Thursday links: crosscurrents aplenty

A look at the range-bound S&P 500.  (VIX and More also Bloomberg)

Doug Kass, the market is facing “crosscurrents aplenty.”  (TheStreet)

Bruce Berkowitz likes Morgan Stanley (MS).  (WSJ also InvestmentNews)

Dr. Copper is back.  (MarketBeat)

Now that the Baltic Dry Index is rising, no one is talking about it.  (The Money Game)

What Ned Davis Research likes right now.  (Trader’s Narrative)

ETF rebalancing is roiling late-day trading.  (Reuters)

PIMCO has emerged from the financial crisis stronger. It has continued hiring as others pause or pull back. “  (Economist)

There is a sellers strike in the market for long-dated volatility.  (Bloomberg)

The CBOE (CBOE) thinks it can go it alone.  (Bloomberg also HFR)

Are VIX moving averages a self-fulfilling prophecy?  (Daily Options Report)

When consumer confidence is at its worst, future stock market returns are at their best.  (Systematic Relative Strength)

Worried about correlations? Think long-term instead.  (Random Roger)

Tom Brakke, “If your way of thinking about your investment exposures is out of sync with the reality of today, it’s time to rip it up and start over.”  (the research puzzle)

It is time to reassess the way investors pay money managers.  (Economist)

Tough times on Wall Street.  Not really.  (The Reformed Broker)

Algorithmic trading programmers are striking to trade their models.  What could go wrong?  (Forbes via Clusterstock)

What caused the 2006-08 commodity price boom?  (Economist’s View)

Cross-currents in the commercial real estate market.  (Pension Pulse)

Renting is the new buying.  (Fortune)

By this measure emerging markets still have a ways to go.  (Fortune)

Euribor continues to move higher.  (MarketBeat)

What happened to the European double dip?  (Bespoke)

Global industrial production is at “record high levels.”  (FT)

On the correlation between M2 and CPI.  (macroblog)

Inflation vs. deflation:  deflation is winning.  (Big Picture)

Maybe economists should be more focused on disequilibrium?  (Rajiv Sethi)

On the correlation between jobs and durable goods.  (Big Picture)

Is the recession shifting even greater power towards employers?  (Rortybomb also Macro Musings)

Raghuram Rajan thinks ultra-low interest rates are preventing the US from making necessary adjustments.  (FT)

On the relationship between debt/GDP and economic growth.  (Free exchange also Money & Co.)

Is debt/GDP the right measure of indebtedness?  (AR Screencast)

The US is the new California.  (Gregor Macdonald)

The rise of the African consumer.  (beyondbrics)

Why the price of electric cars are likely to come down, fast.  (Slate)

The Kindle is going mass market with new, lower priced devices.  (WSJ)

How gaming became the future of social media.  (Fortune)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Wednesday links: trading wipeouts

Companies are raising dividends, but continue to hold big slugs of cash.  (Crossing Wall Street, ibid)

No matter how you look at it earnings surprises (and guidance) look strong.  (Bespoke, ibid also Markets Blog)

Still no reversal in the number of bears.  (Bespoke)

Are ETFs the cause of rising stock correlations?  (FT Alphaville)

ETFs and high-frequency traders simply don’t care about valuations.”  (FT Alphaville)

Josh Brown, “Don’t allow the sudden popularity of “your” stock make you hate it.  Be emotionally possessive about something else, not your investments.”  (The Reformed Broker)

“Sometimes your trades just don’t work out.”  (SMB Training)

The historical performance of August.  (MarketSci Blog)

If gold reverses course it is going to hurt a lot of bandwagon jumpers.  (MarketBeat)

A look at the hedge fund ETFs.   (ETFdb)

Arguments for a second half slowdown.  (Calculated Risk)

Citigroup (C) did all right in selling Phibro.  (DealBook)

Goldman’s fund of fund business is doing just fine, thank you.  (Absolute Return+Alpha)

Don’t confuse strategy with outcome.  (CBS Moneywatch)

How to avoid a (trading) wipeout.  (The Crosshairs Trader)

What if there is no risk-free rate?  (SSRN via CXOAG)

Who is likely to buy what at the BP (BP) “garage sale.” (DealBook)

Um, where did the oil slick go?  (NYTimes)

Goldman Sachs (GS) (and Citigroup (C)) have already found a loophole around limits on proprietary trading.  (FBN, Bloomberg, Points and Figures)

If the US is the new Japan, keep an eye on leading economic indicators.  (The Money Game also Financial Armageddon)

Bill Gross notes the challenges of deleveraging in a world fraught with declining world population growth rates.  (The Money Game, Street Sweep also Daily Intel)

The asset-backed securities market has re-opened, albeit tentatively.  (DailyFinance, FT Alphaville

Debating the value of mortgage securitization.  (Economix)

How much farther do home prices have to fall?  (Big Picture)

How far will the home ownership rate fall?  (Calculated Risk, Bloomberg)

The steel market is soft.  (NYTimes)

Dueling opinions of the durable goods number.  (Kid Dynamite also Calculated Risk, EconomPic Data)

Arguments for a second half slowdown.  (Calculated Risk)

Continued pressure on state and local governments.  (WashingtonPost, Bloomberg)

What is going to be the next big driver of American economic growth?  (DJ Market Talk)

A bull market for financial regulators turned lobbyist.  (Big Picture)

China is not seriously considering raising interest rates.  (China Financial Markets)

George Soros is buying a stake in the Bombay Stock Exchange.  (FT, FT Alphaville)

Four reasons to believe in Brazil.  (Economist)

Middle class Brazilians are beginning to invest in stocks.  (beyondbrics)

The ETF industry has discovered Brazil and provides a number of ways to invest in this BRIC country.  (AR Screencast)

Google (GOOG) wants to take Facebook on.  (WSJ also Bloomberg)

Disney (DIS) is entering the social gaming business in a big way.  (Media Decoder, GigaOM)

Even the most defensible business moats eventually get spanned. (The Psy-Fi Blog)

Why StockTwits is important.  (SMB Training)

Why don’t networks broadcast all the pilots they paid for?  (Freakonomics)

Comedy MVPs since 1975.  (kottke)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Tuesday links: breadth rebound

How closely is the market paying attention to rising earnings estimates?  (Crossing Wall Street, Horan Capital)

The breadth rebound is pushing towards overbought levels.  (Bespoke)

Time to rebalance your portfolio.  (market folly)

A graph that shows just how little yield there is out there.  (EconomPic Data)

