The counterpoint to Fingers of Instability is Glimmers of Hope (see here for an explanation of the thinking behinds Fingers of Instability and Glimmers of Hope), which looks at some of the things that could go right in the economy and drive markets higher.
- Private Sector to drive GDP growth
While Our Man believes that the underlying problem in the US (and other places) is primarily a solvency issue, the Government and the Fed believes that through increased fiscal spending and liquidity (i.e. QE1, QE-lite and QE2) they can help provide an escape valve. In essence, QE and fiscal stimulus have supplied liquidity to the market to help boost GDP and asset prices. This has provided support for the private sector, allowing it time to repair its balance sheet and rebuild confidence in the economy. The underlying hope is that with confidence rebounding and balance sheets in better shape, the private sector will be able to take over the leadership in driving GDP growth and balance sheets can be further repaired as a function of this growth. The Q4 survey data showed the first hints of truly positive data points, and this was supplemented by the Q4-10 GDP data which saw Real Final Sales leaping to 7%+ annualized from the 1-2% run-rate since the recession ended. (Tim Duy has other morcels of good news from the recent Q4-10 GDP data)
- QE2 & the Wealth Effect
The other aim of Quantitative Easing has been to help US households rebuild their balance sheets & net worth, primarily through rising equity prices and the attempt to curtail the fall in house prices. The additional hope is that a rising market will further help build confidence in the economy by boosting investors’ “animal spirits”. Should this prove successful, there’s the possibility of the strong market performance (since QE2 rumours abounded during late-Q3) turning into a melt up.
- Falling Unemployment (and Rising Incomes)
It should go without saying that the best way for US households to repair the balance sheets and increase consumption is for them to be employed in jobs whose salaries are increasing! With regards to the first part, Weekly Unemployment Claims still remain elevated by historical levels, but they have certainly declined from their peak. This, coupled with hiring starting to edge up as the private sector gains confidence in the economy’s stability, has seen the economy start to produce net hiring over the last 6months. While the numbers have been small, they have helped chip slowly chip away at the unemployment numbers. While the second part of the equation has been quieter, Our Man think it’s fair to surmise real incomes are more likely to rise in a falling unemployment market than a rising one!
- China & an Asian soft landing
In much of a similar vein to last year’s Glimmers, perhaps Our Man remains just plain ole wrong on China. Maybe they genuinely have built a better mousetrap in terms of this whole running an economy thing! And if they haven’t, well they’ve shown a willingness and ability to throw money at problems whenever they arise. While this may lead to longer-term imbalances and further misallocation of resources, it could certainly help 2011’s markets.
- Valuation
Like the prior note, it’s another repeat from 2010’s list. Our Man continues to mutter that it’s an expensive market (and using longer-term measures it is) but if one only looks at short-term horizons (or uses current year P/E, or mutations of it….such as P/E based on Operating Earnings, or projected forward P/E, etc) then the market can look cheap.
- Constructive Government behaviour (in the US and Europe)
Stranger things have happened! In the US, with a Democratic President looking to run for re-election in 2012 and the Republican’s having taken over Congress there is incentive for both parties to ensure the economy doesn’t suffer a reversal in the next year or two. Who knows, perhaps they might even find their way to co-operating to do something constructive on Medicare/Medicaid and Social Security over the coming year or so. In Europe, with Greece and Ireland having to be bailed out by their European partners, and Portugal seemingly next on the list, perhaps recent reports of a move towards investors having to take haircuts on their troubled bonds (i.e. reducing the debt burden, for those countries in trouble by making investors take a loss on their bonds) is the first step towards sorting out their sovereign debt problems.
Monday, January 31
Monday, January 17
NCAV 2011-1
The first NCAV update of the year, proved to have no major impact on the Absolute Value bucket portfolio (for information on this bucket, and how it works, read here).
Three new names (NINE and PCC) were found by the screen but were removed by my qualitative overlay;
- PCC and SVLF: the screen used total assets (rather than current assets) thereby invalidating its calculation of NCAV.
- NINE: the financial statements used were stale (over 6months old) and hence NINE was qualitatively removed.
A number of existing names (BXG, LAB, LTON, NED, TWMC, and XIN) reappeared on the screen. As such, the final date that these names must be sold by has been extended (here are the rules when NCAV names are sold).
