Creative Accounting

Stuff like this (WSJ.com sub req'd) makes me wonder if the FASB is a group of dope addicts. Ummm, didn't they just make debt look more like equity, in terms of how it performs on the financial statements? I believe this is FAS 159, which I'll definitely be reading more about. However, between this and FAS 157, you have to think that the deck is stacked in the favor of the financials. While I'm not one to run around saying "its not fair", at the same time, these rules make the accounting quite a bit murkier.

Real Estate Derivatives

I know I would welcome a real estate derivatives market in the US for commercial real estate. That was a concern of mine prior to the recent credit market turmoil - how to profit from the market w/o being into the market as deeply as owning property requires. This would seem to be a nice solution.

I'd love to be able to take a short position on the commercial real estate market in my area, especially given some of the dubious projects I've seen going up over the last few months. I understand that there exist products based on the Case/Shiller index as well, but there will be newer products coming out against it too. I wonder if they have any futures (or options, or other products allowing short positions) on the DC area market. THAT would be handy!

Actually, from scouring the CME site (a site I have serious mixed feelings about), I see that there are contracts on Washington, DC. I'll have to dig a bit deeper to see what kind regional coverage those contracts represent. I would think the bids on the DC contract would be dropping a bit more precipitously over time, but I guess the pessimism isn't that strong for the DC area. Hmmm. While I don't think the DC area will be nearly as hard hit as others, there is no way this region gets away clean. Affordability is a total bitch here. It feels like what it must be like to live in Mayfair, except nothing is in walking distance. I'll definitely take a closer look at the products CME offers on housing, as they could potentially be very useful.

As for my CDS project, that'll require a trip to my local Bloomberg terminal. I'll keep you posted.

Oh Well

It really sucks to liquidate shares just prior (by a day!) to the biggest point gain on the DJIA in 4 years. Talk about bad timing. I definitely won't make that mistake again. I'm not going to even calculate how much I left on the table on that call.

Hell Yeah!

I really don't understand the US and our boneheaded anti-drug policy. Think of all the missed tax revenue! To me, everything else is gravy.

Hell, if Merck and Pfizer (and others) owned the market for producing recreational quantities of cannabis, they'd be growth stocks again. Then add coke and heroin to the mix...that's a buying opportunity on pharmaceuticals right there.

Friggin' moralistic politicians.

Keep in mind there's been major growth in the abuse rates of oxycontin, vicodin and other opioid analgesics in the last few years as well. These things have similar metabolic pathways and affect similar parts of the brain and heroin and other narcotics. I guess no one recognizes those similarities.

All Tied Up

Man, what do you do when most of your money is locked in retirement accounts.

That's what I'm facing now. I have 2 401(k) accounts that I can't do much re-balancing in, at least not as extensively as I would like. I just sold one quarter of my T. Rowe Price Emerging Markets Stock (PRMSX) fund in my regular brokerage account. But still, this is an annoyance. The only reason I left the funds in one of the 401(k)s is because the selections were pretty decent and a call to their support center a few months ago indicated that the 2 accounts were going to be merged. So much for that.

I guess its time to open that self-directed IRA and roll over the older 401(k). I'm on a deadline, and I want to take a large portion of my accounts to cash soon.

Such an annoyance.

Forward Motion

Whew!

Yeah, last week was rough. Still carrying over. However, it was also the most productive week I've had a loooong time, and for that I'm glad.

I finally handled some pressing issues, namely the LLC registration for the company. We had already formed as an S corp through BizFilings.com which was all good and fine. The problem was that the decision of an S corp was a bit hasty when we made it. After some consultation with a good corporate lawyer (who happens to be blood), we decided to dissolve the S corp and reincarnate as an LLC. I think this will offer a lot more flexibility with a lot less hassle. I've had to bury (or am in the process of burying) a few older companies and for a small operation, its just not worth it to go with a corporation.

I also handled the EIN for the company and DBA registration. All in all, it was a productive week. Now its just a matter of carrying all the momentum forward into the coming week. After I sleep, which I haven't done in far too long.

Until next time...

Oooohh!!!

Wow!

Need I say more?

Apologies for fading out recently. Long week.

Help with finding CDS pricing data

Can some benevolent reader out there help me by pointing me to a good source of pricing data for corporate CDS contracts? Not looking for anything esoteric, just the closest thing to CDS prices for standard corporate credits. No high yield, no loan only products, definitely not any asset backed paper, at least not right now. I'm doing a small, personal research project which hopefully will yield some interesting results I can publish here.

