So CBRE says there is effectively no AAA paper in the CMBS market. The TALF program is only accepting AAA paper to be sold to investors. Did I miss something or does anyone else see a problem here? Seems to me there is a disconnect here.
It also doesn't help that the delays in the TALF implementation will mean a few more months of deterioration in the CMBS market before any paper is moved.
While I originally meant to publish this piece a few weeks ago, the thoughts still stand. Here's a Bloomberg.com article that I noticed just a few minutes ago. Everyone should think long and hard about this, but I don't see people giving this the consideration it deserves.
"Timberrr!" That could be the sound of the US economy taking another fall, and in very short order. SRS, as a short, looks promising, but what I really need is an unlevered fund. I'll be spending some quality time with ETFConnect to find one.
Until next time, peeps!
Showing posts with label Capital Markets. Show all posts
Showing posts with label Capital Markets. Show all posts
Friday, July 17, 2009
Monday, June 08, 2009
Monday, May 11, 2009
Canary Red
This quick blurb about HSBC over at Bloomberg.com caught my eye. Why? Because for those who recall early 2007, HSBC was the first major bank to admit any problems with its subprime portfolio. We know how the rest of that year progressed. I have to wonder if they are leading the pack again. I guess only time will tell, but it is definitely something to keep an eye on.
Could that be the stench of death around the financials, yet again? Hmmm. I know my choice for leading contender to die.
Until next time, good people, stay safe...
Could that be the stench of death around the financials, yet again? Hmmm. I know my choice for leading contender to die.
Until next time, good people, stay safe...
Tuesday, May 05, 2009
Peter Thiel on Financial Markets and The Singularity
I will definitely watch this again, but a few things struck me about this presentation by Peter Thiel. (For the unaware, Thiel was the CEO of PayPal who sold the company to eBay. He runs Clarium Capital Management LLC, a global macro hedge fund, and does early stage investing, mostly through The Founder's Fund. He was one of the first investors in Facebook and a bunch of other well known Web 2.0 companies.)
First, Thiel really is nerdier than I expected. I was hoping there was a suaveness to him, a relaxed confidence borne of his intelligence and success both as an entrepreneur, an academic and an investor. No. There really isn't. He's as nerdy looking and sounding as one would expect from reading about him. I'm not sure what to make of this, and it really means ABSOLUTELY NOTHING, but it caught me off guard. He's also a very unpolished speaker. Again, this is not a problem or a bad thing, but I always find it difficult to listen to people who overuse "ummm" and "uhhh" and "you know" in their speech. In Thiel's case, it is probably a matter of his thinking faster than he speaks, and his speech having to catch up with this (disorganized and chaotic) thoughts. However, it only serves to obfuscate his message and, to me personally, makes it almost painful to listen to him. He should probably spend more time preparing and organizing his thoughts when he is to speak to crowds.
Second, I think Thiel has misunderstood Warren Buffett's investing strategy. Maybe Buffett, and by extension Berkshire Hathaway, has invested in The Singularity better than anyone else. However, I don't think that was his objective. Buffett and Berkshire have been doing the very logical thing - managing risks and probabilities. Insurance is the ultimate business of managing risks and probabilities. The insurance business is basically about probability, and this fits with Thiel's singularity thesis because it comes down to managing the fat tail risks.
Thiel makes the point, several times, that there are all of these potential outcomes in a non-Gaussian distribution of risks, from -- for example -- an investment boom being the beginning of "The New New Thing" which will revolutionize life on Earth to just being an extended investment mania. He uses the Japan bubble of the 1980s, the Internet bubble of the late 1990s, the real estate bubble in the US in the early part of this decade and the pursuit of the control of space in the late 1960s as is representative cases. In most of these cases, there was a span of time during which great wealth (or "wealth") was created, followed by a spectacular collapse -- boom and bust.
Thiel continues on to mention that Buffett, by way of Berkshire Hathaway, is investing in the The Singularity by writing insurance against catastrophic events -- the busts. However, I think Thiel has missed some things. First, Berkshire is not new to the insurance business. Second, insurance -- basically, writing puts against given outcomes, which I think of as the best description -- is a well known business with solid underpinnings. Buffett understands this, and uses this to his advantage. The Berkshire insurance businesses are cash generators, and Buffett has intentionally steered away from certain lines, or approached them carefully. For example, Geico only recently began writing renter's and home owner's insurance, after having been in the auto insurance business for a long time. Geico has also been known as the company that would only take on the best drivers (e.g. the lowest risk drivers) and dropping coverage for drivers after a single accident (cutting losses early). The cash thrown off by the Berkshire insurance businesses has fueled Berkshire's acquisitions of other lowly valued businesses (on a fundamental basis) as well as it's war chest, which in turn had driven it's AAA credit rating (until recently).
Even Warren Buffett's mistimed (?) derivatives bets are nothing more than insurance plays. They are bets on the probability of certain outcomes, including the level of the S&P 500 equity index in almost 20 years. While the positions are underwater now, and Buffett can be considered hypocritical for calling derivatives of all stripes "financial weapons of mass destruction", he is fundamentally making similar bets as any of the insurance lines his companies write.
I say all of this to say that Buffett doesn't invest in insurance businesses due to some recognition of or belief in The Singularity but simply because he recognizes that probability is on his side. Everything has risk, but insurance, such as it is (outside of the realm of catastrophe, for example), is well known and generally a cash cow due to the small payout in claims against the large revenue in premiums. Maybe Thiel knows this, but he seems to express a view that Buffett has some grandiose "black swan" perspective on investing. I, personally, think not.
Anyway, it is an interesting presentation and not a bad way to spend 20 minutes of your time. Will you gain any new insight here? Probably not. But you never know. Maybe something he says will land with you in a way other talks have not. Check it out if you have the time.
Until next time...
