Archive for May, 2009
By Ravi Nagarajan
While there have been countless books written regarding Warren Buffett’s track record in business and investing, along with many books of variable quality seeking to find formulas to replicate his success, there are only two full fledged biographies that have been written: The Making of an American Capitalist by Roger Lowenstein and The Snowball by Alice Schroeder.
Lowenstein’s book was published in 1995 and I read it shortly after it came out. Along with reading The Intelligent Investor around the same time, Lowenstein’s work was an inspiration for me to pursue a more careful study of value investing. Schroeder’s book was published in 2008 after several years of work that included unprecedented access to Buffett’s private papers and circle of business and personal contacts. I have read The Snowball as well and found it very insightful. In my opinion, students of Buffett should first read Lowenstein and then proceed to Schroeder. However, which book should be selected for those who only intend to read one biography on Warren Buffett?
Which Buffett biography should you read? (Manual of Ideas)
May 30th, 2009
think not, but that is part of the fun. The reader can collect information — raw data — with real confidence. There will be many accounts of the financial crisis. Anyone seeking a complete understanding should consult many sources.
The Approach
Street Fighters tells an engaging tale focused upon how a mighty firm was reduced to rubble in three days. You know the ending before you start reading, but it is no less engaging. The author has a nice sense of the characters and has done extensive research into backgrounds. We not only learn about the major players, we learn what everyone else thought about them.
Such an approach is open to challenge. Kelly provides footnotes for sources, and acknowledges disagreement. It is convincing support for her narrative.
The Result
The reader is treated to a view from several perspectives. It is an insider’s take on the politics within an investment bank. There is genuine conflict over risk and which products to feature. Even the most jaded reader may have some sympathy for a wealthy guy who spent a lifetime building up his company and his position, only to lose it all in a few days. This is “inside baseball” at its best.
The story is dramatic and well-told.
Assorted Insights
The reader has raw data to draw conclusions on several interesting points. Here are some that stood out for us. Yours might be different. Please consider the following:
- Significance of CNBC. David Faber had a story about firms not trading with Bear. It was big news, but it was later denied by those in question. The damage was already done. The issue is how much information one needs to go with a story like this, when the story itself can affect the outcome. Should Faber have verified more completely before going with this story? Would it have made a difference?
- Significance of Kelly and the WSJ. Many readers will already be familiar with the three-part series in the Wall Street Journal. In the book, Kelly asserts that the series itself — criticizing Cayne’s leadership — had an impact within the firm.
- Hank Paulson’s Role. Paulson is portrayed as dictating a punishingly low stock price for Bear. Historians will combine this information with additional information, includeing his reversal on the use of TARP funds, the decision to force TARP on all of the major banks, and other similar decisions. From our perspective as public policy experts, this is an extraordinary and arbitrary use of powers. It is on a scale that is without precedent for a Treasury Secretary.
- The Fed Role. The decision of the Fed to expand lending to include investment banks, only two days after the Bear failure, was extremely arbitrary with respect to timing. We should all be concerned when public officials make decisions about which firms (and which investors) live or die, and do so without clear rationale. Bear was allowed to die while others were saved.
Conclusions
Kelly’s conclusion is that Ace Greenberg built a firm on some principles and Jimmy Cayne violated those and lost it all. We are not convinced.
We can now see what happened to many other firms. It would not have mattered if Bear’s leverage and risk had been a little less. Kelly is probably right in suggesting that Bear was an unloved firm on the Street, and therefore first to be challenged.
It was beyond her scope to consider other causes, although there is a paragraph or two on the trading in Bear stock. This was something we watched daily on our trading screen. Those betting against the firm could trade in the thin Credit Default Swaps market (CDS), buy puts (where premiums exploded in issues that were far out of the money), short the stock, pull your hedge fund accounts, and spread rumors.
These events were all taking place. The sequence of causation will never be determined. What we do know is that any business depending upon confidence and credit can be destroyed in three days. Those aiding the destruction can make millions as it happens. If that is a verdict on a business model, the entire banking industry is in question.
Final Take
The book is fun to read and has plenty of raw data with authoritative sources. You should read it, and combine what you learn with other information. The story of the 2008 crisis is complicated. We look forward to reviewing other books on the subject.
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In order to do this book review, I have to compare the book to five others that I have reviewed.
