
2) Institutional capture upon becoming Fed chair: "The staff prepared a series of intensive tutorials diplomatically labeled 'one-person seminars,' in which I was the student — senior people from the professional staff taught me my job." (p 100)
3) Still a libertarian? "Unqualified democracy, where 51 percent of the people can legally do away with the rights of the remaining 49 percent, leads to tyranny." (p. 345)
4) A climate doomster? "There can be very little doubt that global warming is real and man-made." (p. 454)
5) Inflation fatalist: "For the most part, the American people have tolerated the inflation bias as an acceptable cost of the modern welfare state. There is no support for the gold standard today, and I see no likelihood of its return." (p. 481)
Folks seeking initial compass points on the intersection between the Beltway and Broadway will learn a lot about the current state of play.
Cynics like me can troll for amusing anecdotes, marvel at the near adoration offered a certain impeached ex-President, and shelve the book for future reference.
The first two bearish economists I've seen said this morning's data "only look strong," and that the deeply obscure metrics (one of the diffusion indicies, for instance) tell a tale of ongoing weakness.
Yeah, a lot of this was unwinding the big miss on Government payrolls last month, but given the amazing noise generated by the August market debacle, it's telling that more than half a million folks chose to enter the workforce in September, and 463,000 of them got jobs.
Had J.R.R. Tolkien applied his talents to Middle America instead of Middle Earth, the result would have been akin to Satan's Bushel, Garet Garrett's 1923 novel, available as a 212 page pdf. Literally beautiful in its language, yet deadly accurate in its particulars, the work is a mystic's perspective on farming and speculation, on death and eternal love. It is worth reading for both its prose and its surprisingly relevant take on markets.
Adam Robinson adds:
For those who want to read an uproariously entertaining book on the economics of becoming a farmer, I can't recommend The Farming Game, by Bryan Jones, highly enough.
Imagine Mark Twain giving advice to a city slicker (Green Acres is the place to be) who dreamed of becoming a farmer, and you'll have an idea of the book's appeal. Acute economic sensibility combined with trenchant wisdom.
There are only two copies of this overlooked classic left in stock at Amazon before they reorder (owing to slow sales, alas). You'll thank me later, and I can promise that if you start reading it over a weekend, you won't stop.
David Lamb interjects:
In the book "Satan's Bushel" is found a snippet on page 123 about
the dreaded financial life of a wheat farmer. Here is the quote:
The farmer was one who paid.The farmer certainly paid.
Everyone who touched him made him pay. What he sold he sold on the
buyer's terms. What he bought he bought on the seller's terms. One in
that situation was bound to be exploited.
In essence, the farmer takes the brunt end of the financial side of
the wheat business. My grandfather farmed wheat. He was always
complaining about everyone taking advantage of him; how he never got a
good enough price; how the prices of equipment are too high, etc. I
grew up thinking two things about this industry: One, I wanted no part
of it and, two that farmers were always poor and there was no way
around that.Then a few years later in life I came across the futures
markets wherein I found out about hedging. I am perplexed why more
farmers don't utilize the futures markets to hedge and, therefore,
protect themselves more. I am very naive and ignorant in this field but
I have included some numbers from the Census of Agriculture data that I
would like to understand. The latest year of available data is 2002.
Number of wheat farms: 169,528 Total number of acres: 45,519,976 Total number of bushels: 1,577,005,140
If one CBOT wheat contract is 5,000 bushels then the total number of
possible short contracts given the number of bushels yielded is
315,401.The average weekly COT data, on the short commercial side, for
the whole of 2002 was 59,996 short contracts. If these were held by
farmers, which I think we can assume so, then the number of bushels
being hedged is roughly 300,000,000, or 19%.If this 19% number is even
remotely close, why aren't more farmers using the futures markets?
Alex Ceresian attempts a reply:
Keep in mind that hedging with futures only protects the farmer from a small portion of the risks the farmer faces.
Futures protect against "price risk", the risk from fluctuations in the market price of wheat.
The farmer also faces "quantity risk", that is uncertainty about the
amount of wheat he will be able to produce. You plant X bushels of corn
but because of umpteen different reasons (mistakes on your part, bad
weather in your local area, pests) you only manage to produce Y<X
bushels. Futures don't help with this risk (and you cannot insure either).
Even worse, the two risks interact and complicate things. If you don't
know how many bushels you are going to produce, how many contracts
should you sell (for price hedging purposes) on the CBOT?
