Sunday links: proving causation

The return of risk-taking and end of the easy money trade.  (Barron’s earlier Abnormal Returns, ibid)

An updated look at the bull market’s pullbacks.  (VIX and More)

Checking in on investor sentiment at week end.  (Trader’s Narrative, The Technical Take)

Jeff Miller, “Proving causation requires more than showing a correlation.  It requires solid evidence of timing, one variable leading another, and also a strong hypothesis about the logic of causation.”  (A Dash of Insight)

Brett Steenbarger, “So much of what frustrates us in trading is not the trading itself, not the markets. It’s the expectations–the unrealistic expectations–that we bring to our trading.”  (TraderFeed)

On the difference between hedging and diversification and how cash can serve as an equity hedge.  (Abnormal Returns)

Have you re-balanced your portfolio recently?  (WSJ)

Floyd Norris, “A funny thing happened to its stock when General Motors went bankrupt. The shares did not go directly to zero, even though it appeared clear that the old shares were worthless.”  (NYTimes)

Are a couple of newspaper stocks a buy for their non-newspaper businesses?  (James Altucher also Megan McArdle)

Palm (PALM) and Research in Motion (RIMM) have a great deal to fear from Android.  (Ultimi Barbarorum)

“Will Citigroup (C) rise again from its recent near-death experience?”  (NYTimes)

Is the slow motion train wreck that is commercial real estate accelerating?  (The Money Game, ibid)

Yet another new inflation-focused ETF the WisdomTree Real Return Fund (RRF).  (IndexUniverse)

Why is everyone so worried about hyperinflation when a fiscal crisis is a more likely outcome?  (Megan McArdle)

Just how did Goldman Sachs (GS) execute its big short bet on subprime?  (naked capitalism)

How John Paulson made (and won) the trade of the century (so far).  (WSJ also EconLog)

Updating the odds that the US is in recession.  (Economist’s View)

Claims about the jobs saved by the stimulus plan are at best unverifiable.  (Real Time Economics, Mish, Atlantic Business)

Why the health care debate cannot be decided solely on economics.  (Mankiw Blog)

One upside to the credit crisis.  Fewer credit card solicitations.  (Infectious Greed)

Angel investing is not as easy as it looks.  (WSJ)

A review of David Leinweber’s Nerds on Wall Street.  (Aleph Blog)

Happy first blogiversary!  (The Reformed Broker)

Paul Kedrosky, “Compression, compression, compression.”  (Infectious Greed)

Changing people’s minds is tough.  (EconLog)

Abnormal Returns is a proud member of the StockTwits Network.


Bad C’s

Before the era of Frankenstein Finance and the fanatical focus on fee-based income, lenders tried to hold themselves out as models of probity (for the skeptics out there, I did say "try."). Those responsible for making credit-granting decisions and looking after the interests of shareholders also demanded that borrowers meet certain standards before they would see even a dime of their employers' money. These criteria are known as the "5 C's of Credit," which are the

key elements a borrower should have to obtain credit: character (integrity), capacity (sufficient cash flow to service the obligation), capital (net worth), collateral (assets to secure the debt), and conditions (of the borrower and the overall economy).

In an interesting twist of fate, the firms that have traditionally decided who should get credit have been put in the position of needing extraordinary amounts of other people's money just to stay alive. Unfortunately, based on what we've seen so far, including reports like those that follow, it's doubtful whether most, if not all, of today's troubled financial institutions would even qualify for a loan based on traditional measures of suitability -- like "character," for example -- if their friends in high places weren't so intimately involved in the process.

"Wall Street’s Sham Profits" (Michael Corkery, Wall Street Journal Deal Journal blog)

My colleague Evan Newmark says that third-quarter economic growth is illusory–an economic confection created by heavily subsidized auto and home sales.

By that reasoning, what does this sham Main Street recovery say about Wall Street’s apparent rebirth? It isn’t hard to find a sham there, too.

While it is hard to unpack the nature of every profitable dollar at Goldman Sachs Group and J.P. Morgan Chase, for instance, one can make a compelling case that–like cars-for-clunkers–our Wall Street institutions are in one way or the other, also on the government dole.

The most obvious subsidy was the Troubled Asset Relief Program. While some financial institutions have made headlines for paying back TARP funds, the vast majority still owe the government billions. (TARP lent $238 billion to more than 680 banks; only 44 banks have repaid the funds, for a total of $71 billion)

Consider the other subsidies at play. In a recent Time magazine cover story, “What’s Still Wrong With Wall Street” author Allan Sloan lays them out.

“The real bailout wasn’t TARP. It was lending and guarantee programs from the Fed and the Federal Deposit Insurance Corp. The Fed had a mere three borrowing programs before the crisis started in the summer of 2007, when two Bear Stearns hedge funds failed. At the height of the bailout, there were no fewer than 13 programs.”

These programs enabled some Wall Street firms to borrow money at historically cheap rates, according to Sloan. At such levels, it isn’t hard to turn a profit from the spreads between borrowing and lending.

“Much of the money that taxpayers have pumped into the financial system has ended up at banks that are lending it back to the government by buying Treasury securities. Isn’t that great? We make money available to the banks at 0%, they lend it to the government at a markup, and they make money off our tax dollars, whining every step of the way,” he writes.

And let us not forget the famous bailout of AIG. Unlike TARP, AIG doesn’t need to pay back the $85 billion that the Federal Reserve Bank of New York provided to pay off the insurer’s credit default swap trades at 100 cents on the dollar.

As Bloomberg pointed out on Tuesday, Goldman received $14 billion when AIG canceled its trades. And according to this WSJ article today, Goldman was paid an additional $5.6 billion for selling the underlying investments behind its swaps to a government created toxic asset fund, called Maiden Lane III.

Other taxpayer subsidies for AIG counterparties, according to Bloomberg, include $16.5 billion that went to Societe General and $8.5 billion to Deutsche Bank (Not, of course, U.S. banks).

"Do Banks Have Something to Hide?" (Colin Barr, Fortune)

Even experts have a hard time getting a handle on how bad losses might get as the commercial real estate market implodes.

The banks have taken some lumps since the economy went bad. But some believe their biggest headaches are yet to come.

The pace at which U.S. commercial banks are adding to their loan loss reserves has slowed this year, while loans continue to go bad at a brisk pace.

Despite the optimism of lenders like Wells Fargo (WFC, Fortune 500), some observers warn that banks aren't socking away enough for a rainier day.

The disconnect is particularly acute in commercial real estate, where lenders are facing a surge of defaults on commercial mortgages and construction loans made when prices were much higher and demand for space much stronger.

Banks have been recognizing commercial real estate losses slowly, even though the high season for defaults isn't expected to arrive until next year.