- Trend Following, (2), (3), (4), (5)
- Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell
- The Fundamental Index
- The Alchemy of Finance, and Soros on Soros
- What Works on Wall Street
I chose these five, because they deal with factors that affect stock performance. With 1 and 4, you can learn a great deal about price momentum. With 4, you learn how price momentum and mean reversion interact, and even get taste of why even fundamentalists should grab onto this.
Today’s book, Quantitative Strategies for Achieving Alpha, takes a mix of factors, including price momentum, and attempts to show how investors can achieve above average returns. That is similar to what was posited in books 2 and 3 in rudimentary ways, and in book 5 in more sophisticated ways. The book that is most similar to this book is What Works on Wall Street. More on that later.
The author has seven “basics” that must be applied to all investments:
- Profitability
- Valuation
- Cash Flow
- Growth
- Capital Allocation
- Price Momentum
- Red Flags
These are the building blocks of good investment strategies, and the best strategies use 2 or more of the “basics.” This is consistent with the book What Works on Wall Street. The most important “basics” are Profitability, Valuation, Cash Flow, and Price Momentum. Good strategies will look at most of them.
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Book reviews of “Street Fighters” and “Quantitative Strategies for Achieving Alpha” (Dash of Insight, Aleph Blog)
May 30th, 2009
Their standing dinner reservation at the country club is for 6:30 p.m., because at least that much never changes. Every Wednesday night, Charles and Mimi Cluss dress in pleated slacks and suit jackets and drive to the manicured playground where Uniontown’s elite have gathered for 101 years. It is like a “second home,” Charles says of the place where he finalized deals for his lumber company and hosted weddings for two daughters. Except on this night in mid-May, he no longer knows what to expect.
Tough times for the country club set. (WashingtonPost)
May 30th, 2009
Recently I had occasion to watch an online debate between a clean-coal advocate and a robust, articulate green-energy blogger. The debate followed predictable contours. In one corner, the clean-coal advocate repeated a series of rather inflated achievements, supposedly gained over the past 30 years in coal-fired power generation. In the other corner, the green-energy blogger appropriately deflated these claims, but then went on to paint pictures of shiny happy people living in a peaceful and clean world. A world portrayed, it should be added, as easily attainable. I patiently read through to the final jousts, and then sat back in my chair to watch oil make its climb above 60.00.
The dialectic of the environmental debate, over coal, has now formed a well-worn path. It’s largely political at this stage and the core thrust of the conversation, just as in oil, is that everything could be solved if only the opposition would get out of the way. While it’s not the focus of today’s post I’ll briefly remark that the type of fast transition to a clean power Grid, often talked about by famous advocates like Al Gore, is simply not possible. Not in a 10 year time frame. Not even close. Equally, I would note that coal remains a serious environmental problem even after 35 years of regulatory improvements. And, I see that the coal industry repeatedly takes total aggregate gains in air quality nationally over the past 35 years and then claims those entirely for itself. C’mon. Also, marking those gains starting from the worst levels in 1970 obviously makes for a dramatic comparison. The Clean Air Act did the heavy lifting here.
The bigger problem with this debate, especially as it occurs in the United States, is that it constantly pivots off the notion that we have lots of freedom and discretion to decide how both we–and especially the rest of the world–will use coal. Sure, we’ve got some choices here. But as I have written previously coal is a nemesis precisely because it’s a cheap source of BTU that continually prices just below other fossil fuels. And sometimes, it prices well below other fossil fuels. Such a pricing is forming now, as oil climbs back above 60.00, while Central Appalachian Coal (CAPP) still lingers in the mid 40’s per ton. The 5.8 million BTU in a barrel of oil will set you back 60 bucks. Yes it’s liquid. And yes, it’s a very useful form of energy. But the fact remains that the world’s poor, a full quarter of humanity, is still in the process of migration to liquid fuels. And coal, with its versatility in both heating and industry, is still the fossil fuel of choice for the developing world. For 45 bucks, you can get yourself as much as 25 million BTU in a ton of coal. That’s a 25% price discount to oil, for more than 4 times the BTU. That is some serious BTU bang for your buck.