Testing the idea that moving average systems have stopped working of late.  (World Beta)

Ugh.  10-year swap spreads are negative again.  (FT Alphaville)

Travel-related stocks are demonstrating some relative strength.  (Barron’s)

There is growing interest in VXX calls.  (VIX and More)

A new twist on the commodity ETF – call writing.  (IndexUniverse)

Who is going to win the ETF ticker lawsuit?  (IndexUniverse)

The current economy is a boon to temporary staffing firms.  (DJ Market Talk)

Exploiting the accrual volatility anomaly.  (CXO Advisory Group)

Investors in Build America Bonds are becoming more cognizant of credit of late.  (Bloomberg)

A reasonable explanation why companies are holding so much cash of late.  (Worthwhile Canadian Initiative, Free exchange)

Squaring the circle:  corporate America and the correlation conundrum.  (Abnormal Returns)

The recovery is increasingly splitting between the haves and have nots.  (The Reformed Broker, The Money Game)

Go North young man.  N. Dakota and Alaska lead the country in job growth.  (Portfolio via Reuters)

Texas largely avoided the housing bubble and recession.  Storm clouds on the horizon?  (Fundmastery Blog, Street Sweep)

The Texas economy was a standout this past decade, but how did Texas stocks perform?  (AR Screencast)

The debate over the fiscal multiplier are back.  (FT, WSJ also Atlantic Business)

James Montier of GMO has a new piece up on the austerity debate.  (Pragmatic Capitalism, Credit Writedowns)

Although backward looking, home prices up according to Case Shiller.  (Calculated Risk, EconomPic Data, Big Picture, Planet Money also Lex)

What effect does uncertainty have on economic activity?  (Real Time Economics)

The gap grows.  India raises its interest rates.  (Lex)

Is the Euro crisis over?  (Curious Capitalist)

BP (BP) plans to sell $30 billion in (questionable) assets.  (FT, The Money Game)

Russia is the new Saudi Arabia.  (Gregor Macdonald)

How the does the Big Mac Index relate to measures of economic development.  (The Atlantic)

A brief (and skeptical) history of behavioral finance.  (Monevator)

Are you in “justification mode“?  (Kirk Report)

How to plan for the fact that our long-term forecasts are likely wrong.  (Farnam Street)

Oliver Stone pulls his punches in Wall Street:  Money Never Sleeps.  (Mean Street)

Based on a recent transaction the Boston Red Sox are now worth $1.2 billion.  (Marketwatch)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Corporate America and the correlation conundrum

Did the financial crisis, and the subsequent economic recession, make us forget the underlying changes in the nature of corporate America’s earnings?

We started answering this question in our screencast earlier today as we discussed the growing gap between how professional investors and individual investors view the market.  This Bloomberg article notes that while institutional investors continue to embrace equities, individuals are increasingly wary of the stock market.  This is due to the fact that they have two very different perspectives on things.

Institutional investors are likely reacting to the results of earnings like those from FedEx that are reflecting the results from a growing, albeit slower than normal, global economy.  Whereas individual investors are focusing on the steady stream of downbeat news coming from the domestic economy.  It is indeed confusing to see this growing disparity between the real economy and the corporate economy.

Zachary Karabell at Time this week notes how the changing nature of corporate America and the global economy have made the link between the stock market and the national economy more tenuous.  He writes:

Stocks are no longer mirrors of national economies; they are not — as is so commonly said — magical forecasting mechanisms. They are small slices of ownership in specific companies, and today, those companies have less connection to any one national economy than ever before.

This trend is likely to continue as the growing middle class in these emerging economies starts outpacing that of the developed world.  In short this beyondbrics post notes:

Spending power is moving south and east, and it’s doing so at blistering pace.

This shift in spending power provides opportunities for growth that American companies simply do not see here domestically or in the rest of the developed world, like Europe.  The above post mentions some companies poised to profit from these opportunities.  It makes perfect sense to pursue them.

The long-term question for American companies is whether position in these large, rapidly going countries is both sustainable and profitable.  If the answer to both of those questions is yes, then investors should feel comfortable putting a reasonable multiple on those earnings.

For investors the question of how to invest based on this knowledge is more problematic.  The past few years have seen unprecedented levels of correlation between national stock markets, sectors and individual stocks.  It seems that macro picture has outweighed whatever benefits one might have seen at the corporate level.  John Authers at FT notes how:

The world trades in unison. Many bright people spend many long hours pondering which stocks, sectors or countries to buy but, of late, it scarcely seems to matter.

Some might take this observation to its logical conclusion that an all-domestic based portfolio is the optimal solution.  We have written a great deal about this topic including this:

Therefore those who argue that an all-domestic portfolio avoids the messy problem of international diversification miss the big picture.  Over some shorter time horizon this decision might very well turn out be a correct one.  Nor is international diversification some sort of panacea.  Investment risks abound both internationally (as well as domestically).  However over the long term ignoring the increasingly dynamic nature of the global economy and the benefits from diversifying across it seems short-sighted at best.

The fact of the matter is we really don’t know what the true correlation is, or should be, between domestic equities and international equities.  All we have is historical results which in the past decade have been punctuated by frequent crises.  Eventually markets will return to something approaching a new normal.  (How long they remain there is another question entirely.)  At that point a new set of skills will be required of today’s macro-themed investors.  Authers again:

Macro factors should dominate at present but not to this extent. The more investors behave on the assumption that the macro is all that matters, the more it tends to be true – and the greater the risks that stock prices get out of kilter. If the market ever calms down, the indiscriminate way investors now allocate their money should create a killing for those who pick their stocks carefully.

Whether we get back to some sort of golden age of stockpicking is less important than acknowledging that the world has changed around us.  While those changes may be a mixed social and economic bag it behooves investors to take the lessons of the new global economy to heart.  Anything less would mean living in denial.


