Crisis may make 1929 look a 'walk in the park' - Telegraph

What happens when the global bond markets decide to shut down for a protracted period?

Banks and financial organizations still hold their assets, though nobody wants to buy them or even trade for something else.  This leaves the organization with a valueless asset, until the market can bear it again.

With all of these assets supporting capital requirements, revaluating them has some important implications.  Banks are required to hold a certain amount of capital according to Basel regulations, and if this doesn't happen, liquidations occur.

But what if there is still no market for the liquidated assets?

Managers and execs will probably decide to go on holidays for awhile...

Glance at the more or less healthy stock markets in New York, London, and Frankfurt, and you might never know that this debate is raging. Hopes that Middle Eastern and Asian wealth funds will plug every hole lifts spirits.

Glance at the debt markets and you hear a different tale. Not a single junk bond has been issued in Europe since August. Every attempt failed.

Europe's corporate bond issuance fell 66pc in the third quarter to $396bn (BIS data). Emerging market bonds plummeted 75pc.

"The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor.

Crisis may make 1929 look a 'walk in the park' - Telegraph

Another scary graph... the music stopped in August and it has been eerily silent ever since.

RGE Monitor - Brad Setser's scary graph

Doesn't this look like something a bunch of lemmings would walk off of?

Basically a drought in US bond purchases is posing a problem with liquidity.

A big drought.  A really, really big drought.

The fall in demand for US corporate debt (especially from the UK) has been especially sharp.

The sharp fall in total bond inflows line from the preceding two graphs is, of course, a reflection of the fall in total inflows to the US in my scary graph. It is based on the same underlying data. The higher frequency graph – updated for October – isn’t quite as scary as before, but it doesn’t suggest rude health either.

RGE Monitor

Finally Woken: Donald Trump's Scotland Golf Plan Rejected.... and then the council was fired.

Trump was talking this one up at the Wealth conference I went to last month. Seems he bought 2000 acres of pristine Scottish waterfront years ago, and some 'loonie' farmer dressed in a kilt was stirring up a ruckus because he wanted to develop it.

Looks like the farmer had his way with ye! Gosh and Begorrah! With heart, faith and steel. In the end there can be only one.

Donald Trump's Scotland Golf Plan Rejected

It's not everyday Donal Trump faces a rejection. But his plan to build a £1 billions (that's Rp 20 trillions or about one-third of Indonesia State Budget of Revenues and Expenditures!) golf complex and housing development at the Menie Estate in Aberdeenshire was rejected last weekend by Aberdeenshire Council's infrastructure committee.

Source: Finally Woken: Donald Trump's Scotland Golf Plan Rejected

I got a really bad taste in my mouth when he mentioned this project at the conference, and it wasn't from the crappy overpriced food I ate in the Jacob Javitts Centre. In my opinion it was disgusting that something of such beauty and natural heritage could be turned into a golf course & housing complex. Golf courses are notorious for their water consumption and effects on the environment, not to mention high-density housing & recreational development.

I do appreciate Trump's view that golf courses are beautiful things and he's going to put a bunch of money into the country and revitalize the economy. However, there has got to be a better way to appreciate your heritage without affecting the environment drastically. Why not build a Trump eco-university with a mini-putt course? The world's largest roadside attraction? Or just buy St. Andrews?

Of course I'm biased because I suck at golf.

Now if they made the ball 1 foot around and played golf in an undeveloped field maybe it would be more fun, and perhaps I could get it in the net. It could be friendly to the environment too... or at least friendlier than a water-sucking golf course.

A place I went to in the summer really showed me how one teacher and a few students with very little money can restore an area and turn it into one of the Seven Best Views in Canada.

Cape Enrage is next to Alma, New Brunswick. I stayed in Alma in the summer of 2007, at the only hotel, next to the only gas station. There wasn't a whole lot to do in Alma. I asked the hotel clerk what he did for fun there.

The clerk, in his late 30s, said to me,

"There's a nice golf course up the hill. I try and go there twice a week when the weather is nice."

Needless to say, I didn't go golfing. I did, however, go to Cape Enrage and Fundy National Park. The whole area is probably one of the quietest and most serene places in the world (except for the constant sound of surf crashing on the rocks).

The main thing to do in the area was to watch the tides come in.... 30 feet per day!

According to one of Trump's associates in the video, "I think it was the people in Aberdeen, the Shire, that were really let down today."

Hopefully the people of Scotland and the council of Aberdeenshire will learn a lesson from Costa Rica, turtles are way more important than golf courses.

They haven't learned quite yet. The project is still a go.

Council Leader Anne Robertson welcomed the decision, saying: "What is important in all this is securing the economic future of the north-east of Scotland.

The application by Trump International Golf Links Scotland was recently rejected by the Council’s Infrastructure Services Committee (ISC) and was called-in by the Scottish Government.

Support for the plans will be put forward by the council as an enhanced consultee as it is now no longer the planning authority, a role now fulfilled by the Scottish Government.

This explains why the hotel we stayed at in Costa Rica ran out of water during my friend's wedding.

If you get a chance, go see New Brunswick's Cape Enrage. You can even play a round at the nine-hole they have down the road. There's no traffic, but watch for bears & moose.

And the Canadian Dollar is still below par right now... at $0.9978 per Amero.

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Update: Apparently the people of Aberdeenshire are 93% in favour of the development. Of course, they did interview a window washer in the news clip. What's he going to do? Turn down a billion pounds to develop some craggy rocks? You'd have to be nuts to do something like that! Maybe dance around in a field wearing a kilt? :)

There's no way this course will get vetoed now.... Trump threatened to send it to Ireland and sic'ed his lawyers on the council, and frequently brings up his mother in talking about the deal. And he's only going to build one course in Europe anyway... because, according to him, "it's too far away."

Yeah, eeecht hoors frae new york is aways Ah guess. It is aw abit scottish heritage thocht.

http://www.youtube.com/watch?v=uV3OtNzkasU

Th' comments fur thes video bonnie much sum up th' varioos opinions. reality is funnier than fiction.

Sorry, foond th' Scottie Translator. Aw future postings will noo be in scottish.

Update: they fired th' guy fa was glaikit enaw tae vote against trump an' turn Scootlund intae a potential Venezuela fur business.

Update: Here's a thread from Aberdeen locals with seemingly close connections to the project.

Update: McConnell 'broke rules' on £300m Trump golf deal

Salmond to appear at Trump probe

Scotland's name globally besmirched over the Trump nonsense

Something tells me Michael Forbes the farmer and his 83 year-old mother are going to become tourist attraction all by themselves. He would be well advised to start building his mini putt course and put up some road signs.

Trump and .... Conrad Black's email?

Mish's Global Economic Trend Analysis: Fitch Discloses Its Fatally Flawed Rating Model

Good article that predicted the subprime failure.. and shows the dependency of banks on their models.

Questions To Ponder

• How many billions of dollars will be lost because of absurd pricing models?
• How can it be that an entire system of investment decisions are based on ratings that the ratings companies tell everyone not to use for investment purposes?
• Were the ratings companies grossly incompetent or just foolish?

Mish's Global Economic Trend Analysis: Fitch Discloses Its Fatally Flawed Rating Model

CADUSD=X Chart - Yahoo! Finance

Looks like we may be in for a pop in the Canadian Dollar again....  an uptick in RSI along with a spike yesterday seems to indicate moves above par for the next little bit. 

Link to CADUSD=X Chart - Yahoo! Finance

FT.com / Home UK / UK - Can managers reduce the risks of lean production?

I wonder if the same goes for the production of credit & the money supply?

Accepting the relationship between risk and stock levels is key, but reducing stock levels without first reducing risk is tantamount to commercial suicide.

FT.com / Home UK / UK - Can managers reduce the risks of lean production?