Why are there no independent prime brokers?

After seeing the recent Economist.com article on conflicts between hedge funds and prime brokers, I started thinking about what would be required to build an independent prime brokerage.

There's been a lot of noise about prime brokers front running their clients, hedge funds, and otherwise trading off information that funds would prefer was a secret. Considering that the prime brokers are just divisions of global investment banks, that shouldn't surprise anyone. There's also the competition between the trading desks at the banks and the fundamental business of many (most?) hedge funds -- trading. What kind of sense does it make to use someone who may be on the other side of a trade with you as your lender, clearing house and possibly an administrative services vendor. (Prop research has also been cited as a benefit for some of the larger primes.)

The smaller funds don't have much choice with this arrangement, obviously. At the other end of the spectrum you have Citadel, which is reported to be pursuing a broker-dealer license and is known to make a pretty penny lending shares to other funds (for short sales). However, I imagine that even a player like Citadel would like to see more autonomy and less competition with its primes (until it can settle its own trades anyway).

Now, the crossing networks and dark pools probably take some of the edge off of these potentially volatile relationships, because there are multiple options (besides having 2+ primes) for trading, and with anonymity and less market impact to boot. However, the primes do provide some services that most hedge funds can use on some level, or so it appears. So my question is "why not?" What are the upsides or downsides of an independent prime brokerage operation that was not competitive with its clients? Does the potential exist for this to be a viable business model? Why hasn't it already been done? Is it because of the "need" for a balance sheet to support customers? Or is the reason that it hasn't been done merely along the lines of "its never been done like that"?

Inquiring minds want to know. Ok, maybe not really, but I do...dammit.

Too Much Money Out There

I was already planning to write this before I saw the most sickening thing I've seen in a while.

What is that, you ask?

I saw a Mercedes CL class being driven with a spare tire in place of the right rear tire. The driver seemed to be blissfully ignorant to the fact that she's driving an almost $100,000 vehicle but treating it with the respect afforded a $2,500 used car. (I say almost because I couldn't make out the exact year or model of the vehicle. The late model CL500s based over $100,000.) The impunity with which she was engaged in this act was utterly repulsive.

How disgusting!!!

How could someone dare to disrespect such a beautiful vehicle by treating it the way one treats a rental car, or a secondhand Hyundai.

Now, why am I so ashamed to witness such a vulgar and vile mistreatment of a beautiful automobile (besides the fact that a Brabus tuned 2001 - 2006 CL600 is my dream car)? I am so offended by this because it proves what has been apparent for a while. There is entirely too much money sloshing around. I imagine the driver of this CL (probably a CL500, since that seems to be what all the wannabes drive) was able to refinance her house and take out the $95,000 or so required to buy the car. I wonder if she considered the almost $10,000 per year required to insure it. (The CL is the most expensive non-exotic auto to insure in the US.) I wonder if she takes the car in for the massively expensive required maintenance, or if she's struggling to pay for the 93 octane fuel required by the car, which I've seen at $3.50/gallon in the recent past.

Basically, just as certain people who had no business buying a house, there were (are) people who have no business buying certain cars. The fact that CLs have become sooo popular speaks to the general debasement of the dollar that the last few years have borne witness to. I've seen CLs with all manners of body damage and other indications that the owners have no respect for those vehicles.

A lot of people are renters for a reason. They don't make enough to afford a house, or they don't know how to respect their property (both house and money). The same goes for an automobile.

Or maybe I'm just an elitist.

*shrug*

The fact remains that there is far too much money floating around out there. This is just one particular example of too much credit being available that irritates me. We've seen this in other markets; just a little bit of thought and I'm sure most of my readers will notice other areas in which they've said similar things. These things didn't and don't make sense because of the issue of moral hazard. This has been on my mind for a while, because for a long time I couldn't figure out why I was seeing so many CLs on the road. The same dynamics which created the housing boom (a credit boom, really) were behind the escalation in the number of CLs. The CL is not an easy vehicle to acquire or own, and with good reason; for that many to be in private hands, there had to be excess money available for purchasing them.

I wonder how long it will take to start seeing serious resales of CLs. I await, nervously, the day I see one with a "For Sale" sign in the windshield.

The End is Near

Closer than anyone thinks, definitely.

And yes, I fully believe that we will not be successful. That's why I'm looking for the exit.