September 27, 2007 | 1 Comment
It is always good to go back to our roots, whether we look at the history of where we were born/where we live, or study the different environments of our ancestors. These studies show us our links to the past and the foundations that others have laid down for us to grow from.
Nathaniel Philbrick tells the story of the roots of America in his book Mayflower. The foundation of modern America begins with four hundred English Puritans who moved from England to Leiden, Holland in the early Seventeenth Century to found a purer version of the Anglican Church. One hundred of these Pilgrims carried on their journey under treacherous conditions, with low supplies, all the way to Plymoth (now Plymouth), Mass., arriving in 1620 — on the run from English agents in Holland.
The Pilgrims were financed by a profit making company, the Virginia Company, that was down on its luck because of a previous venture to Jamestown in 1607, where during the first year, seventy of one hundred and seven settlers died, and during the second year, four hundred and forty of five hundred settlers died. These Jamestown settlers died mostly from starvation and attacks from hostile Indians.
The Plymoth Puritans knew that they would be facing equally hostile conditions, but, "No small things could discourage them as … they knew they were pilgrims."
In the years following 1620, the Pilgrims were joined by many waves of adventurers, motivated mainly by profits. Philbrick's Mayflower is about the religious practices, politics, day to day life, key leaders, economic arrangements, climate, geography, survival techniques, and defensive and offensive strategies that the Puritans and the adventures forged in an effort to prosper in this hostile environment.
For fifty years, there was a relative harmony with the Indians, but this broke down with the death of Massasoit, the leader of the Wampanoag Confederacy, in 1661. Within a year of his death one of the deadliest wars (in terms of percentage of population killed) in American history broke out. Philbrick is a historian with great expertise in maritime, political, military, and natural studies, and on this subject, I believe he tells a convincing story about many events that were previously in the realm of folklore.
On the characters of the time, Philbrick tells us that Squanto was a duplicitous Indian, constantly changing sides, who attempted to lead the Mayflower Pilgrims and adventurers to their destruction at times, but was very helpful to them on other occasions in establishing relations and communications with the Indian tribes. We learn that Miles Standish was a martinet, who was constantly losing his temper, leading the settlers into disaster, and had the settlement in constant military mode.
With the time the settlers spent on military and religious pursuits, it is amazing that they had any time left for survival and the pursuit of happiness. Philbrick tells how in the second year after settlement, the Pilgrims learned the power of incentives, and gave each settler the rights to the fruits of his own labor on his own land.
He points out how much more adroit the Indians were at deception than the settlers, and how they were always ambushing the settlers when they were not prudent or silent enough. Eventually, the only way that the settlers could battle the Indians on equal terms was by enlisting friendly Indians to be on their side, and who showed them how to cope with the deception of the other Indians.
Philbrick tells a great story, and derives many insights that are applicable to life — for example, he talks about the importance of trade with the Indians in creating harmony. Based on his study of the Pilgrims during the first 50 years, Philbrick believes that the essence of Americanism is criticism of authority by self-promoting men. He finds the archetype in the hero of the story, Benjamin Church, a frontiersman who is a combination of Davy Crocket, Daniel Boone and Jack Aubrey.
Like most historians trying to write popular history, Philbrick strives to focus his story on a extreme event. Almost half of the book is devoted to the war of 1670 between the Pilgrims and the Indians, and much of the commentary about the war is about the atrocities, broken promises and misdeeds of the Pilgrims. There is not enough emphasis on the trading relations with England and the other colonies, or on the spirit of incentive that led to the success of the colonies.
Overall, I can heartily recommend this book, as it is interesting, informative, and helpful to understanding the foundations of our country.
Pitt T. Maner III adds:
A visit to Plimoth Plantation a couple of years ago really brought the history to life. The actors and actresses at the historical site were so well versed in the history and the dialect that you were literally transported back in time.
They told me that I must be an escaped slave of the Spanish since I came from Florida! Quite fun. Well worth a visit.
George Zachar writes:
My parents and older brother literally got off the boat here in the US in 1949, and my childhood understanding of the world was based on what they went through in Europe before getting here.
Reading the unending litany of whining in the daily press, my default reaction is, wtf are these people complaining about? With a little focus and effort, the upside here is limitless!
Stefan Jovanovich comments:
Complaining has always been a part of the American tradition. It is the source of our humor (what else is a wise crack?); it is also the reason the varieties of psychological counseling have found far more fertile soil here than anywhere else in the world.