Finally, a short update on QXM who were subject to a take-over offer from their majority shareholder, Qiao Xing Universal Resources (XING), back in September. The offer was of $0.80 in cash and 1.9 shares in XING for each of share in QXM, which is potentially worth $5.95 (XING closed at $2.71 on Friday) or about 20% higher than QXM’s closing price. In early January, a special committee of QXM’s directors has authorized that the offer be put to minority shareholders. As such with QXM trading at a discount to the bid-value, and since Our Man doesn’t want to hold any XING shares, the position will be sold either on/around 1st April 2011 (when it will have spent 366 days since last appearing in the NCAV screen) or earlier, should the deal with QXM be approved and close (so that Our Man does not receive any XING shares).
Three new names (NINE and PCC) were found by the screen but were removed by my qualitative overlay;
- PCC and SVLF: the screen used total assets (rather than current assets) thereby invalidating its calculation of NCAV.
- NINE: the financial statements used were stale (over 6months old) and hence NINE was qualitatively removed.
A number of existing names (BXG, LAB, LTON, NED, TWMC, and XIN) reappeared on the screen. As such, the final date that these names must be sold by has been extended (here are the rules when NCAV names are sold).
Finally, a short update on QXM who were subject to a take-over offer from their majority shareholder, Qiao Xing Universal Resources (XING), back in September. The offer was of $0.80 in cash and 1.9 shares in XING for each of share in QXM, which is potentially worth $5.95 (XING closed at $2.71 on Friday) or about 20% higher than QXM’s closing price. In early January, a special committee of QXM’s directors has authorized that the offer be put to minority shareholders. As such with QXM trading at a discount to the bid-value, and since Our Man doesn’t want to hold any XING shares, the position will be sold either on/around 1st April 2011 (when it will have spent 366 days since last appearing in the NCAV screen) or earlier, should the deal with QXM be approved and close (so that Our Man does not receive any XING shares).
Sunday, January 9
2011: Fingers of Instability
This is Our Man’s way of (exceptionally broadly, see here for an explanation of the thinking behind Fingers of Instability & Glimmers of Hope) applying the concepts of Bak-Tang-Wisenfeld’s sandpile model to how he thinks about investing
- Fraudclosure & the Housing Market
Residential construction has been an important driver in post-WW2 recoveries. Unfortunately, there have been recent signs of a double dip in house prices and the underlying problem of too much supply/too many homes on the market has not been solved. One of the ancillary factors that has been in the background is the “fraudclosure” scandal. While the long-term impacts are unclear, what is clear is that there is greater doubt surrounding the ownership of homes (both foreclosed and not) in the US, which adds yet more uncertainty to the housing market. In all probability there’s unlikely to be any Federal moratorium on foreclosures, though a State-level moratorium (like we saw in the 30’s) is eminently possible. An interesting, but less talked about issue, remains that most of the Mortgage-Backed Securities vehicles (to whom the mortgages were sold) were enacted under NYS Law, where the dealer has to deliver to the mortgage notes to the trustee. If the trustee doesn’t have notes, then the contract isn’t alive and is potentially uncollateralized which I’m certain will lead to all manner of legal arguments.
- Property Taxes, and State & Local Government Finances
The unwritten story of foreclosures is the impact on property taxes, which will hamper state and local governments. This is just another problem for cash-strapped states and local governments with a number of analysts predicting potential defaults in 2011 and the municipal bond market reacting negatively. What does seem likely is that we’ll see some belt-tightening at the state level.
- European debt problems
During 2010 we saw bailouts for Greece and Ireland, what does 2011 hold for Portugal, Spain and Italy? The Europeans have largely been resistant to burden-sharing (i.e. making bondholders take a haircut), instead preferring bailouts of troubled members, as this would force European banks to take losses and potentially raise fears concerning their stability. It will be worth watching to see if there's any impact from the Irish election in March, where the opposition currently lead by double digits and are threatening to press for debt reduction.
-The make-up of the Fed and Politics
Ron Paul, author of “End the Fed”, is now the chairman of the sub-committee charged with overseeing the Fed which should prove for closer Congressional scrutiny and livelier hearings. However, a more important change is in the voting make-up of the Federal Reserve; 2 of the new voting Federal Reserve Bank presidents (Charles Plosser, Philly Fed, and Richard Fisher, Dallas Fed) oppose QE and a third (Narayana Kocherlakota, Minneapolis Fed), is skeptical that it will work. They replace three of the “doves” (Rosengren (Boston Fed), Pianalto (Cleveland Fed) and Bullard (St. Louis Fed), which may not make QE3 as inevitable as it currently seems.