Unless the US-based VOIP-Web-Cam Political-Journal Blogging-Heads type debate wishes to move on now, to whether US coal reserves should be locked into the ground and neither used by us, nor exported, then the bulk of this conversation is frankly rather academic, and leisurely. Furthermore, oil above 40 as early as 2004–let alone oil above 60 today–was more than enough of an energy price-shift to kick global coal demand into a much higher gear. And not solely in the developing world either. The data clearly shows the total global call on Coal this decade, as a kind of panicked flight from expensive oil, was enormous. For these reasons, favorable coal conditions are now moving in because oil is lifting in part from dollar weakness and reflationary policy at a time when industrialism remains weak. These are exactly the kind of difficult, almost fetid, economic conditions in which coal thrives. Coal likes a swampy, stagflationary landscape. One where growth has trouble getting off the floor, but where the world’s 6.7 billion people still need heating and basic power generation. Not exactly a happy story, is it?
–Gregor
Photographs: Mike Brodie, aka The Polaroid Kidd. see Needles and Pens Gallery, San Francisco California.
Further Reading: Why was the Industrial Revolution British? (discussion of Wood and Coal) H/T Freude Bud.
Coal is here to stay for awhile, whether we like it or not. (Gregor.us)
May 28th, 2009
Onetime presidential hopeful and current Republican congressman Ron Paul has an interesting piece of legislation wending its way through the US capitol. HR1206 calls for “a complete audit of the Federal Reserve and removes any significant barriers towards transparency in our monetary system” says Paul’s website.
This bill now has nearly 170 cosponsors, with support from both Republicans and Democrats. Senator Bernie Sanders has introduced a companion bill in the Senate S 604, which will hopefully begin to gain momentum as well. I am very encouraged to see so many of my colleagues in Congress stand with me for greater transparency in government.
Congressman Paul continues:
Fundamentally, you cannot defend the Federal Reserve and the free market at the same time. The Fed negates the very foundation of a free market by artificially manipulating the price and supply of money – the lifeblood of the economy. In a free market, interest rates, like the price of any other consumer good, are decentralized and set by the market. The only legitimate, Constitutional role of government in monetary policy is to protect the integrity of the monetary unit and defend against counterfeiters.
And indeed, continues:
Instead, Congress has abdicated this responsibility to a cabal of elite, quasi-governmental banks who, instead of stabilizing the economy, have destabilized it. It took less than two decades for the Federal Reserve to bring on the Great Depression of the 1930’s. It has also inflated away the value of our currency by over 96 percent since its inception. It has invisibly stolen from the poor and given to the rich through this controlled inflation, and now openly stolen through recent bank bailouts. It has predictably exacerbated the very problems it was meant to solve.
All of which we’d have been quite likely to dismiss out of hand, were it not for its relevence in light of an excellent essay from historian Simon Schama in last weekend’s FT, on the central-bank hating tendencies of President Jackson, and more broadly, the long and rich seam of bankphobia than cleaves through American history:
Jackson, who was in the White House from 1829-1837, was a new brand of politician in American life. No one would confuse him with the Virginian gentlemen-planters who had dominated high office in the early republic. He had been Indian fighter, scourge of the British and darling of the frontier crowds. But what really got his dander up was the Bank of the United States, the institution granted the monopoly to print paper money. The “Monster”, he declared at the height of his presidential knock-down battle with its president Nicholas Biddle, “wants to kill me but I will kill it”.
And destroy the Bank of the United States Jackson did, vetoing the Senate’s renewal of its charter in 1832 and running for re-election as the champion of People v Monster. The result of the liquidation of monetary regulation was predictable: wildcat speculation. Two months after Jackson left office in March 1837, the second of the great American financial meltdowns was under way (the first was in 1819). Another swiftly followed in 1839 under the administration of Jackson’s hand-picked successor, Martin Van Buren. On the eve of the civil war, Jackson’s wish for monetary decentralisation had come true beyond his wildest dreams There were 7,000 local currencies circulating in the republic and an epidemic of counterfeiting. It took Lincoln’s Banking Act of 1862, born of a desperate need for dependable credit to fight the war, for a modicum of monetary order to be salvaged from what Biddle had accurately prophesied would be monetary anarchy.
Jackson tapped into a pulsing vein of American insecurity about the moral character of money.
