Friday links: hedge fund letdown

Hedge funds matched broad market averages in 2009.  Many are not impressed. (FINalternatives, Clusterstock, DailyFinance, EconomPic Data)

Are earnings estimates too high?  (The Pragmatic Capitalist)

More on the evidence that individual investors have reloaded on equities.  (Sentiment’s Edge)

High yield bonds continue to outperform their less risky brethren.  (Bespoke)

How generous your ETF provider with stock-lending revenue can make a difference in fund returns.  (WSJ)

Is a push into mutual funds going to change the way hedge funds do business?  (Economist)

Emerging markets as a prime example of the difference between arithmetic and geometric returns.  (designing better futures)

Is infrastructure a distinct asset class that can be captured by an ETF?  (Random Roger)

Coming soon to China:  fair value calculations for equity index futures.  (Marketwatch)

Noted short seller Jim Chanos thinks China Inc. is the new Enron.  (NYTimes also Clusterstock)

James Altucher thinks Microsoft (MSFT) is a natural buyer of AOL (AOL).  (Financial Adviser)

Do big pharmaceutical mergers do anything to accelerate drug development?  (Atlantic Business)

The banks just can’t win in a post-TARP world.  (Deal Journal)

Is Tim Geithner in trouble?  (FT Alphaville, DJ Market Talk, Business Insider)

Should you feel bad by walking away from an underwater mortgage?  (NYTimes also Business Insider, Felix Salmon)

What happens when the Fed stops buying mortgage- backed securities?  (Calculated Risk)

Bank bonus season is coming.  Get ready for the outrage.  (24/7 Wall St., Baseline Scenario)

Is the non-farm payrolls number indicative of a double-dip for the economy?  (Economix also Calculated Risk, Curious Capitalist, Bespoke, EconomPic Data)

What are we to make of the downward trend in youth labor force participation rates?  (macroblog)

Is Iceland the tip of the iceberg for sovereign defaults?  (Economist)

Some new quant-oriented blogs.  (MarketSci Blog)

Ranking economics bloggers based on their “scholarly impact.”  (Blogmetrics via Mankiw Blog)

On the similarities between professional athletes and bankers.  In short, both are overpaid.  (Baseline Scenario)

Pundits aren’t all that hot in predicting NFL performance. (kottke)

How is the Internet changing the way you think?  (Edge via Arts & Letters Daily)

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Fully Played Out?

Few would argue with the notion that many aspects of life have pendulum-like properties. Markets and social moods, for example, might swing for a while in one direction, but more often than not, they eventually head back the other way.

The mistake that people make, however -- and I am occasionally guilty of this as well -- is to assume that they know just when the transition point will be or has been reached, maybe because they've studied past patterns.

While that knowledge would no doubt be useful in a setting where only the laws of physics apply, it is not quite the same when the trend itself can influence people's behavior in ways that can affect its intensity and duration.

The classic example, of course, is a stock market bubble, where the pattern of price changes and natural herding instincts lead people who might not otherwise care about equities to dive in and buy with both hands, without thinking things through. Under those circumstances, the trend can extend well beyond what many believe is rational.

Applying similar logic to current circumstances, even if you take it as a given that severe recessions are followed by dramatic rebounds, it begs the question: can we assume that the downturn is fully played out, especially in light of reports and other evidence that people are (still) altering their behavior (e.g., spending less and saving more) in response to what's going on around them?

And even if you leave that issue aside, there are still plenty of nasty structural imbalances, many of which had a direct hand in causing the crisis, that have not been fully or even partially resolved and which could still cause plenty of damage to the economy and the markets.

There is also the possibility of an unexpected shock, as Bloomberg/BusinessWeek columnist William Pesek ponders in "Black Swans Abound as Year of Tiger Shows Teeth":

After a miserable year, 2010 has to be better, right? Think again

If many of us could have turned around the moment we entered 2010 and made obscene gestures at 2009, we would have.

After the wreckage of the past 12 months, 2010 has to be a good year, right? Good for governments staving off financial chaos, good for households struggling to stay afloat, good for investors wondering which rules of economics and markets still apply. It really is hard to see this year outdoing the last one in the doom-and-gloom department.

Yet the Year of the Tiger might live up to its name and be a fierce one. Here are five reasons why it may come with its share of sharp teeth and "Black Swans."

1. The bill for 2009 is coming due. Look no further than Japan, which has little to show for the hundreds of billions of dollars it's throwing at the economy. Deflation is intensifying, unemployment is worsening, the ranks of the working poor are growing and Prime Minister Yukio Hatoyama is anything but focused on these fast-mounting challenges.

Now, he faces the hangover from the 2009 borrowing binge. His 2010 budget won't rein in deficits that threaten Japan's Aa2 rating at Moody's Investors Service. The plot thickens when you add a shrinking population and tax base. That's why the cost of a five-year contract to protect $10 million of Japan's sovereign bonds has climbed to $68,650 from $37,000 in August, when Hatoyama's Democratic Party of Japan won power.

Japan is hardly alone. Governments are pouring untold trillions of dollars into economies financed with fresh bond issuance. The debt glut is as unprecedented as it is unsustainable. Expect credit-rating companies and investors to be sniffing around for potential debt crises, be they in China, Greece, Japan or Vietnam.

2. Global demand remains elusive. Singapore, where gross domestic product shrank in the final three months of 2009 — the first time in three quarters — tells the story. It's on the front lines of global trade and the annualized 6.8 percent drop in growth last quarter is an ominous sign.

China's almost 10 percent growth is helping commodity exporters such as Australia. Not so for the rest of Asia as it tries to fill the void left by a hobbled $14 trillion U.S. economy. An undervalued currency greatly limits the spillover benefits of China's stimulus efforts.

Skepticism is being voiced by leading economists on different ends of the ideological spectrum. Conservative Martin Feldstein, of Harvard University, and liberal Joseph Stiglitz, of Columbia University, say growth may falter as stimulus wanes. Just ask Singapore how U.S. frugality is working out for Asia.

3. Trade tensions will explode. Expect China's peg to the dollar to become even more of an issue as unemployment rates rise from Washington to Berlin.

The recent breakdown of climate-change talks in Copenhagen dispels any optimism about multilateral cooperation. It's beggar-thy-neighbor time as global growth limps along, and no one plays the game better than China.