That's not the only problem. Ill-defined or inconsistently applied rules for valuing securities and handling loan modifications can make it hard to say how healthy banks really are, from Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) on down.

The risk is that this year's recovery could turn out to be a false dawn, delivering another blow to investor trust -- not to mention people's 401(k)s.

"The credibility of the banking system could take another step back," said Paul Miller, an analyst at FBR Capital Markets. "Everyone is expecting we've seen the peak in losses, but it's impossible to know for sure because you can't get an apples-to-apples comparison."

Extend, pretend?

Banks have been swimming in losses since the collapse of the credit markets in mid-2007 sapped demand for all sorts of goods and services.

chart_loan_03.gif

Loans written off as uncollectible hit their highest level on record in the second quarter, according to government data. Loan loss reserves are also at a peak since the government started keeping track in 1984, according to data from the Federal Reserve Bank of St. Louis.

Taking losses on souring loans and troubled assets eats into profits, which tends to drive down share prices and executives' pay. The losses also erode capital, reducing lendable funds and forcing banks to raise new money by selling stock or businesses.

Accordingly, banks have been eager to stretch their losses across as long a period as possible. Facing a triple-digit bank-failure count and trying to manage hundreds of troubled lenders, regulators are willing to go along, up to a point.

In April, accounting rule makers gave banks more leeway in valuing hard-to-trade securities. That's led to current discussions over when banks will have to bring some off balance-sheet assets and liabilities back in house.

"Politically, this sort of forbearance is the lowest-cost way of stopping the train wreck," said Wayne Landsman, an accounting professor at the University of North Carolina. "The banks wanted that April change very badly, and you have to assume they wanted it for a reason."

Behind the curve

The risk, of course, is that deferring the reckoning can create a bigger problem later. And there are those who believe the banks are doing just that.

Nonperforming and restructured assets grew six times as fast as loan reserves over the past year, analysts at Keefe Bruyette & Woods estimate, while reserve building as a proportion of new troubled loans tapered off after peaking in the fourth quarter of 2008.

This pattern suggests "the banks are not ahead of the curve in providing for troubled loans," the KBW analysts wrote in a report earlier this month.

Plenty of trouble is ahead. Prices on apartment, industrial, office and warehouse properties dropped 33% over the past year, according to the Moody's/REAL commercial property price index.

Real estate research firm Foresight Analytics estimates banks should have booked losses on around $110 billion of defaulted commercial real estate and construction loans. But so far they have taken their medicine in only about a third of those cases.

That means the banks could face a backlog of $70 billion or so defaulted but unreserved loans as we head into the teeth of down cycle in commercial real estate -- where the bulk of bubble-era loans are due to be repaid or refinanced between 2010 and 2012.

Regional and community banks, rather than the giant TARP-taking entities, will bear the brunt of this onslaught. Banks with between $100 million and $10 billion in assets have almost $900 billion of commercial real estate exposure, Foresight estimates. That's three times their capital.

"Right now, we're closer to the beginning of this problem than the end," said Matthew Anderson, a partner at Foresight in Oakland, Calif.

Apples and oranges

Even some seemingly well established positive trends look muddled with a closer look at the numbers.

For instance, publicly disclosed financial reports have been showing a slowdown in the growth of early-stage delinquencies, those in which borrowers are a month or two behind on their bills. Investors have been cheered by this trend because it suggests the worst losses are behind the banks.

But regulatory filings by the same banks often paint a less upbeat picture, said FBR's Miller.

He said nonperforming asset levels were 17% higher in regulatory filings than in public statements, according to FBR estimates based on second-quarter data for the top 25 banks and thrifts by assets -- suggesting that some big banks are understating problem loans as they go through the restructuring process.

One view into this puzzle is the banks' handling of loan modifications and other changes, under the category of troubled debt restructurings.

Troubled debt restructurings have doubled over the past year, according to KBW, as banks extend loan maturities and cut interest rates or loan balances, particularly on troubled residential loans.

But not all institutions account for restructured loans in the same fashion -- which could mean some bank investors are in for a surprise down the road as many restructured loans go sour.

"The issue is that accounting for loan mods is not transparent and makes delinquency data appear better on the surface," FBR's Miller wrote in a note to clients this month.

"You Cheat, I Cheat, as Wall Street Acts as Model" (Bloomberg News commentary by columnist Susan Antila)

Trickle down really does work. Consider these inspired words, from an online reader of USA Today, reacting last week to news that Americans were lying, cheating and law-breaking to get their hands on an $8,000 tax credit for first-time homebuyers:

“The system is scamming you, so why not scam back a little,” wrote the reader, using the name “None in 08.” “You’ve seen what crooks in Washington and on Wall Street can get away with.” So “it’s time to get yours.”

Amen, brother. What are role models for, anyway?

People who make their livings studying the business world’s ethics -- and lack thereof -- say it doesn’t take a nutburger to sense there’s some systemic unfairness at work.

“The heavy hitters, the high-rollers and the powerful have been getting away with this type of thing, so people say, ‘Why shouldn’t I get my few cents?’” says Thomas Bausch, a professor of management who teaches business ethics at Marquette University in Milwaukee.

The public is onto the fact that the casino known as the stock market operates with one set of rules for the high rollers and another for the little people, says Barbara Porco, director of program development at Fordham University’s School of Business Administration, in New York City.

The truth is the public may have a better chance gambling at a casino than on Wall Street. At a casino, Porco said, “Whether it’s the five-dollar table or the thousand-dollar table, everyone plays by the same rules. That’s not how it works in the stock market, where you have different rules for different groups.”

Cue the Looters

Regrettably, the financial market casino of late has all the ambience of looters storming the neighborhood after natural disaster has struck.

Along with news that Joe Taxpayer had listed his 4-year-old as owner of the family home in hopes of pocketing that $8,000, we also learned in recent weeks that Citigroup Inc. is selling its Phibro LLC energy-trading unit to Occidental Petroleum Corp. for $250 million. Citi, recipient of $45 billion in taxpayer money, was highly motivated to slither out of the harsh spotlight associated with the $100 million bonus it owed to Andrew Hall, star Phibro trader. Thus, a $250 million corporate transaction was set into motion to protect one guy’s payday.

There is the possibility, of course, that decadence and thievery today is no worse than at other times in history, but I couldn’t find a lot of ethics pros willing to sign on to that thesis.

Titans and Progress

During the late 19th century, industrialists such as Andrew Carnegie and John D. Rockefeller lined their pockets by taking advantage of people. As Bausch notes, at least those meanies, unlike today’s financial titans, built something that lasted and had some economic value. Where’s the historian who’s ready to congratulate the team that cooked up today’s “dark pools”?

Porco sees the shift in the morality of business and political leaders reflected in feedback from her students.