Monday links: house of mirrors

Institutions are bullish while individuals stay bearish.  (Bloomberg, The Technical Take)

Are equities overvalued? (Pragmatic Capitalism, ibid)

If Fedex (FDX) is raising estimates can the economy be all that bad?  (WSJ, Pragamatic Capitalism, MarketBeat)

Why the increasingly global nature of commerce is confusing individual investors.  (AR Screencast)

Edward Chancellor on the attraction of large, quality US stocks.  (IndexUniverse)

David Merkel, “Nothing beats the flexibility and simplicity of cash in a disaster.”  (Aleph Blog earlier Abnormal Returns)

Wall Street is a house of mirrors. There is very little original thought that is usually copied and multiplied.” (Ivanhoff Capital)

Investors tend to seek our confirmatory opinions.  (CXO Advisory Group)

Money is flowing into merger arb hedge funds in hopes of an M&A boom.  (FT)

Keep an eye on the agriculture stocks.  (chessNwine)

What effect have wheat prices had on consumer inflation?  (Minyanville)

Investors are on the hunt for new currency safe havens.  (Reuters)

Better trend following via improved roll yield.  (Au.Tra.Sy Blog)

Are French and German equities attractive?  (FT Alphaville)

By emerging market standards the Korean market is cheap.  (beyonbrics)

Increasingly globalized companies now “inhabit their own thriving economy, unencumbered by many of the ills of nation-states.”  (Time)

The FCIC wants to look at Goldman Sachs (GS) books.  (FT)

New home sales are not that impressive.  (The Money Game, Calculated Risk)

The Chicago Fed National Activity Index turned down in June. (Calculated Risk, EconomPic Data)

Steven Malanga, “State and local borrowing, once thought of as a way to finance essential infrastructure, has mutated into a source of constant abuse.”  (City Journal)

Economists have no idea how deflation works in practice.  (WSJ)

Why did economists so completely miss the financial crisis?  (FT Alphaville also The Hedgehog Review)

Europe’s stress tests were not all that stressful.  (WSJ, Calculated Risk, Dealbook, FT Alphaville, Street Sweep, Bespoke)

The “flight path of global wealth” is in the emerging markets.  (beyondbrics)

Is uranium’s bear market over?  (Telegraph UK)

The lesson of sunk costs is a difficult one to learn.  (A VC)

Can the Kindle thrive alongside the iPad?  (Newsweek)

Is Apple (AAPL) lowballing its revenue estimates for next quarter?  (Apple 2.0, ibid)

Lessons on how to age gracefully from Hall and Oates. (True/Slant)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Sunday links: unconventional bullets

Comparing this market recovery to 15 others.  (dshort)

Equity sentiment at week-end.  (Trader’s Narrative)

Total market cap now exceeds GDP.  (Big Picture)

Ten stock market myths.  (WSJ)

Stock buybacks vs. dividends:  which wins?  (Points and Figures)

The search for a simple investment system is never easy.  (Telegraph UK)

The bullish case for equities.  (Trader’s Narrative)

Yet another case of yield chasing.  (WSJ)

Tail risks, de-risking and the allure of cash.  (Abnormal Returns)

Satisficing stockpicking and the danger of having too much information.  (The Psy-Fi Blog)

Is KKR (KKR) cheap?  (Barron’s)

Need a list of LBO candidates?  Here you go.  (Deal Journal)

2010 has been a tough year for the Tiger Cubs.  (Institutional Investor)

On the opportunity of investing in post-reorganization equities.  (Distressed Debt Investing)

A local currency emerging market bond ETF debuts.  (ETFdb)

Now it really is a mature business.  ETF companies in a spat over “misleading” ticker symbols.  (WSJ)

Where are the “tough pay guidelines” for banks?  (Rational Irrationality)

The FDIC is doing what?  (Big Picture, Kid Dynamite, naked capitalism)

What “unconventional” bullets does the Fed have left?  (Free exchange)

The Euro bank stress tests are to a degree a self-fulfilling prophecy.  (CNBC also The Money Game, FT, WSJ, Felix Salmon, DJ Market Talk)

More anxiousness around the falling ECRI WLI.  (BondSquawk)

Why the economy sucks.  (The Awl)

Something on the jobs front changed this decade.  (Economist’s View)

How much cocoa is Anthony Ward going to end up buying?  (NYTimes)

Aircraft orders rebound.  (Lex)

Could even a modest attempt at high speed rail disrupt the freight system?  (Economist)

Jeff Jarvis, “Advertising is f****ed.”  (BuzzMachine)

Why choose?  Buy Apple (AAPL) and Microsoft (MSFT).  (Barron’s)

What would a T-Mobile iPhone mean?  (GigaOM)

Will Zynga become the Google (GOOG) of games?  (NYTimes)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Tail risks, de-risking and the allure of cash

The idea of tail risk and investor’s desire to hedge it has been floating around the blogosphere for a couple of weeks now.  Felix Salmon kicked things off with this post and we weighed in as well.  Eradicating tail risk is a worthy goal, but in all likelihood an elusive one.  That has not stopped Wall Street from seizing on the desire of investors for downside protection.

An article at Bloomberg this week summed things up quite succintly:

Wall Street’s hottest new product is fear.

The article goes on to recount the number of products firms are rolling out to protect investors from severe downside events.  Needless to say these products have high explicit and implicit costs.  The CBOE is getting into this game as well with a new skew product that will “allow investors to take positions on market expectations of extreme losses.”

One could argue that the abundant interest in the VIX index and the growing number of VIX-related products is a function of investors looking to hedge tail risks.  The question is whether any of products is much better than simply “buying puts on something” as Adam Warner has said previously.

The fact that putting on these tail risk hedges is costly and expensive tells us something.  That investors are still in a bit of denial.  Rather than de-risking their portfolios, by moving into cash or other safer assets, they desire a magic bullet to protect their portfolios.  As Joe Weisenthal writes:

Nobody wants to de-risk, in the sense that they want to actually take some money off the table. Instead..it’s all about pricing and quantifying risk, and of course hedging against it.  And hedging against risk, and actually de-risking are not the same thing.

Jared Woodard notes that these solutions are expensive in part because they provide “permanent” insurance.  That is they do not adjust based on market conditions (and prices).  In short, the naive approach is the expensive approach.

The solutions Wall Street is providing would be great if they were in any sense of the word – cheap.  James Montier notes that the costs of insurance always rise right after an untoward event.  The result of which, as Montier writes, is compounding the problem:

Buying expensive insurance is just like buying any other overpriced asset…a path to the permanent impairment of captial. Rather than wasting money on expensive insurance, holding a larger cash balance makes sense. It preserves the dry powder for times when you want to deploy capital, and limits the downside.

Wall Street has a checkered past in offering investors downside protection.  The case of portfolio insurance and the 1987 stock market crash being a perfect example.  If you interested in obtaining tail risk insurance you need to ask yourself whether you have too much risk on to start.  De-risking isn’t fun (or cool), but as noted above it may be the best solution to an intractable problem.