-Inflation (in China)
Our Man has talked about inflation in China before, in large part because it presents great difficulties for the economic planners there. The two biggest ways that the Chinese have been trying to control it is through raising rates and controlling credit expansion (directly, or indirectly via the banks’ reserve ratios). However, both of these have the potential impact of slowing down their economy growth which has been a driver of Global growth (and especially commodity prices) and is expected to grow at 10% (ad infinitum!). Furthermore, given the possibility of a credit-driven bubble in Chinese property are the Chinese about to discover (like their Western peers) that it’s not easy to engineer a soft-landing from a credit boom?
- Global Trade, Protectionism & Emerging Asian Economies
For those who are historically minded, the steady decline of Global Trade and the rise of Protectionism, was one of the noticeable features of the 1930's depression in the US. With many seeing Quantitative Easing (QE) as an attempt to weaken the dollar, others accusing China of currency manipulation and most countries still hoping to drive GDP gains through increases in exports, it is little surprise that rhetoric surrounding trade wars continues to increase. Let’s hope we don’t see an equivalent of the Kindleberger spiral for 2010’s!
- Valuation
Though market participants always seem to manage to call the market ‘cheap’, from Our Man’s perspective the market does not appear cheap based on long-term measures. Both the Shiller CAPE ratio (currently 22x vs. a historical average of 16.5x), and the Tobin’s Q (Q3-end 1.05x vs. a historical average of 0.70x) suggest that markets are over-valued. While these long-term measures have not helped investors time the markets, they have served as good long-term guides to valuation and are worth noting.
- Fraudclosure & the Housing Market
Residential construction has been an important driver in post-WW2 recoveries. Unfortunately, there have been recent signs of a double dip in house prices and the underlying problem of too much supply/too many homes on the market has not been solved. One of the ancillary factors that has been in the background is the “fraudclosure” scandal. While the long-term impacts are unclear, what is clear is that there is greater doubt surrounding the ownership of homes (both foreclosed and not) in the US, which adds yet more uncertainty to the housing market. In all probability there’s unlikely to be any Federal moratorium on foreclosures, though a State-level moratorium (like we saw in the 30’s) is eminently possible. An interesting, but less talked about issue, remains that most of the Mortgage-Backed Securities vehicles (to whom the mortgages were sold) were enacted under NYS Law, where the dealer has to deliver to the mortgage notes to the trustee. If the trustee doesn’t have notes, then the contract isn’t alive and is potentially uncollateralized which I’m certain will lead to all manner of legal arguments.
- Property Taxes, and State & Local Government Finances
The unwritten story of foreclosures is the impact on property taxes, which will hamper state and local governments. This is just another problem for cash-strapped states and local governments with a number of analysts predicting potential defaults in 2011 and the municipal bond market reacting negatively. What does seem likely is that we’ll see some belt-tightening at the state level.
- European debt problems
During 2010 we saw bailouts for Greece and Ireland, what does 2011 hold for Portugal, Spain and Italy? The Europeans have largely been resistant to burden-sharing (i.e. making bondholders take a haircut), instead preferring bailouts of troubled members, as this would force European banks to take losses and potentially raise fears concerning their stability. It will be worth watching to see if there's any impact from the Irish election in March, where the opposition currently lead by double digits and are threatening to press for debt reduction.
-The make-up of the Fed and Politics
Ron Paul, author of “End the Fed”, is now the chairman of the sub-committee charged with overseeing the Fed which should prove for closer Congressional scrutiny and livelier hearings. However, a more important change is in the voting make-up of the Federal Reserve; 2 of the new voting Federal Reserve Bank presidents (Charles Plosser, Philly Fed, and Richard Fisher, Dallas Fed) oppose QE and a third (Narayana Kocherlakota, Minneapolis Fed), is skeptical that it will work. They replace three of the “doves” (Rosengren (Boston Fed), Pianalto (Cleveland Fed) and Bullard (St. Louis Fed), which may not make QE3 as inevitable as it currently seems.