Another article from Roger Martin, Dean of Rotman School of Management, that provides a contrarian view to portfolio management theory.  Michael Lee Chin bets the farm on 1 stock & wins.

http://www.rotman.utoronto.ca/rogermartin/OM_Excerpt1.pdf

The part I like the best is the comment that "The Chinese character for 'crisis' combines the characters for 'danger' and 'opportunity'".  I wonder how you write Fear & Greed in Mandarin?

Organization of Debt into Currency by Charles Holt Carroll

Sounds like a dry book to me, but it's strikingly similar to the current situation with CDOs, SIVs, and other derivative products. 

But the difference is that it was first brought up around 1858. 

Although both borrower and lender cannot have the same dollar at the same time, both are privileged to check upon it, and may offer it for purchases; thus it produces the same effect upon market prices, by degrading the exchange value of money, as double the amount of gold and silver in the hands of individuals. A sum thus available at sight by a check on the bank is as much currency as the bank note deposited in one's pocket.

Source: Organization of Debt into Currency by Charles Holt Carroll

Ever wonder why it takes a day to get your savings transferred to your chequing?  Perhaps it's because savings accounts don't really have any money in there.  You are loaning the bank money, which it "sweeps" out of your account on a regular basis, lends out, bundles into derivative products, gambles on the markets, or pays its employees & shareholders.  Your bank balance is just a computer printout until you sweep the money back into your hand from an ATM.  It duplicates, triplicates, fabricates the currency until it is many times leveraged. 

A similar thing happens to your chequing account, though on a smaller scale, since some reserves are sometimes required.

What if the money you're depositing isn't really anything either? 

"The term "deposit," as applied to the amount at the credit of a borrower, is in truth a misnomer, for the borrower deposits nothing—there is no money in the transaction; it is simply an exchange of debt. Yet it is effectually currency to be used as equivalent to coin at any moment. In event of a bank contraction, however, it is apt to become a most embarrassing claim upon both bank and borrower, for real dollars that are nowhere—that never existed."

This is another situation currently happening in the markets.  Lack of liquidity in derivative instruments has forced some financial institutions to write off their "mark to model" assets at a heavy discount.  Because they need a certain amount of capital or assets to maintain their credit worthiness or to stay within loan limits, this is causing some serious crunches.

"But the effect upon the general commerce and the individual prosperity and happiness of the people of this country is our concern in this matter. Nothing will prevent the precious metals from going where there is an effective demand for them, and nothing will prevent them from leaving the country where such demand does not exist. If we do not use them for currency they will go where they have that use in addition to other uses; for, like all other commodities, where they possess the highest utility they possess the highest value, and under the keen instincts of commerce they are as obedient to the law of value as matter to the law of gravitation. They only are money; a promise to pay them is debt, and that debt is not equivalent to money, unless coin is exchanged for or remains deposited and pledged to meet it."

This is a bit antiquated, as currency has really become a psychological gold.  Because so many instruments, assets, and debt are traded with currency, gold is forgotten in many circles.  It is only when there is a crisis in the markets that the gold factor is really hyped.  The key reason?  Maybe it's to sell more debt to dig for more gold... and use the debt and assets raised to purchase other things.  Really it's all in your head, as is the concept of money.

The other thing that was found when analyzing these complex financial instruments, was that the bundles they had of debt were sometimes duplicated or triplicated, or worse.  Your mortgage was sold to one party, then bundled and sold to another.  They both paid for the same virtual good, and will expect to hold title to that good.  When things will get interesting is when they decide to pick up their purchase, or audit their books to figure out what the heck it was they actually paid for.

The auditing is what happened in August.  Inventory didn't go so well that month.

"We cannot eat our cake and have it too; this truth was settled to the satisfaction of each one of us in the nursery; nevertheless, we try the same absurdity in principle in our currency, and the consequences are demonstrated in financial revulsions, such as that which befell the country last fall. We must accept money or debt for currency; we cannot have them both for the same sum at the same time."

Again, this was the 1850s.

List of Canadian Securities Dealers

Here is a list of Canadian Securities Dealers. 

Some facts about Canadian Securities taken from this list.

Ontario has the bulk of securities dealers with 126 firms.  If you want to corner the market and be a deep thought in a shallow pond, go to Saskatchewan, Manitoba, or Nova Scotia.

There are around 27 cities in Canada with securities dealers.

The largest?  Toronto of course... nothing's got Bay St. beat.

A suprise?  Westmount Quebec has 3 dealers.  Quebec City has 2.  There's a dealer in Uxbridge, Ontario (First Leaside Securities Inc) and Red Deer Alberta (Retire First Ltd).

There are a few Americans on the list, some with Canadian company names, others with Canadian company addresses (but American head offices).

Liquidnet Canada is stationed in New York.

optionsXpress Canada, which I just printed out my application for, is in Chicago.  I never did finish my e*Trade application, even though I attempted it 3 times.

If you're looking for a security dealer and you're not happy with your bank, one of these should do.

The Global Financial Market's play the Telephone Game

Ummm.... does this work in real life?  It never worked when we played the telephone game in school.  By the time the conversation got to the end of the line it would be a mangled mess. 

The so-called ''originate-to-distribute'' business model involves a chain of stages with different counterparties transferring risks between them. At the outset of the chain, a mortgage company provides a housing loan to a borrower, categorised as ''sub-prime'' due to their less creditworthiness. Then, the lender, or the originator of the mortgage loan, sells it to commercial banks and investment banks, which then bundle different loans together to form securitised products such as mortgage-backed securities (MBS) and collaterised loan obligations (CDOs). In this process, these arrangers of securitised products deal with credit rating agencies to obtain ratings from them. In the final phase of the process, these securitised products are sold to end-investors through distributors, typically large investment banks. At each stage of this process, credit risk is transferred from one party to its counterparty. Supposedly, accurate information on the risk should also be transferred from one party to another in due manner in this process.

Source: The Global Financial Market... : FSA

The Japanese Commissioner to Japan's Financial Services Agency (FSA), Takafumi Sato agrees.

In reality, however, this may not have been the case. Rather, there is a possibility that in many cases information was transmitted in a distorted manner and accurate information was not transmitted between counterparties. For a party who was going to transfer credit risk by selling its claims to the counterparty, there might have been little incentive to carefully examine the quality of the credit due to be sold. Moreover, there may have been disincentives for the party in question to disclose accurate information to its counterparty. Thus in many cases, end-investors, and probably arrangers and distributors as well, may not have been adequately informed of, and may not have fully understood, the true nature of the risks they were bearing.

 

Could your home foreclosure cause a hedge fund to fail overseas?  This is the Butterfly Effect taken to a new level.

CXOAG Trading Calendar - December

 Looks like vacation days are good trading days in December...

Trading Calendar - December

The following chart shows the average month-to-date percentage change in the S&P 500 index by trading day during December from 1990 through 2006. Day 0 represents the November close. The index during December tends to be quite positive, with the gains coming mostly at the beginning of the month and toward the end of the month (Santa Claus rally). We have not used data for trading day 22, because most Decembers do not have 22 trading days. Also, sample size is only 12-17 for specific trading days, so these results are only weakly suggestive rather than predictive. For 1990-2006, 14 Decembers have been winners and only three losers.

Source: CXOAG Trading Calendar - December

Financial Consumer Agency of Canada - Money Tools

 This service allows you to compare bank fees and credit cards in Canada.

 

Cost of Banking Guide - For quick and direct access to information on current banking account packages available in Canada. Find out which one works best for you.

Credit Cards and You - Find the credit cards that best suit your spending habits. Compare cards in detail — side-by-side, feature-by-feature.

Source: Financial Consumer Agency of Canada - Money Tools

Innocent bystanders and government bailouts

 Don Kohn, Vice Chair of the Fed, talks about justifications for the bailout of lenders and borrowers in a November 28, 2007 meeting with the Council on Foreign Relations.