For 20 years, the Fordham professor has started each semester by going around the classroom to ask students to identify their heroes. “When I first began at the university, I’d hear names of heroes who were corporate leaders, or heroes in the media or even in government,” she says. For the past four or five years, her students without exception have defaulted to naming members of their families. The hero of business or government is a dinosaur to the next generation.

So what happened that we got to this disheartening point? Stephen B. Young, global executive director at the St. Paul, Minnesota-based Caux Round Table, a group that’s taken on the unenviable task of promoting “a moral capitalism,” says the culture of indulgence and entitlement engendered by the baby boomers was one factor.

Bad Examples

There is also the simple matter of bad examples: The more people observe bad guys getting away with it, the more they cheat, says Dan Ariely, author of “Predictably Irrational: The Hidden Forces That Shape Our Decisions.”

Ariely worries about what he calls “the Madoff effect,” a swine-flu-grade virus that causes people who witness corruption to conclude that cheating has become acceptable, and to wind up cheating, too. When Mom and Dad are putting their tots’ names on the income-tax forms to scam $8,000, Ariely says, “we’re seeing the aftershock of all this dishonesty on Wall Street.”


Friday links: slow capital

“In summary, there are always uncorrelated assets, but they are unlikely to maintain the same correlation throughout all market cycles due to the fact that all market cycles are different.”  (The Pragmatic Capitalist)

ETNs are expensive to trade.  (IndexUniverse)

David Merkel, “Bond indexes are what they are.  They represent the average dollar invested in the bond markets.  Those that say that the indexes are flawed miss the point.”  (Aleph Blog)

Flows into junk bond mutual funds are helping push yields lower.  (BusinessWeek)

Is HFT driving market correlations higher?  (FT Alphaville)

Taking a closer look at the newish equity-based commodity ETFs.  (IndexUniverse)

“In other words, the Sharpe ratio has no validity as a forward-looking investment decision tool.”  (All About Alpha)

Mutual fund inflows finally come to equity funds.  (Money & Co.)

Brett Steenbarger, “If you’re fighting a trend, you’re defending your view.”  (TraderFeed)

Seven lessons gleaned from the late great Jesse Livermore.  (Minyanville)

The gates are open again at the Citadel Group.  (WSJ, Dealbreaker)

Why China’s stock market is so volatile.  (Deal Journal also The Money Game)

Has the IPO window shut already?  (Zero Hedge)

What’s a banker worth? Less.  (Time also Curious Capitalist)

Floyd Norris, “Why are financial industry paychecks so big?”  (NYTimes)

Why aren’t banks using the opportunity to raise more equity?  (Economist)

How the Feds could have obtained a haircut on AIG (AIG) CDS contracts.  (Epicurean Dealmaker)

With 3Q GDP figures in the rear view mirror:  Is the recession over?  (Calculated Risk, Mean Street, WSJ, Economist’s View, The Stash, Floyd Norris, Econbrowser, Free exchange, DJ Market Talk)

The case against Starbucks (SBUX) and its “overpriced, sticky-sweet goo passed off as coffee.”  (Minyanville)

It turns out that the vitamin business is counter-cyclical.  (Slate)

(Legal) testosterone is now a $1 billion business.  (BusinessWeek)

Reduced leverage, smaller deals and lower returns mean a much smaller private equity industry.  (Economist)

The basic tenets of “slow capital.”  (A VC)

Some good advice on blogging from an interview with Mark S. Ament of SportsBiz.  (Newstex)

Congratulations to Barry Ritholtz on his 50 millionth visitor.  (Big Picture)

Twitter list mentions are the new re-tweet. (Mediaite)

Abnormal Returns is a proud member of the StockTwits Network.

Thursday links: uncorrelated returns

A couple of short-term oversold measures.  (VIX and More, Quantifiable Edges)

Most investors would have been better off doing nothing the past eighteen months.  (IndexUniverse)

Paul Tudor Jones, gold and the future of hedge funds.  (The Pragmatic Capitalist, market folly, FT Alphaville, DealBook)

High-velocity hedge funds aren’t really about investing,” said one hedge fund founder. “It is a cat and mouse kind of thing, a game.”  (FT also Clusterstock)

Derek Hernquist, “What can we use to distinguish between a healthy trend and an crowded idea?”  (StockTwits Blog)

On the attraction of managed futures.  (NYTimes)

The myth of uncorrelated returns.  (FAJ via Infectious Greed)

“Investors who overweight their personal experiences are the teenagers of the investment world.”  (The Psy-Fi Blog)

Five steps to consistent profits.  (Kirk Report)

Schwab’s new ETFs are going to have rock bottom expenses.  (IndexUniverse)

Eight reasons to hate natural gas.  (The Money Game)

Ken Griffin has ambitions to create a bigger, more diversified firm.  (Bloomberg also Dealbreaker)

Are finance professors to blame for the financial crisis?  (Curious Capitalist)

Robert Teitelman, “Goldman, of course, is a microcosm — a very large microcosm — of Wall Street’s evolution, at least among the larger firms, from a predominately intermediary or adviser to a principal investor.”  (Dealscape)

Banks are holding government securities, not making loans to Main Street.  (Clusterstock)

Bailing out GMAC is a form of insanity.  (Mean Street)

Is it sustainable?  Parsing the Q3 GDP numbers.   (Big Picture, Capital Spectator, 24/7 Wall St., Free exchange, Atlantic Business, Real Time Economics, Curious Capitalist)

The future of venture capital according to Paul Kedrosky:  “We will see more small funds, fewer large ones, and less capital committed in total. And those are all good things.”  (Infectious Greed)

Dear Motley Fool, Please stop spamming Yahoo! Finance.  (The Reformed Broker)

The 50 most valuable Internet startups.  (Silicon Alley Insider)

The existence bias when “people treat the mere existence of something as evidence of its goodness.”  (Journal of personality and social psychology via Jonah Lehrer)

Abnormal Returns is a proud member of the StockTwits Network.

