Friday, August 28, 2009

links of the day 8-28-09

Keep on Keepin' On: Moral Hazard at its worst (WP)

Good and Bad Financial Innovation - Felix Salmon

Q: How much money is enough? A: More than you'd think.

A Paper by Cliff Asness on Value and Momentum Investing (AQR Capital)

Thursday, August 27, 2009

Update on my AIG Call-$40

Who called it? This guy.

On Friday, I said AIG was going straight to $40 and look at this:

Wow. Look at that. Flat, flat, flat, flat, boom! Straight to the moon!


links of the day 8-27-09

Weekly Unemployment Claims (Bloomberg)
Commentary on the numbers (Calculated Risk)
It appears that initial weekly claims have peaked for this cycle.

Markets and Values

Failed Banks by the Numbers (NYT)

Lexington's encounter at a healthcare rally (Free Exchange)

Wednesday, August 26, 2009

Panic! [in 1857]

Article here.

This tale seems vaguely familiar, hmm. Volatile markets were in turmoil leading a major company to fail leading to a drop in faith in the financial institutions. Then,

Commodity prices plummeted, factories shut their doors, railroads declared bankruptcy, hundreds of thousands of people lost their jobs, and land prices deflated.

Yea, that sounds pretty similar. The difference is: today we have The Beard [Bernanke]. He won't let the money supply contract like those idiots did back in 1857. I have faith in our banks because I have faith in Ben Bernanke!


Challenges facing Bernanke

What "pitfalls" should the Chairman be wary of? Economists respond whole-heartedly. The story is here.

Length of time to earn a Big Mac

In case the question "if I lived in Jakarta, how long would I have to work to be able to buy a Big Mac?" ever crossed your mind:

No good deed goes unpunished

Bloomberg story, here.

Good work chap. Bravo. You stuck your neck out and blew the whistle on some tax-evading American floozies. And now your good work has been rewarded with prison time! Hooray! So, while you have some time to think in your cell, picture this: your tax evading boss is running free as the wind back in Europe, singing on Swiss hilltops like somebody out of a Rodgers & Hammerstein musical, eating delicious chocolates, and he probably even plays daddy to your children on the weekends. Justice doesn't quite seem fitting in this case.

Hey, at least you'll get that up to 30% of recouped tax money as the whistleblower's reward, right? Actually, hold that thought. This Washington Post article says: "However, an IRS notice says the agency will refuse to pay a reward if the whistleblower 'is convicted of criminal conduct arising from his or her role in planning and initiating' the tax evasion." Damn!

A thought on prison: from Bryan Caplan at EconLog, prison rape. You have a 5% chance to get raped per year. And with three years in prison the odds are looking pretty bad, son.

And to think the Constitution has an Amendment against cruel and unusual punishments. I would probably characterize his treatment at the very least highly unusual.


Paul Krugman, Nobel Laureate; A left-wing stooge

All the President’s Zombies - August 23, 2009

"Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming. "

You are naive, Paul Krugman. There, it's been said. Now that we have that over with, I feel like shouting at you: Reaganism isn't over! Most people [who aren't liberal blabs] don't like taxes. Even if the Laffer Curve's concavity isn't as sharp and the benefits garnered aren't as strong as we would have liked, it doesn't rebut the fact that people liked the tax cuts!

"And then there’s the small matter of the worst recession since the 1930s.There’s a lot to be said about the financial disaster of the last two years, but the short version is simple: politicians in the thrall of Reaganite ideology dismantled the New Deal regulations that had prevented banking crises for half a century, believing that financial markets could take care of themselves. The effect was to make the financial system vulnerable to a 1930s-style crisis — and the crisis came. "

Wow. It must take a lot of guts to put these words in a major American newspaper. I seriously doubt that you actually believe what you have actually written. For one thing, it is an extreme oversimplification of a complex topic.

No, you should never think criticize Bill Clinton for signing into law the Gramm-Leach-Bliley Act which essentially permitted Citigroup to exist and allowed financial firms to consolidate. Nope, Reaganites get all the blame. No harsh words for Bill Clinton, who allowed two bubbles to form (stock and housing). That blame lies with Alan Greenspan (who was appointed by Reagan). Nor should we bring up the fact that Clinton applied pressure on Fannie and Freddie to increase the amount of loans going to subprime borrowers. That has to go to the Republican majority in Congress under the throes of that nasty Reaganite doctrine.