First, Thiel really is nerdier than I expected. I was hoping there was a suaveness to him, a relaxed confidence borne of his intelligence and success both as an entrepreneur, an academic and an investor. No. There really isn't. He's as nerdy looking and sounding as one would expect from reading about him. I'm not sure what to make of this, and it really means ABSOLUTELY NOTHING, but it caught me off guard. He's also a very unpolished speaker. Again, this is not a problem or a bad thing, but I always find it difficult to listen to people who overuse "ummm" and "uhhh" and "you know" in their speech. In Thiel's case, it is probably a matter of his thinking faster than he speaks, and his speech having to catch up with this (disorganized and chaotic) thoughts. However, it only serves to obfuscate his message and, to me personally, makes it almost painful to listen to him. He should probably spend more time preparing and organizing his thoughts when he is to speak to crowds.
Second, I think Thiel has misunderstood Warren Buffett's investing strategy. Maybe Buffett, and by extension Berkshire Hathaway, has invested in The Singularity better than anyone else. However, I don't think that was his objective. Buffett and Berkshire have been doing the very logical thing - managing risks and probabilities. Insurance is the ultimate business of managing risks and probabilities. The insurance business is basically about probability, and this fits with Thiel's singularity thesis because it comes down to managing the fat tail risks.
Thiel makes the point, several times, that there are all of these potential outcomes in a non-Gaussian distribution of risks, from -- for example -- an investment boom being the beginning of "The New New Thing" which will revolutionize life on Earth to just being an extended investment mania. He uses the Japan bubble of the 1980s, the Internet bubble of the late 1990s, the real estate bubble in the US in the early part of this decade and the pursuit of the control of space in the late 1960s as is representative cases. In most of these cases, there was a span of time during which great wealth (or "wealth") was created, followed by a spectacular collapse -- boom and bust.
Thiel continues on to mention that Buffett, by way of Berkshire Hathaway, is investing in the The Singularity by writing insurance against catastrophic events -- the busts. However, I think Thiel has missed some things. First, Berkshire is not new to the insurance business. Second, insurance -- basically, writing puts against given outcomes, which I think of as the best description -- is a well known business with solid underpinnings. Buffett understands this, and uses this to his advantage. The Berkshire insurance businesses are cash generators, and Buffett has intentionally steered away from certain lines, or approached them carefully. For example, Geico only recently began writing renter's and home owner's insurance, after having been in the auto insurance business for a long time. Geico has also been known as the company that would only take on the best drivers (e.g. the lowest risk drivers) and dropping coverage for drivers after a single accident (cutting losses early). The cash thrown off by the Berkshire insurance businesses has fueled Berkshire's acquisitions of other lowly valued businesses (on a fundamental basis) as well as it's war chest, which in turn had driven it's AAA credit rating (until recently).
Even Warren Buffett's mistimed (?) derivatives bets are nothing more than insurance plays. They are bets on the probability of certain outcomes, including the level of the S&P 500 equity index in almost 20 years. While the positions are underwater now, and Buffett can be considered hypocritical for calling derivatives of all stripes "financial weapons of mass destruction", he is fundamentally making similar bets as any of the insurance lines his companies write.
I say all of this to say that Buffett doesn't invest in insurance businesses due to some recognition of or belief in The Singularity but simply because he recognizes that probability is on his side. Everything has risk, but insurance, such as it is (outside of the realm of catastrophe, for example), is well known and generally a cash cow due to the small payout in claims against the large revenue in premiums. Maybe Thiel knows this, but he seems to express a view that Buffett has some grandiose "black swan" perspective on investing. I, personally, think not.
Anyway, it is an interesting presentation and not a bad way to spend 20 minutes of your time. Will you gain any new insight here? Probably not. But you never know. Maybe something he says will land with you in a way other talks have not. Check it out if you have the time.
Until next time...
Wednesday, April 29, 2009
Eric Rosenfeld Lecture about LTCM
If you haven't yet caught it, you should run - don't walk - over to Zero Hedge and check out this approximately 90 minute video of Eric Rosenfeld giving a lecture about the LTCM collapse back in 1998. Fascinating insider's view. The comments over at Zero Hedge, as expected, are acerbic but many are enlightening and worth a read.
I know I will be revisiting this again shortly, as I found the entire lecture interesting. While I'm sure Rosenfeld mixes and mis-uses some vocabulary and concepts, all in all I think there are definite lessons here. The biggest, of course, as we've learned in the last 2 years, is that in times of stress, all correlations go to 1. However, I want to reconsider the endogenous risks that Tyler @ Zero Hedge mentions. I'll definitely watch this again soon, maybe after my nap this morning.
I think the leverage factor, which has been widely associated with the LTCM implosion, bears added consideration. Recently, Accrued Interest made the point that leverage isn't what kills; bad investments kill. Clearly, this is true. However, leverage has the force multiplier effect and can transfer an innocuous loss into a catastrophe. Eric's lecture covers what he calls the 10 biggest myths and misconceptions about LTCM, and yes, they did hit 300x leverage at various points, according to him. However, it did not occur for the reasons you might have suspected. It adds a bit more color to the whole conversation. I know that, in my own mind, I vilified LTCM for such egregious use of leverage. Seems I was mistaken.
Finally, we're all familiar with the idea of prime brokerages frontrunning their hedge fund clients. As I think I have previously mentioned, I think there may be an opportunity for a 3rd party prime brokerage business to emerge, or even for trustees and custodial banks to subtly move into the space. State Street and Bank of New York Mellon are the obvious candidates, as they already have large custodial and administration businesses, so why not move up the value chain and entrench yourself further with you customers (for additional fees, of course). However, there's a startup opportunity in there too, I believe.
Anyway, go check it out. Good stuff for us finance geeks, anyway.
Until next time...
I know I will be revisiting this again shortly, as I found the entire lecture interesting. While I'm sure Rosenfeld mixes and mis-uses some vocabulary and concepts, all in all I think there are definite lessons here. The biggest, of course, as we've learned in the last 2 years, is that in times of stress, all correlations go to 1. However, I want to reconsider the endogenous risks that Tyler @ Zero Hedge mentions. I'll definitely watch this again soon, maybe after my nap this morning.
I think the leverage factor, which has been widely associated with the LTCM implosion, bears added consideration. Recently, Accrued Interest made the point that leverage isn't what kills; bad investments kill. Clearly, this is true. However, leverage has the force multiplier effect and can transfer an innocuous loss into a catastrophe. Eric's lecture covers what he calls the 10 biggest myths and misconceptions about LTCM, and yes, they did hit 300x leverage at various points, according to him. However, it did not occur for the reasons you might have suspected. It adds a bit more color to the whole conversation. I know that, in my own mind, I vilified LTCM for such egregious use of leverage. Seems I was mistaken.