In fact, in the unstable conditions of America in the 1830s, the paper of the Bank of the United States was by far the most dependable medium of transactions from Maine to Louisiana. But Jackson was convinced that unless the Bank perished, American democracy would always be infected by its machinations. What was at stake was the battle of rural and urban values for the economic soul of America. In some ways this was almost as momentous as the struggle between the slave south and the free north for it went to the heart of what America was supposed to be: a place where simplicity and transparency ruled in small moral communities, or a self-energising machine of unlimited economic growth and power: Field of Dreams or Citizen Kane?
Interesting times we live in.
America has a long tradition of central bank antagonism. (FT Alphaville)
May 28th, 2009
Keith Bradsher’s New York Times story on the recent evolution of China’s foreign portfolio gets — at least in my view — the story right. Of course, that may be because I was — rather obviously — a source for the story. Check out the charts that accompany the article!
The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.
China’s purchases of Treasuries (especially short-term bills) have gone up even as China’s reserve growth has slowed, as China shifted money out of Agencies and — in all probability — out of money market funds that are taking credit risk and other privately managed accounts. The failure of Reserve Primary had a big impact on China. Bradsher:
“Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars. This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. ….
China was the world’s biggest buyer of [securities issued by government-sponsored enterprises] a year ago, splashing out more than $10 billion a month. But in the 12 months through March, it actually had net sales of $7 billion, and ramped up purchases of Treasuries instead. China has also changed which Treasuries it buys. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States. As recently as a year ago, China actively bought long-dated bonds, seeking the extra yield they could bring compared to Treasury securities with short maturities, of which China bought virtually none. But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. This gives China the option of cashing out its positions in a hurry, by not rolling over its investments into new Treasury bills as they come due should inflation in the United States start rising and make Treasury securities less attractive.
At the same time, China has sought to ramp up its exposure to commodities. China’s government clearly is adding to its strategic stockpiles — and perhaps encouraging state firms to build up inventory as well. China’s government is encouraging Chinese state firms to invest more abroad, especially in the mining sector. And China’s government is providing financing to cash-strapped commodity exporters (Russia, Kazakhstan, Brazil and no doubt others) to help tide them through a rough patch and, China hopes, to secure future supplies. Bradsher:
“This spring China has also been stepping up its purchases of commodities, which are usually bought in dollars. Iron ore has been piling up on Chinese docks, government stockpiles of crude oil and grain are being expanded and stockpiles are being started for products like gasoline, diesel and sugar.”
The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.” (Brad Setser)
May 28th, 2009
This recession is now the worst since at least 1958, which is as far back as the index of coincident indicators stretches back.
The Conference Board reported today that the index, which is intended to measure how the economy is doing on an overall basis, slipped a little in April. The decline was smaller than in previous months, and two of the four indicators edged up, which could be taken as a sign that the economy is at least getting worse at a slower pace.
As I noted last month, the index was nearing the 5.6 percent decline that it experienced in the 1973-1975 recession. Now it is down 5.7 percent.
One way to put that into perspective is that the decline so far in this recession is more than the maximum falls combined in the two previous recessions, in the early 1990s and then in 2001.
“..the decline so far in this recession is more than the maximum falls combined in the two previous receptions, in the early 1990s and then in 2001.” (Floyd Norris)
May 27th, 2009
From Eric Lipton at the NY Times: Bankruptcies Swell Deficit at Pension Agency to $33.5 Billion
The deficit at the federal agency that guarantees pensions for 44 million Americans more than doubled in the last six months to a record high, reaching $33.5 billion …
The Pension Benefit Guaranty Corporation, as of October, had faced a shortfall of $11 billion. But the combined effect of lower interest rates, losses on its investment portfolio and the increase in the number of companies filing for bankruptcy protection resulted in a deepening of its estimated deficit, officials said Wednesday.
…
With the bankruptcy of Chrysler and a possible similar move by General Motors, the agency is facing a record surge in demand. The new deficit estimate takes into account both pensions it has taken over in the last six months, and others it believes it will have to assume control of soon.
Here is the PBGC statement: PBGC Deficit Climbs to $33.5 Billion at Mid-Year, Snowbarger to Tell Senate Panel
The $22.5 billion deficit increase was due primarily to about $11 billion in completed and probable pension plan terminations; about $7 billion resulting from a decrease in the interest factor used to value liabilities; about $3 billion in investment losses; and about $2 billion in actuarial charges.
Snowbarger notes that as of April 30, the PBGC’s investment portfolio consisted of 30 percent equities, 68 percent bonds, and less than 2 percent alternatives, such as private equity and real estate. All the agency’s alternative investments have been inherited from failed pension plans.