Wednesday links: stale prices

Don Fishback, “It appears as though VXX is yet another in a long line poor performing ETFs that are based on futures products.”  (Don Fishback)

Eddy Elfenbein, “There’s a lot wrong with EMH, but I don’t think we can hang our current mess on it.”  (Crossing Wall Street)

For the past 25 years gold has not been a good predictor of inflation.  (Liscio Report)

Brett Arends, “But here’s the secret of TIPS: You don’t buy them because you know where inflation is headed. You buy them so you don’t have to care.”  (ROI)

The new Jefferies TR/J CRB Global Agriculture Equity Index Fund (CRBA) aims to compete against the popular Market Vectors – Agribusiness ETF (MOO).  (IndexUniverse)

Matrix pricing, stale prices and the bond ETF dilemma.  (Morningstar)

Is it time to take another look at ETNs?  (IndexUniverse)

System trading distinguishes itself from other forms of trading in that it has a high threshold for capital allocations. Feelings, notions, guru tips and gut instinct are not sufficient for the system trader.”  (Milk Trader)

We have all placed “idiot trades.”  (TraderFeed)

The petrodollar recycling machine is humming again.  (Gregor Macdonald)

Ironically dark pools of liquidity are the antidote to high frequency trading.  (Kid Dynamite, ibid)

Todd Harrison, “Remember, in the eyes of both the government and Main Street, hedge funds are an acceptable casualty of war.”  (Minyanville)

We need some better options than simply bailing out GMAC (again).  (Clusterstock, Baseline Scenario, Fund My Mutual Fund, Rolfe Winkler, Atlantic Business)

Why again did the Feds pay off AIG (AIG) swap counterparties in whole?  (Clusterstock, Washington Post, Atlantic Business, Epicurean Dealmaker)

Norway is the third country to raise their benchmark lending rate.  (Credit Writedowns)

Demand for temp staffing is on the rise.  (The Money Game)

The Treasury is right to try and extend government debt maturities.  (Rolfe Winkler)

Apparently the first-time home buyer tax credit is good politics.  (Calculated Risk)

Steve Randy Waldman, “The great moderation made aggregate GDP and employment numbers look good, and central bankers sincerely believed they were doing a good job. They were wrong.”  (Interfluidity also Free exchange)

Have “elite universities” actually become a better deal over time?  (The Stash)

CNBC ratings year over year are not pretty.  (Zero Hedge also Daily Options Report, Davian Letter)

A nice interview with and profile of the Greenbackd Blog.  (Simoleon Sense)

The first few chapters from the new book from William Bernstein’s The Investor’s Manifesto are online.  (Efficient Frontier via World Beta)

David St. Hubbins, Bush & Obama, Wal-Mart (WMT) and why context matters when consuming media..  (Abnormal Returns)

How the New York Yankees are like Microsoft (MSFT).  (An Entirely Other Day via Kottke)

Abnormal Returns is a proud member of the StockTwits Network.

Why context matters

Josh Gerstein at Politico recently wrote a piece that compared how similar incidents during both the Bush and Obama administrations have been covered very differently by the press.  The gist of the argument being that Obama has gotten a pass from the mainstream media on these issues.  Gerstein writes:

It’s a sign that the media’s echo chamber can be a funny thing, prone to the vagaries of news judgment, and an illustration that, in politics, context is everything.

Politics aside, the important thing to take away is the fact that context in which a story appears matters a great deal.

To bring this notion around to financial matters, let’s take a look at Wal-Mart (WMT), the nation’s leading retailer.  It is not far-fetched to say that the company was one of the most reviled prior to the onset of the economic crisis.  Not many companies have organizations designed to follow and comment upon their every move.

The funny thing is that chatter about Wal-Mart has declined dramatically in the face of the financial crisis and the resulting economic recession.  As Hank Gilman at Fortune writes:

Let’s go to the numbers. If you did a database search, which my colleague Marilyn Adamo kindly conducted for me, there were some 47 stories in 2006 with the words “evil” within ten words of a “Wal-Mart” mention. So far in 2009: only two.

Gilman notes the many reasons for this decline including changed behavior on the part of Wal-Mart, even worse behavior on the part of Wall Street and “Wal-Mart bashing fatigue.”  He also notes that the value proposition for which Wal-Mart is best known is now an asset in tough economic times. Mark J. Perry at the Carpe Diem blog pulls together a number of threads that amount to what he calls the: “Wal-Mart Economic Stimulus Plan.”

None of this should be read as an endorsement of Wal-Mart as a company or the stock itself.  The fact is that the above news has not been all that positive for the stock.  After outperforming leading up to (and during) the heart of the economic crisis Wal-Mart stock has underperformed notably since then.

To look at it another way, one can see that the era of Wal-Mart bashing was coincident with the stock badly underperforming the S&P 500.  It is impossible to say in which way the causality runs, but it is interesting to note how when Wal-Mart was most reviled it was also a poor holding.

There are any number of examples like this where context affects how a message gets relayed to us by the media.  One need only go back a few years to read how residential real estate was a no-brainer.  Not coincidentally the peak in the housing market was right around the same time.  The fact of matter is that few wanted to read bearish housing stories at the time, and were therefore not written.

This is in no way an endorsement of knee-jerk contrarianism.  Just because the media is covering a story does not mean that is necessarily wrong or out-of-date.  But it is important to be aware of the overall context in which a story is being told.  Stories are one of the major ways in which we humans make sense of our world.  Just don’t get enamored with every story you read.

Disclosure:  No positions in Wal-Mart.


Tuesday links: stock price fragility

Eric Falkenstein, “I would estimate 90% of all alpha is misrepresented.”  (Falkenblog)

Just what is the “implied cost of assuming alpha’s existence“?  (All About Alpha)

Everyone is reading the newly bearish quarterly missive from Jeremy Grantham.  (Market Beat, Credit Writedowns, The Money Game, MarketBeat, Investment Postcards, Fund My Mutual Fund)

An updated look at pullbacks in this market upswing.  (VIX and More)

Transports are signaling economic weakness,  (The Pragmatic Capitalist)

A new ETF, the IQ CPI Inflation Hedged ETF (CPI), targets 2-3% over CPI.  (IndexUniverse)

Don’t get fooled by volume surges in ETFs with easy substitutes.  (Investing with Options)

What is the best way to “buy volatility“?  (Daily Options Report)

“There have been some strange goings on in the world of ETF gold bar holdings of late.”  (FT Alphaville)

Joshua M. Brown, “We are not yet in a frothy enough market to have LBO shops and private equity firms dump their leftovers on us quite so soon.”  (The Reformed Broker)

Gregor Macdonald, “Mostly, American money management remains quite stuck in a bunch of antiquated, regressive viewpoints about the world, most of which are American-centric and offer cheerleading in the place of science, and the hard work involved in understanding these subjects.”  (Gregor Macdonald)

Stock price fragility” measures the relationship between ownership structure and non-fundamental risks.  (SSRN)

Ken Griffin on the need for centralized exchange for derivative products.  (FT)

The August Case-Shiller home price numbers show a modest month over month gain.  (Calculated Risk, Big Picture, Curious Capitalist, Free exchange, Bespoke)

Do home prices need to correct all the way back to pre-bubble levels?  (The Money Game)

The first-time home buyer’s credit was a bad idea.  Why would we extend it?  (Washington Post)

Should the SEC force dark pools to increase trade transparency?  (Marketwatch also DealBook)

Where did all the Wal-Mart (WMT) haters go?  Think recession.  (Fortune)

What is the solution to the fact that our financial skills decline after age 53? (Vanguard Blog)

Investment books to help you think like an investor.  (Contrarian Edge)

The music industry didn’t see the Apple (AAPL) iPod coming.  Is the DVD industry ready for the much-rumored Apple Tablet?  (24/7 Wall St.)