Friday links: infrastructure matters

17 reasons to be bullish from David Rosenberg?!?  (FT Alphaville)

Market timers are not that impressed with the current rally.  (Marketwatch also Bespoke)

UPS (UPS) and McDonald’s (MCD) both show global strength.  (NYTimes, FT)

The US market is lagging much of the developed world.  (Bespoke)

Eddy Elfenbein, “This is the problem with owning a richly valued stock…You have zero room for error. If you make one small misstep, you’ll be punished harshly.”  (Crossing Wall Street)

Value guys like volatility. Crazy, gyrating market? Giddyup.”  (Greenbackd earlier Abnormal Returns)

How to implement a large, quality stock-focused strategy.  (Street Capitalist)

How value investors can use market volatility to their advantage in this environment..  (AR Screencast)

More VIX ETNs are on the way.  (VIX and More)

There is a great deal of interest in the just launched Global X Lithium (LIT). (IndexUniverse)

A managed futures ETF is coming from WisdomTree.  (IndexUniverse)

John Gapper, “So much for the death of hedge funds.”  (gapperblog earlier Abnormal Returns)

How much lower can Treasury yields go?  (Lex, BondSquawk)

What financial stress?  (Street Sweep)

The Fed has a willing buyer for its mortgage backed bonds in the general public.  (NYTimes, The Money Game)

GM’s (excellent) subprime adventure.  (WSJ, CNBC, Lex, Big Picture, Points and Figures, DJ Market Talk, DealBook)

Somebody knew something.  SEC investigating suspicious trading in Goldman Sachs (GS) shares.  (Clusterstock)

Who got it worse from the SEC:  Dell (DELL) or Goldman?  (Felix Salmon)

Ratings agencies can’t get comfortable with their increased accountability under finreg.  (FT Alphaville also Felix Salmon)

Why Elizabeth Warren is the only logical person to head the Consumer Financial Protection Bureau.  (Rortybomb, Floyd Norris, Felix Salmon)

John C. Bogle on financial reform.  (Huffington Post)

What is the “critical” debt/GDP ratio?  (Marginal Revolution also Ezra Klein)

Hip, hip hooray.  UK GDP comes in ahead of expectations.  (EconomPic Data)

Indonesian equities aren’t cheap any more.  (beyonbrics)

The latest Big Mac Index shows Asian currencies undervalued.  (Economist)

“In 2008 for-profit colleges accounted for 7.7% of all post-secondary enrolment. For better or worse, that share is likely to grow.”  (Economist)

On the interplay between discipline, experience and confidence.  (The Perplexed Investor)

Happy second blogiversary!  (MarketSci Blog)

When it comes to social media, infrastructure matters.  (GigaOM also peHUB)

Thankfully for Microsoft (MSFT) people still love Windows.  (NYTimes, FT)

Amazon (AMZN) shareholders shouldn’t be all that surprised that earnings missed (badly).  (Lex also WSJ)

Is Netflix (NFLX) the next Crocs (CROX).  (Deal Journal contra Wall St. Cheat Sheet)

Jonah Lehrer, “Behind every successful entrepreneur is a vast network.  (The Frontal Cortex)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Abnormal Returns: screencasts of the week

We hope you are enjoying our ongoing series of screencasts.  The Screenr functionality at Chart.ly is well worth a look for anyone looking to illustrate their investment ideas.

We have linked below to our screencasts from the week ended July 23rd.  Below you can find our most recent screencast embedded.  Please feel free to contact us with questions and/or feedback.

Monday, July 19th:  EEM:  Are emerging markets and high quality stocks a remedy for a lost decade for equities?

Tuesday, July 20th:  SCHN:  Anecdotal evidence of economic strength is not necessarily showing up in stock prices.

Wednesday, July 21st:  AAPL:  Sometimes the hype really does live up to reality. The case of the iPad and the mobile revolution.

Thursday, July 22nd:  ACF:  Compare and contrast. $F having problems issuing debt, GM buying publicly traded lender $ACF.

Friday, July 23rd:  AMZN:  How value investors can use market volatility to their advantage in this environment.


ARTV talks with Felix Salmon

Apologies in advance for the video quality of the below broadcast.  That being said we enjoyed our discussion yesterday with Reuters uber-blogger Felix Salmon on StockTwits.tv.  We discuss the growing use of online video in news organizations, the existence of the equity risk premium and whether the emerging markets have truly transformed themselves.

You can also check out our growing archive of shows at StockTwits.tv.  You can stream them for free 24/7.


Thursday links: robot fingers

Is China’s market overbought or oversold?  (beyondbrics, The Money Game)

3M (MMM), Caterpillar (CAT) and UPS (UPS) all beat earnings estimates.  (MarketBeat, ibid, ibid)

Stocks continue to react negatively to earnings.  (Bespoke)

The 10-year note has put 3% in its rearview mirror.  (MarketBeat)

An exercise in variant perception.  (market folly)

Doug Kass, “There is a market void.”  (TheStreet)

Can a robot have a “fat finger“?  (The Source)

John Paulson can’t get enough assets under management.  (FT, WSJ, Clusterstock)

Trading volatility is harder than is looks.  (Daily Options Report)

How the relative performance of growth and value affects the stock market.  (MarketSci Blog)

Is it too late to buy REITs?  (Systematic Relative Strength)

How contango conspires to harm commodity ETF returns.  (Bloomberg also Afraid to Trade, FT Alphaville)

For insurance to be useful it has to be cheap.  (Behavioural Investing)

Absent credit ratings, bond deals are being “driven underground.”  (Deal Journal also AR Screencast)

Is financial reform already putting a chill on fundraising?  (Dealbook, Clusterstock, Ezra Klein, PE Beat)

GM buys AmeriCredit (ACF).  What could possibly go wrong?  (Dealbook, Kid Dynamite, 24/7 Wall St., Peridot Capitalist, Felix Salmon)

The latest from Howard Marks.  (Infectious Greed, Kid Dynamite)

Seasonality and the Baltic Dry Index.  (FT Alphaville)

Close but no cigar.  The SEC comes close to scrapping 12b-1 fees.  (NYTimes, WashingtonPost)

Existing home sales fall.  (Atlantic Business)

How long will it take to sop up excess housing supply?  (Calculated Risk)

Unemployment claims increase.  (Calculated Risk)

Is the Fed out of bullets?  (DJ Market Talk, The Money Game)

Edward Harrison, “The Federal Reserve is more powerful an institution than ever.”  (Credit Writedowns)

Have we offshored our coal demand to China?  (Gregor Macdonald)

General Motors is killing it in China.  (NYTimes)