Finally, we're all familiar with the idea of prime brokerages frontrunning their hedge fund clients. As I think I have previously mentioned, I think there may be an opportunity for a 3rd party prime brokerage business to emerge, or even for trustees and custodial banks to subtly move into the space. State Street and Bank of New York Mellon are the obvious candidates, as they already have large custodial and administration businesses, so why not move up the value chain and entrench yourself further with you customers (for additional fees, of course). However, there's a startup opportunity in there too, I believe.
Anyway, go check it out. Good stuff for us finance geeks, anyway.
Until next time...
Thursday, April 23, 2009
The Hidden Risks of a Central Counterparty in CDSland
If you didn't catch it yesterday, FT.com's Alphaville had a great piece about why a central CDS (credit default swap) counterparty (read: exchange or clearinghouse) might not work as well as everyone thinks it would. While I still think it necessary, it's obvious that the idea needs work. Specifically, it needs to be integrated with existing clearinghouses/central counterparties to make sure that cross-exposures are appropriately netted.
The piece also raises the point that CDS account for only 11% of the OTC (over the counter, or dealer-to-dealer) derivatives market.
Again, putting CDS trading on an exchange or other central counterparty is important, but at most only 40% of trades might move to such a central counterparty. CDS are not standardized, and standardization removes profit which is why B/Ds are loathe to do it. It needs to be done though, to bring as much of the shadow banking system into the light (along with many other moves, however, like re-splitting commercial and investment banks a la Glass-Steagall, as I previously mentioned). The more trades in a central location, the better. There will always be OTC trading, but it should be for the most esoteric and specialized -- and hopefully rare -- trades.
The piece also raises the point that CDS account for only 11% of the OTC (over the counter, or dealer-to-dealer) derivatives market.
Again, putting CDS trading on an exchange or other central counterparty is important, but at most only 40% of trades might move to such a central counterparty. CDS are not standardized, and standardization removes profit which is why B/Ds are loathe to do it. It needs to be done though, to bring as much of the shadow banking system into the light (along with many other moves, however, like re-splitting commercial and investment banks a la Glass-Steagall, as I previously mentioned). The more trades in a central location, the better. There will always be OTC trading, but it should be for the most esoteric and specialized -- and hopefully rare -- trades.
Monday, April 13, 2009
Trading Report: Risk Management
This report will describe the lessons learned from my experience trading DXO, the PowerShares DB Crude Oil Double Long ETN (exchange traded note). Hopefully my experiences will serve as a warning and a guideline to those of you reading this. We should always seek to learn from our mistakes, and to make new ones as opposed to making the same ones repeatedly.
After my previous experience trading DXO, I figured I could use it as a vehicle for some trading gains. I believe in the long term thesis around commodities, and oil in particular. I think that $200 oil and $5 gasoline are eventualities in the US. I chose DXO as the vehicle because of its extremely low price and embedded leverage, making it, as @marketfolly remarked "a call option on oil". Nice!
The problems with this particular idea were manifold. First, DXO is an exchange traded note as opposed to being an exchange traded fund. If, for some reason, the sponsor were to go bankrupt or some other restructuring, the holder of DXO becomes an unsecured creditor of the sponsor. That adds counterparty and credit risk to the inherent market risk. Over on the Market Folly blog, there was a guest post by @tradefast which covered some of the details of trading oil via ETFs and ETNs, including the counterparty risk issues. That guest post is a must read!
The next problem is that DXO is a double long ETN. It seeks to replicate 2x the movement of its underlying index. For example, if the index moves 1% up on a given trading day, DXO should move 2%. Thankfully, in the case of DXO, this calculation is done on a monthly basis as opposed to daily, making DXO slightly less volatile than it could otherwise be.
My first, and probably biggest, mistake in wielding DXO as a trading vehicle was to not use stops. I really have no excuse for such an egregiously stupid act, and the market punished me accordingly. Generally, my stops on DXO ended up being far too tight, and I would get stopped out much sooner than I really had a tolerance for. Either that or I would get stopped out right before a bottom. While setting proper stops on DXO is difficult due to the high volatility, at least having them in place would have (possibly) prevented the $6000 meltdown that I experienced.
The second problem I introduced was using bad position sizing. This may be the most critical failure. Given the price range DXO was trading in at the time (January - mid February 2009), I accumulated a sizable block of shares, somewhere in the neighborhood of 6000. This represented at least 50% and probably closer to 60% of the assets in my brokerage account. What's even worse, I had this oversize position on a security which essentially acted as a call option! This increased the overall volatility of my portfolio and created more stress than anything. It was a completely irresponsible action on my part.
My third problem was failing to construct a proper trading plan."Plan your work, work your plan." Simple, right? Not if you don't create the plan! I was trading DXO by the seat of my pants, and thus, by emotion instead of trading it in accordance with the plan I constructed. This caused me to buy at bad times, sell at bad times, and generally overtrade. Overtrading is the quickest way to deplete your funds, it seems to me. But the biggest issue with failing to construct a proper trading plan - and adhere to it - was being swept up in the daily volatility and gyrations of DXO. For a security that moves as violently as DXO, with built-in leverage to boot, you absolutely must have resolve in your idea. If the facts change enough to warrant getting out of the trade, then so be it. All of that is testable against your plan, however. If the market conditions, when compared to the plan, tell you not to do anything, then you don't. If they do, then you do. The trading plans adds clarity, focus and structure to what can easily spiral out of control into a emotional quagmire.
So, all of that said, what practices can be put into place to prevent these mistakes from recurring?
First, creating a trading journal is a must. Dr. Brett Steenbarger talks about this here. There's really nothing more for me to say on the topic.
Second, no day or swing trades will be undertaken without an accompanying trading plan. Long(er) term position trades or investments (12+ month time horizons) won't require this level of detail to enter the position. There would be nothing wrong with doing so, though. The trading plan is a tool to enforce discipline in the face of emotion. Since the emotion, for me, is a much stronger factor when dealing with the short term trades, I will focus on optimizing my routines for those cases first.