Just One More Google Thing

Sorry, but from what I've seen, its never good when the finance guy leaves. Nope. No way. Not good. Maybe its just one more bad sign in a sea of good ones, but its still a bad sign.

Thoughts on the Quant Crunch

Ok, maybe that's a bit extreme, I don't know that recent events in quant land can or should be called a crisis. Problematic - sure, especially if you're an investor in a fund that recently got hit. However, that's how this game works, right? There is inherent risk, no matter how much we attempt to mitigate it. Otherwise, we'd be discussing buying US Treasuries of varying durations, right? (Hell, there's risk there too but I really don't feel like attempting to have that discussion now.)

There was an interesting post recently over at AllAboutAlpha including interviews with professors David Hsieh and William Fung. Now, the part that grabbed me was the bit about the wide dispersion of a strategy giving rise to a factor or alternative beta. That is to say that when you have a small group of operators successfully using a strategy, the result is alpha generation. However, once that strategy becomes popular, the returns become due to alternative beta as opposed to alpha. I'll buy that.

Now, all of this discussion was taking place within the realm of hedge fund replication. However, the implications are pretty interesting. A crowded trade leads to alternative beta, thus shrinking the average returns that the strategy is responsible for. The once proprietary component of the model thus becomes yet another factor which can be included in a replicator's model. So now we start generating alternative beta without the need for the compensation overhead standard in the HF world. Why pay 2 and 20 for beta of any kind?

The moral of the story would appear to be that you have to keep those proprietary factors fresh. There are only so many original ideas; most success comes down to the execution of the idea. The quant analysts will have to keep constantly on their toes in order to bring new strategies to the table which can successfully generate alpha.

As for the matter of hedge fund contagion which has come up recently in many venues, it appears to me that the NY Times is off the mark. The illiquidity of investments in hedge fund portfolios caused those funds to sell off liquid investments in order to cover redemptions and margin calls. At least, its a reasonable guess that seems to fit the observations of hedge fund professionals who have commented on the matter. Maybe I missed something, but it looked like they were a bit wide on that shot.

As for this piece over at the FT, we again see the need for refreshing the prop factor pool, and I'm sure people smarter than me are looking at how to model the perturbations caused by all of those operators crowding a strategy. The last thing any HF operator wants is his prop factor to lead to alt beta, right?

In the end, it looks like a lot of quants got caught for various reasons. Some were probably legitimately in the wrong place at the wrong time. Of course, aren't they paid to be elsewhere at the wrong time?

*shrug*

This reminds me of Finbar's recent note wherein he said:

The nearest rebellion I have seen is when one of my quants on 16 August told me he was switching all the long and short signals because he knew all the other models were tightly correlated. He made the fund 13% in one day and is now the proud owner of a Porsche (which he sold as he doesn't have a drivers license and bought at auction an early IBM 86 PC with box and instructions).

Others probably were swimming naked when the tide went out. I guess time will tell who falls into each category. But everyone takes a loss sometime. I should know.

Time to get to work on my trading model...

Disconnected

That would be me. I'm in the process of moving from one inexpensive place to one much more expensive place, and with an overlapping month of rent.

*sigh*

Since my cable modem and router have already made the move so that my roommate can get online, I find myself without Internet connectivity during the day. Given that I work at night, I sure sleep better, but finding moments to update this blog will be tough for a little while. Just FYI.

Anyway, I'm working on some things that I thought I'd have out before the end of August, but it doesn't seem like anyone is around to read so I don't consider it a loss. Watch for the hook...

Inside the Googleplex

Hmmm.

I admit, my Google interview was a bitch, and I didn't get the job. More and more, I'm glad I didn't, and I see that sentiment from other places as well. I first had a call from Google in 2002, one week after starting a new gig. I had a phone interview in fall 2005 when I had been awake for about 18 hours after working all night, so probably not the best conditions for high performance. But I blew it, plain and simple. The interview was fun, in a masochistic sort of way, but I digress...

I personally think Marc Andreessen's Law of Crappy People will eventually infect Google, if it hasn't already. The growth rate has just been sickening. The idea was that Google was minimizing its use of expensive humans by implementing cheap computing resources. 13,000+ employees and growing? Ha! (That's based on the Google recruiter e-mails I still get.) Would I short 'em? Not yet, but I haven't done any extensive research either. However, that time is coming.

Just a thought.

This post brought to you by Blogger, a Google company. The link to the Wired article is courtesy of Google's search engine. Oh, the irony!