Are these innocent bystanders (lenders) really that innocent?  Didn't they know that a resetting ARM mortgage is a risky way to lend money, and instead of just keeping hands in the pockets of their customers they were pulling off their clothes? Are the banks planning on getting in the business of selling used clothing?

How about the borrowers?  To a lesser extent, they should have understood that there's no such thing as a free lunch, and that debt is usually a bad thing, especially when there's a time-delay bomb attached to the loan.  But free money is hard to refuse.  And being able to borrow free money and make payments on a house you can't affort is a great thing while it lasts.  Especially if you don't need to justify why you need to borrow the money.

The FOMC vice-chair speaks on morals...

The first issue I want to discuss is moral hazard. Central banks seek to promote financial stability while avoiding the creation of moral hazard. People should bear the consequences of their decisions about lending, borrowing, managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill-advised. At the same time, however, in my view, when the decisions go poorly, innocent bystanders should not have to bear the cost.

And then goes into repricing assets for liquidity

In general, I think those dual objectives -- promoting financial stability and avoiding the creation of moral hazard -- are best reconciled by central banks focusing on the macroeconomic objectives of price stability and maximum employment. Asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift.

And then he compares the tech bubble to the housing bubble

Such a strategy would not forestall the correction of asset prices that are out of line with fundamentals, nor would it prevent investors from sustaining significant losses. Losses were evident early in this decade in the case of many high-tech stocks, and they are in store for houses purchases at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely.

Does this mean they're going to pay me back the money I lost on bid.com & Nortel?  Whohoo!

Then he goes on to Joe Economy, and how he is currently being held hostage. 

To be sure, lowering interest rates to keep the economy on an even keel when adverse financial-market developments occur will reduce the penalty incurred by some people who exercise poor judgment. But these people are still bearing the cost of their decisions, and we should not hold the economy hostage to teach a small segment of the population a lesson.

The solution?  Bail out the greater fool!

Third topic: Liquidity provision in bank funding markets. Central banks have been confronting several issues in the provision of liquidity in bank funding. When the turbulence deepened in early August, demand for liquidity in reserve pushed overnight rates in interbank markets above monetary policy targets. The aggressive provision of reserves by a number of central banks met those demands, and rates returned to targeted levels.

In the United States, strong bids by foreign banks and dollar-funding markets early in the day have complicated our management of this rate. And demands for reserves have been more variable and less flexible in an environment of heightened uncertainty, adding to volatility in the overnight rate.

In addition, the Federal Reserve is limited in its ability to restrict the actual federal funds rate to within a narrow band because we cannot, by law, pay interest on reserves for another four years.

That statement caught my eye.  Paying interest on reserves?  Does that mean that bank reserves are now loans to the government rather than insurance against defaults?  That's got to be a substantial drain on taxpayers dollars to pay for the security of the banking system.  Maybe the money's coming from somewhere else?  Peter or Paul?  I hope I'm going to get some interest paid to me when my auto insurance comes up for renewal, instead of having to pay them monthly interest for something I don't really want anyway, but I'm legislated to have for my own protection. 

Of course, if I wasnt legislated to have insurance, I probably wouldn't have had it when my car was stolen or broken into, which caused me to keep buying more expensive car stereos, which caused them to keep getting stolen, which caused my premiums to go up, which caused my personal reserves to go down.  Note to self: next time, don't buy the most stolen car of the year and don't drive around with the stereo blaring.

Most Stolen Autos.

Reminds me of the story one of my former co-workers told me about his first job working for the government out of college.  He found out his starting salary was $28,000 per year.  First thing he did?  Bought a $27,000 Camaro.

His dad was driving around the car by the next year.

 

Ultimately the banks wouldn't be paying much interest anyway, since they may eliminate reserve requirements altogether.

MR. MEYER: Okay. Well, I hope you appreciate that that was an absolutely brilliant speech. It was incredibly forthcoming. It sounded nothing like anything you've heard since the last meeting from other FOMC members. That's not a surprise, because the only FOMC members that can change the message are the vice chairman and the chairman. And that was an absolutely brilliant speech. I'm breathless. This has answered all the questions I had, so I don't know what I'm doing up here. (Laughter.)

Source: C. Peter McColough Series on International Economics (Transcript) - Council on Foreign Relations

I'm out of breath here too... More on Financial Services Regulatory Relief from the minutes of October 25, 2006 Fed meeting.

The Chairman noted that the President had recently signed the Financial Services Regulatory Relief Act of 2006, which among its provisions gave the Federal Reserve discretion, beginning October 2011, both to pay interest on reserve balances and to reduce further or eliminate reserve requirements. The Act potentially has important implications for many aspects of the Federal Reserve's operations and the Chairman asked Vincent Reinhart, Director of the Division of Monetary Affairs, to form a committee of Federal Reserve System staff to consider these issues.

http://www.federalreserve.gov/fomc/minutes/20061025.htm

 

Ignorance is bliss, and recent Fed transparency & bank transparency changes are the opposite of ignorance.  Not sure if it is a good thing or not.  The Vice Chair isn't sure either...

But I do think the -- and expected some year-end pressures, but I have to admit -- speaking for myself and certainly not for the committee -- the degree of deteriorating that's happened over the last couple of weeks is not something that I personally anticipated. I think the losses that have been announced that seem entrain and have been announced were greater than people expected. This raised questions about financial institutions, how much capital they had, how vigorous they would be in pursuing new loans. Financial institutions became more cautious. And I think this process is one that we're going to have to take a look at when we meet in a couple weeks.

And my favourite question.

MR. MEYER: Okay. My last substantive question: Do you believe there was a Greenspan put?

Let me answer that with what he is obviously going to say anyway... You so crazy!

The questions after the interview are even more forthcoming.  US Dollar valuation, inflation, central bank intervention. Basel II implementation, etc.

Read the full transcript here.  C. Peter McColough Series on International Economics (Transcript) - Council on Foreign Relations

Pink Sheets: Disaster Preparedness Systems (DPSY)

This just proves that it makes sense to go public if you're crappy with your finances.

Let's look at the balance sheet where we see forty-four dollars in cash and $1,090 due from a related party.

During the nine month period ended August 31, 2007, the Company advanced $1,077 (2006 - $Nil) to a relative of a director. The amount is unsecured, non-interest bearing and due on demand. [Note 7 c]

Dude, pay the damn loan back!

Pink Sheets: Disaster Preparedness Systems (DPSY)

How to lose $9 trillion in a bull market - Nov. 29, 2007

Paper gains or no gains at all... between commissions, taxes, and market timing, the average market gain is only 4.3%/year.  Take any information on gains with a grain of salt.

In reality, because investors pumped $1.1 trillion into Nasdaq stock offerings between 1998 and 2000 - just before the worst crash in modern history - the typical dollar invested in the Nasdaq earned only 4.3 percent a year, less than half the historical return.

Source: How to lose $9 trillion in a bull market - Nov. 29, 2007

Why Invest?

We invest for an emotional return that more important even then the financial return. In fact, money is never the goal of investing. It is the means to the end, a currency that buys us emotional states (e.g., feeling safe, feeling proud, feeling free).

Source: Stock Market Psychology Blog: Behavioral finance and beyond

Don't be a Footsie neurotic - Fear and Greed

 The reason why the stock market has been around for so long?  Same reason that any activity involving fear or greed has been - receptors in the brain.  The more they fire, the more you need them to fire to feel at least as good as last time.

Plunging stock prices ignite the same circuits in your brain that respond to the snarl of a lion. Just a flash of the red colour that symbolises a downtick is enough to excite the circuitry in your brain - and to make reflective thinking more difficult.

Merely reading the words "stock market plunges" in this sentence will raise your pulse, quicken your breathing, increase your blood pressure and tense your muscles.