On Jan. 1, a free-trade agreement between China and Southeast Asia came into force. It consolidated a sixfold surge in economic activity over the past decade between countries representing a quarter of the world's population. Yet countries such as Indonesia are already concerned about lowering their guard against Asia's rising superpower. Expect fireworks.

4. Central bankers will be on the ropes. They must find exit strategies for their monetary largess as asset bubbles inflate. Tap on the brakes too much and markets might crash. Apply them too timidly and inflation may accelerate.

India is one case of monetary policy being behind the curve. Officials from Seoul to Hanoi also face balancing acts.

Central-bank independence is a concern. It's impossible politically to put rates back to reasonable levels anytime soon. They must try, though, and those efforts will make for a volatile year in Asian markets.

5. Black-Swan risks abound. Umar Farouk Abdulmutallab's attempt to blow up a plane over Detroit on Christmas Day is a reminder that terrorism can shake markets anytime. The assassination of a major world leader also would be an unexpected event with great impact.

Sovereign defaults can't be ruled out, and troubles in small economies such as Iceland or Dubai have a way of spanning the globe. A huge dollar rally or yen plunge could upset so- called carry trades and bring down a couple of hedge funds. A crash in gold or oil prices would do the same.

Perhaps Japan will get its act together and recover for real. Or maybe things will go the other way: a debt crisis in Japan, the U.S. or the U.K.

Markets are hardly discounting hyperinflation, hyperdeflation, a global pension crisis, a collapse of North Korea's repressive regime, social unrest in China or Iran, major earthquakes in Tokyo or California, or Somali pirates getting their hands on more than oil.

And, more basically, what if optimism that we dodged another Great Depression is hubris and markets tank anew? Treating the symptoms of the financial crisis isn't the same as removing the causes.

We have seen how the impossible has a way of becoming possible these last two years. The one ahead may hold its own surprises as the Chinese zodiac's tiger roars.

William Pesek is a Tokyo-based columnist for Bloomberg News, providing opinions and commentary on economics, business, markets, and politics throughout the region. His columns routinely appear in the International Herald Tribune, The Australian, The Straits Times, The Japan Times and many other publications around Asia and the globe. He writes a monthly column for Bloomberg Markets magazine and is a regular on Bloomberg Television. The opinions expressed are his own.

Thursday links: error prices

Five investing mea culpas for the year that was.  (Big Picture)

Individual investors are way too bullish.  (Sentiment’s Edge)

Cyclical stocks continue to outperform.  (Crossing Wall Street)

Russell 2000 volatility is stretched relative to the S&P 500.  (VIX and More)

Bond fund managers are holding a big slug of cash.  (Trader’s Narrative)

Buy German bunds.  Sell US Treasuries says Bill Gross.  (WSJ)

2009 was a really bad year for dividends.  (MarketBeat)

Target prices for stocks are useless without an accompanying “error price.”  (research puzzle)

Do commodity ETFs change demand for the underlying?  (24/7 Wall St.)

Eric Jacobson, “Splitting hairs in a quest for one be-all-and-end-all fund has diminishing returns and often can do more harm than good.”  (Morningstar)

How checklists can prevent you from “investing by the seat of your pants.” (Abnormal Returns)

On the practice of “deliberate practice” and its implications for investing.  (Street Capitalist)

Take the returns on hedge fund indices with a big grain of salt.  (Breakingviews)

Is an influx of former hedge fundies going to help performance for asset managers?  (Felix Salmon)

Carried interest is likely to be taxed at ordinary rates in 2011.  (WSJ also Clusterstock)

The Tim Geitner-AIG (AIG) story just keeps getting worse.  (Bloomberg, Deal Journal, Kid Dynamite, naked capitalism, Fund My Mutual Fund)

“Today the prices of many assets are being held up by unsustainable fiscal and monetary stimulus.”  (Economist)

The economic recovery is going to happen without housing.  (Slate)

Why the economy feels worse than the reported figures.  (EconomPic Data)

Did demand for credit really fall?  (Baseline Scenario)

Do we need an independent “National Institute of Finance“?  (Economix)

Iceland vs. the UK.  A fair fight?  (Felix Salmon also Financial Crookery, FT Alphaville)

Is Iraq about to change the world’s oil equation?  (The Money Game)

Just in case you haven’t tired of the past decade.  A decade-meta list.  (Kirk Report)

Some business books worth reading from the past year.  (Aaron Pressman)

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Wednesday links: measuring fear

Forget the BRICsThe MAVINs are where it is at for the next decade.  (The Money Game also Trader’s Narrative)

The mutual fund business is rapidly changing as ETFs continue to take a chunk of their business away.  (WSJ, ibid, Morningstar)

Hedge fund firms, including AQR, continue to embrace mutual funds as a way of diversifying their businesses.  (WSJ)

Goldman Sachs (GS) is still in the business of buying stakes in hedge funds.  (BusinessWeek)

What is Buffett’s game in calling out Kraft (KFT) management?  (FT Alphaville, Deal Journal)

Tariq Ali, “The problem I see with most people looking at Buffett is that they forget the partnership days and instead try to emulate the Buffett of today.  I do not believe that is the right course of action for most investors.”  (Simoleon Sense)

Measuring fear by how much investors whip their portfolios around.  (MarketSci Blog)

Ten surprising ETF statistics from the past year.  (ETF Database)

Is Japan the ultimate contrarian bet for 2010?   (The Pragmatic Capitalist)

US farmland is still the best bet for global farmland investors.  (AgWeb via Cato)

Should you take financial advice from some one who writes for a living?  (Marketwatch)

All Serious Economists Agree” that too big to fail banks are a huge problem.  (Baseline Scenario also Felix Salmon)

The Chicago School of Economics is now a loose agglomeration of factions. (Curious Capitalist)

The states are still facing huge budget problems.  (Calculated Risk)

The Chinese yuan is still undervalued according to the Big Mac Index.  (Economist)

If Apple (AAPL) and Google (GOOG) are smartphone winners, who are the losers?  (I, Cringley, Above the Crowd, Infectious Greed, MarketBeat, Brainstorm Tech, Economist)