Is $77 oil cheap in light of Chinese demand for autos?  (Globe and Mail)

Are commodity bulls relying too much on Chinese demand to drive prices higher?  (Lex)

Brazil raises rates 50bp.  (beyonbrics)

On the evils of “risk free savings.”  (NY Observer)

A review of “Diary of a Hedge Fund Manager” by Keith McCullough.  (All About Alpha)

Further reason to read FT Alphaville.  (Recorded Future)

Happy first blogiversary!  (CSS Analytics)

Why the news industry needs bloggers.  (Felix Salmon)

Is Steve Ballmer on the way out at Microsoft (MSFT)?  (The Daily Beast, SAI also Bloomberg)

Netflix (NFLX) is getting squeezed.  (24/7 Wall St. also NewTeeVee)

Baidu (BIDU) vs. Google (GOOG) is no longer a fight.  (Lex)

PayPal continues to help the bottom line of eBay (EBAY).  (GigaOM)

Henry Blodget, “I have to hide the iPad from my kids.”  (SAI)

Twitter is building its own data center.  (GigaOM)

Carl Richards, “The past is the past. All that matters now is making the correct decision for today.”  (Bucks Blog)

Jonah Lehrer, “Money is surprisingly bad at making us happy.”  (The Frontal Cortex)

Fun graphic comparing the size of social networks to nations.  (Economist)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts, and Abnormal Returns TV.


Wednesday links: profit airpockets

A preview of Q2 earnings.  (MarketBeat)

A bid still remains under the Treasury market.  (FT Alphaville, Bespoke)

Hedge funds are covering their Euro shorts.  (market folly)

Rydex market timers hate energy services.  (Trader’s Narrative)

Gold market timers are “unexpectedly cautious.”  (Marketwatch)

Trading profits have hit an “airpocket.”  (Street Sweep)

Investors are increasingly bypassing hedge fund of funds.  (FT)

Momentum rocks.  (Crossing Wall Street)

Everyone is now a macro “expert.” (The Reformed Broker)

How fundamentals and technicals interact:  leverage.  (CSS Analytics, IWO)

Are there predictable patterns of return continuation in equities?  (SSRN)

Junk bonds are the new sovereigns.  (Infectious Greed, FT Alphaville)

What is a PCF or portfolio composition file and how does it matter for your ETF?  (FT Alphaville)

ETF MLPs are tricker than they look.  (Morningstar also 24/7 Wall St.)

For all you value hounds a media stock trading at 2x cash.  (Financial Adviser)

“Sometimes it’s not enough to have a good strategy, you also need to understand why it’s a good strategy in order to profit in the long term. “  (The Psy-Fi Blog)

The Gulf drilling moratorium is lifted, for now.  (Bloomberg)

What is private equity going to do with all that cash?  (WSJ)

The FDIC:  Congress continues to be generous with your money.  (Street Sweep)

New home sales collapse.  (Calculated Risk, Bespoke, Big Picture, Curious Capitalist, Atlantic Business, EconomPic Data)

Lakshman Achuthan and Anirvan Banerji, “A slowdown in U.S. economic growth is imminent, but a new recession is not.”  (Big Picture)

The Baltic Dry Index is on a 17 day losing streak.  (Bespoke also Data Diary, The Source)

What’s next for the Fed?  (Pragmatic Capitalism)

Should we fear a little bit of inflation?  (Economix)

Suburban population growth has slowed.  (Real Time Economics)

Europe is not homogenous.  Nor will the effects of a weaker Europe be. (EconomPic Data, FT Alphaville)

Skepticism that the IPO of Booz Allen Hamilton will actually make for a better company.  (WashingtonPost)

Is Apple now “too big to succeed“?  (Bloomberg also Minyanville)

It is Apple (AAPL) and everyone else in the Nasdaq 100 (QQQQ).  (Bespoke also AR Screencast)

The new iPhone rocks.  (WSJ, NYTimes)

Apple has sold 3 million iPads to-date.  (Apple 2.0, ibid)

Microsoft (MSFT) is languishing.  (FT)

The story surrounding the Tesla IPO keeps on getting more interesting.  (DealBook also earth2tech)

Jeff Miller, “A valuable investor skill is identifying the real experts.  Hardly anyone can do this.  Evaluating expertise is difficult.”  (A Dash of Insight)

What you can learn from Victor Niederhoffer’s blow-ups.  (VIX and More, Random Roger)

How are people spending their time these days?  (EconomPic Data)

The bluefin tuna is at risk from overfishing.  (NYTimes, Economist)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts.


Tuesday links: liquidating lumber

Country “PEG” ratios.  (Bespoke also dshort)

Is the market already overbought?  (Trader’s Narrative)

Eight ways Doug Kass has adapted to this market.  (TheStreet)

Are you prepared for a prolonged period of little (or no) equity risk premium?  (Bucks Blog, Capital Spectator)

Adam Warner, “In real life, not every day of an option’s life is equal. The simplest example is that a day has less value for an option if the market is closed.”  (Options Zone)

The continuing economic shift from developed to emerging markets.  (Trader’s Narrative)

One of the few reasons to watch CNBC.  (CXO Advisory Group)

When a reverse split is a positive:  the case of ETFs.  (WSJ)

In a world of highly correlated assets maybe all you need is one ETF.  (The Money Game)

Hedge fund rising stars for 2010.  (Institutional Investor)

Trading is a business, not a hobby.  (Joe Fahmy)

Home improvement stocks have been notable laggards of late.  (Barron’s also WSJ, AR Screencast)

Incompetence, uncertainty and risk.  The case of the $BP analysts.  (Abnormal Returns)

Socially responsible investors were onto BP (BP) for some time now.  (Guardian)

Anadarko Petroleum (APC) debt is viewed as increasingly risky.  (WSJ also Barron’s)

Are Vanguard’s ETFs cannibalizing the firm’s index funds?  (SSRN)

A sign of things to come:  weakness in Ford (F) stock?  (The Stock Bandit)

Dow Chemical (DOW) is adding capacity.  (Value Plays also The Money Game)

Commercial real estate prices are bouncing along the bottom.  (Calculated Risk)

More weakness in existing home sales.  (Calculated Risk, EconomPic Data)

The odds of a double-dip recession.  (Marketwatch, Pragmatic Capitalism)

Bad unemployment statistics are no longer news.  (The Macro Trader)

Can bond auctions actually fail?  (Pragmatic Capitalism)

Why is Germany so interested in fiscal austerity?  (Marginal Revolution, EconomPic Data)