Third, I have created a new rule that any trade, long or short, will be made with an accompanying stop/loss order set. Discipline is required to keep up with this one, at least until I change to a new broker. My current online broker (who shall remain nameless to protect the guilty) sucks but there's little I can do about that at the moment.
I may delve further into this topic and the specific actions I took that led to this point. Deconstructing them may be instructional. But for now, I hope this analysis is interesting and useful to someone.
Until next time...
After my previous experience trading DXO, I figured I could use it as a vehicle for some trading gains. I believe in the long term thesis around commodities, and oil in particular. I think that $200 oil and $5 gasoline are eventualities in the US. I chose DXO as the vehicle because of its extremely low price and embedded leverage, making it, as @marketfolly remarked "a call option on oil". Nice!
The problems with this particular idea were manifold. First, DXO is an exchange traded note as opposed to being an exchange traded fund. If, for some reason, the sponsor were to go bankrupt or some other restructuring, the holder of DXO becomes an unsecured creditor of the sponsor. That adds counterparty and credit risk to the inherent market risk. Over on the Market Folly blog, there was a guest post by @tradefast which covered some of the details of trading oil via ETFs and ETNs, including the counterparty risk issues. That guest post is a must read!
The next problem is that DXO is a double long ETN. It seeks to replicate 2x the movement of its underlying index. For example, if the index moves 1% up on a given trading day, DXO should move 2%. Thankfully, in the case of DXO, this calculation is done on a monthly basis as opposed to daily, making DXO slightly less volatile than it could otherwise be.
My first, and probably biggest, mistake in wielding DXO as a trading vehicle was to not use stops. I really have no excuse for such an egregiously stupid act, and the market punished me accordingly. Generally, my stops on DXO ended up being far too tight, and I would get stopped out much sooner than I really had a tolerance for. Either that or I would get stopped out right before a bottom. While setting proper stops on DXO is difficult due to the high volatility, at least having them in place would have (possibly) prevented the $6000 meltdown that I experienced.
The second problem I introduced was using bad position sizing. This may be the most critical failure. Given the price range DXO was trading in at the time (January - mid February 2009), I accumulated a sizable block of shares, somewhere in the neighborhood of 6000. This represented at least 50% and probably closer to 60% of the assets in my brokerage account. What's even worse, I had this oversize position on a security which essentially acted as a call option! This increased the overall volatility of my portfolio and created more stress than anything. It was a completely irresponsible action on my part.
My third problem was failing to construct a proper trading plan."Plan your work, work your plan." Simple, right? Not if you don't create the plan! I was trading DXO by the seat of my pants, and thus, by emotion instead of trading it in accordance with the plan I constructed. This caused me to buy at bad times, sell at bad times, and generally overtrade. Overtrading is the quickest way to deplete your funds, it seems to me. But the biggest issue with failing to construct a proper trading plan - and adhere to it - was being swept up in the daily volatility and gyrations of DXO. For a security that moves as violently as DXO, with built-in leverage to boot, you absolutely must have resolve in your idea. If the facts change enough to warrant getting out of the trade, then so be it. All of that is testable against your plan, however. If the market conditions, when compared to the plan, tell you not to do anything, then you don't. If they do, then you do. The trading plans adds clarity, focus and structure to what can easily spiral out of control into a emotional quagmire.
So, all of that said, what practices can be put into place to prevent these mistakes from recurring?
First, creating a trading journal is a must. Dr. Brett Steenbarger talks about this here. There's really nothing more for me to say on the topic.
Second, no day or swing trades will be undertaken without an accompanying trading plan. Long(er) term position trades or investments (12+ month time horizons) won't require this level of detail to enter the position. There would be nothing wrong with doing so, though. The trading plan is a tool to enforce discipline in the face of emotion. Since the emotion, for me, is a much stronger factor when dealing with the short term trades, I will focus on optimizing my routines for those cases first.
Third, I have created a new rule that any trade, long or short, will be made with an accompanying stop/loss order set. Discipline is required to keep up with this one, at least until I change to a new broker. My current online broker (who shall remain nameless to protect the guilty) sucks but there's little I can do about that at the moment.
I may delve further into this topic and the specific actions I took that led to this point. Deconstructing them may be instructional. But for now, I hope this analysis is interesting and useful to someone.
Until next time...
Tuesday, March 24, 2009
The Missing Man
So I was reading some of the commentary about the new Geithner plan, and the one thing that struck me (particularly as I read this) is that we still haven't see anything cogent about the valuation of these "troubled assets".
At the end of the day, I think the banks ARE currently insolvent BUT I think they can survive this. The key will be getting those assets off their books. YES, they will be insolvent. Get over it. As Steve Randy Waldman said over at Interfluidity the other day, they were insolvent before, during the S&L crisis. Insolvency isn't the issue. A few years of reasonable earnings w/o dividend payouts and public markets recapitalization -- as James Surowiecki has advocated (see the Interfluidity post for the links to Surowiecki) -- and I think many (not all) of the current banks survive in some form. Obviously, the industry will see huge structural changes in other ways, but overall, I don't think we risk losing too many of the existing banks. Yes, the banking system needs to be fundamentally overhauled, and personally, I think Glass-Steagall needs to make a return, but that's a conversation for another day.
Aside: The ones I think we DO lose would appear to be interesting shorts. :) Figuring out those names is left as an exercise to the reader. That's what the comments are for! I'll start with WFC.
What worries me most is whether Geithner's new plan will attempt to do what Hank Paulson's original plan(s) attempted to do - bailout the banks with unrealistic valuations of these assets. I don't think too many private investors will be interested in overpaying to take these assets off the balance sheets of the banks. I know I wouldn't be interested in overpaying for distressed assets. The marks they carry are because they are distressed! So I am particularly curious to see when and how this question is answered. If anyone out there reading has anything to share, speculation or otherwise, please do share!
I already think this bounce is setting up a huge shorting opportunity. However, until this question is answered, we're still in what Upside would call a Wile E. Coyote moment, not realizing there's no ground underfoot but still running. If this question isn't answered well AND soon, gravity kicks in with a vengeance! Of course, that's not to say that gravity won't kick in just because. It is "The Market" after all.