Is Apple making the same mistakes it made two decades ago?  (Silicon Alley Insider)

Jonah Lehrer, “(T)he peak of all intellectuals seems to be getting postponed, as the increasing complexity of research in general requires increased time to master.”  (The Frontal Cortex)

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Tuesday links: not-so distressed debt

Has bullish equity sentiment reached an extreme?  (Big Picture also Behind the Headlines)

The market is going to do what it does regardless of the calendar.   (Daily Options Report, Marketwatch, MarketSci Blog, Afraid to Trade)

Dave Nadig, “All indexes—not just commodity indexes—are in a way an active bet.”  (IndexUniverse)

The unbelievable year in distressed debt investing.  (Distressed Debt Investing also Bloomberg)

Vincent Fernando, “So here’s the secret to forecasting success — maintain an extreme, polarizing long-term view. Then adopt the exact opposite view, as a short-term trading idea, and blame governments for making it happen.”  (The Money Game also Big Picture)

Byron Wien’s ten surprises for 2010.  (Fund My Mutual Fund also Credit Writedowns)

The average S&P 500 P/E ratio by decade.  (Bespoke)

Quickie bankruptcies are all the rage.  (WSJ)

S&P 500 historical volatility is at a two-year low.  (VIX and More)

Steven M. Sears, “In essence, selling puts lets investors leverage the residual fear that many big investors feel about another stock decline.”  (Barron’s)

When is the best time to use a buy-write strategy?  (OptionsZone)

Some cracks are showing in the transportation stock rally.  (Barron’s)

iShares still rules the ETF roost.  (WSJ)

Matt Hougan on the state of the ETF industry.  (Barron’s)

Everybody and their brother wants to get into the actively managed ETF business.  (Investment News)

On the quiet death of the Macroshares housing ETPs.  (The Reformed Broker)

High frequency trading is coming to Japan.  (Clusterstock)

Kraft (KFT) gets an “almighty smackdown” from Warren Buffett.  (FT Alphaville also Rolfe Winkler, Street Capitalist)

What is an acceptable ROE for the banking industry?  (Breakingviews)

John Carney, “The grimmest news of the new year has to be the fact that Fed chairman Ben Bernanke still has no clue about the causes of our financial crisis or what measures need to be undertaken to avoid another crisis.”  (Clusterstock)

Carmen Reinhart, “If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies..”  (Real Time Economics)

What if ratings agencies disappeared?  (Atlantic Business)

Tim Duy, “The economy is gathering steam.  Can’t deny it.  But the clear path to sustained recovery remains clouded by government stimulus, both in the US and abroad.”  (Economist’s View)

Our best hope for house prices is stability not increases.  (Economix)

Could “The Checklist Manifesto” help you become a better trader/investor?  (Freakonomics)

The Apple (AAPL) tablet is real and will ship in March.  (WSJ)

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Trades of the Unexpected

In "Ten Blasphemous Trade Ideas That Spit In The Face Of Conventional Wisdom," Business Insider highlights a number of developments that would likely surprise many investors if they came to fruition. Although I would take issue with some of them (in addition to the associated "speculative contrarian bets," even if the underlying calls proved to be correct), they serve as interesting food for thought:

If you feel dumb even mentioning a trade idea, it's either A) a really dumb idea or B) a huge opportunity to profit from a very crowded trade.

Here are ten blasphemous 2010 trade ideas that spit in the face of conventional wisdom.

You can be the judge whether each idea is genius or just really dumb.

The U.S. will fall into an even deeper recession than it just did.

The conventional wisdom: The U.S. economy will grow in 2010, even if just moderately.

The speculative contrarian bet: Short junk bonds or buy credit default swaps for lower-rated debt. Junk bonds had a huge rally in 2009 and would be hammered if the prospect of high U.S. corporate default rates emerged.

The real credit crunch hasn't even happened yet.

The conventional wisdom: The worst of the credit crunch is past.

What if U.S. economic growth proves to be a massive head fake, belatedly? The Fed could end up tightening monetary policy right before another a wave a surprise losses in the financial system. Knocking a few more major banks into insolvency could make our recent credit crunch simply a preview.

The speculative contrarian bet: Short AFLAC (AFL) shares. They fell massively during the last credit crunch but have quadrupled since. At the same time, the company probably isn't too big to fail thus they could feasibly be wiped out.

Goldman Sachs will go Lehman.

The conventional wisdom: Goldman Sachs is the smartest, most protected financial player in the world.

Lehman was an extremely respected institution before it suddenly collapsed, thus it's not inconceivable that Goldman could screw up its risk management. While it's unlikely a suddenly distressed Goldman would be allowed to fail, it could end up with Citi or AIG-style bail out whereby Goldman's listed shares collapse and the government becomes a major shareholder.

The speculative contrarian bet: Long deep out-of-the-money Goldman put options.

Click here to view the rest of the slideshow.

Monday links: a mixed bag

December was a mixed bag of performance for the major asset classes, mainly because fixed-income was weak.”  (Capital Spectator)

Mark Hulbert, “Basing a trading strategy on the market’s performance over the first five days of January can be dangerous to your wealth.”  (Marketwatch also MarketBeat)

Can the market rally without the financials?  (Bespoke)

Ten blasphemous trade ideas for 2010.  (Clusterstock)

A look back at the VIX and volatility in 2009.  (VIX and More)

Hedge funds turned things around in 2009.  (WSJ, The Deal)

Hedge fund replicators just keep on coming.  (InvestmentNews)

German bonds trade as if it were a safe haven.  Is it really?  (WSJ)

Selling covered calls in 2010.  (Options for Rookies)

A field guide to market bears.  (The Reformed Broker)

Gold wasn’t all that in 2009.  (The Money Game)

Investors:  think for yourself.  (Jeff Matthews)

On the dangers of economic optimism.  (Atlantic Business)

Is Chairman Bernanke in denial on the role of the Fed in the credit crisis?  (WashingtonPost, Big Picture, Baseline Scenario, 24/7 Wall St., Crossing Wall Street)

The lesson of California is that a political system too dysfunctional to avert crisis is also too dysfunctional to respond to it.”  (Ezra Klein)

On the dangers of overestimating self-control or the “restraint bias.”  (The Frontal Cortex)