If you needed to make a snap decision about a stock immediately after reading those frightening words, you would involuntarily have been propelled toward selling. Yet, because emotions can often be unconscious, you might well believe that you had made a reasoned decision at the very moment you were in the grip of a primordial fear.

Source: Don't be a Footsie neurotic - Telegraph

I think there will be a lot of Neuro-Economicists in the future.

And the best reason to ditch your Blackberry and become a techno-idiot like Warren Buffett?

Psychologist Paul Andreasen found that investors who received frequent updates on their holdings earned half the returns of those who got no news at all.

Ignorance is bliss.

SSRN-Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula (third version) by Espen Haug, Nassim Taleb

So the option pricing formula everyone is using isn't really Black-Scholes, and all they really did was market a well-known formula that already existed.

Similar to the lightbulb, which Edison didn't invent, or the car, which Ford didn't create, Black-Scholes-Merton have apparently created a mask of illusion that they derived the magic formula for pricing options.

And did they fool the Nobel committee?  How many other Nobel prize winners were actually just good marketers?  The guy who invented the lobotomy?  Prize decisions are irreversible so their medals should be safe.

I wonder if Haug and Taleb have a vendetta against these guys - they sure aren't pulling any punches in this essay.  I'm surprised they didn't put any yo mamma insults in there...

Abstract:
Options traders use a pricing formula which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian. Such formula is popularly called “Black-Scholes-Merton” owing to an attributed eponymous discovery (though changing the standard deviation parameter is in contradiction with it). However we have historical evidence that 1) Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the “risk” parameter through “dynamic hedging”, 2) Option traders use (and evidently have used since 1902) heuristics and tricks more compatible with the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter by using put-call parity. The Bachelier-Thorp approach is more robust (among other things) to the high impact rare event. The paper draws on historical trading methods and 19th and early 20th century references ignored by the finance literature. It is time to stop calling the formula by the wrong name.

Source: SSRN-Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula (third version) by Espen Haug, Nassim Taleb

Guts, Long Term Capital Management, and Doubling Down your losses

LTCM was a hedge fund that failed in the late '90s after betting enormous amounts of money and losing to a few 'Black Swans', mainly an event overseas that they couldn't predict (Russian Ruble collapse) along with a loss of liquidity, massive declines in assets, and an increase in their leveraged investments.  Apparently their competition got access to their positions too, which couldn't have helped them.

Since LTCM had an almost unlimited bankroll, they could easily put their funds 'all in' and scare off any competition.  They could move markets, and even create new ones.  Manipulation?  Definately possible.

However, they couldn't win if there was no market left, and the loss of liquidity and value of the Ruble killed their Russian bets and ultimately the fund.  Being large meant that they could not easily exit their positions without major losses.  The very fact that they were selling some of their smaller positions caused the value to decrease.  Plus their competition could snipe them as they went down.

This article talks about the Kelly criterion, which is really a way of position sizing your bets based on a given expectation of positive value, while keeping some money left in your bankroll.  Perhaps LTCM used this type of formula in their quant-based system, along with some time-decay math?

It didn't work for them, because "the market can stay irrational longer than you can stay solvent."

The cold hard fact is that all progressive betting systems are nothing more than modified versions of the Martingale system. In the Martingale, you risk one unit, and if you win you keep risking one unit. If you lose, you double your bet, and if you lose again you re-double and keep re-doubling until you finally do win. Then you go back to risking one unit.

As any fool can plainly see, the Martingale can’t miss, so long as you win one more bet before you die you’re going to be a winner.

Well, yeah, if you lose12 bets in a row you’d have to risk $409,600 to win $100, but how often is that going to happen?

As it turns out, plenty.

Source: Debunking the Kelly Criterion - Sports betting picks, sports betting 'how-to' material, sports betting books, audio tapes, research material, sports betting computer programs on disks, gambling info, football, basketball, baseball picks, gambling money management, team stats, 'Professional Gambler' newsletter, tools for serious gamblers

One of the guys I used to work with bet on ProLine.  His sports gambling habit one year paid off to the tune of $27,000 in just a couple of tickets.  He went out and bought a brand new truck.

Less than a year later he hit a Black Swan - not literally, but he had the truck stolen from a parking lot near work.  Along with his golf clubs.

Do you think he went out and bet $60k on Proline tickets?  Could have, he was a pretty big gambler... but I doubt it.

At least he didn't somehow manage to borrow $7,950,000 against the truck like LTCM did.

If he did, I think the bank would have been willing to loan him another $60k to get their money back.

Ritual dating from 1919 sets price of gold - washingtonpost.com

How is the price of gold determined?

In addition to Barclays and Deutsche Bank, the other banks who take part in the fixing are HSBC Bank, Societe Generale and Bank of Nova Scotia's bullion division, Scotia Mocatta.

Ritual dating from 1919 sets price of gold - washingtonpost.com

Fear and Greed - The Risk of a U.S. Hard Landing and Implications for the Global Economy and Financial Markets

 This speech from NOURIEL ROUBINI, Stern School of Business, New York University on September 13th is the best summary of the current capital market mess and its implications for the world that I have seen.  If you're an optimist or realist, I would suggest not reading this as it could get you down.  If you're a pessimist don't read it either - it will just make you worse.

So we have created essentially in part a little bit of a monster. Of course we all know the benefits of financial globalization and securitization and all those things, I am not saying that I am against them. But you've created a financial system in which if you take out mortgages, the mortgage originator does not care: he or she maximizes volume and [gets higher] income. Then the bank originates the stuff and packages it in MBSs and then they get the fee and they shove it to the investment banks. And the investment banks tranch it in all the different tranches of CDO and then shove it to their final investors and the rating agencies give their blessings. You would think that the final investor is the one who has to provide the market discipline but after four stages you do not even know what it is, and after CDOs you have CDOs of CDOs, and CDOs of CDOs of CDOs
(Laughter.)

and then how you price this stuff. Of course there is an element of greed. At some point people were searching for yields or they should have known better, so I cannot just blame the rating agencies. But you have a whole system in which essentially people were making income not from bearing the credit risk but essentially transferring it somewhere else and getting the fees, and in most of the financial system that is how it gets its profit these days, so there is a fundamental kind of problem. On top of that the regulators [were] asleep at the wheel and let this stuff occur without any kind of constraint.

Source: Transcript of IMF Seminar -- The Risk of a U.S. Hard Landing and Implications for the Global Economy and Financial Markets

And then he goes into speaking about a possible hard landing in the US Economy, and whether the world will be affected.

The final thing I want to just briefly just speak about is this question of will the world decouple from the U.S. or not.

A little bit less than briefly, this is the longest paragraph in the speech.

The first victim of a hard-landing in the US economy?  China? Who would benefit the most from a hard landing in the US economy?  Russia?  Other parties affected?  Emerging markets due to risk aversion.  Commodity-rich countries.  Anyone and everyone, though not on the scale of the US.  The bigger they are....

The question and answer session has even more tidbits of information.

MS. SANTOS: That was quite a disturbing lecture. I am Barbara Santos, retired from the World Bank. Let me ask you, professor, if you were in Mr. Greenspan's shoes a year ago or 18 months ago, what measures would you have taken to avoid this terrible scenario?

Mr. Roubini speaks about the last few years of "laissez-faire" regulation, and summarizes the current financial woes in the simplest manner possible.

So essentially you have the element that private markets want to make money, they are greedy, and you have to have good, sound public policy and there were failures of the credit ratings of the financial institutions and the regulators. So that was an element of the problem.

The other element of the problem is right now: I think there is going to be a renewed debate about this issue of how you deal with asset bubbles.

He suggests that the Fed should have popped the bubble long ago, but that it is the belief of Greenspan, Kohn, and Bernake that you should let the market do it's thing in good times, and only be there to provide a cushion in bad times.  (The cushion being the US taxpayer eventually.)