Finally, realize that I am only speaking about this plan right now. So many people seem to have forgotten about the BIG elephant in the room, the REAL missing man. There will be a next leg down, I'm fairly certain. And the banks will continue to be insolvent. Whether that turns into a liquidity problem is To Be Determined. All bets are off on any of the existing private banking institutions surviving once the leg down kicks in.
Until next time...
UPDATE: Looks like I spoke a bit too soon, but still, I personally want more detail.
At the end of the day, I think the banks ARE currently insolvent BUT I think they can survive this. The key will be getting those assets off their books. YES, they will be insolvent. Get over it. As Steve Randy Waldman said over at Interfluidity the other day, they were insolvent before, during the S&L crisis. Insolvency isn't the issue. A few years of reasonable earnings w/o dividend payouts and public markets recapitalization -- as James Surowiecki has advocated (see the Interfluidity post for the links to Surowiecki) -- and I think many (not all) of the current banks survive in some form. Obviously, the industry will see huge structural changes in other ways, but overall, I don't think we risk losing too many of the existing banks. Yes, the banking system needs to be fundamentally overhauled, and personally, I think Glass-Steagall needs to make a return, but that's a conversation for another day.
Aside: The ones I think we DO lose would appear to be interesting shorts. :) Figuring out those names is left as an exercise to the reader. That's what the comments are for! I'll start with WFC.
What worries me most is whether Geithner's new plan will attempt to do what Hank Paulson's original plan(s) attempted to do - bailout the banks with unrealistic valuations of these assets. I don't think too many private investors will be interested in overpaying to take these assets off the balance sheets of the banks. I know I wouldn't be interested in overpaying for distressed assets. The marks they carry are because they are distressed! So I am particularly curious to see when and how this question is answered. If anyone out there reading has anything to share, speculation or otherwise, please do share!
I already think this bounce is setting up a huge shorting opportunity. However, until this question is answered, we're still in what Upside would call a Wile E. Coyote moment, not realizing there's no ground underfoot but still running. If this question isn't answered well AND soon, gravity kicks in with a vengeance! Of course, that's not to say that gravity won't kick in just because. It is "The Market" after all.
Finally, realize that I am only speaking about this plan right now. So many people seem to have forgotten about the BIG elephant in the room, the REAL missing man. There will be a next leg down, I'm fairly certain. And the banks will continue to be insolvent. Whether that turns into a liquidity problem is To Be Determined. All bets are off on any of the existing private banking institutions surviving once the leg down kicks in.
Until next time...
UPDATE: Looks like I spoke a bit too soon, but still, I personally want more detail.
Friday, March 06, 2009
What's Missing in the Market: Panic
You know, I could be short all day and not have a problem with it. Really. However, given the statistical history of the markets, there are so much better opportunities for making money being long in a rising market which has solid fundamentals AND technicals underpinning it. Everybody wants to be early, no one wants to be late. I, for one, can stand to be late, if it means probability is working in my favor. This is a war of attrition. Capital preservation is the order of the day, if you're not trading.
The one thing I am noticing, and I see it in today's closing, is the lack of absolute panic. There has been fear, true, but it seems like everyone is trying to call the bottom (except for the people I follow/listen to, who are just trading along). There's been a lot of knife catching, and I should know, as my trading report will show. But most of what I see is people just waiting - hoping? - for the turnaround to start "any day now" so they keep buying the dips, just to jump out later for a loss. It's such a Pavlovian response. It would be funny if it didn't indicate just how long and drawn out this tape will be.
Now, don't get me wrong...there are a lot of pieces which need to come together for a sustainable rally to take hold. Most of those pieces are non-existent currently, which is why a bottom is really no closer. Given all the factors I've seen, and even with my respect for Jeremy Grantham and John Hussman, I'm staying out of the long side right now (with the exception of my primary thesis around commodities). Long is so, so wrong right now. Doesn't even feel right. We get closer to a bottom, true, but I think all of the knife catchers will find that the knife still has yet to reach the floor. THAT'S when I plan to pick it up.
I just don't see enough panic to say that all of the suckers have been cleared out. Yes, TLT is racking up gains (though it is off its highs), and TBT is getting its ass handed to it most days. Savings are up, but they can go up more. People don't even realize what else is coming down the pike, and insurance is SO fucked up I'm shocked and scared (just when I thought I had a good handle on the scope of our problems). But there's still too much hope out there. A lot more people need to get crushed to clear out the dead and create space for rebuilding. A LOT MORE.
That is all.
The one thing I am noticing, and I see it in today's closing, is the lack of absolute panic. There has been fear, true, but it seems like everyone is trying to call the bottom (except for the people I follow/listen to, who are just trading along). There's been a lot of knife catching, and I should know, as my trading report will show. But most of what I see is people just waiting - hoping? - for the turnaround to start "any day now" so they keep buying the dips, just to jump out later for a loss. It's such a Pavlovian response. It would be funny if it didn't indicate just how long and drawn out this tape will be.
Now, don't get me wrong...there are a lot of pieces which need to come together for a sustainable rally to take hold. Most of those pieces are non-existent currently, which is why a bottom is really no closer. Given all the factors I've seen, and even with my respect for Jeremy Grantham and John Hussman, I'm staying out of the long side right now (with the exception of my primary thesis around commodities). Long is so, so wrong right now. Doesn't even feel right. We get closer to a bottom, true, but I think all of the knife catchers will find that the knife still has yet to reach the floor. THAT'S when I plan to pick it up.
I just don't see enough panic to say that all of the suckers have been cleared out. Yes, TLT is racking up gains (though it is off its highs), and TBT is getting its ass handed to it most days. Savings are up, but they can go up more. People don't even realize what else is coming down the pike, and insurance is SO fucked up I'm shocked and scared (just when I thought I had a good handle on the scope of our problems). But there's still too much hope out there. A lot more people need to get crushed to clear out the dead and create space for rebuilding. A LOT MORE.
That is all.
Wednesday, November 26, 2008
Ratings Agencies: A New Model
One of the fundamental breakdowns of this credit crisis was in the ratings agencies (technically, the Nationally Recognized Statistical Rating Organizations - NRSROs).