Google Chrome has edged into third place in browser use.  (The Big Money)

How to get from here to there.  Mapping your goals and the plans to achieve them.  (Kirk Report)

There is a difference between linking and approval.  (Daily Dish)

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Sunday links: a clean slate

The worst of 2008 were first in 2009.  (Bespoke)

Can’t wait until Tuesday.  (Sentiment’s Edge)

There is very little that indicates a momentum effect for the overall stock market.  (NYTimes)

It doesn’t get much better than this for the junk bond market.  (Barron’s)

Investor sentiment at week (and year) end.  (Trader’s Narrative, The Technical Take, Disciplined Approach to Investing)

Sometimes it pays to keep it simple when it comes to options.  (Barron’s)

Covered call strategies get all the press.  (WSJ)

The 2010 Buy List.  Performance of the 2009 Buy List.  (Crossing Wall Street, ibid)

Why closed-end funds are attractive targets for activist investors.  (Simoleon Sense)

Brett Steenbarger, “When frustrated traders attribute losses to general and persistent forces beyond their control…, there is no way that they can summon the motivation to make corrective efforts in trading and improve performance. “  (TraderFeed)

“Acquiring great wealth in a spurious quest for happiness is a pointless and pathetic occupation.”  (The Psy-Fi Blog)

Conspiracy theories generate pageviews, but little in the way of investment insight.  (A Dash of Insight)

Were the bank stress tests the administration’s best economic decision in 2009?  (TNR also Atlantic Business)

Edward Harrison, “The reason economists failed to anticipate the crisis is because they were fixated on avoiding downturns and driving the economy to unsustainable growth rates by using debt to consume today what will be earned in the future.”  (Credit Writedowns)

Mortgage modification programs have made things worse.  (Business Insider, Big Picture, naked capitalism)

Rail freight traffic continue to expand  year-over-year.  (The Pragmatic Capitalist)

What we lost in relying on a bailout mentality in 2009.  (Nancy Miller)

Daniel Gross, “We’re in a Missouri economy now, one in which recovery has to be shown, not told.”  (Newsweek)

Ugly graph showing just how bad the economy was in the past decade.  (WashingtonPost)

The world’s most populous nations, outside the U.S., made great economic strides in the past decade.  (NYTimes)

To do inflation right, you have to be a little sneaky.”  (Rick Bookstaber)

The wireless carriers have some catching up to do on their 3/4G networks.  (Ultimi Barbarorum)

Jon Gruber on the much-rumored Apple Tablet, “I say they’re swinging big — redefining the experience of personal computing.”  (Daring Fireball)

Why Apple (AAPL) was company of the decade.  (GigaOM)

Why Twitter will endure.  (NYTimes also Parkman’s Blog)

Areas that Fred Wilson finds of interest.  (A VC)

Ron Lieber, “Savers are never losers, even if some stocks have let us all down in the short term.”  (NYTimes)

Where is the next “call of the decade” going to come from?  (The Reformed Broker)

Evil is as evil does.  Google (GOOG) shuts down the Bronte Capital blog.  (Felix Salmon, Clusterstock)

Costly signaling theory” helps explain why men can be conspicuous spenders.  (New Scientist)

Economists are cheap.  (WSJ also EconLog)

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Thursday links: bear market in bears

Here’s wishing all of our readers a happy (and safe) New Year!  Thank you for all your support in 2009.

Individual investor bears are a dying breed.  (Sentiment’s Edge)

“It’s time for dividends to come back into fashion.”  (Breakingviews)

2010 could see a reversal of the risk trade.  (Barron’s)

The biggest risk for corporate bonds in 2010 are higher government bond yields.  (WSJ)

Year-end is always a weird time for closed-end funds.  (Zero Hedge)

Sector winners for 2009.  (StockCharts Blog)

The worst footnote of 2009.  (footnoted)

The ultimate 2010 prediction and forecast round-up.  (The Pragmatic Capitalist)

Jared Woodard, “You don’t need to be a financial engineer to know that deep out of the money options can be deceptively tricky to price.”  (Condor Options)

Is the Japanese bond market doomed to failure?  (The Money Game)

Options volume set another record in 2009.  (BusinessWeek)

Evan Newmark, “Goldman Sachs will pay out big bonuses, be publicly vilified for a month and then go quietly back to printing profits.”  (Mean Street)

The economics statistics of the decade.  (Michael Mandel also Felix Salmon)

Six lessons we failed to learn in 2009.  (Big Picture)

What should we do about the banking lobby?  (Curious Capitalist)

James Hamilton, “My advice would be the sooner the Fed can return to plain vanilla central banking, the better.”  (Econbrowser)

The bull market in farmland may already be played out.  (The Money Game)

In 2009 I learned that…  (The Reformed Broker)

Felix Salmon, “While finance may or may not be good at the efficient allocation of capital, it seems to be positively bad when it comes to the efficient allocation of the labor of intelligent and perspicacious individuals.”  (Reuters)

The Google (GOOG) decade comes to an end.  (The Big Money)

“A project is strategic for Google if it affects what sits between the person clicking on an ad and the company paying for the ad.”  (Chris Dixon)

Barry Ritholtz is the Yahoo Tech Ticker Guest of the Year.  (FusionIQ)

Another blogger opts out from Seeking Alpha.  (World Beta)

Is the issue of head injuries going to transform the game of football?  (NPR)

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A Little Fun for Year-End

Josh Brown, publisher of The Reformed Broker, decided to have a little fun for year-end and asked a number of bloggers, authors, journalists, and investors how they would complete the sentence, "In 2009 I Learned That..." Here is an excerpt from the write-up he just posted:

If it's true that we learn new things with every passing year then the year 2009 was like a crash course in fringe economics, lunatic civics and paranormal market activity all rolled up in one.

I got a little help from my friends on this one, I hope you enjoy the wit and wisdom below.

Downtown Josh Brown (The Reformed Broker): the ink was all red, most Americans were blue, but stocks went bananas, bonds and commodities too!

Trader Mark (Fund My Mutual Fund): Ben Bernanke can remain irrational far longer than I can remain solvent.

TPC (The Pragmatic Capitalist): Wall Streeters are like gold fish - they have very short memories, are practically useless and require a great deal of help from outside resources to survive.