The Canadian finance minister's view on bubbles seems to contradict our neighbours to the south.  BCE, one of Canada's largest taxpayers, decided to go the Income Trust route and save $800 million a year.  Last October, the minister promptly and efficiently put a pin into the Income Trust bubble, calling it "a growing trend towards corporate tax avoidance" that would hurt Canada.  However, he left REITs alone, and the housing bubble has kept growing since, with the best year ever for Toronto markets.  The average house price is almost $400k. By contrast, homes in the US are expected to decline in price by 10%-20% between the peak of 2007 to the low of 2009. 

His comments on 'Chindia'—China giving us all the cheap goods and India all the cheap services really make sense when it comes to inflation control on goods and services, while increasing the prices of assets and commodities.  By outsourcing inflation to China & India, it causes the CPI number to go down.

What happens when the Fed intervenes in a bubble?  It breaks, but when a bubble breaks it can sometimes form many smaller bubbles.

MR. ROUBINI: It could be the next housing crisis or maybe the next bubble. Some people say the Fed created first the tech bubble and then the housing bubble, and if they now ease they are going to create another bubble, even if we are running out of asset markets in to create bubbles.

(Laughter.)

For a while people thought it was private equity; now that has reached its peak and so on. But we can find other things.

There is already a post-mortem being done by the Financial Stability Forum (FSF) on the financial situation that came to a head in August, and the patient isn't even dead yet.  They recommend a quick adoption of the Basel II capital guidelines, a set of requirements for managing risk to a portfolio of instruments.  This report won't come out until next Spring at the earliest, so don't expect any fast solutions to the problem, and don't expect the US to spend more CAPEX on adopting Basel II.

According to Mr. Roubini, "(t)here will be changes. After LTCM I remember—in 1998 I was in the U.S. Treasury and the White House—there were lots of proposals and then when calm came back and nothing was done, and 10 years later we are still discussing whether we should regulate hedge funds or not, directly or indirectly, and I am not saying that we should. But changes in financial regulation, even when there are big crises, occur only slowly, incrementally at the margin."

The largest bubble mentioned in Mr. Roubini's speech?  "Credit derivatives 10 years ago were zero, today they are a notional value of $26 trillion".  That's $26,000,000,000,000.00 in US dollars. 

Even with a systemic breakdown in these instruments, he doesn't see a Great Depression or anything of that sort.

More on Nouriel Roubini on his home page at NYU, his Wikipedia entry, his blog on Global EconoMonitor.

Notes from Alan Greenspan's 2008 Forecast @ The Learning Annex

Notes from Alan Greenspan's 2008 Forecast @ The Learning Annex

I recently attended the Wealth Expo organized by The Learning Annex. Bill Zanker has signed Trump on to a 3-year deal, and he was the headliner of the show along with Tony Robbins and Alan Greenspan.

Alan Greenspan came on the satellite feed shortly after 8am on Sunday morning. It was an interview-style presentation, with NBC's Michael Corbett leading with the questions. Some of the ones that stood out for me. Based on my notes, the wording could be slightly modified ** means more than slightly. I tried to recap the message Greenspan was trying to convey, though there could be a bit of misinterpretation based on my memory.

MC - Who was your favourite president to work with?
AG - Gerald Ford, he will be missed greatly by me.

Reagan was great as well, and his policy advisors complemented the policy of the Fed.

MC - *Why is there a housing crisis?*
AG - In 2003, lower rates in Japan caused problems with deflation. The US does not want this to happen here. The housing bubble and condo bubbles are coming to an end. Long term rates ultimately affect the market. Housing bubbles are due to decreases in short term interest rates.

The difference between this bubble and many in the past is that the real estate bubble is the same everywhere. There needs to be a global solution to the problem.

The core reason why the bubble happened is due to consequences of the end of the Cold War, the rise of Market Capitalism, and production growth inflation.

There was an obvious amount of liquidity permeating the markets, and the low rate was creating problems, with a 5% growth in money supply year over year.

MC - How long will the softening of the real estate market continue?
AG - New homebuilders need smaller inventories. Vacant homes cause many problems for builders, including vandalism and exposure to inclement weather. Builders are creating fire sales to move inventory.

How low will prices fall before consolidating? We haven't even started.

(AG cellphone rings off camera. A warning from the Plunge Protection Team? )

If liquidation is fast, there is a possibility of prices flattening out in spring. (AG pauses, somehow I think he believes it is worse than that)

MC - With regards to the dollar decline & economy, why did the USD weaken?
AG - It was not necessarily a weakening of the US dollar as it was an increase in demand for the Canadian dollar. The last several years have gradually seen an improvement of the value of the Canadian dollar compared to the USD. The main reason is the huge demand for commodities in China and emerging markets. Spot exchange rates fluctuate with interest rates, and are cyclical. There is currently a major inflation concern. However, the weakening USD has no real economic consequences for Americans. (Huh?)

A large share of the US national income goes to the finance sector. Savings and capital investments are key spending trends. The US wastes almost no savings. (Wha?!?) China wastes much more.

New York is exporting finance to other markets, including deals in Canada, and Europeans are investing in the United States.

MC - What will be the effect of a new president on the economy?
AG - With the extent that globalization is taking over individual economies, the economic policies of the president and government are mainly relevant to internal problems and not the world economy. The cost of medicare will double in 25 years. With the current demographic trends, society cannot afford Medicare. There appears to be a 50% shortfall in the medicare system. The usual role of the president in foreign affairs has also changed.

MC - Should we invest rather than let our government handle our retirement?
AG - It is essential. The amount of retirement income must be increasingly private. With current social security funding, it is expected that supplements will be 40% less income than pre-retirement. Medicare is declining as the demographic population grows older. With economics and politics, there doesn't appear to be a solution to the medicare problem.

In 25 years, the US will still be a world economy leader. The world depends on the US. We are by far the current leader. The US must continue opening new markets, and maintain these open markets. It must avoid protectionism at all costs, as it erodes the systems and standards of a country. Medicare and protectionism are 2 major problems now and in the next 25 years.

MC - Who was the most interesting world leader you have met?
AG - Zhu Rongji - the retired premier of China. Quoting Deng Xiaoping, he said he practiced "Socialism with Chinese influences" which in my opinion was wrong. He practiced some of the purest forms of capitalism possible, even more so than in the US.

Rongji and Gorbachev were perhaps the two most significant economic personalities of the last 30 years.

MC - Social Security and Medicare - are they in trouble?
AG - Medicare has a huge shortfall. If there are no tax increases, there will be half the benefits that should be available.

Social Security is cash defined and not increasing. The 2% gap in funding could be closed and there are 5 to 10 proposals out to fix this. There are absolutely no suggestions for Medicare, and both Democrats and Republicans appear to be avoiding the issue altogether.

MC - With all of the stock market scandals, do we have policy changes to implement?
AG - We already have Sarbanes Oxley. Scandals and fraud, however, are human nature. Legislation will target individuals and individual situations, however there is no hope of keeping up with scandals or fraud.

MC - Is real estate one of the best investments?
AG - Over the long run, yes. There will be a testing period for real estate immediately ahead. It is difficult to get investment right now. In the short term, it is a bad investment. I am not sure how long this current market will last.

MC - In 2008, what do we have to look forward to?
AG - Buy my book to find out.


Later on in the evening, Donald Trump came on. I will try and recap his speech later, but these points really stuck out:

Trump's opinion is that we're in a recession. He thinks that could be a good thing for real estate investors, as it allows them to go in and offer money to the banks for discounted foreclosure mortgages.

The best investments are outside of the United States. Trump has 2000 acres of oceanfront in Aberdeen, Scotland. His friends keep calling him asking about investing there.

The banks are out of business - use Other Peoples Money (OPM) for real estate deals.

Green buildings are too costly and technology is not there yet to implement properly.

Banks are gone.