-Inflation (in China)
Our Man has talked about inflation in China before, in large part because it presents great difficulties for the economic planners there. The two biggest ways that the Chinese have been trying to control it is through raising rates and controlling credit expansion (directly, or indirectly via the banks’ reserve ratios). However, both of these have the potential impact of slowing down their economy growth which has been a driver of Global growth (and especially commodity prices) and is expected to grow at 10% (ad infinitum!). Furthermore, given the possibility of a credit-driven bubble in Chinese property are the Chinese about to discover (like their Western peers) that it’s not easy to engineer a soft-landing from a credit boom?
- Global Trade, Protectionism & Emerging Asian Economies
For those who are historically minded, the steady decline of Global Trade and the rise of Protectionism, was one of the noticeable features of the 1930's depression in the US. With many seeing Quantitative Easing (QE) as an attempt to weaken the dollar, others accusing China of currency manipulation and most countries still hoping to drive GDP gains through increases in exports, it is little surprise that rhetoric surrounding trade wars continues to increase. Let’s hope we don’t see an equivalent of the Kindleberger spiral for 2010’s!
- Valuation
Though market participants always seem to manage to call the market ‘cheap’, from Our Man’s perspective the market does not appear cheap based on long-term measures. Both the Shiller CAPE ratio (currently 22x vs. a historical average of 16.5x), and the Tobin’s Q (Q3-end 1.05x vs. a historical average of 0.70x) suggest that markets are over-valued. While these long-term measures have not helped investors time the markets, they have served as good long-term guides to valuation and are worth noting.
Monday, January 3
December Review
Performance Review
The portfolio’s behaviour and performance in December tended to be broadly reminiscent of recent months, especially October. The result, a fall of 180bips in December left the 2010 performance at a disappointing +5.04%.
The theme of recent months, weak Treasury bond performance as hopes for economic growth increased, continued throughout December. The Long Treasury Bonds (-166bps) and Long Bond Funds (-26bps) contributed substantially all of the portfolio’s losses during December. While their combined sizable negative contribution over the last 4 months of the year hampered the portfolio, it should not be forgotten that they were the largest contributors to performance (c500bps combined) throughout the year.
With December proving to be another strong month for equities, it is little surprise that the main positive contribution came from the various Equity buckets. Value Idea Equities (+28bps), NCAV Equities (+35bps) and Other Equities (+2bps) all largely moved with the markets. Against this, the Hedges/Put Options bucket (-34bps) suffered from both the rise of the equity markets and the continued fall in volatility. For the year, the NCAV bucket (+45bps) contributed well and largely outperformed the market from its inception during the latter half of the first quarter. The other main equity buckets (Value Idea Equities, Other Equities and Hedge/Put Options) were largely a wash during the year, with the negative performance of the Hedges/Put Options cancelling out positive performance from the other buckets. I was early in exploiting my China thesis and that bucket (-35-40bps) was a negative contributor. The position in Gold, which was sold far too early, also proved to be a small negative contributor.
Finally, the recently introduced Currencies bucket (-19bps) gave back part of its gains during the month as the Euro strengthened following approval of a bailout package for Ireland.
Portfolio
41.3% - Long Treasury Bonds (TLT and the Aug-29 Bond)
14.6% - Long Bond Funds (HSTRX, and VBIIX)
8.1% - Value Idea Equities (THRX, and DRWI)
4.6% - NCAV Equities
3.1% - Other Equities (NWS, CMTL and SOAP)
-0.0% (delta-adjusted) - China-Related Thesis (<1bp premium in FCX put)
-1.3% (delta-adjusted) - Hedges/Put Options (43bps premium in S&P Dec-11 puts and 1bps premium in a GS Jan-11 put)
6.0% (leverage-adjusted) – Currencies (EUO)
25.0% - Cash
The portfolio’s behaviour and performance in December tended to be broadly reminiscent of recent months, especially October. The result, a fall of 180bips in December left the 2010 performance at a disappointing +5.04%.
The theme of recent months, weak Treasury bond performance as hopes for economic growth increased, continued throughout December. The Long Treasury Bonds (-166bps) and Long Bond Funds (-26bps) contributed substantially all of the portfolio’s losses during December. While their combined sizable negative contribution over the last 4 months of the year hampered the portfolio, it should not be forgotten that they were the largest contributors to performance (c500bps combined) throughout the year.