Abnormal Returns is a proud member of the StockTwits Network.

Dancing Again

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing."
--Former Citigroup CEO Charles Prince (from an exclusive July 2007 Financial Times interview)

After trillions of dollars of losses, the near seizing up of the global financial system, a degree of taxpayer support for and government intervention in the banking sector and other parts of the economy that is unprecedented, and a growing public backlash against Wall Street and the wealthy, you would have thought that those who created the mess we are in would have changed their tune, or at the very least, acknowledged that it was time to reconsider old, bad habits. On the contrary, if the following Reuters report, "Noyer Warns Banks on Excessive Risk," is anything to go by, it appears that the merchants of financial mayhem are up out of their seats, dancing again:

European Central Bank Governing Council member Christian Noyer warned that banks are taking the same risks that led to the financial crisis and said they should preserve capital rather than pay it out to bankers and investors.

His comments came as regulators around the world mull reforms to lower the risks that large banks can pose to the financial system and rein in the type of recklessness that fueled the credit crisis.

Noyer said impressive bank profits in recent weeks were a result of public policies to combat the crisis, and did not mean the industry had recovered its balance or that further reforms were not necessary.

"Nothing could be further from the truth. Indeed, one major risk in the period to come is the emergence of a business as usual mentality," Noyer said in a speech at a financial conference in Singapore on Monday.

"There are signs that parts of the financial industry have resumed risk taking practices reminiscent of those which led to the crisis," he said, pointing to bankers' pay packages that appeared out of line with performance.

Recent news that Goldman Sachs had set aside $16.8 billion to pay staff, so soon after repaying $10 billion in taxpayer money, fueled concerns that Wall Street is returning to practices commonplace before the crisis.

BANKS NEED TO BOOST BOOKS

Noyer, who is also the head of France's central bank, said the global economy has stabilized and the worst had been avoided. But he noted that bank credit to businesses, especially small and medium sized companies, was faltering.

"Most of the negative effects of the economic downturn on balance sheets are still to come," he said. "Efforts toward long term reform must not create, in the short run, additional downside risks to economic activity."

Noyer said banks in the long run needed to be robust and better capitalized, and in the short term should hang on to profits to strengthen balance sheets and finance credit.

"This would require some restraint in dividend distribution and of course in the overall amount of variable compensation," he said. "In parallel, all possibilities to issue new equity should be exploited."

U.S. Federal Reserve Chairman Ben Bernanke said last week that requiring big banks to hold more capital was under consideration.

Noyer said as a result of the crisis the financial system will be permanently changed, but the details were still up for discussion.

"We don't know yet what kind of financial system will emerge from the crisis. We need to think about this."


Monday links: transport weakness

“The hedge fund industry is on the brink of recouping all its investment losses sustained during the credit crunch, placing many funds in a position to earn performance fees.”  (WSJ)

What are we to make of the weakness in Transports?  (Small Fish, Big Odds, VIX and More)

US dollar volatility is returning to normal levels.  (Bespoke)

How is that the bond market is perceived to be “smarter” than the stock market?  (Abnormal Returns)

The case for local currency emerging market bonds being a better way to invest in the emerging markets.  (Kiplinger’s)

Are insider trading cases a big waste of time?  (Forbes, Clusterstock contra Jeff Matthews)

A legal way to profit off insider trading.  (New Rules of Investing)

Estimating the equity risk premium is no easy task.  (CXO Advisory Group)

Carl Icahn is on a bit of cold streak.  (Silicon Alley Insider)

James Surowiecki, “The trouble is that the “market” for banking is so distorted…that it’s hard to know whether big banks are adding value or are simply exploiting their oligopolistic positions.” (New Yorker, The Balance Sheet)

Are the Feds going to soon get more powers to deal with “too big to fail” banks?  (NYTimes)

Is the US Treasury betting on higher inflation?  (The Money Game)

Debating the status of the jobless recovery.  (FT Alphaville)

Is there any evidence that the Fed is manipulating equity prices?  (Credit Writedowns)

Nassim Taleb can’t understand why everyone misinterprets his writings.  (Falkenblog)

What would the Cramer, when he was a hedge fund manager, have said about TheStreet.com (TSCM) stock?  (Wall St. Cheat Sheet, Zero Hedge)

“We have to face facts: the mobile internet has been brought about, and is now owned and controlled by, Apple (AAPL).”  (Ultimi Barbarorum)

StockTwits comes to the iPhone via the brand new Nasdaq Portfolio Manager application.  (StockTwits Blog, Howard Lindzon, TechCrunch, Appolicious, IR Web Report)

Should we just “grow up” and start paying for content on sites like Hulu?  (The Big Money)

Abnormal Returns is a proud member of the StockTwits Network.


Sunday links: your own time horizon

Jason Zweig, “As an investor, you are free to choose your own time horizon. If other people want to try earning a few fractions of a penny a few thousand times a day, you should wish them well — and refuse to join them.”  (WSJ)

“The wild ride of the last decade or so does not mean that stocks will underperform bonds in the months or years ahead. If only it were that simple.”  (NYTimes)

What role have individual investors had in the run-up in commodity prices?  (The Reformed Broker, Journal of Investing via Infectious Greed)

As money flows into bonds, some of it is finding its way into individual bonds.  (WSJ)

Rydex market timers are “all in” and other  investor sentiment measures at week-end.  (The Technical Take, Trader’s Narrative)

Why should we assume there is a stable relationship between the price of crude oil and the S&P 500?  We shouldn’t.  (Abnormal Returns)

On the use of your equity curve to guide trading decisions.  (CSS Analytics)

The ability to sit through a trade is greatly underappreciated.”  (TraderFeed)

Add Richard Bernstein to the bull camp. (Credit Writedowns)

What are the odds that Bruce Berkowitz can outperform as a bond manager?  (Marketwatch)

Now is a good time for a stock replacement strategy.  (Barron’s)

Who won (collectively) over the past ten years:  Vanguard investors or Fidelity investors?  (Morningstar)

TheStreet.com (TSCM) is a mess.  (Zero Hedge)

Why is Citigroup (C) pulling out all the revenue stops?  (Mish)

Joe Nocera, “Goldman makes its money primarily by taking trading risks, and so long as that is the case, American taxpayers are going to question why they should have to be on the hook if Goldman suddenly runs into serious trouble.”  (NYTimes also Big Picture)

John C. Ogg, “The fate of Fannie and Freddie as far as the common and preferred shares go depends almost entirely upon the political situation in Washington …”  (24/7 Wall St.)