Let the PBGC bailout talk commence. (Calculated Risk)
May 27th, 2009
You live, you learn. Right?
Well, not in America. Here we live, screw up and then go back to doing the same stupid things we did before.
Apparently, it is just too hard for us to make the tough, necessary choices.
Look at the sorry state of our sorriest state, California. It may be the sixth or eighth largest economy in the world, but it isn’t just broke, it’s broken.
California is “broken” due in large part to its inability to make “tough necessary choices.” (Deal Journal)
May 27th, 2009
Subprime is done. All the teaser rates are over, the interest rates have reset and the writing is on the wall.
But in the coming quarters, the scenario will play out with other exotic mortgages, Option ARM (pick-a-pay), Alt-A, etc. The homebuyers may have had better credit, but they had the same strategy: Get a low interest rate upfront, and then deal with the reset down the road, by either refinancing or selling the home. But, whoops, home values are way lower and the economy sucks. Plan derailed.
The subprime mortgage issue is largely past, here comes the Option ARM and Alt-A mess. (Clusterstock)
May 27th, 2009
http://jessescrossroadscafe.blogspot.com/
Bernanke’s wager is on a virtual free lunch by printing money.
“Fed chair Ben Bernanke has long argued that central banks can bring down long-term borrowing rates by purchasing bonds “at essentially no cost”. His frequent writings rarely ask whether foreigner investors – from a different cultural universe – will tolerate such conduct. Mr Bernanke is betting that under a floating currency regime there is no risk of repeating the disaster of October 1931, when the Fed had to raise rates twice to stem foreign gold withdrawals, with catastrophic consequences.”
“
May 25th, 2009
The UK’s AAA-rating is at risk. (Bloomberg, MarketBeat, EconomPic Data, Zero Hedge)
Bye, bye miss american pie…..
Don’t wait…..buy Gold and Gold Mine Stocks!
May 25th, 2009
In for a dime, in for a dollar. “The GMAC funding is an illustration of how rapidly the government effort to rescue the U.S. auto industry is escalating in cost and scope.” (WSJ)
GM Borrows $4 Billion From U.S. to Push Loans to $19.4 Billion
General Motors Corp., facing rising cash needs before a June 1 bankruptcy deadline, tapped $4 billion more in U.S. aid to push its total to $19.4 billion.
May 25th, 2009
Is the Required Yield Theory better than the Fed Model? (CXO Advisory Group)
What aggregate return thresholds are critical to investors in deciding whether to accept or reject equity and bonds for investment portfolios? In their December 2008 paper entitled “A Required Yield Theory of Stock Market Valuation and Treasury Yield Determination”, Christophe Faugère and Julian Van Erlach argue that investors first require that U.S. stocks and bonds in aggregate prospectively provide a real after-tax earnings yield directly related to real long-term GDP per capita growth. Investors then decide between stocks and bonds based on the better after-tax real return. Applying this Required Yield Theory (RYT) to quarterly data over the period 1953-2006, they find that:
- Real, after-tax Treasury and S&P 500 forward earnings yields reliably revert to positive means. For stocks, the mean yield is very close to the long-run average real GDP per capita annual growth rate (2.24% during 1929-2001 and 2.03% during 1929-2006).
- The equity risk premium derives mostly from business cycle risk, as measured by the growth in book value of equity per share (productivity growth). Inflation risk and fear-based risk have only transient, secondary impacts on the premium. The equity premium is always positive or zero relative to long-term Treasuries, but may be negative relative to short-term Treasuries when short-term productivity outpaces medium-term and long-term trends.
- Periods when the after-tax 30-year Treasury bond yield is below the nominal required yield indicate that a fear-based premium is present.
- Using quarterly data, the RYT Model fits the S&P 500 forward earnings yield with adjusted R-squared statistics of 88% over 1953-2006 and 94% over 1978-2006, about 19% better than the fit provided by the Fed Model (see chart below). Transient deviations from the model arise from: (1) economic, productivity or policy shocks that impact the equity risk premium; (2) shocks to earnings, productivity or inflation forecasts; and, (3) short-term noise trading.
- Treasury yields are a function of short-tem productivity growth relative to its long-term trend. The RYT Model fits the yields on 1-year, 10-year and 30-year Treasuries with adjusted R-squared statistics over 66%.