With December proving to be another strong month for equities, it is little surprise that the main positive contribution came from the various Equity buckets. Value Idea Equities (+28bps), NCAV Equities (+35bps) and Other Equities (+2bps) all largely moved with the markets. Against this, the Hedges/Put Options bucket (-34bps) suffered from both the rise of the equity markets and the continued fall in volatility. For the year, the NCAV bucket (+45bps) contributed well and largely outperformed the market from its inception during the latter half of the first quarter. The other main equity buckets (Value Idea Equities, Other Equities and Hedge/Put Options) were largely a wash during the year, with the negative performance of the Hedges/Put Options cancelling out positive performance from the other buckets. I was early in exploiting my China thesis and that bucket (-35-40bps) was a negative contributor. The position in Gold, which was sold far too early, also proved to be a small negative contributor.
Finally, the recently introduced Currencies bucket (-19bps) gave back part of its gains during the month as the Euro strengthened following approval of a bailout package for Ireland.
Portfolio
41.3% - Long Treasury Bonds (TLT and the Aug-29 Bond)
14.6% - Long Bond Funds (HSTRX, and VBIIX)
8.1% - Value Idea Equities (THRX, and DRWI)
4.6% - NCAV Equities
3.1% - Other Equities (NWS, CMTL and SOAP)
-0.0% (delta-adjusted) - China-Related Thesis (<1bp premium in FCX put)
-1.3% (delta-adjusted) - Hedges/Put Options (43bps premium in S&P Dec-11 puts and 1bps premium in a GS Jan-11 put)
6.0% (leverage-adjusted) – Currencies (EUO)
25.0% - Cash
Tuesday, December 21
Occam’s Razor, the Gordian Knot and the Von Mises Prophecy
The rise in Treasury yields has hurt Our Man’s portfolio in recent months, but there seems to be no consensus as to why they’ve risen with numerous opposing points of view. Arguments range from the Bond bubble is bursting (and hyperinflation is imminent) to this just being evidence that the Fed’s QE2 is working.
How to untangle such a mess? Well, 14th century English logician William de Ockham created a helpful ‘rule’ that’s come to be known as Occam’s Razor. It recommends that when choosing between hypotheses which are equal in other respects, one should choose the hypothesis that makes the fewest new assumptions.
What does that mean in this situation?
Simply that Treasury yields have risen as a result of people’s perception of the economy improving, something that’s been evident by the broadly better data and by various economists (and Wall Street Banks) upping their GDP growth targets during November/December. Now, perhaps, time will also suggest that the alternative arguments are true…that QE2 was successful (though for $600bn, or 4% of GDP, you’d hope that the Fed’s aim was to increase actual growth not just people’s perceptions about it), that the bond bubble has burst (though the graph below would suggest “not yet”) or that hyperinflation is imminent (again the CPI, and other inflation measures don’t yet show it). For now, however, I’m sticking with the guy who lived over 600years ago.
Now, with all these worries about hyper-inflation and QE2’s impact on prices, a reasonable fellow might ask why is Our Man comfortable holding Treasuries and betting on deflation. Well, regular readers will know that Our Man doesn’t view this as your run-of-the-mill business cycle recession but instead one caused by the level of debt (see graph here) reaching unsustainable levels. As such, the typical monetarist solutions that are the foundation of central banking have little impact on the economy when contrasted against the size of the deleveraging that occurs as households rebuild their balance sheets. (While this is, of course, a simplistic overview...for those wanting to know a little more, I’d recommend this piece by Professor Steve Keen, and for the very geeky his entire blog).
This idea of debt-deflation was developed by Irving Fischer during the 1930’s. What makes it interesting is that it is the Gordian Knot of the economics profession; the traditional and preferred solutions (many of which are being attempted now) have no real impact on solving the underlying problem. Reductions in interest rates fail to spur businesses or households to relever. Supplying money to the system, either through fiscal policy (“stimulus”) or monetary policy (“quantitative easing”) produces an initial response which fades and then collapses each time the policy is stopped, and the longer it continues the greater the risk of the economy becoming dependent upon it. Austerity, while it may help reset the generation of future debts, merely increases the pain by future reducing demand and enhancing the deflationary forces. The “Alexandrian solution” to the challenge is of course default (in the private/household sector, preferably) but the resultant probable insolvency of financial institutions* is not something the powers that be are currently willing to accept. Thus for the foreseeable future, unless the household sectors starts to relever itself, Our Man will continue to bet on deflation and disinflation.