The residential market has dried up, and commercial will follow shortly. If you are being foreclosed due to an exploding mortgage, negotiate with your lenders, or sue the pants off them for improper financing.

Never give up. Always get even.

Microsoft Show How Banks Can Differentiate with Technology at BAI Retail Delivery Conference & Expo

How about a 99% growth rate in your employee base in 5 years?

PressPass: How committed is Microsoft to the banking industry?

Issel: We’re very committed to serving this industry. In the past five years, Microsoft has grown from six to 600 people supporting the financial services business.

Microsoft Show How Banks Can Differentiate with Technology at BAI Retail Delivery Conference & Expo

Marketocracy Funds Masters 100 Fund (MOFQX): Stock Quote & Company Information

A fund for the masses...

Marketocracy Funds Masters 100 Fund (MOFQX): Stock Quote & Company Information

The Fed - Housing & Monetary Transmission Mechanism

Huge document with some interesting items to note with the housing market, including lots of charts around international housing prices, the effects of Fed rates on real estate,

Page 28 has a mortgage delinquency rate chart that is slightly scary... 14% subprime defaults?  Worse than  September, 2001 @ 10%?

Another fact to note - fixed-rate prime is now less than variable rate prime for the first time since mid 2002.

The last few paragraphs contain the best Fed nuggets though...

One objection to an easing of monetary policy following the collapse of an asset bubble is that it might lead market participants to believe that the central bank will always act to prop up asset prices, a belief that can make a bubble more likely. The central bank can mitigate such an interpretation, however, if it publicly emphasizes that its monetary policy is not directed at stabilizing any particular asset price but is rather
focused on achieving price stability and maximum sustainable employment. Making sure that a house-price collapse does not do serious harm to the aggregate economy in no way eliminates sharp declines in house prices and so does not provide insurance against such declines. The same reasoning holds true for stock prices. Indeed, we have seen substantial declines in housing and other asset prices in many countries even when monetary policy has been eased substantially.

http://www.federalreserve.gov/Pubs/feds/2007/200740/200740pap.pdf

E-Trade Shave & A Haircut...

 

The Citigroup analyst Prashant Bhatia likes giving haircuts..

http://tinyurl.com/yscv89

Posted by: wavesmash at November 12, 2007 1:51 PM

Bill Cara: Cara's Commentary & Community Chat, Mon., Nov. 12, 2007, 7:25am ET

BullRunner, following the Market

On Monday I posted the following: 

"Taking a look at the USDCAD=X pair chart, the USD is heavily oversold and has been on a downward ski slope since mid-September. "

At the time I was looking at the fact that Relative Strength indicated that the USD was weaker than a little girlie man and needed to pump up a bit.

Then I predicted:

Today the USD should recover slightly, and for the rest of this week either pull back some more or reverse dramatically upwards. 

I should have said today the USD should sell off dramatically, and for the rest of the week plummet to record-breaking lows and then reverse dramatically with a market selloff on Friday.

The way things are looking, people are going to cash after the Fed's statements, and all of the bad news companies and the media are pushing out on them are instilling a sense of fear and dread.

It used to be that you had to use PIPs and Forex trading systems to trade the USD.  I went to the bank Monday and Wednesday, and they were ready to trade the currency realtime with me, and I could have made money buying Wednesday morning and selling Friday.  When the currency should move no more than 25 basis points during a day, and it ends up moving 3-4% something is seriously wrong.

MNTA - P&F Charts from StockCharts.com

Here's an ugly chart... what's with not getting FDA approval = stock crushing.

 

 

MNTA

Source: MNTA - P&F Charts from StockCharts.com

Vietnam latest news - Thanh Nien Daily

 

The Vietnam State Securities Commission (SSC) has announced it would help Cambodian officials open the country's first stock exchange by 2009.

Vietnam latest news - Thanh Nien Daily

Contrarian Currency Trade: The Canadian Dollar - Seeking Alpha

Taking a look at the USDCAD=X pair chart, the USD is heavily oversold and has been on a downward ski slope since mid-September. 

http://finance.yahoo.com/charts#chart3:symbol=usdcad=x;range=1y;indicator=volume+rsi+volumema;charttype=line;crosshair=on;logscale=on;source=undefined

Today the USD should recover slightly, and for the rest of this week either pull back some more or reverse dramatically upwards. 

The obvious question is of course how far will the bulls take it? Perhaps $100 crude and 1.10 CAD, but the upside of a potential reversal and resulting long liquidation (and not enough short interest to keep covering as price supportive) makes it worth shorting both. I am short at 1.07 CADZ07 (December 07 futures), and think a move back to parity is likely. I may exit and re-enter intermediately to manage this entry, but its a trade I intend to press when it starts working.

Contrarian Currency Trade: The Canadian Dollar - Seeking Alpha

Looking at TLT, or TLH, supposed proxies for VIX (Volatility Index), we can see that volatility is at numbing highs and have most likely hit a barrier.  This should result in a decrease in volatility, some cooling of the economy-crushing gold and oil prices, and a higher USD.

Let's see if my theory is correct by the end of the week.  Interesting times...  I won't be shorting the CAD anytime soon, but I will be going long USD... since I'm going to New York next week to see Alan Greenspan, Trump & his buddies again.

The Daily, Tuesday, October 30, 2007. Computer and peripherals price indexes

Statscan has some useful info on the price of computers and hardware in Canada....

More prices on all goods should be dropping dramatically, to compensate for the huge gains in the Canadian dollar.  Everything's for sale on eBay and Amazon in USD right now.

In August, the index for commercial computers decreased 1.4% from July to 34.2 (2001=100). The index for consumer computers also declined, down 1.4% to 14.1.

In the case of computer peripherals, monitor prices decreased 1.0% to 50.8, while printer prices fell, down 0.6% to 47.3.

These indexes are available at the Canada level only.

The Daily, Tuesday, October 30, 2007. Computer and peripherals price indexes

Preferred List

 

Financials are beat down... Can they go lower? 

Preferred Shares of the Big Five Canadian Banks^a,b

Preferred List

Money101 Lesson 5: Stocks - Rebuffing lessons

Here are my wacky, uninformed, cynical, yet somewhat reasonable responses to CNN's Money101 article.  Am I taking this stuff too literally?

1. Stocks aren't just pieces of paper.

When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings.

If you want ownership in a company, buy bonds.  Stocks have the lowest claim on assets and you have to pay $50 or so to get the paper itself.

However, bonds only outperform stocks in certain markets.  Don't buy bonds just to get the "proper" portfolio mix.  Buy them when there is a flight to safety.

2. There are many different kinds of stocks.

The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example.

There's only 1 kind of stock - that is the ticker symbol you pay for with the price you bid on it.

3. Stock prices track earnings.

Over the short term, the behavior of the market is based on enthusiasm, fear, rumors, and news. Over the long term, though, it is mainly company earnings that determine whether a stock's price will go up, down, or sideways.

Earnings don't matter.  Look at Google, Apple, or any rapid-growth high-tech company. (not that either of those are bubble companies, but there are companies with stronger earnings that aren't doing as well)  Over the long term, price can be expected to be manipulated.  It is not earnings but the impression people get about the company from financial releases.  What if the earnings aren't really the earnings, and the financial statements aren't accurate? 

4. Stocks are your best shot for getting a return over and above the pace of inflation.

Since the end of World War II, the average large stock has returned, on average, more than 10 percent a year - well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

Partially true.  Stocks are also the best way to lose money for long-term goals like retirement too.  It is not just what you buy, but when you buy it that matters.

5. Individual stocks are not the market.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

This is not necessarily true for stocks that fall into index funds and other portfolio funds.

6. A great track record does not guarantee strong performance in the future.

Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip.

A strong track record, or high gains, usually sustain themselves unless there is a story or the gains are manipulated.  See Google for a great track record that could guarantee strong performance in the future.