Even Philbrick's otherwise admirable book ends up literally whining about the past — i.e. if only the Pilgrims had been more understanding, King Philip's war would never have happened, etc.. His premise is the ultimate therapeutic fallacy — that quarrels over culture and property can somehow be mediated if only people will sit down and talk forever.
Philbrick is a marvelous scholar and writer, but as Vic notes, in Mayflower he falls prey to the standard (at least these days) academic and journalistic presumption that, ultimately, whatever went wrong is somehow the "Americans'" (sic) fault. Even though his book has an elegant description of the sparring of the Spanish, French, and English explorers, adventurers and merchants that preceded the landing at Plymouth, Philbrick concludes that the Pilgrims and Bay colonists should somehow have avoided the follies of war and strife that tortured Europe in the 17th century. He also accepts the perversely racialist notion that the Indians (sic), like other historical losers (blacks, Palestinians, etc. but never, of course, Jews) are automatically entitled to exemption from any critical judgments.
George and James have each once again gone to the heart of the matter. The essence of being an American is that you have to make your own deal, no matter where you come from. Washington and Otis and Warren believed that America was special, not because Americans were somehow unique but because, through the accidents of history and geography, Almighty Providence had given the sons and daughters of Virginia and Massachusetts the unique blessings of individual liberty.
What made these men truly revolutionary, to this day, was their perverse belief that the same liberty was and always should be the birthright of every human. Or, as the rattlesnake flag puts it in classic American vernacular, "Don't Tread on Me."
As an explanation of everything, I liked How We Got Here by Andy Kessler, available free online. It covers the invention of nearly everything from the steam engine to the Internet and touches on issues dealing with patents and banking systems along the way. It's his best work and well worth reading. He inserts levity and explains things very well. I also liked Running Money and Wall Street Meat by the same author, but found his latest, The End of Medicine, worthless.
George Zachar writes:
Hans-Hermann Hoppe explains pretty much everything in his 33 page essay Banking, Nation States and International Politics, tying together gold, fiat currency, banking, the State, the evolution of the Euro….
September 23, 2007 | Leave a Comment
A property statistics observation, prompted by this item:
More than 15% of the homes for sale in Detroit, or almost 1 out every 7 homes for sale, is priced at $20,000 or less.
How much of the statistical weakness in house prices is related to utter freefalls in dead-end places like Detroit, Cleveland, Buffalo, etc., pulling down the averages?
Average income in Manhattan is a truly meaningless stat, as both seven figure compensation and welfare checks are common here.
What about "average" house prices, lumping together entire neighborhoods that are bidless along with suburban stretches just "giving back" the last couple years of appreciation?
Is this a meaningful distortion?
Tom Larsen remarks:
I look at houses on line from time to time in Flint, MI. I look at my old neighborhood, and the houses are still going for the price my Dad sold his for in the 70s. The main difference is the factories are gone and the people are poor. Oh, and there weren't any drive-bys when I was growing up. You got beaten up, but no shootings. A house two blocks from where I grew up is listed for $25,000 on Zillow. At least it's not a dump. Maybe someone could make money buying these places. I'd live there (though my wife wouldn't), except I moved to San Francisco many years ago, and let's just say Flint is short on the amenities I enjoy here. Michigan has always been my "put" — if we run out of money, we will have to go back there.
Sept. 21 (Bloomberg) — Calyon's global head of credit markets left the investment bank after it said an unauthorized proprietary trade cost the firm 250 million euros ($347 million). Loic Fery, 33, who oversaw credit markets from London, left the bank this week…
Call me old fashioned, but I would have expected the "global head of credit markets" at a major bank to have seen at least one credit cycle before attaining command of the balance sheet.
The wise Doctor Brett
Goes hip-hop in naming his
value grid: Style Cube.
September 20, 2007 | Leave a Comment
The following is an extract from NewYorkBusiness.com:
Credit crunch aside, commercial real estate sales in Manhattan have already surpassed last year's record total, according to a report released Wednesday by Cushman & Wakefield Inc.
The real estate company estimates that in the first eight months of the year, sales transactions that either closed or are under contract totaled more than $40 billion. In all of 2006, transactions amounted to $34.7 billion.
The first half of the year was the strongest six-month period ever reported for commercial sales, with transactions reaching $34.1 billion, up from $18.58 billion in the corresponding period in 2006.