The limited impact of the Yuan revaluation.  (NYTimes, beyondbrics, MarketBeat)

Why was everyone so excited by the Yuan news?  (FT, Macro Man also Free exchange)

Which is it:  yuan or renminbi?  (MarketBeat)

In case you didn’t believe it, more evidence that China is not a free market economy.  (The Money Game)

Looking for growth in China.  (Leigh Drogen)

Economic growth solves a lot of problems.  (Free exchange)

Roger Lowenstein, “Opportunities for financial reform don’t arise very often.”  (Bloomberg)

The Obama administration has fumbled the opportunity in regards to the Gulf oil spill.  (Big Picture)

Think the Deepwater Horizon disaster is going to stop deep water drilling?  Think again.  (WashingtonPost)

Are Android+Nokia an inevitability?  (Ultimi Barbarorum)

Don’t be fooled.  Microsoft (MSFT) is at-risk.  (SAI contra All Things D)

Google and Twitter go to bat for TheFlyontheWall.  (NYTimes)

Who is going to win the e-book wars?  (GigaOM, Minyanville)

Firms like Quora are fighting over the space not filled by Google (GOOG).  (WSJ)

More on the use of “text mining” to trade stocks.  (Digits)

Victor Niederhoffer on being wrong.  (Slate)

Another area where the emerging markets rule:  football.  (EconomPic Data)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts.


Incompetence, uncertainty and risk

Aaron Pressman at Reuters had a piece last week that looked at how to a man the analysts covering BP (BP) in the aftermath of the Deepwater Horizon disaster could have gotten things so wrong.  As oil spilled into the Gulf and the company’s stock continued to plummet the vast majority of analysts continued to rate the company a “Buy.”  It wasn’t until June that many analysts began downgrading the stock.  Pressman writes:

How could so many analysts have gotten the call so wrong? Of course, to err is human. And Wall Street is also prone to herd-like tendencies. But some experts say the unanimity of error around the BP blow-up also has exposed — yet again — the conflicts and weaknesses that still bedevil the sell-side analyst community, despite a decade of much-heralded reform.

Then again, we probably shouldn’t be all that surprised by this.  The sell-side has been a topic of derision ever since the bursting of the Internet bubble.  Felix Salmon also at Reuters writes:

Sell-side analysts live in mediocristan, and are prone to being blindsided by the unexpected; they almost never, for instance, recommend negative-carry trades. Investors, if they’re any good, know this. No one ever made money by blindly following sell-side advice, and so we should hardly be surprised that people whose position coincided with the sell-side consensus ended up losing a lot.

However this case is a good illustration of something else:  the Dunning-Kruger effect.*  To wit:

When people are incompetent in the strategies they adopt to achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realize it.

Errol Morris writing at the New York Times has a piece well worth reading exploring this effect, including an interview with David Dunning.  The idea that there are “known unknowns” and “unknown unknowns” runs throughout the piece.  This is not entirely dissimilar from the idea of “risk and uncertainty.”  There are ideas and information that are so far removed from our normal state of awareness that we are left completely unaware of them until they pop up.  Morris writes:

Put simply, people tend to do what they know and fail to do that which they have no conception of.  In that way, ignorance profoundly channels the course we take in life.  And unknown unknowns constitute a grand swath of everybody’s field of ignorance.

Coming back to how this relates to the topic at hand.  The fact is that deep water drilling is a novel technology that heretofore had not experienced a catastrophic failure.  Therefore trying to estimate the potential damages from this accident at that early date was at best an exercise in dart-throwing.  Joshua Brown at The Reformed Broker has it about right:

So now you take a scenario like BP where, in truth, no one has any clue what the damage could be, how much the disaster may cost, who is on the hook for the cleanup, etc.  It’s all unprecedented.  For a fundamental analyst to step up in the midst of all the uncertainty and pretend like their “models” have an answer is the height of slapstick-comedy-masquerading-as-research.

There is nothing wrong with saying you don’t know something.  After a reading of Dunning-Kruger one could argue that acknowledging one’s lack of knowledge is in fact a sign of intelligence.   This is not just a BP issue.  It pervades the modern world and the world of finance as well.  There is simply too much out there that we don’t know to state with confidence what is at best conjecture.

*Hat tip to Jason Kottke for pointing us to the Errol Morris piece.


Monday links: renminbi redux

Where has all the volume gone?  (Trader’s Narrative)

A long term look at the CAPE.  (EconomPic Data)

What does the market typically do around July 4th?  (CXO Advisory Group)

A look at the dip in the VIX.  (Daily Options Report)

Is it time to bottom fish in the homebuilders? Nope.  (Big Picture)

Where Mark Mobius is seeing opportunities.  (beyondbrics)

Grains are in wicked surplus.  (WSJ)

Commodities will see little impact from the rise in the Yuan. (Market Blog, ibid)

On the parallels between winning golf and winning trading.  (VIX and More)

Distress does not seem to be priced in the cross-section of equity returns.  (SSRN)

More on the drop in the Baltic Dry Index.  (FT Alphaville)

Schwab (SCHW) makes inroads into the ETF business by being a low-cost provider.  (Morningstar)

The ETF industry is going to continue pushing the envelope.  (Bloomberg Magazine)

Why the Pimco Enhanced Short Maturity Strategy (MINT) is changing the active ETF equation.  (IndexUniverse also AR Screencast)

Just how on the hook is Anadarko Petroleum (APC) for clean-up costs?  (Fortune)

Should we bee all that surprised that sell-side analysts misplayed the BP news?  (Felix Salmon)

China didn’t have many options in regards to a revaluation of the Yuan. (FT, WSJ, Free exchange)

The moves in the Yuan are really not all that big.  (EconomPic Data, WSJ, BondSquawk)

A really long term look at where the Yuan may be going.  (Maoxian)

Will the Euro benefit from the move in the Yuan?  (MarketBeat)

Is China now at risk of a “tidal wave” of capital inflows?  (beyondbrics)

An interesting look at currency trade weights over time.  (Minyanville)

China’s move signals a more normal global economy.  (MarketBeat, ibid)

Deflationary risks followed by inflationary risks.  (Econbrowser)

Some Eurozone companies are thriving in this environment.  (NYTimes)

Andy Kessler on the parallels between bailing out the banks and bailout out Europe.  (The Daily Beast)

Even China recognizes that natural gas is a better bet than coal.  (The Reformed Broker)

Shale gas discovery is not without its risks.  (Bloomberg Magazine)

The IPO market waits on a bellwether tech IPO.  (TechCrunch)

What is the third largest Internet company in the world?  The answer may surprise you.  (TechCrunch)

Some thoughts on herding.  (Zero Beta)

A Warren Buffett reading list.  (market folly)

Aggressive math-focused players are dominating tournament poker.  (Time)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts.