Is the stimulus working?  (Time also Atlantic Business)

Taking a look at the long term effects of substantial federal budget deficits.  (SSRN)

Donald J. Boudreaux, “Insider trading is impossible to police and helpful to markets and investors. Parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors.”  (WSJ)

Do we have the health care plan all backwards?  (NYTimes also EconLog)

Does economics violate the laws of physics?  (Scientific American via Economist’s View)

Howard Lindzon, “There is one bubble that I do not fear…the social web/social leverage bubble.”  (Howard Lindzon)

John Gruber, “Operating systems aren’t mere components like RAM or CPUs; they’re the single most important part of the computing experience.”  (Daring Fireball)

Is blog reading now mainstream?  (A VC)

U-pick-it orchards are a big scam.  (Slate)

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A Little Financial Armageddon-Style Humor

The only way to deal with tragedy is to laugh at it.
--Indra Sinha

I serve up plenty of bad news on this site, but that doesn't mean I'm a gloomy person. In fact, I enjoy a good laugh as well as the next guy (or girl). So, without veering too far away from the usual topics of discussion, I bring you a little Financial Armageddon-style humor:

First up: a report from Britain's Sky News, "Credit Crunch Calendar Is Surprise Hit":

Februarycalendar

The revelation that Britain is still in recession could be good news for a surprise bestseller which 'celebrates' the decay wrought by the downturn.

Each month of the Credit Crunch Calendar features a depressing image of economic decline, such as closed-down shops and vandalised factories.

Covercalendar

The depiction of a derelict Woolworths - the old retail favourite which became a symbol of high street failure - adorns the front cover.

The product is the brainchild of Worcestershire printer Kevin Beresford, whose creations also include the Round-A-Bouts Of Great Britain range of calendars.

The UK's downtrodden industrial landscape, viewed up-close on his many roundabout-spotting trips, moved Mr Beresford to create his chronicle.

He told Sky News: "I was just looking at all these sad, depressing things and wondered if I could turn it around and put a positive, quirky slant on it.

"I thought 'What the hell, we're in a recession anyway - we may as well laugh instead of cry about it'."

And last but not least: "Bohemian Bankruptcy - A Tragedy by Drag Queen," a satire from iBall, a daily video blog for investors from Britain's Interactive Investor (via blip.tv):

(Hat tip to EF.)


Ratio charts run amok

We recently wrote about the dangers that charts can pose to our pattern-seeking brains.  Charts can be useful tools, efficiently summarizing a great deal of data into a single picture.  Other times the intuition behind the chart itself is flawed.  This is often the case when analysts try to tell a story using the ratio of two price series, when in the fact the two series are not related.

One of the best providers of (free and subscription) charts are the guys at Bespoke Investment Group.  (Who by the way make frequent appearances in our daily linkfests.)  However they may have gone one chart too far in a recent case.  Unfortunately the graph in question is a part of their premium service, but the results were described in a recent Bloomberg article.

In it they plot the ratio of the S&P 500 to the price of crude oil.  From the Bloomberg article:

The benchmark for American equity traded at an average of 21 times oil between 1986 and 1997, Bespoke said in a research note. Should the price of oil remain at its current level, the S&P 500 would have to climb to 1,700 to restore the ratio.

“Unless you think there’s some sort of secular shift in the relationship, oil supplies declining or something, then you would expect the historical relationship to return to normal,” Paul Hickey, an analyst and co-founder of Harrison, New York- based Bespoke, which manages money for wealthy investors and provides financial research to institutions, said in an interview.

Lets leave aside the potentially huge moves this analysis implies for either the stock market or the price of crude oil.  Let’s think more broadly about this ratio.  Below you can find our version of the chart.  The data does not include the entire period Bespoke covers, but you get the general idea.

A quick glance at the chart shows anything but a stable relationship.  Trying to make predictions (short or long term) for either crude oil or stock market seems like a mug’s game.  There is simply too much variability.  For kicks, let’s replace oil with everybody’s other favorite commodity, gold, to see if we get a better result.

Again the variability is such that there is little in this chart that should change the way any one thinks about either the price of gold or the S&P 500.  Back to oil.

We do not know of any economic theory that posits a stable relationship between the price of commodity (oil) and that of equities. Remember that equities are (presumably) priced on the discounted value of their future free cash flows.  (We don’t remember a variable “O” in the dividend discount model.)  The price of oil is driven by the current supply and demand situation.  Given the dynamic nature of the economy why would one expect this ratio to remain relatively stable over decades?

On the contrary there are any number of reasons to believe that this relationship is not stable.  For instance the changing energy intensity of economic production should affect this ratio.  As should the changing sectoral composition of the S&P 500.  To say nothing of the changing dynamics (including technology) of the global oil industry.  Let’s not forget about the role of interest rates either.  In short, there any number of dynamics at play that should work against there being a stable relationship between the price of oil and stocks.

The S&P 500 might soar (or fall) and the price of oil might fall (or soar) but it will not be because the relationship between the two got out of whack.  The underlying dynamics of each market will do that all by themselves.

The fact of the matter is that these type of charts are generated every day.  Before drawing any sort of conclusion you need to ask yourself whether there is any sort of financial or economic intuition behind the posited relationship.  If not, there is nothing to see here, move along.


Friday links: slick sales pitches

Meriwether, in other words, is proof that markets are not efficient, and investors are frequently stupid, and frequently dazzled by slick sales pitches.”  (Ezra Klein also Credit Writedowns, Fund My Mutual Fund earlier Abnormal Returns)

2009 is a rarity with equities, gold and bonds all up double digits.  (Economist)

Two analysts firmly in the stock market is overvalued camp.  (FT Alphaville, The Pragmatic Capitalist)

What recent sector performance tells us about the state of the stock market.  (Afraid to Trade)

The financial sector is back to their historical weighting in the S&P 500.  (Bespoke)

Do a couple of financial IPO filings indicate a “return to risk”?  (Deal Journal, Telegraph)

The return of the Why-P.O.  (The Reformed Broker)

Some of the big banks are still way behind in their loan loss reserves.  (Accrued Interest)

The junk bond rally YTD has been breathtaking.  (WSJ)

Earning estimates, read (AMZN, MSFT) sometimes “fail.”  (Daily Options Report)

Is a buy-and-hold investment strategy the best of a bad lot?  (Abnormal Returns also Crossing Wall Street)

Smita Sandana, “Don’t confuse time frames.”  The long term is made up of a series of short terms.  (Wall St. Cheat Sheet)

“I would argue that as long as people are responsible for making investment decisions whether directly or indirectly, there will always be a huge impact of their aggregate bias on the market.”  (CSS Analytics)

The slew of new mortgage REITs are designed to be lucrative for their managers.  (Morningstar)

Risk in any diverse financial organization cannot be summed up by a third party into a scalar.”  (Falkenblog)

Nassim Taleb is trying to correct misperceptions about the Black Swan.  (CXO Advisory Group)