7. You can't tell how expensive a stock is by looking only at its price.

Because a stock's value is depends on earnings, a $100 stock can be cheap if the company's earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim.

A $100 stock is a $100 stock.  Of course it may not be worth $100, but that's what it's selling for so that's how expensive it is.

8. Investors compare stock prices to other factors to assess value.

To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company's performance expectations to those of its industry is also common -- firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

Again, sometimes this doesn't matter - it depends on which portfolios of funds the stock resides in and what economic cycle investors feel we are in.

9. A smart portfolio positioned for long-term growth includes strong stocks from different industries.

As a general rule, it's best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

Not necessarily true.  Dump your losers as soon as they hit your risk/reward limit.  A smart portfolio doesn't include large losses.

10. It's smarter to buy and hold good stocks than to engage in rapid-fire trading.

The cost of trading has dropped dramatically -- it's easy to find commissions for less than $10 a trade. But there are other costs to trading -- including mark-ups by brokers and higher taxes for short-term trades -- that stack the odds against traders. What's more, active trading requires paying close, up-to-the-minute attention to stock-price fluctuations. That's not so easy to do if you've got a full-time job elsewhere.

If you own any individual stock, ensure you have the time to pay close attention to it.  If you don't have the means to monitor it, either through yourself or your advisor, you shouldn't be buying it.  Since I'm my own advisor, whenever I'm going on vacation or feel iffy about the markets, I dump the bulk of my portfolio.  Oddly enough, a couple days later the market tanks and I got out at the top.  I still have the nasty habit of getting out when everyone else abandons the ship, when I should be getting the bailing bucket and waiting till the sun comes out.

In blackjack, would you let the dealer play your hand if noone else was watching and you stepped away from the table?  How about if the dealer was betting against you and counting the cards?  And every buy-in or cash-out cost you $60 in commissions?

The stock market is a gamble.  They key is not to win, but to cut your losses early, preserve your initial capital, and take gains.

Source: Money101 Lesson 5: Stocks

The US is a smarts... s-m-r-t

The US intelligence budget has almost doubled in 10 years... maybe because of inflation?

The US intelligence budget for fiscal 2007 was 43.5 billion dollars, national intelligence chief Mike McConnell disclosed Tuesday, making public a figure that has been kept secret for nearly a decade.

AFP: US spends 43.5 billion on intelligence: official

Never trust the sleeping markets

When oil went past $50/barrel, there were serious issues with the economy.

Now that oil is past $90/barrel, where does that put us?

Captial markets are melting up...

This bet is more akin to "The Fed loses control entirely and Effective Fed Funds trades radically higher irrespective of what Bernanke does, because nobody trusts anyone anymore - not even overnight."

Source: Market Ticker

So what does this mean?  If banks are borrowing at leg-breaking interest rates of 15% for overnight, they may as well just get an American Express Card.  At least they get the Air Miles or Cash Back points...

An asset is worth only what someone else will pay for it.  If CDOs or other credit derivatives have no market, or become too risky (aka costly) to finance, you end up with the Bell Curve of lending rates falling apart, and everyone taking what they can get just to get out of the burning building.

In statistics, normal distribution is measured out two standard deviations from the mean, where 95% of activity is considered to fall.  Anything outside this is considered outside the norm.

Three standard deviations is a fluke.

Four standard deviations is a mess.

Five standard deviations is a lotto ticket or a lightning strike.

Otherwise known as 5-Sigma.

In a standard normal distribution, an event that occurs five standard deviations or more from the mean has about a 1 in 3,488,555 chance in happening -- fairly unlikely, in other words. Yet plenty of stocks have seen more than their fair share of these lightning strikes.

Interesting thing about lighting, is that it can sometimes strike in the same place twice, can sometimes hit the same person twice, and many people are frightened simply by the ominous sound of thunder in the sky, when really there is nothing worth worrying about.  Except that doesn't matter - people will worry.

Chance & probabilities really don't mean much when you are dealing with irrational behaviour.  Or more specifically, Irrational Exuberance.

In the case of the real-estate bubble, quantity meant more than quality.  The more mortgages issued, the more money was made.  There was no fear of "risk" exposure, because these mortgages were bundled up and sold as packages, diluted like so much oil dumped in the ocean.  The "lead paint" in the asset only showed up after it has been consumed by the market, more specifically the credit markets, and found to be worthless, or at least rated far less than it once was determined.

If 10 of your friends told you something was garbage, would you want to get rid of it?  What if one of your friends offered you $0.10 on the dollar for it, the going rate for something sold in a pawn shop?  Would you trust that friend anymore, especially if he once told you it was worth much more?

With over $2.6 trillion in outstanding swaps (probably more like $4 trillion today), a 90% haircut would leave about $260 billion left over for whoever wanted to fight over it.

But really this is a worst-case scenario, isn't it?  Maybe not... what if there's no market at all for this $2.6 trillion dollars in swaps, or if there was a $0.10 on the dollar market that no one in their right mind would take?  The market for these CDOs would dry up until the next economic cycle makes them viable again....

I am not a market specialist or CDO specialist or even a financial specialist, so these are really just my thoughts on the whole matter of CDOs, Subprime, and the current state of the markets based on what I have read.  Chances are things will always revert back to the mean, and all of this stuff will disappear eventually.  People like a sense of normalcy...

"It's like a free lunch," said Gorgeon. "You're immune to default."

Guaranteed returns on your investment with no risk?  Where do I sign up?

Apple is worth more than IBM - Craaazy!

Did Crazy Eddie open up a few Mac Stores for Apple to get to that level of market cap?

Here's a link to an in-depth interview with the Darth Vader of Capitalism himself.

Also, Crazy Eddie's cousin, former CFO of the company Sam Antar, has a blog. In it he talks about the sequel to Crazy Eddie's, Overstock.com, or The Phantom Menace.

Eddie's family was known for throwing massive parties, like the one that attracted over 1,000 people and had Kool & the Gang performing.

Here's a bio of Crazy Eddie from NNDB.

NNDB looks interesting. Tracks notable names & celebrities, their bios and criminal records, and their potential risk factors (Alcoholism, Vegetarian, etc). You can even see who has been pied. Did you know that Wierd Al was a vegetarian? Bill Gates' risk factor is LSD and he's a member of the Digerati? Lindsay Lohan's got them both beat. Her risk factors are Asthma, Bulimia, Smoking, Marijuana, Alcoholism, Cocaine, Appendicitis, and Yoga.

Back to the craziness. Crazy Eddie's former CFO recently got his CPA revoked from New York State... after being convicted of securities fraud for 15 years. They asked him to send them a copy of his criminal record so that they could confirm this! Apparently it is too tough for them to run $20 background checks. There are 547 registered CPA's in Brooklyn. At @ $20 a pop it would cost them around $11k to find out how many convicted felons they have. That's probably less than what 1 convicted felon CPA could defraud someone out of in a couple of keystrokes.

Eddie & Sam recently went on camera together after not speaking for 20 years.

There's a 19-page thread about the segment on Crazy Eddie's guestbook. Former employees and Sam himself defend and bash Crazy Eddie and reminisce about the good old days of selling cheap speakers and watching the first 5 minutes of Superman... over and over again.

Facebook IPO'd via Microsoft Bought Deal

Did Facebook just inadvertently IPO via Microsoft's tiny investment of a quarter of a billion dollars?  MSFT stock seems to indicate that people are investing more in Microsoft... perhaps not only because of the positive earnings statement but to get to Facebook's value? 

There are a near-infinite number of ways to look at these sorts of deals, but even as an investment with benefits, this is too much.

Source: Microsoft's Facebook deal makes no sense - MarketWatch

Maybe it isn't too much.  Microsoft's market cap is $328.42 billion today.  Since going from around $29.50/share at the beginning of October they have gained more than $50 billion dollars in market cap, or around 15%.