As for the long-term; here, Our Man will once again defer to some chap to lived a long time ago. Ludwig von Mises, the Austrian economist, wrote the following:
“There is no means of avoiding the final collapse of a boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
* The side benefits of bankruptcy on the system are under-rated. As a simple example, Bank of America is getting sued by a number of investors who are seeking to have BoA repurchase soured mortgages that were packaged into bonds by Countrywide Financial (Bank of America bought them in 2008). Do you know why we’re not hearing anything about J.P. Morgan getting sued for the deals that Washington Mutual (or why nobody’s suing Lehman Brothers)? Because when WaMu (and Lehman) went through bankruptcy, the unliquidated claims are trapped there and thus have no impact on JP Morgan. Therein lies the beauty of bankruptcy for the system -- clean assets with which to regenerate things!
How to untangle such a mess? Well, 14th century English logician William de Ockham created a helpful ‘rule’ that’s come to be known as Occam’s Razor. It recommends that when choosing between hypotheses which are equal in other respects, one should choose the hypothesis that makes the fewest new assumptions.
What does that mean in this situation?
Simply that Treasury yields have risen as a result of people’s perception of the economy improving, something that’s been evident by the broadly better data and by various economists (and Wall Street Banks) upping their GDP growth targets during November/December. Now, perhaps, time will also suggest that the alternative arguments are true…that QE2 was successful (though for $600bn, or 4% of GDP, you’d hope that the Fed’s aim was to increase actual growth not just people’s perceptions about it), that the bond bubble has burst (though the graph below would suggest “not yet”) or that hyperinflation is imminent (again the CPI, and other inflation measures don’t yet show it). For now, however, I’m sticking with the guy who lived over 600years ago.
Now, with all these worries about hyper-inflation and QE2’s impact on prices, a reasonable fellow might ask why is Our Man comfortable holding Treasuries and betting on deflation. Well, regular readers will know that Our Man doesn’t view this as your run-of-the-mill business cycle recession but instead one caused by the level of debt (see graph here) reaching unsustainable levels. As such, the typical monetarist solutions that are the foundation of central banking have little impact on the economy when contrasted against the size of the deleveraging that occurs as households rebuild their balance sheets. (While this is, of course, a simplistic overview...for those wanting to know a little more, I’d recommend this piece by Professor Steve Keen, and for the very geeky his entire blog).
This idea of debt-deflation was developed by Irving Fischer during the 1930’s. What makes it interesting is that it is the Gordian Knot of the economics profession; the traditional and preferred solutions (many of which are being attempted now) have no real impact on solving the underlying problem. Reductions in interest rates fail to spur businesses or households to relever. Supplying money to the system, either through fiscal policy (“stimulus”) or monetary policy (“quantitative easing”) produces an initial response which fades and then collapses each time the policy is stopped, and the longer it continues the greater the risk of the economy becoming dependent upon it. Austerity, while it may help reset the generation of future debts, merely increases the pain by future reducing demand and enhancing the deflationary forces. The “Alexandrian solution” to the challenge is of course default (in the private/household sector, preferably) but the resultant probable insolvency of financial institutions* is not something the powers that be are currently willing to accept. Thus for the foreseeable future, unless the household sectors starts to relever itself, Our Man will continue to bet on deflation and disinflation.
As for the long-term; here, Our Man will once again defer to some chap to lived a long time ago. Ludwig von Mises, the Austrian economist, wrote the following:
“There is no means of avoiding the final collapse of a boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
* The side benefits of bankruptcy on the system are under-rated. As a simple example, Bank of America is getting sued by a number of investors who are seeking to have BoA repurchase soured mortgages that were packaged into bonds by Countrywide Financial (Bank of America bought them in 2008). Do you know why we’re not hearing anything about J.P. Morgan getting sued for the deals that Washington Mutual (or why nobody’s suing Lehman Brothers)? Because when WaMu (and Lehman) went through bankruptcy, the unliquidated claims are trapped there and thus have no impact on JP Morgan. Therein lies the beauty of bankruptcy for the system -- clean assets with which to regenerate things!