This article over on the Financial Times gives a nice overview of the growth of Moody's and the NRSROs, especially in the structured finance arena. You should check it out, twice if you're not really a follower of the market.
The big takeaway from this whole crisis, on the NRSRO side, is that the appropriate compensation model for the NRSROs is for their customers to be the buyers of bonds and other credit products. Additionally, they should probably be private versus public organizations, much like SC Johnson. Many firms are public that have no good reason to be. I am all for public markets, but when a firm serves such a large public role, being publicly traded is probably a handicap as opposed to a benefit. Adding a touch of the Google internal stock market is probably a good idea for these private firms, but their shares do not need to trade on public markets. I really don't get this desire for firms to be public, except if they are struggling. Maybe all those LBO targets are on to something? (About being private, anyway. It sure isn't their business processes.)
As for the point of credit buyers paying the ratings firms, this is ideal because they are the ones who ultimately will benefit from the research. The current structure invites severe moral hazard. The FT articles mentions that the complexity of rated products forced growth in the size of Moody's in order to rate these large entities and the esoteric products coming into the credit market. Well, maybe scale was required, but the flip side of the subscription model is that if a corporation will not allow the NRSRO to rate its product -- if the corporation willfully decreases transparency into its credit quality -- then a suitable discount must be applied in the market to compensate for the lack of information. This is the ONLY model that makes sense. Without the information, the opacity should force the market to discount the bonds, commercial paper, convertibles, or structured product being sold (or underwritten) by the corporation. That's not fair -- its just plain good sense and good business!
The final concern becomes the models themselves. As has been widely noted, the NY Times covered this recently. The models are just mathematical equations. They have no position on this subject; they are merely tools, and like any tool, they can be misused or misunderstood by those wielding them. Human frailty (and that damn good sense) come into play here again. The Times piece looks at how quickly humans were willing to set aside their reason in the pursuit of compensation, or assume that the real world was accurately reflected by the models.
The models were not then, and are not now, the problem. The problem is the gatekeepers wielding the models. Once a flaw - a programming bug, or worse, a design flaw - was found, anything rated with that software should have been re-rated. The decision to NOT re-rate those issues should be considered an act of negligence, possibly willful and criminal negligence. Models will evolve if their creators update them. Secondly, if any product has little to no history, then you cannot reasonably rate it based on historical performance of any other product.
So if you're out there in the credit market in any way, you owe it to yourself to do SOME credit analysis on any product you might buy. Whether we're talking bond funds, or direct investment in credit products, you have to understand what you're buying on some level. Credit analysis is more difficult than equity analysis. Such is life.
So to wrap this (very late) missive up, the ratings agencies can serve a useful function. However, their role of being public watchdogs, a la the press, must be honored. Otherwise, that role is better subsumed within a unified regulator (whenever the SEC and CFTC merge), and let's face it - we don't want that. This is something that is probably better suited to government functionally than most other tasks it takes on, but it still should be a market function. Government could provide credit research and publish it, for free even, but would that research be very good? Could it be subverted? A market system for credit research will go a longer way to promoting the transparency and lack of conflict that investors deserve. Adding that value should come with a price.
This article over on the Financial Times gives a nice overview of the growth of Moody's and the NRSROs, especially in the structured finance arena. You should check it out, twice if you're not really a follower of the market.
The big takeaway from this whole crisis, on the NRSRO side, is that the appropriate compensation model for the NRSROs is for their customers to be the buyers of bonds and other credit products. Additionally, they should probably be private versus public organizations, much like SC Johnson. Many firms are public that have no good reason to be. I am all for public markets, but when a firm serves such a large public role, being publicly traded is probably a handicap as opposed to a benefit. Adding a touch of the Google internal stock market is probably a good idea for these private firms, but their shares do not need to trade on public markets. I really don't get this desire for firms to be public, except if they are struggling. Maybe all those LBO targets are on to something? (About being private, anyway. It sure isn't their business processes.)
As for the point of credit buyers paying the ratings firms, this is ideal because they are the ones who ultimately will benefit from the research. The current structure invites severe moral hazard. The FT articles mentions that the complexity of rated products forced growth in the size of Moody's in order to rate these large entities and the esoteric products coming into the credit market. Well, maybe scale was required, but the flip side of the subscription model is that if a corporation will not allow the NRSRO to rate its product -- if the corporation willfully decreases transparency into its credit quality -- then a suitable discount must be applied in the market to compensate for the lack of information. This is the ONLY model that makes sense. Without the information, the opacity should force the market to discount the bonds, commercial paper, convertibles, or structured product being sold (or underwritten) by the corporation. That's not fair -- its just plain good sense and good business!
The final concern becomes the models themselves. As has been widely noted, the NY Times covered this recently. The models are just mathematical equations. They have no position on this subject; they are merely tools, and like any tool, they can be misused or misunderstood by those wielding them. Human frailty (and that damn good sense) come into play here again. The Times piece looks at how quickly humans were willing to set aside their reason in the pursuit of compensation, or assume that the real world was accurately reflected by the models.
The models were not then, and are not now, the problem. The problem is the gatekeepers wielding the models. Once a flaw - a programming bug, or worse, a design flaw - was found, anything rated with that software should have been re-rated. The decision to NOT re-rate those issues should be considered an act of negligence, possibly willful and criminal negligence. Models will evolve if their creators update them. Secondly, if any product has little to no history, then you cannot reasonably rate it based on historical performance of any other product.
So if you're out there in the credit market in any way, you owe it to yourself to do SOME credit analysis on any product you might buy. Whether we're talking bond funds, or direct investment in credit products, you have to understand what you're buying on some level. Credit analysis is more difficult than equity analysis. Such is life.
So to wrap this (very late) missive up, the ratings agencies can serve a useful function. However, their role of being public watchdogs, a la the press, must be honored. Otherwise, that role is better subsumed within a unified regulator (whenever the SEC and CFTC merge), and let's face it - we don't want that. This is something that is probably better suited to government functionally than most other tasks it takes on, but it still should be a market function. Government could provide credit research and publish it, for free even, but would that research be very good? Could it be subverted? A market system for credit research will go a longer way to promoting the transparency and lack of conflict that investors deserve. Adding that value should come with a price.