Why do bankers make so much money?  (Rick Bookstaber also The Big Money)

Skepticism abounds about the effectiveness of proposed pay restrictions.  (WashingtonPost, NYTimes, Clusterstock, Time)

“The overwhelming majority of the working population will never be able to prepare themselves for a period of unemployment lasting more than six months.”  (Felix Salmon)

The UK recession is not over.  (Calculated Risk, EconomPic Data)

“Nothing out there currently exists as a tech platform for RIAs.”  (World Beta)

How Havard economists invest.  (Harvard Crimson via Greg Mankiw)

On the importance of challenging ourselves and learning from our mistakes.  (The Frontal Cortex)

On the ultimate failure of Moneyball.  Does this include the movie as well?  (TNR via Infectious Greed)

Are today’s college graduates unprofessional?  (Inside Higher Ed)

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Thursday links: demand for yield

The demand for yield is blowing new bubbles.  (Clusterstock)

John Meriwether is raising money for yet another hedge fund.  Is the risk culture back?  (Abnormal Returns)

Why do we encourage debt so?  (Atlantic Business)

Jason Zweig, “When people say diversification failed, they’re defining failure in a very strange way. They seem to be saying if, when most assets went down, something didn’t go up, then diversification didn’t work.”  (Morningstar)

Canada, for good reason, has become a target for foreign capital.  (Trader’s Narrative)

What do Apple (AAPL), Visa (V) and Mastercard (MA) have in common?  (World Beta)

Pattern seeking run amok.  How we humans (and investors) see patterns were none exist.  (Abnormal Returns)

How to fix bond ETFs.  (IndexUniverse)

Do gold-denominated hedge funds allow you to have your cake and eat it too?  (Felix Salmon)

Updating the statistics on value-glamour returns around the world.  (SSRN)

Given their Madoff-like returns, just how long did The Galleon Group benefit from insider trading?  (The Pragmatic Capitalist)

“Not all traders feeding off of Galleon’s wind down are making wise moves.”  (Dealbreaker)

What you need to know about dark pools of liquidity.  (Clusterstock)

Don’t put too much stock in the ABC Weekly Consumer Comfort Index.  (Bespoke)

Commodity investors are at the mercy of the futures curve.  (Neil Collins)

Is the CFTC trying to kill domestic futures trading?  (Bloomberg)

“If after years of trying to gain its independence the CBOE is folded back into the CME Group, it would make for one nice happy family — Chicago style.”  (Minyanville)

America’s banks resemble a pyramid, and not in a good way.  (Economist)

Given the state of the US dollar foreign central banks are reluctant to raise their rates before the US does.  (The Money Game)

On the prospects of a job-less recovery:  “The percentage of employee separations labeled permanent is at a recorded high.”  (macroblog)

Financial regulation could become THE political issue of 2010.  (FiveThirtyEight)

Americans are driving again.  (Carpe Diem)

Twitter posts will soon be searchable via Bing or Google.  (NYTimes)

Is Twitter a fad or a true democratic platform? (24/7 Wall St., DailyFinance)

Apparently the Bogleheads know something about retirement planning.  (Aleph Blog)

A bull market in hand sanitizer.  (Infectious Greed)

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Wednesday links: cash returns

Low returns on cash are pushing investors into riskier assets.  (FT Alphaville)

Is the gold trade getting crowded?  (Rolfe Winkler)

Is the “distressed debt party” already over?  (All About Alpha)

On the use of stock screens:  “The problem is that most investors use these strategies only after a period of significant outperformance only to then suffer disappointing underperformance by doing so.”  (Kirk Report)

Historical comparison graphs “were kind of fun to look at a few months ago, but seriously, markets don’t trace out precise patterns from decades ago.”  (Crossing Wall Street)

How soon we forget.  A sub-20 VIX is quite high if you look at the paste decade or so.  (VIX and More)

Money is flowing back into ultra-short bond mutual funds.  (Morningstar)

“Every day you own an option that’s overpriced relative to the volatility realized in the underlying, you theoretically lose money.”  (Daily Options Report)

Is Warren Buffett at risk of being behind the curve?  (24/7 Wall St.)

On the benefits and drawbacks to using 13F filings instead of direct investing in a  hedge fund.  (World Beta)

“In trading, we see inertia when a position is obviously going against a trader, but the trader does not exit the position until an obvious stop out level is hit..”  (TraderFeed)

More notes from the Value Investing Congress.  (market folly)

How financial news and firm advertising affect subsequent stock returns.  (SSRN, ibid)

The yuan forward market anticipates a reset higher for the Chinese currency.  (The Money Game)

The US dollar, as a reserve currency, has problems, but what is the alternative?  (Daniel Drezner)

The Galleon Group winds down (no bailout required).  (DealBook, DailyFinance)

Paul Volcker is pounding the table on de-risking banks.  Is any one listening?  (NYTimes also Baseline Scenario, Big Picture)

The Hank Paulson-Goldman Sachs (GS) connection stinks.  (Felix Salmon, Economist’s View)

How much weight should we put on predictions of deflation based on current unemployment levels?    (Econbrowser)

Good people don’t get very far in Washington.”  (DJ Market Talk)

“Do lower health care costs mean higher wages?”  (Ezra Klein)

No wonder enrollment in community colleges is jumping.  (Economix also Atlantic Business)

Cash on the balance sheet is both a boon and a bother for the tech giants Microsoft (MSFT), Google (GOOG) and Apple (AAPL).  (Infectious Greed)

A look at the best books on the financial crisis.  (New York)

A roundtable takes a closer look at Andrew Ross Sorkin’s Too Big to Fail.  (The Big Money)

On the challenges of setting a blogging agenda:  “The more you study, the more intellectual hooks you find.  They all seem important.”  (A Dash of Insight)

Turning the tables.  An interview with Damien Hoffman of Wall St. Cheat Sheet.  (Behind the Spread)

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The Sum Total of All That Is Wrong

Although there are many reasons why I believe the economic outlook remains bleak despite all the bailouts, wishful thinking, and spin, my normal routine at Financial Armageddon on any given day is to focus on one or two areas of concern. But to really get a grip on where things are at, it makes sense to occasionally step back and summarize all that is wrong. While the summary that SurvivalBlog.com recently put together, entitled "Twenty-Two Reasons Why this Recession is Different and Why it Will Endure," has a few overlapping elements and some that are missing (e.g., the terrible state of our nation's infrastructure), publisher Jim Rawles does a decent job of getting the point across:

I find it surprising that I'm now getting inquiries from readers, asking if "we've reached bottom" in the current economic recession, and asking if the time has come to start buying stocks or residential real estate. It seems that the talking heads of mainstream media are using some sort of voodoo. How can anyone think that we've hit bottom, and an economic recovery is in progress? To dispel the myths from the CNBC Cheering Section, please consider the following. (And note that I've provided references for each assertion, just so you know that I'm not talking out of my camouflage hat.):