Cushman notes that the credit crunch has led to more stringent underwriting, more expensive lending terms and an increase in the amount of equity required for purchase. It says that eventually the market turmoil could lead to fewer property sales, fewer bidders and ultimately lower prices for buildings. However, for now, the company says property values have remained strong.
At mid-year, Cushman pegged the class-A vacancy rate at 5.4%, the lowest since 2001. The average asking rent was $69.58 per square foot, a record high and up 38% from the corresponding period in 2006. [Read more]
Here is the key inflation issue: the Fed know core CPI is flat or falling and that the price of everything a person actually needs to live is rising rapidly (food, energy, healthcare, education, insurance, etc.). Plus, they believe the disinflationary effects of emerging markets has diminished which is evident from the fact that Indian firms are not outsourcing to Mexico where wages are cheaper (as one example). So, there is now an important (but quiet) debate in the FOMC and among the staff about whether more attention ought to be paid to headline inflation as well as core.
Plus, digging a bit deeper, they fear that real interest rates may already be negative if you adjust your numbers using headline instead of core. Or, even worse, you could think about using the inflation numbers that arise from the old methodology before they stripped everything out of it. That calculation (see John Williams' work on Shadow Statistics) shows inflation running at 8-10%.
So, there is much more worry than the market realizes about cutting rates now and essentially pulling the ripcord that unleashes an inflation which will be hard to deal with later (a la Greenspan's comments over the last few days).
George Zachar adds:
It is comforting to know that, under the surface, there are folks in the monetary clerisy that "get it" vis a vis honest-to-G-d inflation.
Unfortunately, the Fed's calculus is complicated by political and systemic risk factors. The left controls the political and media agendas, creating a fierce headwind against discipline.
And there's something about bank runs (albeit in the UK) that's apt to focus a central banker's attention on immediate problems, leaving longer-tailed inflation concerns for another day.
Greenspan publicized the notion that the Fed would try to make its mistakes in ways that could be remedied — that is, if they were going to screw up, they would do so in a way that left them policy tools to address the problem.
In the case of deflation, they deliberately stayed too easy too long, to make sure they didn't have "a Japan problem", assuming they could always jack rates up to mitigate subsequent inflation.
I fear/suspect that a similar calculation is being make now: Is it better to extinguish the systemic risk fire now with a big ease, and then later have to tighten even more? Or to make a half-effort now on the liquidity side, hope that's adequate, and promise to ease more if required?
August 9, 2007 | Leave a Comment
The long-time produce clerk at the locals' supermarket here in Aspen was chatting up a customer this morning.
"Do you watch the stock market? It's been going down down down. Yes it jumps every now and then, but still, it's going down.
"Then I heard on the radio that a lot of people are going to start walking away from their mortgages….just walking away from their houses….Do you think that can happen here?"
The customer was probably a local real estate broker, because he paused and gave a very detailed description of how the different sub-markets in this area would behave under different mortgage market scenarios.
"Okay, okay," the clerk continued. "So you think I should still go ahead and buy that house?"
At that point I couldn't find anything else nearby to pretend to examine, so I moved on.
A Kennedy/shoeshine boy moment?
August 3, 2007 | Leave a Comment
Slashdot.org is giving its readers highly granular control over its feed. I was struck by the elegance of this:
Play with the color slider to find the level you enjoy reading most at.
My daughter, 8, will likely never have to memorize the fixed formats of pre-printed periodicals to home in on regular features of interest. As a former newspaper layout geek, it's interesting to see generations of habit suddenly rendered moot.
Stefan Jovanovich extends:
When I left New York 35 years ago the New York Times had the presumption that it was like the medieval church or the compulsory public school, that the common folk had to accept what was preached at them whether or not it was of any use or interest to them. Apparently, that presumption endures even with the changes that have occurred in the world of information.
There are 14,000 radio stations broadcasting today, twice the number that existed in 1970. This does not include satellite radio, which in the six years since its launch has acquired 13 million subscribers nationwide. Eighty-six percent of American households subscribe to cable or satellite TV, receiving an average of 102 channels; many receive two, three, four, and even five times that number. As of 2005 there were 18,267 separate magazines with regular publication schedules; in 1993 there were 14,302. The Internet Systems Consortium says that in 1982 there were 235 Internet host computers that allowed people to post content on the web; in 2006 the count was 400 million. Technorati counts more than 63 million blogs on the net. They believe 175,000 new ones are created every day.