- Using the difference between long-term and short-term growth in aggregate book value per share, the RYT Model largely explains the spreads in yields between long-term and short-term Treasuries (term spread), with adjusted R-squared statistics over 58%. The model successfully generates 10 of 12 yield curve inversions over the sample period.
- RYT partially validates the Fed Model since both the S&P 500 forward earnings yield and the 10-year Treasury yield both derive from the required yield (long-term real U.S. GDP per capita growth)
May 25th, 2009
An important question at Custerstock:
Are activist investors to blame for horrible corporate balance sheets? (Clusterstock)
On Squawk Box this morning, DealBook maven Andrew Ross Sorkin made some comments about the role investor activism played in getting companies to lever up their balance sheets during the boom times.
That this happened is indisputable, as conservative boards and executives were constantly getting pilloried for taking on too-little debt, paying out too low of a dividend or not executing stock buybacks rapidly enough.
The converse to this idea is that more entrenched, conservative boards, impervious to investor activists would’ve been more likely to resist the temptation of leverage. (If there’s any academic literature on this question, please let us know.)
Perhaps the most striking thing, though, is not just that companies and investors levered up during the boom times (that’s obvious, people always think that they’ll last forever) but that calls for more buybacks and debt were occurring very late into 2007, early 2008. We remember going to media industry banking-sponsored in early 2008, when it seemed pretty obvious that the writing should be on the wall, and yet investors would barrage management with requests for more buybacks. As we wrote, elsewhere, companies frequently complied.
Too bad more boards didn’t have the spine to stick with common sense.
May 25th, 2009
“The creation of risk capital, of which I.P.O. demand is a leading indicator, is crucial to getting the economy back on its feet.” (Breakingviews)
In the grand scheme of the global capital markets, half a billion dollars is a drop in the bucket.
But that sum, the amount raised by three market debutantes this week, says more about the spirits of investors than its size might suggest. Strong demand and robust pricing for riskier companies hints at a latent desire by investors to put money to work. That’s a critical component in any economic recovery.
Make no mistake: it is unlikely to be the definitive start of a new bull market. And the near-$500 million raised by the market’s newest entrants — DigitalGlobe, SolarWinds and OpenTable — amounts to less than 5 percent of the cash that Bank of America pulled in overnight on Tuesday.
But the ability of a few unproven companies with visible warts to attract such interest shows that investors are willing to move on from a strict focus on repairing the balance sheets of troubled companies with time-tested track records.
Take the online restaurant reservation service OpenTable. Its pending initial public offering is no big deal at just over $50 million. But it is noteworthy that a company so highly geared to fine dining can attract more than a glimpse from investors during a recession. It is even more extraordinary when one considers that nearly half of the deal’s proceeds are going to its venture capitalists rather than to expand the business.
Nonetheless, OpenTable’s underwriters were confident enough to raise the deal’s indicative price by as much as 50 percent on Tuesday night. The shares should begin trading on Thursday.
Similarly, shares of SolarWinds, a software maker, popped 10 percent on their opening on Wednesday, even though the company had priced its offering a third above its own initial expectations. The company, which competes with Cisco and I.B.M., also routed a chunk of the proceeds to selling shareholders.
The creation of risk capital, of which I.P.O. demand is a leading indicator, is crucial to getting the economy back on its feet. So when companies like these enjoy such vigorous attention it is hard to see this as anything but a beneficial sign, just so long as investors don’t engage in too much ebullience too soon.
May 25th, 2009
There are funds that implement a so called 130-30 strategy. The strategy is to first put 100% into an index like the S&P 500. Then sell short 30% in stocks expected to do worse than the market. Take the proceeds from the short sales to go long stocks likely to beat the index.
Proponents say this can add two percentage points of returns while reducing volatility. However, there is no free lunch.
This concept is in the same general realm of the low-beta-pairs-trading, at least that is the idea behind the funds. The 2% alpha mentioned seems like it could be rather unpredictable. Getting the longs or the shorts or both wrong could easily result in a lag.