Thursday, December 9
Things from my Google Reader: Dec-10 Edition
As Our Man has been running around interviewing, doing projects and lining up references in his quest for a day job, posting has continued to be light. To fill the void, here are some of the things that Our Man has read recently, and found rather interesting.
As usual, I’ve put the finance ones at the top and the non-finance (more interesting?) ones at the bottom.
- Is QE printing money or not? (Video)
Who knows, not Fed Chair Ben Bernanke who thought it was 2-years ago but doesn’t think it is now. It’s a little sad, that John Stewart not the “real” media was the one to call him out on it.
- Buy the Dip (Video)
Some fine ‘advice’ proffered to Our Man, by a good friend (and reader) after a recent post.
- What 311 Reveals about New York
If you’re a New Yorker then you’ve probably used 311. Not only is it surprisingly helpful and efficient, they are actually trying to capture all of the data and find ways to use it productively! (Wired Magazine)
- Some Thoughts on Harry Potter
To Mrs. OM’s chagrin, Our Man decided not to venture to the cinema to see the latest in the Harry Potter films. Instead he read this fine article by Joe Posnanski about his Harry Potter reading experience (both alone, and reading it with his young daughter). Mr. Posnanski’s a sports writer, hence there’s also a nod towards the debatable scoring system in Qudditch. (Joe Posnanski Blog)
- Roads Gone Wild
Making driving seem more dangerous could make it safer. So argues Hans Monderman, one of the leading traffic engineers in the world, and you do that you start by getting rid of traffic signs and then let human behavior (and the survival instinct) take over! (Wired Magazine)
- Later
What does procrastination tell us about ourselves? Even those who know about behavioural biases, and the downside to them, find themselves unable to escape their trap. (New Yorker)
- You Get What You Pay For?
Healthcare has been prominently debated over the last few years, but Dr. Rob nails it when he says "your system is perfectly designed to yield the outcome you are currently getting"! (Musings of a Distractible Mind)
And finally,
- An Irrational Guide to Gifts
In a nod to the impending arrival of Christmas, here are a Behavioural Economics Professor’s suggestions on the best type of gifts. (Dan Ariely's Blog)
As usual, I’ve put the finance ones at the top and the non-finance (more interesting?) ones at the bottom.
- Is QE printing money or not? (Video)
Who knows, not Fed Chair Ben Bernanke who thought it was 2-years ago but doesn’t think it is now. It’s a little sad, that John Stewart not the “real” media was the one to call him out on it.
- Buy the Dip (Video)
Some fine ‘advice’ proffered to Our Man, by a good friend (and reader) after a recent post.
- What 311 Reveals about New York
If you’re a New Yorker then you’ve probably used 311. Not only is it surprisingly helpful and efficient, they are actually trying to capture all of the data and find ways to use it productively! (Wired Magazine)
- Some Thoughts on Harry Potter
To Mrs. OM’s chagrin, Our Man decided not to venture to the cinema to see the latest in the Harry Potter films. Instead he read this fine article by Joe Posnanski about his Harry Potter reading experience (both alone, and reading it with his young daughter). Mr. Posnanski’s a sports writer, hence there’s also a nod towards the debatable scoring system in Qudditch. (Joe Posnanski Blog)
- Roads Gone Wild
Making driving seem more dangerous could make it safer. So argues Hans Monderman, one of the leading traffic engineers in the world, and you do that you start by getting rid of traffic signs and then let human behavior (and the survival instinct) take over! (Wired Magazine)
- Later
What does procrastination tell us about ourselves? Even those who know about behavioural biases, and the downside to them, find themselves unable to escape their trap. (New Yorker)
- You Get What You Pay For?