Welcome to debate whether the Sulzbergers and the Times's staff are more or less honest than Roger Ailes, Rupert Murdoch, and Fox News; but that is truly an academic question. What is incontrovertible is that Mr. Murdoch's team has been amazingly more successful in gathering a paying audience. They have, in a matter of years, gained more viewers and readers than the Times acquired in the half century after the Herald Tribune stopped publication.
Gutenberg's movable type made writings that had been accessible to thousands available to millions. It did not guarantee that anything written would be honest, but it did mean that the judges in the competition for the truth would be all who took the trouble to learn to read, not just those lucky people who had been anointed by official learning.
The following is from the article, Point Shaving in the NBA: An Economic Analysis of the NBA’s Point Spread Betting Market.
The setting of the point spread is inducing games to end up on one side more often than the other, due to the betting market's non-linear payout structure altering incentives.
The Nth time I saw Marc Faber's name cross the tape, I was inspired to run his name on blogpulse.com, to see how his mentions correlate with market action.
The graph speaks for itself.
Tim Humbert adds:
I used to follow his material while it was free, but lost track. And yes, it was quite bearish.
Someone mentioned his name a few weeks ago, and I decided to compare his fund's performance to the market's from 1998, when it's first listed on Bloomberg. He seems to have done well; though if you look from the trough in stocks in 02/03 he has underperformed.
2006 188.90 146.28
2005 170.26 128.75
2004 169.39 125.00
2003 157.05 114.69
2002 147.85 90.75
2001 147.94 118.31
2000 137.99 136.06
1999 120.57 151.41
1998 106.36 126.67
Vance Humbert adds:
Try using the unyielding David Tice, whom Bloomberg quotes today as saying "this could be the big one," and a somewhat similar pattern emerges.
By KAREEM FAHIM
Published: July 24, 2007
NEWARK, July 23 — At his arraignment in federal court Monday, former Mayor
Sharpe James pleaded not guilty to corruption charges.
After scanning this morning's New York Times offering on Newark's ex-mayor, I had a flashback to a lecture by a (literally) communist professor I had in college.
He said visiting Soviet officials marveled at how in our putative decentralized, capitalist, pluralist, free press, the material was so uniform across media and across the nation.
They always asked "How do you do it?"
Well, given that yet again the former "newspaper of record" pointedly failed to mention the political affiliation of an accused politician, I can only assume one thing:
The Times's internal word processing software automatically deletes the word "democrat" by default, if the word "corruption" is elsewhere in the same block of text. Certainly no meatware system could be so consistent.
Sam Kumar remarks:
This inference drawn from one instance is probably false. The tenor of the post is that of a joke, but a propaganda message is clearly being sent here.
George Zachar adds:
This morning's front-page NY Times piece on the misuse of state police for political purposes in Albany, fails to mention the party ID of the suspects or their masters. This is noteworthy in light of East Sider's observation.
Press-as-partisan has a long history in the US. What's different with this cycle is the false-flag pretense of objectivity.
Potter's realm? Wall Street.
Hubris, stealth, misdirection.
It's always a dame.
It is almost impossible for most of us living now to imagine a world in which Sam Walton's motto — Save and Do Better — was the majority view of politicians, but that was the general opinion. Kennedy, like FDR, campaigned on a platform that accused his Republican Presidential predecessor of being extravagant (partly true in Hoover's case; laughable in Eisenhower's). What changed things forever was the wholesale acceptance of Keynesian economics at MIT, Harvard and even Chicago. That gave respectability, nay, wisdom to the inclination of politicians in both parties (Johnson nationally, Rockefeller in New York State) to indulge once again in the fantasy that it was OK to for governments to borrow more and more money as long as they spent it as quickly as possible. One reason for the continuing Anglophile disdain for the French is that they were the first to say that the United States was no longer serious about gold and the dollar being equally scarce monetary commodities. Of course, they were right; and we have yet to forgive them for being so treacherously truthful. That abandonment of all fiscal common sense is what took us off to the races in 1964 and 1965; some would argue that we have been running ever since. Eisenhower, like Grant, receives far too little credit for his monetary frugality. Belief that the Treasury would only spend a small part of what American earned is what established the "soundness" of the dollar and allowed the U.S. economy to enjoy its greatest period of real growth since the 1870s and 1880s.
George Zachar replies:
Eisenhower is damned as a do-nothing, caretaker president, whose popular references now are largely comprised of golfing photos and sneering references to his VP.
The only presidents getting "credit" in the history departments and newspaper clippings are those who manfully strove to expand the government's footprint.— keep looking »
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