I am not necessarily drawn to the specific strategy of the fund, but I find it interesting that there may be more attention given to concepts that focus more on low-beta absolute returns. Here I am not talking about strategies that try to shoot the lights out, but more along the lines of capturing most of the return of the market with just a fraction of the volatility.
http://allaboutalpha.com/blog/2009/05/20/13030-once-had-cool-factor-now-has-fleas/
May 23rd, 2009
The VIX:VXV ratio is flashing a warning sign for the stock market. (VIX and More)
Note that while this basic interpretation of the VIX:VXV ratio sets parameters for long and short entries, it does not include recommendations about exits or how to incorporate the VIX:VXV ratio into a trading system.
May 23rd, 2009
“Wall Street will market the VIX as bullish no matter what it does.” (Daily Options Report also Trader’s Narrative, Freakonomics)
We should take it as good news that after a substantial stock price run up on Monday, the VIX responded on Tuesday by falling — a sign that the increase was moving us toward lower future volatility.
May 23rd, 2009
Muni bonds are back to pre-crisis levels. (TraderFeed)
In a low interest rate environment, those tax-free yields have looked attractive to retail investors and, amidst hopes of economic stabilization, investors have been willing to move away from Treasuries and into munis.
May 23rd, 2009
Do you believe the US Dollar is going to tank? Think international equities. (Barron’s, BusinessWeek)
May 22nd, 2009
For many investors their definition of diversification is changing. (NYTimes, Bull Bear Trader)
May 22nd, 2009
When President Obama won approval for his $787 billion stimulus package in February, large sections of the 407-page bill focused on a push for new technology that would not stimulate the economy for years.
The inclusion of as much as $36.5 billion in spending to create a nationwide network of electronic health records fulfilled one of Obama’s key campaign promises — to launch the reform of America’s costly health-care system.
But it was more than a political victory for the new administration. It also represented a triumph for an influential trade group whose members now stand to gain billions in taxpayer dollars.
A Washington Post review found that the trade group, the Healthcare Information and Management Systems Society, had worked closely with technology vendors, researchers and other allies in a sophisticated, decade-long campaign to shape public opinion and win over Washington’s political machinery.
With financial backing from the industry, they started advocacy groups, generated research to show the potential for massive savings and met routinely with lawmakers and other government officials. Their proposals made little headway in Congress, in part because of the complexity of the issues and questions about whether the technology and federal subsidies would work as billed.
As the downturn worsened last year, advocates helped persuade Obama’s advisers to dust off electronic records legislation that had stalled in Congress — legislation that the advocates had a hand in writing, the Post review found.
Their sudden success shows how the economic crisis created a remarkable opening for a political and financial windfall: the enactment of a sweeping new policy with no bureaucratic delays and virtually no public debate about an initiative aimed at transforming a sector that accounts for more than a sixth of the American economy.
“It was perhaps a once-in-a-generation opportunity to make something happen,” said H. Stephen Lieber, the trade group’s president. Obama “identified the vehicle that he could use to move his policy agenda forward without the crippling policy debate.”
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/15/AR2009051503667.html?hpid=topnews
May 20th, 2009
From Bloomberg:
May 20 (Bloomberg) — The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.
The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.
The 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, has seen its reputation tarnished as some lawmakers blamed it for missing the incipient financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme. Any move to rein in the agency is likely to provoke a battle in Congress, which would need to approve the changes, and draw the ire of union pension funds and other advocates for shareholders.
“It would be a terrible mistake,” said Stanley Sporkin, a former federal judge and enforcement chief at the SEC. “Whatever the SEC has done or didn’t do, it is still the premier investor protection agency around.”
Schapiro Determination
SEC Chairman Mary Schapiro’s agency has been mostly absent from negotiations within the administration on the regulatory overhaul, and she has expressed frustration about not being consulted, according to people who have spoken with her. She has pledged to fight any attempt to diminish the SEC, they said.
Treasury Secretary Timothy Geithner was set to discuss proposals to change financial regulations at a dinner last night with National Economic Council Director Lawrence Summers, former Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and Elizabeth Warren, the Harvard University law professor who heads the congressional watchdog group for the $700 billion Troubled Asset Relief Program.
Levitt, in an interview today with Bloomberg Television, said it’s unlikely the SEC will ultimately be stripped of its responsibilities.
“I don’t think it’s a great idea nor do I necessarily think it’s going to happen,” Levitt said. The SEC “is a pretty powerful unit and to substitute that for a new bureaucracy is a mistake. I don’t think policy makers are likely to go down that path.”
May 20th, 2009
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