Healthcare has been prominently debated over the last few years, but Dr. Rob nails it when he says "your system is perfectly designed to yield the outcome you are currently getting"! (Musings of a Distractible Mind)
And finally,
- An Irrational Guide to Gifts
In a nod to the impending arrival of Christmas, here are a Behavioural Economics Professor’s suggestions on the best type of gifts. (Dan Ariely's Blog)
Thursday, December 2
November Review
Performance Review
November was a strange month for the portfolio, which spent the majority of the month mired in negative territory before benefiting from a mixture of the troubles surrounding Ireland and a company specific events (THRX, in the Value Equity bucket) to end up 7bips (putting the YTD at +6.97%)
The Treasury Bonds bucket was the big negative performer during the month (-69bps) as we saw continued appetite for risk for the majority of the month, before concerns about Ireland’s fiscal stability led to a late rally in yields. The Bond Funds (-10bps) also posted a small loss, which was constrained largely due to their exposure to shorter duration instruments. The concern surrounding Ireland’s fiscal debt situation resulted in some weakness for the Euro, something that benefited the Currency bucket (+39bps).
With the equity markets largely flat to down slightly, a number of the equity buckets failed to contribute. The NCAV (-24bps) and Other Equity (-13bps) buckets both posted small losses, which were broadly spread amongst the underlying positions, and the neither the Puts/Hedges (-1bp) nor the China bucket (-<1bp) had much impact on the portfolio.
The portfolio was however, pushed into positive territory by the Value Equity bucket (+83bps) but even here performance was mixed with DRWI being a slight negative contributor. The same could not be said of THRX, which was the key to this month’s performance, adding almost 100bps after the stock rallied over 20% during the month. The key driver came late in the month when GlaxoSmithKline (GSK) announced it would increase its stake in THRX to 19% through a private placement.
Portfolio
42.2% - Long Treasury Bonds (20.1% TLT and 22.2% in the Aug-29 Bond)
14.6% - Long Bond Funds (6.8% HSTRX, and 7.9% VBIIX)
7.7% - Value Idea Equities (5.5% THRX, and 2.2% DRWI)
4.1% - NCAV Equities
3.0% - Other Equities (1.5% NWS, 1.5% CMTL, and 0.0% SOAP)
-0.0% (delta-adjusted) - China-Related Thesis (<1bp premium in FCX put)
-2.3% (delta-adjusted) - Hedges/Put Options (1bps premium in S&P 2010 puts, 68bps premium in S&P 2011 puts and 7bps premium in a GS put)
6.3% (leverage-adjusted) – Currencies (3.2% EUO)
24.5% - Cash
November was a strange month for the portfolio, which spent the majority of the month mired in negative territory before benefiting from a mixture of the troubles surrounding Ireland and a company specific events (THRX, in the Value Equity bucket) to end up 7bips (putting the YTD at +6.97%)
The Treasury Bonds bucket was the big negative performer during the month (-69bps) as we saw continued appetite for risk for the majority of the month, before concerns about Ireland’s fiscal stability led to a late rally in yields. The Bond Funds (-10bps) also posted a small loss, which was constrained largely due to their exposure to shorter duration instruments. The concern surrounding Ireland’s fiscal debt situation resulted in some weakness for the Euro, something that benefited the Currency bucket (+39bps).
With the equity markets largely flat to down slightly, a number of the equity buckets failed to contribute. The NCAV (-24bps) and Other Equity (-13bps) buckets both posted small losses, which were broadly spread amongst the underlying positions, and the neither the Puts/Hedges (-1bp) nor the China bucket (-<1bp) had much impact on the portfolio.
The portfolio was however, pushed into positive territory by the Value Equity bucket (+83bps) but even here performance was mixed with DRWI being a slight negative contributor. The same could not be said of THRX, which was the key to this month’s performance, adding almost 100bps after the stock rallied over 20% during the month. The key driver came late in the month when GlaxoSmithKline (GSK) announced it would increase its stake in THRX to 19% through a private placement.
Portfolio
42.2% - Long Treasury Bonds (20.1% TLT and 22.2% in the Aug-29 Bond)
14.6% - Long Bond Funds (6.8% HSTRX, and 7.9% VBIIX)
7.7% - Value Idea Equities (5.5% THRX, and 2.2% DRWI)
4.1% - NCAV Equities
3.0% - Other Equities (1.5% NWS, 1.5% CMTL, and 0.0% SOAP)
-0.0% (delta-adjusted) - China-Related Thesis (<1bp premium in FCX put)
-2.3% (delta-adjusted) - Hedges/Put Options (1bps premium in S&P 2010 puts, 68bps premium in S&P 2011 puts and 7bps premium in a GS put)
6.3% (leverage-adjusted) – Currencies (3.2% EUO)
24.5% - Cash
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