Could this be due to share buybacks from the company itself?  It was planning to spend more than $40 billion to thicken its heavily diluted stock.  

Is it odd that they announced the Facebook deal just before announcing earnings for the quarter?  Perhaps they got this Facebook stake for free now? 

Is this how to get $250 million for free?

1. Stock buyback already in the works
2. announce great earnings
3. Facebook deal
4. sell stock...

Well, it's not really for free, but I'm sure that by moving some money around they could make this look good on the balance sheet. 

Capital Link Shipping | Investing In International Shipping

Lots of info on shipping carriers. 

Capital Link Shipping | Investing In International Shipping

Shocked Investor - Gains in US aren't always in CAD

 
I can attest to this with my positions in CEF-A fund, that even though gold is at all time highs, this gold/silver mix fund is still not breaking even for me.

The Illusion of the DJIA - Updated

(Click on image to enlarge)
From January 2 2007 to today October 11 2007 the DJIA is nominally up 12% up. However this is only true for those investors inside the US. Investors in Europe who bought the DJIA have seen gains of only 5%. For investors in Canada and Brazil, the DJIA has dropped 5%. These investors have lost money. Similarly for investors using gold as currency, the DJIA has also dropped 5%.
The graph above shows the actual value of an investment in the DJIA in each currency, and gold.
Nominal DJIA (USD): 12.7%
For investors in Europe: +5.4%
For investors in Canada: -5.3%
For investors in Brazil: -5.4%
Using gold as currency: - 5.3%
The DJIA has gone up only for investors in the US that are fully insulated from the rest of the world. To consider the actual real value, US investors should reduce this by the real rate of inflation.
Consider also the appreciation of gold in 2007. While the price of an ounce of gold has gone up by 18% in USD and by 11% in Euros in 2007, it has not appreciated at all for those investors in Canada and Brazil:

(Click on image to enlarge)
This can be attested by any investor in Canada who bought the GLD ETF, it has remained virtually unchanged in 2007 in Canadian dollars.
GLD in USD: +18.7%
GLD in Euros: +11.3%
GLD in CAD: 0.0%
GLD in Real: 0.0%

Source: Shocked Investor

COTs Timer

Ever wonder what the smart money is doing in the markets? You don’t need to pay big bucks to find out. Just read the U.S. government’s free weekly Commitments of Traders reports. This Holy Grail of market info lists trillions in positions in 100 markets. It’s the great market leveler—data for the people, creating market transparency. Yet, top economists and traders have mostly failed to crack the COTs code. Until now. My COTs trading system beat the NASDAQ by over 600%. This free blog shows how.

COTs Timer

FDIC: Failed Bank Information - Bank Closing Information for NetBank, Alpharetta, GA

Netbank failes and is acquired by ING Direct for a paltry $11M. 

Link to FDIC: Failed Bank Information - Bank Closing Information for NetBank, Alpharetta, GA

MSFTextrememakeover: Still searching for a dividend strategy

MSFT announced a dividend increase.  Not quite keeping up with currency conversion, or inflation. 

The actual announcement? Another .01/Quarter increase - just like last time. That brings us to .44 annually, or 1.51% yield at the current closing price. But due to the now higher share value, that's actually a lower yield than when MSFT announced the last dividend increase (1.51% vs the then 1.54%). It's also a smaller % increase on its own. Clearly, management isn't telegraphing much confidence in the future stock price despite its depressed YTD performance.

By way of comparison, INTC's current yield is 1.77% and IBM's is 1.6%. The S&P 500 average is 1.71% (2.2% if you count just dividend-payers) and the DOW 30 average is around 2.3%. In other words, even with this increase, MSFT's dividend lags behind the S&P 500 average, the DOW 30 average, and behind some of its equivalent tech peers - as it has since inception. But the "bonus" is that you get worse-than-market stock performance too! For example, down over 2% YTD while the NAS is up more than 7%, for a total 9% relative underperformance (7%, if you want to compare to the S&P).

Source: MSFTextrememakeover: Still searching for a dividend strategy

U.S. DOJ says MS Euro ruling chills innovation and harms competition

What other companies helped with the ruling?

I.B.M., Oracle, Red Hat, RealNetworks and Nokia have applied to intervene against Microsoft in its court appeal of a European Union antitrust ruling last year, said the lawyer, Thomas Vinje.

What other companies are exposed to potential judgements against them?

Maybe Apple & Adobe?

A U.S. official's criticism of a European Union court ruling dismissing Microsoft's monopoly abuse appeal was "totally unacceptable," EU antitrust chief Neelie Kroes said Wednesday.

Kroes said it was wrong for a representative of the U.S. administration to criticize "an independent court of law outside its jurisdiction."

"The European Commission does not pass judgment on rulings by U.S. courts, and we expect the same degree of respect from U.S. authorities on rulings by EU courts," she said. "It is absolutely not done."

U.S. criticism of Microsoft ruling unacceptable, EU says

Fears of dollar collapse as Saudis take fright - Telegraph

 

Looks like China is not the only one looking to divest of their dollar assets. 

Time to spend your PayPal funds!  How about EWZ?

Link to Fears of dollar collapse as Saudis take fright - Telegraph

Northern Rock bank run in England

This is what I have been fearing over the last couple of months, really since June but more so since the August credit crunch.

London's Daily Telegraph explained this run by bank depositors by saying the "fears were prompted by the revelation this morning that [Northern Rock] Britain's fifth-biggest mortgage lender had to ask the Bank of England for emergency financial assistance."

Source: GoldMoney - Founder's Commentary

Do we have to worry about this in Canada?  Probably not.  Canada is tied with Australia for the soundest banking systems in the world.  The CDC insures accounts up to $100k per account.  If you have > $100k you may want to purchase alternate insurance or redistribute your holdings.  There have been only 2 bank failures since 1923, both with small regional banks in the 1980s.

Here's a huge paper from World Bank's web site outlining deposit insurance coverage per country.

Interesting to note that CMHC no longer holds a monopoly over housing mortgage insurance.  Three other companies, PMI, Triad, and AIG have offerings.

However, one thing to watch may be the drying up of liquidity in the financial sector, specifically in equity markets.  Another thing to note is that for foreign-owned banks to operate in Canada, all they need is a minimum of $10 million in capital to startup operations.

MSDN - Capital Markets Center

 

Integrating the Trading Value Chain via .NET Framework

This paper describes how .NET Framework 2.0 was used to integrate a strategy execution management system with grid-enabled trade order analytics and financial markets data management platform. Integration details and functional overviews of respective solutions are provided.

High-Performance Excel-Based Applications in Financial Services

This paper describes a comprehensive solution based on Microsoft and GigaSpaces technologies that addresses scalability and performance challenges with Excel-based applications in securities and capital markets industry. The solution combines the latest Microsoft technologies, including Office Excel, Excel Services and Windows Compute Cluster Server 2003 with GigaSpaces eXtreme Application Platform to deliver unparalleled usability, performance, and scalability.

.NET StockTrader Sample Application

This application is an end-to-end sample application for .NET Enterprise Application Server technologies. It is a service-oriented application based on Windows Communication Foundation (.NET 3.0) and ASP.NET, and illustrates many of the .NET enterprise development technologies for building highly scalable, rich "enterprise-connected" applications. It is designed as a benchmark kit to illustrate alternative technologies within .NET and their relative performance.

MSDN Architecture Webcast: Microsoft Technologies in Capital Markets

There are several Microsoft products that are directly and closely aligned with the needs of the Financial Services industry, including BizTalk Server 2006 and BizTalk Accelerator for SWIFT 2.1, Windows Compute Cluster Server (CCS) 2003, Excel 2007 Client, and Excel Services in Office SharePoint Server 2007. This presentation will provide an overview of these products with a specific focus on the Capital Markets industry.

Source: Capital Markets Center