I have news for you: the world isn't one big conservative conspiracy. The left marches astep and is more complicit in the crisis than you would have us believe.

Paul Krugman is an inane goof who masquerades as a savior of the poor but he is really a typical academic apologist that made his name by striking a contrarian position [for an economist], found an warm, receptive audience, and ran with it. All the way to the bank. By the way, nice new place, Paul.

(note: I don't hate Krugman. I dislike his politics because he reads like an overbearing liberal, but I read a lot of his work. He is very intelligent and funny, thought provoking, and a great read. Proof: here, here, and here.)

links of the day 8-26-09

All the papers discussed in Jackson Hole are here.

Edward M. Kennedy dies at 77. (BG)

Emerging Market Debt is riskier than previously thought - (FT)

Internet Advertising (Felix Salmon)

CFA's market returns are greater than their MBA brethren. The results "suggests that business schools are teaching MBA’s to create risk."

Anal_yst fights back for the Blogosphere.

A nasty email dissin' the New School [of Chicago Economics]

Tuesday, August 25, 2009

Twittered Congrats to Big Ben

@Bernanke: gratz bro on gettn props from Obama. thx 4 keepn my free chk acct open. may b help me out on the savings %?

links of the day 8-25-09

An extremely great read about the complacency of Americans in resisting healthcare reform. (The New Yorker)

What this suggests about health care is that, if people have insurance, most will value it highly, no matter how flawed the current system. And, in fact, more than seventy per cent of Americans say they’re satisfied with their current coverage. More strikingly, talk of changing the system may actually accentuate the endowment effect. Last year, a Rasmussen poll found that only twenty-nine percent of likely voters rated the U.S. health-care system good or excellent. Yet when Americans were asked the very same question last month, forty-eight per cent rated it that highly. The American health-care system didn’t suddenly improve over the past eleven months. People just feel it’s working better because they’re being asked to contemplate changing it.

Obama: "Nobody's gonna hold me down. Oh no, got to keep [the money] amovin'!" Deficits are gonna get worse, sure.

The big news of the day: Beardie has been reappointed as Chairman of the Fed! Hurrah for maintaining consistency with monetary policy! I'll drink to that. (WSJ)

Becker has a new post out about the Cash for Clunkers program.

Monday, August 24, 2009

Dilbert tackles the mutual fund industry

links of the day: 8-24-09

Touristic Bias by Bryan Caplan of Marginal Revolution. A great review of why Europeans and Americans have the impressions they get when travelling across the Atlantic and why these impressions are misleading.

Dr. Doom: Surprise! Things are bad and I think it's going to get worse. That's what I've become known for saying, I get paid to say it, and besides, I say it smart.

Calculated Risk on Social Security. Hey, fossils, back to work! Stop watching TV and supplement that pension.

How toxic finance created an unstable world: By Wolfgang Münchau. An excellent article on the current predicament.

How will the US deal with the mountain of debt it is accumulating? The Money Game takes a look at the words of one of my favorite economists and bloggers, Arnold Kling.

Goldman Sachs apparently disseminates trading advice in a tiered system-skewing towards their better clients. I don't really think the WSJ is on the brink of anything, because I doubt these investment banking practices are new to anyone who reads their papers.

A hilarious walkthrough of a not-so-generally-publicized love affair with Bernie Madoff.

Saturday, August 22, 2009

Two of the largest US bank failures in history with little fanfare.

This week two of the largest bank failures in the history of the United States were announced. Yet Colonial Bank (6th, link: here) and Guaranty Bank (10th, link here) went down with few words and even less impression on the markets.

The question this raises to me is: does the media's selective coverage and "spin" represent some sort of concerted effort to manipulate the markets? Last fall to spring the media constantly bombarded us with these images of banks and factories closing, people being laid off, and a broadly-felt malaise. Today the media's tone has done a 180-degree turn. They present all of the "green shoots" in the best possible light, with the overarching message being that everything is getting better. All the while, these reports feed this "new" bull market where the S&P marches above 1000! Hurrah, everything is gloriious!