Thursday, October 30, 2008
Negative Crack Spread
The FT Alphaville has a piece on the negative crack spread. I'm not going to get into explaining what the crack spread is here, since the article does a much better job. However, it does make me wonder what trade might be available in the next 3 - 6 months in the energy futures market. Buy the RBOB, while going short WTI?
Just sayin'.
Just sayin'.
Tuesday, October 14, 2008
Beware the Second Order Effects!
A nice piece, several days old, by John Dizard over at the Financial Times. Not sure where I picked this one up, but thanks to whomever supplied it!
If nothing else, the moral of this story is "beware those second-order effects". It seriously takes conscious thought to catch this stuff, and I figure 99.99% of the planet is technically unconscious so...we should be surprised that we get the results we do.
Beware those second order effects!
If nothing else, the moral of this story is "beware those second-order effects". It seriously takes conscious thought to catch this stuff, and I figure 99.99% of the planet is technically unconscious so...we should be surprised that we get the results we do.
Beware those second order effects!
Monday, October 06, 2008
An Old Market Hand Speaks
Nice interview with Seth Glickenhaus here (WSJ.com sub req'd). Definitely worth a few minutes to read. I'd say it was spot on, but then I'd probably be gushing.
Saturday, October 04, 2008
Clicked
This has been floating around in my mind for a while, but it all just came together right now as I finished reading the Bloomberg article referenced in my last post.
Whenever you hear someone make an analogy between almost any advanced derivative or structured product and some simpler product, the simpler product is almost always a call option. There is almost a 100% chance that the simpler product will be an option of some sort, but usually, it is a call option. If THAT doesn't convince you to just trade the underlying options directly, I don't know what does.
Just a thought.
Whenever you hear someone make an analogy between almost any advanced derivative or structured product and some simpler product, the simpler product is almost always a call option. There is almost a 100% chance that the simpler product will be an option of some sort, but usually, it is a call option. If THAT doesn't convince you to just trade the underlying options directly, I don't know what does.
Just a thought.
Laziness Insurance
So I'm finally catching up on some reading, post-vacation. After getting about halfway through this piece of reporting at Bloomberg.com, I'm once again led to wonder who the hell would buy a principal protected note. Ever. From anyone.
The Japanese and Chinese investors, apparently, and as usual. Somehow they seem to embrace a product just as it is getting ready to implode.
Think about this shite. After some term, you are guaranteed - GUARANTEED - to get back your principal. Return of principal versus return on principal. Fair enough. However, did no one calculate the loss due to inflation?
No laughing!
If you're that inclined to lose money, why not just get a regular bank account (in the US)? I don't know what the HK folks had at their disposal, but somehow I imagine there were safer products, plain vanilla products, available for purchase. The whole notion of principal protection, while it sounds good, should more accurately be considered an insurance policy against doing one's research. We see how well that works out. Doing the research improves your odds.
(It made sense in my head. Hopefully it makes sense when you read it. If not, that's what the comments are for.)
So what have we learned, if nothing else, childrens?
1. To hell with the bells and whistles. If you don't understand the product, and most importantly, the risks attendant with investing in the product, you don't purchase it. Salient advice for all time.
2. The game IS risk management. This is a world of probability. While it could be said I am re-stating #1, I don't fully agree. You must always be present to the risks around you, because EVERYTHING, even the safest of activities, have some level of risk. Look at the swap spreads on US Treasuries to see what I mean - even the "risk-free" investment has risk. Can you live with the risk? Can you hedge it? Because you can't eliminate it.
3. Beware asset gathering. Any firm which has rumors swirling around it that introduces a high return product is probably trolling for funds. So consider this, and be sure about where you land in the capital structure if said firm goes tits up. Basically, see #1. If BSC had already been chewed through, and you're an unsecured investor in Lehman Brothers, the #4 investment bank, you're next in line to be chewed through. So if you MUST buy, buy quality, and that means buy Goldman unsecured products. Duh!
4. Don't bet what you can't afford to lose. This goes for the $100 I blew in Vegas playing craps this past week, and it goes for the $2B US that those suc...investors in Hong Kong will be blessed to recover. (I'd say lucky, but you create your own luck.)
5. Do your homework. Swap spreads and the death of BSC should have told people to avoid Lehman structured debt products.
6. Homie don't play dat!
Oh, and if you ever feel the need to be separated from your money that badly, just give it to me. I accept PayPal donations. At least that way, you know its going to a good cause - liquor and women, although not necessarily in that order.
:)
G'night, all!
The Japanese and Chinese investors, apparently, and as usual. Somehow they seem to embrace a product just as it is getting ready to implode.
Think about this shite. After some term, you are guaranteed - GUARANTEED - to get back your principal. Return of principal versus return on principal. Fair enough. However, did no one calculate the loss due to inflation?
No laughing!
If you're that inclined to lose money, why not just get a regular bank account (in the US)? I don't know what the HK folks had at their disposal, but somehow I imagine there were safer products, plain vanilla products, available for purchase. The whole notion of principal protection, while it sounds good, should more accurately be considered an insurance policy against doing one's research. We see how well that works out. Doing the research improves your odds.
(It made sense in my head. Hopefully it makes sense when you read it. If not, that's what the comments are for.)
So what have we learned, if nothing else, childrens?
1. To hell with the bells and whistles. If you don't understand the product, and most importantly, the risks attendant with investing in the product, you don't purchase it. Salient advice for all time.
2. The game IS risk management. This is a world of probability. While it could be said I am re-stating #1, I don't fully agree. You must always be present to the risks around you, because EVERYTHING, even the safest of activities, have some level of risk. Look at the swap spreads on US Treasuries to see what I mean - even the "risk-free" investment has risk. Can you live with the risk? Can you hedge it? Because you can't eliminate it.
3. Beware asset gathering. Any firm which has rumors swirling around it that introduces a high return product is probably trolling for funds. So consider this, and be sure about where you land in the capital structure if said firm goes tits up. Basically, see #1. If BSC had already been chewed through, and you're an unsecured investor in Lehman Brothers, the #4 investment bank, you're next in line to be chewed through. So if you MUST buy, buy quality, and that means buy Goldman unsecured products. Duh!