Sunday links: pension problems

Doug Kass fears a continued contraction in P/E multiples.  (TheStreet)

Equity market sentiment at week-end. (Trader’s Narrative also Attitrade)

A look at market breadth by sector.  (StockCharts Blog)

Why investing with the herd feels so good.  (WSJ)

Corporate cash continues to grow.  (Horan Capital Advisors)

The move in natural gas has caught many unawares.  (WSJ)

The CBOE (CBOE) makes for a tempting target.  (Barron’s)

Is Google (GOOG) cheap?  (Market Blog)

Is it a good time to bet against Apple (AAPL) stock?  (Apple 2.0)

Why are these warrants so cheap?  (Aleph Blog)

Negative carry and the need for investment flexibility.  (Abnormal Returns)

Let the debate about ethanol begin again.  (24/7 Wall St.)

Wall Street analysts completely misplayed the BP (BP) oil spill.  (Reuters, TRB)

Anadarko Petroleum (APC) is trying to distance itself from BP.  (Bloomberg, CNNMoney)

BP is going to sue Anadarako Petroleum and try and raise some serious cash.  (Telegraph, The Money Game, Guardian)

Are BP bonds a bargain?  (Barron’s)

The vultures are circling BP.  (Deal Journal)

How herding behavior can occur.  (Economist’s View)

How dark pools adversely affect liquidity and price discovery.  (The Psy-Fi Blog)

Lumber prices are off 30% since April.  (Calculated Risk)

The costs to fix Fannie and Freddie keep going higher.  (NYTimes, Calculated Risk)

Public pensions are unsustainable at current rates.  (NYTimes)

Who loses (and how much) in financial regulatory reform?  (Huffington Post)

Lakshman Achuthan at the Economic Cycle Research Institute (ECRI) on the value of leading economic indicators to forecast the stock market.  (Tech Ticker)

Why does anyone still listen to Alan Greenspan?  (Big Picture)

Is hyperinflation even possible?  (Data Diary)

On the relationship between new housing starts and unemployment.  (Calculated Risk)

On the role consumer sentiment measures play in forecasting economic activity.  (macroblog)

China talks “gradual” currency appreciation.  (NYTimes, Bloomberg, naked capitalism, Street Sweep)

Is the Canadian dollar a “petro currency”?  (The Buzz)

Let’s end the carried interest debate once and for all.  (Infectious Greed)

The IPO market shows some signs of life.  (Dealbook)

A successful via IPO is a rarity these days.  (A VC)

A review of Sebastian Mallaby’s “More Money Than God.”  (FT)

Hedge fund manager Ray Dalio’s philosophy of “hyper-realism.” (WSJ)

A strategy session with Adam Warner and Charles Kirk.  (Kirk Report)

In defense of Business Insider.  (Zero Beta)

Abnormal Returns screencasts of the week.  (Abnormal Returns)

Happy Fathers Day.  (The Reformed Broker, A VC)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts.


Negative carry and investment flexibility

In an earlier post we talked about the advantages (and disadvantages) of being an individual investor versus an institutional investor.  One way in which the individual investor often has an advantage is flexibility.  Michael Arold at Holistic Swing Trading left a comment on the post noting the following:

There is a law in mathematical optimization theory saying “the fewer constraints are put on a optimization problem, the better the optimum”. Since individuals have clearly fewer constraints in their investment process, they should outperform (just theoretically).

This point was driven home in Gregory Zuckerman’s book “The Greatest Trade Ever” which documents how John Paulson was able to suss out and profit greatly from the subprime/mortgage bubble. We would recommend the book as a companion piece to Michael Lewis’ “The Big Short” which we also enjoyed.  (Only hardcore investors need both, however.)

As surprising as it is in hindsight, Paulson had a great deal of difficulty attracting investors for his Paulson Credit Opportunities Fund that was dedicated to shorting the subprime market.  One big reason why many investors balked was the fact that the fund would have “negative carry.”  Zuckerman writes:

A key reason even experienced investors resisted buying mortgage protection:  CDS contacts were a classic example of a “negative-carry” trade, a maneuver that investment pros detest almost as much as high taxes and coach-class seating.  In a negative-carry trade, an investor commits to paying a certain cost for an investment with the hope of untold riches down the line.  In the case of CDS contracts, purchasers usually agree to make an up-front payment, and to shell out annual insurance premiums, both of which bake in a sure cost.*

Many investors were unwilling to take on the ongoing costs of trades.  In so doing they missed out on untold profits that Paulson was able to reap.  This institutional mindset did not allow for this type of risk-reward situation where relatively small costs could yield huge profits, especially in the world of mortgage bonds.

That is not to say there are not plenty of cases were positive carry, the flip side of negative carry, works out for investors.  Indeed on area we touched in our earlier posts, distressed debt, has this characteristic.  Investors who buy beaten down debt, provided it is still current, have both the opportunity to earn a high current yield and profit from a re-pricing of the debt instrument.  Indeed, the best of both possible worlds.

However some investors focus exclusively on negative carry trades.  Investors who follow a strategy popularized by Nassim Taleb purchasing (far) out-of-the-money option contracts in anticipation of greater than expected market moves.  This strategy requires a steady stream of option purchases, many of which will finish out-of-the-money.

The bottom line is that investors need to remain flexible in their approach to the market.  Sometimes that means positive carry trades make sense.  Other times negative carry trades are necessary to capture sharp market moves.  Some institutional investors recognize this, but many are hamstrung both by their investment mandates and their by-the-book thinking.  Chalk one up for investment flexibility.

*p. 119, Gregory Zuckerman, “The Greatest Trade Ever”, Broadway Books, New York, NY, 2009.

Please note:  We purchased our own copy of “The Greatest Trade Ever” and were in no way compensated for this post.