Barry Ritholtz (The Big Picture): that human nature never changes.

Lawrence McDonald (Author, A Colossal Failure of Common Sense): $10 trillion will always buy you 4000 DOW points.

Ben Shoval (Hedge Fund Comedian): doing God's work pays better than I thought...also, too much credit is the problem... and the solution.

And, from yours truly:

Michael Panzner (Financial Armageddon): only three words matter when it comes to investing in today's markets: ignorance is bliss.

Click here to read rest (there's 36 more).

Wednesday links: as steep as it gets

The yield curve is about as steep as it gets.  What it means for stocks.  (Bespoke also Crossing Wall Street)

Have equities already priced in a sharp rise in corporate earnings?  (WSJ)

“The possibility that there’s a link between the calendar and stockmarket performance, mediated by some combination of behavioural bias and weather related conditions can’t be ruled out. “  (The Psy-Fi Blog)

Should we care that next year ends in a ‘0′?  (Sentiment’s Edge)

Are sentiment indicators still useful?  (The Technical Take)

Even when correct, shorting is a difficult game to play.  (Bronte Capital)

On the use of liquidity as an investment style.  (Pensions & Investments)

James Kwak, “But the general point is that when everyone agrees on an investment strategy, they are probably wrong.”  (Baseline Scenario)

A new actively managed commodity ETF is coming to market.  (IndexUniverse)

There still are some asset classes that need ETFs.  (Morningstar)

“Option owners acquire certain rights when they buy an option.  Option sellers have no rights.  None.“  (Options for Rookies via Daily Options Report)

The best (free) institutional research.  (World Beta)

More details on the Optima farmland hedge fund.  (Clusterstock)

Why Warren Buffett is betting on railroads.  (Railway Age via market folly)

Homes are finally cheap for most Americans.  Or not.  (ROI, Calculated Risk)

The House Banking committee is too big to succeed.  (Big Picture)

When 42 is too old for investment banking.  (Times Online)

The Iranian regime now fears for its future.  (Economist, Huffington Post)

Even in a bad economic decade a great deal of progress is made.  (Howard Lindzon)

An interesting discussion with Charles Kirk of the Kirk Report.  (Wall St. Cheat Sheet)

A dozen economics books worth your time.  (Aleph Blog)

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Tuesday links: historic lows

Joel Kotkin, “If the U.S. were a stock, it would be trading at historic lows.”  Don’t give up on the U.S. just yet.  (New Geography via The Browser)

“Both sports betting markets and financial markets are efficient ENOUGH that you have to do your own work – and LOTS of it – if you expect to generate alpha.”  (Kid Dynamite)

A long-term look at Dow yields vs. Treasury yields.  (Bespoke)

Money continues to pour into junk bond funds.  (The Money Game)

Relative Strength 101.  (CSS Analytics)

On the need for traders to adapt to high-frequency trading.  (TraderFeed)

Big names are lining up to invest in the Rusal IPO.  (WSJ, Times Online)

How John Paulson could become the richest man in the world.  (The Money Game)

Adam Warner, “Is there a volatility play in GLD itself?”  (Options Zone)

Is the tanker glut telling us oil could fall next year?  (Big Picture)

A new hedge fund is focused on US farmland.  (FINalternatives earlier Abnormal Returns)

As ETFs proliferate it becomes more important to understand what you are buying.  (Fundmastery Blog)

RIP, MacroShares housing ETFs.  (ETF Database, 24/7 Wall St.)

Home prices seem to be flattening out.  (Calculated Risk)

Why are Fannie and Freddie rallying?  (Money & Co.)

What happens to mortgage rates when the Fed stops buying mortgage-backed securities.  (Atlantic Business)

Noted pessimist James Grant is still surprisingly upbeat about the economy’s prospects in 2010.  (NYMag)

On the relationship between dynamism and safety.  (Curious Capitalist, Felix Salmon)

On the damage of inflation and the power of compounding.  (Freakonomics)

Inside the mind of Sam Zell.  (Simoleon Sense)

Estimates of the stock losses from the Tiger Woods scandal are overestimated.  (Felix Salmon)

Fred Wilson, “Someday machines may be smart enough that they don’t need humans to give them cues, but today I believe the state of the art in machine intelligence right now is ‘humans first, machines second’ as Google did it.”  (A VC)

The top 100 tickers on StockTwits in 2009.  (Howard Lindzon)

The five best investment reads of the year.  (World Beta)

In praise of the Happiness Project.  (Marginal Revolution)

Location-based apps are going to huge.  Can Foursquare thrive?  (The Big Money)

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Monday links: adjusting for inflation

Adjusting for inflation makes the past decade look even worse for stocks.  (WSJ)

2009 was the year of the junk bond.  (VIX and More)

Is it time for the dispersion trade?  (Daily Options Report)

20 years of the yield curve.  (Research Puzzle)

Five biggest risks of 2010.  (The Pragmatic Capitalist)

Can Goldman Sachs (GS) take a bite out of the ETF market?  (IndexUniverse)

Hedge fund startups are back, albeit smaller and with lower fees.  (WSJ)

Roger Ehrenberg, “Machine-driven trading will continue to proliferate, and represent a sustained source of alpha.”  (Information Arbitrage)

Howard Lindzon, “The great thing about the stock market is you DO NOT have to call turns. You did not need to buy stocks on March 9th to have a banner year.”  (Howard Lindzon)

Do the smartphone wars come to a head in 2010?  (The Reformed Broker)

Say hello to physical platinum (and palladium) ETFs.  (ETF Database)

Rising mortgage rates threaten the housing recovery.  (24/7 Wall St. also The Money Game)

Investors reached for yield in AAA-rated CDOs.  Who is to blame?  (Felix Salmon, naked capitalism)

The many ways in which the Feds are supporting housing prices.  (Calculated Risk)

Is this the pin that pricked the housing bubble?  (Crossing Wall Street)

“The bottom line is that when reserves pay interest, the monetary base is a pretty uninteresting economic statistic.”  (Mankiw Blog)

Are we seeing a repeat of 1979 in Iran? (Daily Dish also BBC, NYTimes, Economist)