But is that the case? I'm not 100% convinced. I'm not some whacked-out conspirator from Snopes, but I have a hard time buying into a conviction that everything is all better. Sure it is heartening that national unemployment dropped month over month from 9.5% to 9.4% in July. And that's not some statistical fluke of an exodus from the labor force because the more broad U-6 number also fell by the same amount.

I think we are going to see positive GDP growth in the second quarter fed by the replenishing of depleted inventories. This fact, combined with the seasonal summer hirings, may have pushed the unemployment figures down as hiring managers have been loathe to fire seeing picked up demand during the holidays while simultaneously hoping for demand to pick up. However, if managers don't see sustained improving demand going into the fall we may be in for another, deeper round of job losses.

These are the predictions that I see for the upcoming three months. Considering this, I think that the market and the media are overhyping the earnings outlooks and therefore the prices of companies. Since I don't consider myself the smartest man in the world I doubt that I am the only one to share these beliefs. In fact many of these bits and pieces are borrowed from various economist's publishings. Which is why I am dumbfounded that the media has taken this deliberate, overly-optimistic mood; almost inviting the criticism that they are manipulating the markets. These ideas are probably in my head because I am reading Lefevre's "Wall Street Stories," which play up on the idea that there is a "man" in control.

In summary, I have to say that I hope my ideas are far-fetched and off-base because I don't want the suffering to be even broader and, for those [masses] on long term unemployment, even deeper. And as someone who checks their account daily, I want to be wrong. But if I am, my savings will come off the sidelines to pick up bargains. As I have come to learn, with every piece of bad news on Wall Street there is a silver lining.

Friday, August 21, 2009

AIG: Gives new meaning to volatility

I watch the markets carefully and with a lustful eye. I just finished graduate school, so I’m not overflowing with funds which mean I don’t have the extra cash to trade. Buy and hold will have to make do, and I’m doing exceedingly well with that (up 70 percent since the inception of my Scottrade account). I know that high return is heavily influenced by the date that I chose to start (mid-October 2008), but it wasn’t the absolute bottom and my return is better than the market return since then.

Anyway, the stock that has caught my eye lately has been AIG, the failed insurance giant. Looking further, I found that it has a beta of 3.59! (source: Yahoo!Finance). Thinking on it further, this is probably heavily influenced by the steep decline from ~500 to ~100 in just a few short weeks last fall. Also, it has 24.9m shares short out of a float of 134m (~19%), which leaves a big squeeze play on the table and helps to generate those huge swings. Still, in the past two weeks it has moved 20% a day multiple times. In fact, I advised a friend (who does have the money to burn) to purchase a small amount around 23 this week. He called me last night and said “whoa! That baby can move! I’m already up over 30%! Thanks, man!”

My thoughts on AIG: I think it is going to become ever more profitable as the credit crunch abates (realistically not until FY 2010), which will relieve AIG's creditor requirements that they post significantly more collateral on the CDSs. Who cares about that even? They hold $119b in cash (I know, I know, government money but it can be used for investment purposes). I think that 2Q earnings were no fluke, that they can be repeated and that the stock is so-so at $32/share. If I were holding it now I would target $40 and take my profits. Mostly because I am already skiddish about this fall's entire market outlook, but more on that later.

First Post

Good Afternoon All:
There are a lot of blogs available for consumption these days, but I wanted to throw my hat in the ring, too. Where is my comparative advantage? Well, I work an 8-5 job so I will be a regular, probably multi-poster week-daily. In addition to my punctuality, the content of the blog is what interests me most: economics, finance, the markets, and most of all $$$.
So what can you expect?
1. ISLM links of the day-everybody has a links post, not everyone names theirs after a macroeconomic model.
2. The random, enlightened evaluation of someone else's work (rarely ever original).
3. And, hopefully, I'll get around to being creative and build my own model, write unique analyses, or anything else that strikes me.
I don't have hopes to build the world's most followed blog, but if I could create something useful, something worthwhile, something that Ayn Rand would consider worthwhile, then I will be satisfied.