4. Don't bet what you can't afford to lose. This goes for the $100 I blew in Vegas playing craps this past week, and it goes for the $2B US that those suc...investors in Hong Kong will be blessed to recover. (I'd say lucky, but you create your own luck.)
5. Do your homework. Swap spreads and the death of BSC should have told people to avoid Lehman structured debt products.
6. Homie don't play dat!
Oh, and if you ever feel the need to be separated from your money that badly, just give it to me. I accept PayPal donations. At least that way, you know its going to a good cause - liquor and women, although not necessarily in that order.
:)
G'night, all!
Friday, October 03, 2008
Thinking about CDS
Not like this is due to happen anytime soon, but I do have to wonder when shorting CDS becomes a viable strategy?
Just a thought...
Or how about a company shorting its own CDS, maybe through a shell or subsidiary?
Just a thought...
Or how about a company shorting its own CDS, maybe through a shell or subsidiary?
Tuesday, September 30, 2008
Damn!
Its really time to get out of this country. That's really all that I can think of now.
Thanks to P. Kedrosky for this one.
Thanks to P. Kedrosky for this one.
Tuesday, September 23, 2008
The Story of LIBOR
I am fascinated by the inputs to, machinations of, and outputs from the global financial system. That's why I love this kind of behind the scenes, in depth coverage of something as arcane as LIBOR. (Well, I guess its not arcane in this world, but among "normal" people, a group I've never been accused of belonging to, it is.) It gives you a sense of what really goes on in calculating LIBOR, dollar LIBOR in particular. And FINALLY, an explanation of "eurodollar"! Very cool indeed.
Friday, September 19, 2008
Buffett's Latest Buy
This is really just a stream of consciousness post.
A friend of mine sent along a recent Market Mover's post by Felix Salmon over at Portfolio. Anyway, in reading this, especially the comments, it occurred to me that Buffett will probably ditch the trading operation. Now, I'm not sure who the buyer might be, but considering that trading likely had something to do with making Constellation Energy the target it became, weakening it and increasing the collateral requirements, I can't see MidAmerican holding on. It seems a bit too volatile for Berkshire.
I think about the General Re acquisition some years ago. It took a long time, but Buffett unwound a bunch of contracts that Ge Re had entered into which increased the overall corporate risk exposure. I'll go dig up that story if I have some time. The same forces would appear to come into play now with CEG. Buffett will keep the parts that generate free cash and sell off the bits that detract more than they add, slowly if necessary but quickly otherwise. At least, that's the first thing that comes to my mind.
Thoughts?
Its all about risk management, baby. I think that, if nothing else, is the lesson of the week.
A friend of mine sent along a recent Market Mover's post by Felix Salmon over at Portfolio. Anyway, in reading this, especially the comments, it occurred to me that Buffett will probably ditch the trading operation. Now, I'm not sure who the buyer might be, but considering that trading likely had something to do with making Constellation Energy the target it became, weakening it and increasing the collateral requirements, I can't see MidAmerican holding on. It seems a bit too volatile for Berkshire.
I think about the General Re acquisition some years ago. It took a long time, but Buffett unwound a bunch of contracts that Ge Re had entered into which increased the overall corporate risk exposure. I'll go dig up that story if I have some time. The same forces would appear to come into play now with CEG. Buffett will keep the parts that generate free cash and sell off the bits that detract more than they add, slowly if necessary but quickly otherwise. At least, that's the first thing that comes to my mind.
Thoughts?
Its all about risk management, baby. I think that, if nothing else, is the lesson of the week.
Wednesday, September 03, 2008
Movin' On Up!
When your largest provider of vendor financing starts pulling back, you have a problem. I think I've said this a few times recently. It was truly inevitable.
While mortgage rates have climbed recently, I think you've only seen the beginning. They have not yet begun to increase!
On another note, it totally makes sense for PIMCO to invest in agencies, no matter how Mish feels about it. PIMCO is in business to make money, for their clients, shareholders (vis-a-vis Allianz), and by extension, themselves. They are in a position to hold the bonds and get made whole (or at least a decent return on invested capital) when the US eventually nationalizes the GSEs. That's their job, right? To make money. I don't see why Bill Gross and PIMCO should be faulted for attempting to follow their mandate. Its a perfectly reasonable position for them given their business.
The part I find most interesting is that if foreign holders of agency debt are unloading, is the US Federal government going to be as interested in taking care of the debtholders, PIMCO among them? Hmmm. It makes me wonder. The Feds have to take care of the people who are holding US government debt of all stripes, even though I think eventually the damn will break and the Treasury rates will soar. For now, the Fed are just trying to maintain as much control as possible. Taking care of China and Japan is in order given the scenario, and anyone (such as PIMCO) can go along for the ride if they choose. I just wonder if Japan has also been selling out of its positions in agencies? In every trade, there's a buyer and seller, but its easier to screw over your populace than a foreign government that facilitates your shell games.
No matter how you slice it, rates are going up. I stand by that assertion.
While mortgage rates have climbed recently, I think you've only seen the beginning. They have not yet begun to increase!
On another note, it totally makes sense for PIMCO to invest in agencies, no matter how Mish feels about it. PIMCO is in business to make money, for their clients, shareholders (vis-a-vis Allianz), and by extension, themselves. They are in a position to hold the bonds and get made whole (or at least a decent return on invested capital) when the US eventually nationalizes the GSEs. That's their job, right? To make money. I don't see why Bill Gross and PIMCO should be faulted for attempting to follow their mandate. Its a perfectly reasonable position for them given their business.
The part I find most interesting is that if foreign holders of agency debt are unloading, is the US Federal government going to be as interested in taking care of the debtholders, PIMCO among them? Hmmm. It makes me wonder. The Feds have to take care of the people who are holding US government debt of all stripes, even though I think eventually the damn will break and the Treasury rates will soar. For now, the Fed are just trying to maintain as much control as possible. Taking care of China and Japan is in order given the scenario, and anyone (such as PIMCO) can go along for the ride if they choose. I just wonder if Japan has also been selling out of its positions in agencies? In every trade, there's a buyer and seller, but its easier to screw over your populace than a foreign government that facilitates your shell games.
No matter how you slice it, rates are going up. I stand by that assertion.
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