Eric Falkenstein, “A good [economic] theory can often be modeled, though not all theories are helped by modeling (eg, the theory ‘power corrupts’, or ‘the invisible hand’).”  (Falkenblog)

Tyler Cowen, “What are the odds that the best chess player in the world has never played chess?”  (Marginal Revolution)

Putting the odds of airborne terror into perspective.  (FiveThirtyEight)

Is big media going to be successful in 2009 in charging for web content?  (NYTimes)

Movies were recession-proof this year.  (24/7 Wall St. also BusinessWeek)

The list to end all 2009 best of lists.  (Filmoculous)

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Sunday links: forecast frenzy

Well said.  “The end-of-year forecast frenzy is simply a bit of temporally induced fun which shouldn’t be taken seriously.”  (The Psy-Fi Blog)

Roger Nusbaum, “The reason to invest in foreign anything is for diversification.”  (Random Roger)

For what it is worth the S&P 500 has retraced 50% of its losses.  (Big Picture, ibid)

Why did stocks do so poorly the past decade?  Valuation.  (Econbrowser also Bespoke)

2009 in one graph.  (Crossing Wall Street)

Earnings revisions are historically pretty high.  (The Money Game)

An economic moat was a hindrance to performance in 2010.  (The Reformed Broker)

Is the emerging markets trade getting crowded?  (Barron’s)

Hedge fund clones are gaining ground on the real thing.  (WSJ)

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

A model based on the monetary base, signals inflation ahead.  (WSJ)

Using options to get long Buffett-like stocks.  (Barron’s)

Warren Buffett gets a pass more often than not.  (Felix Salmon)

Jason Zweig, “It’s high time for corporate compensation committees—and investors—to start doubting whether the lavish pay packages they endorse actually work.”  (WSJ)

Sitting on a corporate board of even a failed company is currently a no-lose situation.  (NYTimes)

Will Fannie and Freddie ever actually fade away?  (Breakingviews, Clusterstock, Rolfe Winkler, naked capitalism)

Is now the time to introduce GDP-linked bonds?  (NYTimes also Crossing Wall Street, Aleph Blog)

“..we can’t just continue to castigate the Big Bad Banks as the cause of all our financial woes if we want to have any hope at all of righting our sinking fiscal ship.”  (Kid Dynamite)

An introduction into the “liquidity movement” in macroeconomics and what it says about the state the world economy.  (Barron’s)

Savers are a forgotten class in this 0% economy.  (NYTimes)

Six great economics and finance books for 2009.  (Floyd Norris)

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Thanks for the Support

Just wanted to say thanks and all the best to regular visitors, those who've occasionally dropped by, tip jar contributors, commenters, and all those bloggers and website publishers that have sent visitors my way, including consistently large referrers like (in no particular order):

Naked Capitalism
Dollar Collapse
Calculated Risk
FT Alphaville
The Big Picture
Jesse's Café Américain
Some Assembly Required
Dr. Housing Bubble
The Automatic Earth
Seeking Alpha
Financial Sense
Business Pundit
Of Two Minds
What Really Happened
Jr Deputy Accountant
The Financial Ninja
Bull! Not Bull
Credit Writedowns
Phil's Stock World
Trader Mike
Bearish News
The Daily Crux
Carolyn Baker

Otherwise, I leave you with a bit of Financial Armageddon-style humor (I couldn't help myself!) from one of my favorite cartoonists, Scott Adams:


Thursday links: a true bull market

Happy holidays to all of loyal Abnormal Returns readers.  Be safe and enjoy some time off.  The markets will be there when you get back.

On contrarianism.  (Aleph Blog)

The 2010 Bespoke Roundtable is worth a look.  (Bespoke)

Some different approaches to trading ETFs.  (VIX and More)

Here’s hoping for better ETF education in the new year.  (IndexUniverse)

The worst fund launches of the 2000s.  (Morningstar)

David Tepper continues his bet on the banks and a sustained economic recovery.  (The Pragmatic Capitalist)

In praise of active management.  (Derek Hernquist)

Brett Steenbarger, “Quiet markets reveal the best traders.”  (TraderFeed)

A new paper that examines the microstructure of the TIPS market.  (FinanceProfessor)

More signs that 2010 will be the year of M&A. (The Reformed Broker contra Breakingviews)

Has the global economy and the price of oil re-coupled?  (24/7 Wall St.)

In this economic recession Texas is a big winner in terms of migration.  (Fund My Mutual Fund)

Goldman Sachs (GS) bet against its clients in the housing crisis, and won.  (NYTimes also Big Picture, naked capitalism, Clusterstock)

Don’t reconfirm Ben Bernanke.  (Baseline Scenario)

Excess capacity has peaked.  What does it mean for unemployment?  (Economist’s View)

A new value investing blog worth a look. (Simoleon Sense)

How a “very flat and democratic Internet” changed everything this past decade.  (GigaOM)

There is always a bull market somewhere.  The companies are cashing in on the growing international demand for bull semen.  (WSJ Magazine)

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Bespoke Roundtable: 2010 Outlook from the Blogosphere

Bespoke Investment Group, an investment research and advisory firm and publisher of the Think B.I.G. blog, invited me and other bloggers to offer our thoughts on the current investing environment and the outlook for the year ahead. Below is a brief excerpt from the write-up they put together, which they've just posted at


At the end of each year, the big financial media outlets typically conduct roundtables to get outlooks from key players in the financial markets. Over the past few years, the individuals that run the best financial blogs and websites have become key players in their own rights, and their opinions are highly regarded by millions of loyal readers. This year, we decided to conduct our own roundtable with some of the major names in the online financial community, and it's all available for free to anyone with Internet access!

Twelve of the most popular financial blogs/websites agreed to participate in the roundtable. Each participant was asked to respond to the same 25 questions regarding their 2010 outlooks as well as their take on 2009. The responses we got were incredibly insightful, and they should really help investors form their own opinions on what is to come for financial markets in the year ahead.

Below is a list of our roundtable participants. We have created a page for each of them that has all of their responses, and we encourage you to visit their websites as well if you haven't already done so.