Friday links: economic cross talk

How HFT machines have fundamentally changed the way markets operate.  (The Atlantic via Clusterstock)

It’s difficult to see what news might kick off a big upward surge, but it’s easy to identify things that could send things down.”  (Free exchange)

Investor sentiment remains somewhat mixed.  (Pragmatic Capitalism)

What are Rydex market timers up to?  (The Technical Take)

Money seems to be flowing into North American assets.  (Derek Hernquist)

Gold vs. gold mining stocks.  (market folly)

Buy corn.  (Zero Hedge)

How realistic is all this Treasury bubble talk?  (Big Picture)

The ETN comeback.  (ETF Trends)

iShares is getting into the active ETF business.  (IndexUniverse, ETFdb)

How should you trade the open?  (CXO Advisory Group)

In search of a standard for “erroneous trades.”  (Bloomberg)

What is the copper/gold ratio telling us?  (Trader’s Narrative)

What Caterpillar (CAT) is telling us about global growth.  (Value Plays)

A look at the relative strength of the energy sector.  (Trader’s Narrative)

Citigroup (C) does not seem to be very concerned with financial reform.  (Clusterstock)

How to put on a “disaster trade” using options.  (VIX and More)

Who should we believe in the muni default debate?  (Deal Journal)

Credit ratings may soon be liable for bum ratings.  (Big Picture)

BP bond risk illustrated.  (Morningstar)

Have Americans fallen back in love with natural gas?  (The Money Game)

Jim Chanos is reportedly short Exxon Mobil (XOM).  (Clusterstock)

Dividend cut aside, can BP bear the costs of the oil spill?  (FT Alphaville, Breakingviews)

“..for 99.9 percent of investors, there is no reason to do involve yourself with the company (BP) other than to send money to the clean-up efforts”  (Howard Lindzon)

What are high yield bond spreads telling us about the state of the economy?  (WSJ)

Core CPI is at its lowest levels since 1966.  (Bespoke)

Quantifying the double dip.  (Macro Musings)

The ECRI WLI continues to decline.  (Pragmatic Capitalism)

“Feels like a normal recovery to us.”  (Jeff Matthews also Economix, AR Screencast)

To what degree is the rise in leading economic indicators due to easy money?  (EconomPic Data)

Economic choices are not scalar.”  (Interfluidity)

Like it or not, retirement ages are going higher around the world.  (FT)

The north-south divide in Europe could continue for awhile.  (FT Alphaville)

The Swiss franc continues to rally against the Euro.  (MarketBeat)

European bond spreads continue to widen out.  (Calculated Risk)

Russia looks to take advantage of the BP oil spill.  (beyondbrics, The Money Game)

Hungary is the Switzerland of Central Europe.  (beyondbrics)

China as a “stealth buyer” of gold.  (CNNMoney, TRB)

“Has Vietnam’s moment finally arrived?”  (BusinessWeek)

The “long-term supercycle for coal” continues unabated.  (Dot Earth)

What a true oil man looks like.  (The Reformed Broker)

Individuals vs. institutions.   What advantages do individuals have?  (Abnormal Returns)

Merrill Lynch is getting into the online brokerage business.  (WSJ)

How big a deal (or not) is the Kindle to Amazon (AMZN)?  (CNBC)

Quotes of the day.  (The Reformed Broker)

Horse racing continues it slow slide into obscurity.  (SportsBiz)

There are now a number of ways to follow Abnormal Returns including:  @ARupdates, free e-mails:  AR ClassicAR Energy, AR Options, the Abnormal Returns widget, our daily screencasts.


Abnormal Returns: screencasts of the week

We have been experimenting with a new screencasting feature here at Abnormal Returns.  The Screenr function at Chart.ly allows anyone to record and upload a screencast of up to five minutes.  We have been using this feature to offer a little bit more explanation on some of the links in our daily linkfest.  As you can see it is not limited to technicians. Below you can see our screencast from earlier today talking about the state of the economy.  In it we walk through some posts in today’s linkfest that discuss signs of economic weakness (and strength).  In addition we have listed the other screencasts we recorded during the past week.

  • Sunday, June 13th:  NFLX:  An Abnormal Returns screencast. Stock buybacks are a sideshow at this point for $NFLX shareholders.
  • Monday, June 14th:  SBUX:  Should Starbucks shareholders care all that much about the surge in coffee prices ($KC_F)?
  • Tuesday, June 15th:  CBOE:  The CBOE IPO may strike some as pricey, but can you truly put a price on scarcity value?
  • Wednesday, June 16th:  FDX:  FedEx, the effect of the BP oil spill on Russia ($RSX) and a cool infographic in today’s screencast.
  • Thursday, June 17th:  BP:  More on BP as a battleground stock. Investors now focusing on BP bonds and related stocks.
  • Friday, June 18th:  CAT:  Caterpillar vs. the ECRI: who should we believe on the state of the economic recovery? If you have any questions or comments about this new feature please feel free to contact us.


Individuals vs. Institutions

Investing (and trading) is one the few in modern life where amateurs (individuals) can compete directly with professionals (institutions).*  One can argue that the playing field is less than even, as has been done many times with high-frequency trading.  But by and large individuals and institutions compete in the same arena when it comes to stocks, options and even forex.

Unfortunately for individuals one area where it is prohibitively expensive to compete is in the realm of bonds, specifically corporate bonds.  In an earlier screencast we discussed the situation surrounding the bonds of BP (BP).

The point being that institutions are sniffing around the bonds of the troubled oil giant.  Finding, researching and trading the bonds of a company, even as big as BP, is simply out of reach for individuals.  So it sounds like distressed debt investing and capital structure arbitrage are better left to the hedge funds and big institutions.  So what?

Individual investors have some distinct advantages over institutions.  Most institutions need to be acutely aware of the indices against which they benchmark.  Individuals, on the other hand, are beholden only to themselves.  The performance of the S&P 500, for example, should be but a data point to an individual.  Many institutions need days to enter (and exit) their equity positions so as not to move a stock’s price.  An individual can do this (usually) in seconds.  Maybe most importantly individuals don’t have clients breathing down their necks.  As an individual investor you are your own client.

The point is that individual investors should look less at trying to invest like an institution and focus more on the advantages of their situation.  Most institutions can’t take meaningful positions in small cap stocks.  Individuals can. Most institutions can’t undertake options strategies.  Individuals can.  Most institutions can’t day (or even swing) trade.  Individuals can.  Maybe most importantly an individual doesn’t need to trade (or invest) if the set-up isn’t right.  Most institutions are hemmed in by their need to “fully invested.”

Are there real downsides to being an individual investor (or trader)?  Sure.  However as the Internet continues to democratize the flow of information these advantages are becoming smaller.  Individuals should play to their strengths, stay nimble and focus on the (absolute) returns that matter to them most of all.

*$10,000 does buy you a seat at the World Series of Poker No-Limit Hold’em Championship.