A Dash of Insight - 2010 Bespoke Roundtable Q&A
Crossing Wall Street - 2010 Bespoke Roundtable Q&A
Financial Armageddon - 2010 Bespoke Roundtable Q&A - 2010 Bespoke Roundtable Q&A
Paul Kedrosky's Infectious Greed - 2010 Bespoke Roundtable Q&A
Investment Postcards - 2010 Bespoke Roundtable Q&A
The Kirk Report - 2010 Bespoke Roundtable Q&A
Random Roger - 2010 Bespoke Roundtable Q&A
The Reformed Broker - 2010 Bespoke Roundtable Q&A
VIX and More - 2010 Bespoke Roundtable Q&A
Wall St. Cheat Sheet - 2010 Bespoke Roundtable Q&A
World Beta - 2010 Bespoke Roundtable Q&A

To start off the roundtable, we've created a matrix highlighting prognostications for various asset classes in 2010. Not all participants took part in this section of the Q&A, but the ones that did are included in the matrix below. As shown, the consensus view is that the S&P 500 will be up in 2010, bonds will be down, oil will be up, the dollar will be up, US home prices will be up, and China's stock market will be up. The projection for gold was split.cPlease visit the individual Q&A pages (links above) to view each participant's projections along with price targets where applicable.

Below we provide various responses to each of the 25 questions. Remember that there is a Q&A page for each participant that shows all of their responses as well. The links are posted next to each participant's name above. Enjoy!

1) What has surprised you the most and least about financial markets in 2009?

Most participants thought that the sharp rally off the March lows without a meaningful correction was the most surprising thing about 2009. There were a wide range of "least surprising" answers. Below are a few responses.

Financial Armageddon: Least: The fact that equity investors don't really have a solid grasp of macroeconomics or geopolitics. Most: The willingness of policymakers and investors to repeat the same mistakes that helped bring about the worst financial crisis this century.

Footnoted: Obama's seemingly uncanny ability to call the bottom of the market (most). How some executives still don't seem to get the fact that outrageous perks, including tax gross-ups are disgusting (least).

Infectious Greed: How quickly U.S. consumers began spending again. Maybe it's true that U.S. consumers can't stay downbeat more than 18 months.

Random Roger: The size of the rally off of the March low has been the biggest surprise. After events like 2008, massive rallies are very normal, but the lack of a meaningful correction along the way has been surprising.

The Reformed Broker: The market's ability to put the blinders on and rip for 10 months has to have surprised everyone, myself included. I'm least surprised by the resumption of the commodity obsession that was abruptly put on pause in the heat of the credit crisis. It came back without missing a beat.

A Dash of Insight: My biggest surprise was the short honeymoon for the Obama Administration and the stock market reaction. For me, the least surprising thing was the general improvement in the economy and stocks throughout the year.

2) What do you believe are the most important lessons to be learned from the 08/09 financial crisis?

All of the responses to this question are worth reading, and they are listed below.

A Dash of Insight: We learned what happens when you get a complete cessation of lending in an economy that depends upon normal and sensible borrowing for regular commerce.

Crossing Wall Street: When market participants panic, governments panic as well. Not a new lesson but a good example of an old one.

Financial Armageddon: 1) The mistakes of the past have a habit of repeating themselves. 2) Bad policies beget bad outcomes. 3) While there may be free money, there's no such thing as a free lunch.

Footnoted: Greed isn't always good - sometimes it leads to serious problems. Greenspan wasn't the maestro he was made out to be. There's only so much crap that even skilled hucksters can repackage and sell.

Infectious Greed: 1) Don't watch television. I'm kidding. Mostly. 2) You can know that an epochal bubble exists, and you can know how to profit from its looming decline, but time the trade wrong and you might as well have stayed home that decade. 3) Credit rating agencies are a pro-cyclical disaster.

Investment Postcards: Banks' financial statements do not necessarily reflect the true financial picture. Geared hedge funds are responsible for extreme excesses in financial markets. Failure by central banks to enforce their monetary policy on banks as executors thereof eventually leads to financial and economic disaster.

Kirk Report: 1) Capital preservation is always more important than capital accumulation. 2) Wall Street is undergoing changes in ways that will make our markets more volatile than ever before. 3) America has significant challenges that must be addressed to restore its economic leadership over the world. If nothing is done, the standard of living for most of its population will be in decline over the next decade.

Random Roger: The details causing the crisis were different but the behavior of the market was not. Human behaviors repeat over and over, misusing leverage as one example. People have very short memories with regards to market turmoil.
The Reformed Broker: 1) Someone who went to Wharton can just as easily lose you all of your money as anyone else. 2) Someone who sits on charitable foundations regulatory boards of directors can rob you blind. 3) When rich people panic, really bad decisions are made with taxpayer money.

Vix and More: 1) Always know your exits (especially where to take losses) in advance and do not deviate from the plan. 2) In a fat tails environment, the feedback effects will trump the underlying economics for an extended period. 3) Disasters almost always happen in stages.

Wall St. Cheat Sheet: Risk management, Risk management, Risk management. If you have any money in speculative products such as financial investments, you MUST have a stop loss point that allows you to call timeout and reevaluate the situation. Trends and emotions can always go much farther than we expect, so we need to have a simple line in the sand which acts as complete protection against the unexpected. Since most of us are not psychic, the unexpected is always around the corner.

World Beta: Avoid losing money. Investors dislike losses much more than they enjoy their gains. If investors and advisors were to design portfolios with that fact in mind, they would be much more proactive about managing their risk rather than maximizing their gains.

Click here to read the rest.

Wednesday links: momentum moves

The VIX edges below 20.  (VIX and More)

The US Bloomberg Financial Conditions Index is in positive territory for the first time in over two years.  (Carpe Diem)

Seasonality is positive.  (Quantifiable Edges)

How Newton’s First Law applies to big momentum moves like we have seen this year.  (Kid Dynamite)

Ten thoughts (or so) on the past decade in equities.  (Abnormal Returns)

Implications of the forward Treasury curve.  (Aleph Blog)

Why David Tepper will not become the next John Paulson.  (Clusterstock)

AAA-rated securities are an endangered species.  (Breakingviews)

Translating observations from behavioral finance into action is tougher than it looks.  (The Psy-Fi Blog)

Funny predictions for 2010.  (Daily Options Report, The Reformed Broker)

The rise in Treasury yields is impacting home mortgage rates.  (Money & Co.)

Why banks aren’t lending and the payoff from bank lobbying.  (Big Picture, ibid)

Why should we trust the government with new financial regulations when they proven they can’t enforce the one currently in effect.  (Atlantic Business)

David Altig, “How can we be sure that the “new [financial regulatory] system” will be an improvement on the one it replaces?”  (macroblog)

Deferred compensation for banking executives is going to affect state-level tax receipts.  (Atlantic Business)

On the growing gap between new and existing home sales.  (Calculated Risk, Atlantic Business)

Strategic defaults are okay for the big guys, why not for middle America?  (Slate)

This recovery sucks.  (Dealbreaker)

Is healthcare reform a “game changer” for healthcare stocks?  (FiveThirtyEight also Ezra Klein)

Berkshire Hathaway’s shareholders are not covering themselves in glory. (Reuters)

Why are we surprised when the Blackberry network goes down?  (Infectious Greed)

We need an “exit strategy” from the “uncertainty” surrounding the “unprecedented” “historical opportunity” created by the “green shoots” of the “new normal.”  (Bloomberg)

Bess Levin, insurgent.  (NY Observer)

Science, done correctly, should be boring.  (NewScientist)

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Tuesday links: no hold bonds

Jeff Miller, “I have never seen a great investment where the first information came through advertising.” (A Dash of Insight)

Andrew Smithers, “We see no reason for investors to hold bonds.” (FT Alphaville)

A simple sector ETF momentum approach seems to work.  (CXO Advisory Group)

Why ETFs are attractive to traders.  (VIX and More)

Testing the theory of distribution days.  (Sentiment’s Edge)

Byron Wien’s ten surprises for 2010.  (Credit Writedowns)

Ten predictions for 2010 from James Altucher.  (Financial Adviser)

Just who are the big flippers of new issues these days?  (Minyanville)

There is a new (middle) tier of prime brokers.  (FINalternatives)

An in-depth profile of high-frequency trading.  (Technology Review)

A Warren Buffet-wannabe at work.  Steak ‘n Shake (SNS) launches a bid for an insurance company.  (IBJ)

Is some bad winter weather just what natural gas bulls ordered?  (IndexUniverse, FT Alphaville also Bespoke)

Why aren’t there more pure quant funds?  In a word, overconfidence.  (Greenbackd)

Brett Steenbarger, “(T)traders should consider taking breaks from trading when they’re making money–not just when they’re losing.”  (TraderFeed)

Cramer doesn’t do it but you should.  “For investors, be sure to review an investment and ascertain what comprises its yield”  (Disciplined Approach to Investing)

2010 will be the year of geopolitical and sovereign risk.  (The Business Insider)

Banks have paid other banks massive fees to raise equity capital to repay the Treasury.  (NYTimes)

A lack of data did not cause the housing/financial crisis.  (Atlantic Business)

Investing based on economic estimates is fraught with risk.  Today’s example: the downward revision in 3Q GDP.  (Kid Dynamite, Fund My Mutual Fund, Atlantic Business, Curious Capitalist)

Despite existing home sales figures prices will likely begin falling again.  (Calculated Risk also The Money Game)

What should we make of recent weakness in the Baltic Dry Index?  (The Pragmatic Capitalist)

Don’t be surprised if the rise in temporary employment stalls.  (Calculated Risk)

Is there still a role for private equity in today’s capital markets?  (Zero Hedge)

A financial crisis book reading list.  (USA Today)

Some sage advice from Lou Mannheim.  (DJ Market Talk)

Paul Kedrosky on the coming tech IPO boom. “It may start with Twitter, or Facebook, or Zynga (or even Yelp), but an IPO wave is coming and all it requires is a Netscape moment.”  (Infectious Greed)

50 winners and losers in the world of technology.  (GigaOM)

Is Apple (AAPL) going to be able to push the idea of ‘Internet TV’ forward?  (The Atlantic Wire)

How to learn from failure.  (Wired)

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Monday links: lost decade for stocks

By all accounts this was the worst decade for stocks in well over a century.  (WSJ also Calculated Risk, Falkenblog, Big Picture)

Is the equity cult finally dead and buried?  (Institutional Investor)

The decades served investors who diversified away from domestic equities.  (The Capital Spectator)

If the US follows the Japan-model you need to ask:  “is your portfolio prepared for the possibility (no matter how remote) of stocks being down 75% from their peak in another 10 years?”  (World Beta)

The top five investing lessons from the last year.  (LATimes)

Hedge fund manager David Tepper had a huge 2009 by betting on the survival of the US economy.  (WSJ also Daily Intel, Atlantic Business)

The best performing fund of the past decade.  (eFinancialNews)

Doug Kass’ 20 surprises for 2010.  (Infectious Greed)

Ten things to look for in 2010 for online finance.  (New Rules of Investing)

Ten ultimate stock picker picks for 2010.  (Morningstar)

Warning.  Steve Leuthold turns somewhat cautious.  (The Pragmatic Capitalist)

The year in junk bond yields.  (The Research Puzzle)

Does the US dollar rally have much more steam in it?  (VIX and More)

Having faith (literally) in your ETF.  (IndexUniverse)

Billionaire smackdown over Atlantic City casinos.  (The Reformed Broker)

What should we make of the rally in health insurance stocks?  (FiveThirtyEight)

A bear market in carbon offsets.  (Green Sheet)

Expect an upsurge in M&A activity in 2010.  (IDDmagazine via TheStreet)

An extended look at how the Fed failed to adequately regulate the banks leading up the credit crisis.  (WashingtonPost)

What will happen when the Fed reserves its purchases of mortgage-backed securities?  (Economics One)

Some worthy crisis-related books.  (Baseline Scenario)

Demand for temporary workers is on the rise.  (Carpe Diem, Expected Returns)

How Hollywood turned around box office sales in 2009.  (NYTimes)

2010 is looking like a crunch year for smartphones, and for many vendors “crunch” may be more than a figurative description.”  (Ultimi Barbarorum also Felix Salmon)

Is the App Store Steve Job’s most important innovation?  (Silicon Alley Insider)

Should we worry that older scientists are getting more grant money?  (Marginal Revolution also Free exchange)

Twitter turns a profit.  (Bloomberg also GigaOM, DealBook)

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