  1. A broken global credit market that has not fully recovered. See: After Lehman, U.S. firms adjust to new face of credit
  2. Lack of transparency in Mortgage-Backed Securities and other re-packaged debt instruments. See: Geithner Blames Lack of Transparency for OTC Derivatives Hit on Market.
  3. The increasing Federal debt, which is growing at an unprecedented rate. See: The National Debt Clock.
  4. Mountains of consumer and corporate debt. See: Observations on the US Debt.
  5. The Federal budget deficit. See: Federal Deficit Hits All-Time High of $1.42 Trillion.
  6. Ever-expanding bailouts. (I call this The MOAB.) See: As More Companies Seek Aid, 'Where Do You Stop?'
  7. Monetization of the National Debt. See: Fed Could Expand MBS Purchases. (Can you spell Oroborus?):
  8. The destruction of the American consumer economy. (It had been artificially credit-driven). See: A Year After The Crisis, The Consumer Economy Is Dead.
  9. Chronic unemployment, possibly much higher than officially reported. See: Alternate Data at ShadowStats.
  10. More than $500 Billion USD in hedge funds that have borrowed short and lent long. See: Assets invested in hedge funds increase by $100bn
  11. A double wave of residential mortgage rate resets. See: this chart of scheduled mortgage interest rate resets.
  12. Continued down-ratcheting of house prices. See: Housing Prices Will Continue to Fall, Especially in California
  13. The under-reported "shadow inventory" of foreclosed houses. See: The "Shadow" Foreclosure Inventory
  14. The very likely collapse of commercial real estate ("the other shoe to drop".) See: Is a commercial real estate bust inevitable?
  15. A huge crisis lurking in over-the-counter derivatives. See my analysis published in 2006 and the dozens of articles on the Derivative Dribble Blog.
  16. Under-funded pensions. See: Almost half of top unions have under funded pension plans.
  17. A coming wave of municipal bond and municipal bond hedge fund failures. See: The Failure of Leveraged Municipal Bond Hedge Funds.
  18. Increasing numbers of bank failures. See: FDIC: Bank Failures to Cost Around $100 Billion.
  19. Insurance company collapses--some, like AIG, were foolish enough to insure more than a trillion dollars in derivative contracts. See: AIG: Is the Risk Systemic?
  20. Worsening state, county, and city budget crises. See: State prepares for shutdown as budget deadline looms, and this article from a liberal site: Predicting Worse Ahead from America's Economic Crisis.
  21. Loss of faith in the US Dollar, on the FOREX. See: Dollar's reserve currency status in focus as G-7 finance ministers meet.
  22. The coming mass currency inflation, following some asset deflation. See: Which is more likely in 2010: Deflation or inflation?


Tuesday links: making market calls

If you’re in the business of making market calls, you’re going to wrong. That’s just how it is. I’m wrong all the time. So is Jim Cramer. It happens. But I won’t tolerate someone trying to run away from their calls. There’s no excuse for that.”  (Crossing Wall Street)

Will investors in Covestor and kaChing’s new investment accounts fare any better than they would have in mutual funds or ETFs?  (Abnormal Returns also Kirk Report)

What time frame is the promising for individual traders?  (CSS Analytics, A Dash of Insight)

“There is now only one problem with the rally in stocks…CNBC and some real shitty money managers are getting off the hook. I hate that more than anything. Some time the guilty just get off.”  (Howard Lindzon)

Should we care if the VIX dips below 20?  (Bespoke, Daily Options Report)

“The real issue here is that the idea of monolithic bond indexes just doesn’t work.”  (IndexUniverse)

More notes from the Value Investing Congress.  (footnoted, Rolfe Winkler, market folly, Deal Journal)

Breaking down how a (non-leveraged) mutual fund returned 121% YTD.  (Morningstar)

What lessons did investors learn from Black Monday?  (Floyd Norris)

“For all the damage from the crisis, the exposure of ordinary folks — Main Streeters — to the financial markets looks to remain at best unchanged and at worst more extensive than when the crisis began.”  (Dealscape)

“Hard and fast rules like this “fill the gap” belief were made to be broken.”  (The Reformed Broker)

Apparently investors in Galleon Group hedge funds don’t want their money with an accused inside trader.  (WSJ, Dealbreaker, Clusterstock)

Where is the line between insider trading and just good old fashioned information?  (NYTimes)

A blunt tool, a windfall profits tax, is being wielded against bonus-paying banks.  (Big Picture, Economist)

“By failing to withdraw its support of an overtly strong dollar when one was no longer desirable (quite the contrary), the US Treasury has done America and the rest of the world a disservice.”  (Macro Man)

A slew of currency pairs are at or near parity with the US dollar.  (The Money Game)

Brazil puts the kibbosh on financial inflows with a 2% tax.  (WSJ, FT Alphaville)

China still has a bunch of stimulus in the pipeline.  (The Pragmatic Capitalist)

The commercial real estate decline has a ways to go.  (EconomPic Data, Calculated Risk)

A nice primer on relative strength rotation models.  (Market Rewind)

Apple (AAPL) reports blow out earnings.  Is the stock now overvalued? (Bespoke, ROI)

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Monday links: competence and confidence

With the insider trading cat out of the bag, former colleagues are turning on Galleon Group head Raj Rajaratnam.  (WSJ, Clusterstock)

Are there more hedge fund-related insider trading cases on tap?  (FT Alphaville, 24/7 Wall St.)

The Galleon case emphasizes the ongoing need for hedge fund due diligence.  (Breakingviews)

The return on leveraged ETFs is so path dependent it is hard to say much about their returns.  (Daily Options Report)

A list of “strategies in a box” or actively managed ETFs.  (VIX and More)

The basic premise of most corporate bond indexes is flawed. There has to be a better way.”  (IndexUniverse)

A boom in Asian sovereign bond issuance.  (FT Alphaville)

Country risk is down across the board YTD, with one notable exception, Japan.  (Bespoke)

Everyone is bearish on the US dollar, but valuation models differ on its underlying value.  (WSJ)

Gold can now be used as collateral at the CME.  (Bloomberg)

CME Group (CME) is in talks to buy the Chicago Board Options Exchange.  (Crain’s Chicago Business, DealBook)

Happy 22nd anniversary, Black Monday.  (Crossing Wall Street)

Another example why shorting is more difficult than going long.  (The Money Game)

Some notes from the Great Investors’ Best Ideas symposium.  (Distressed Debt Investing)

“It’s tempting to thinking otherwise, but the future is always unclear.”  (Capital Spectator)

PIMCO wants to get into the active equity business.  (Pensions & Investments)

Investment site kaChing now allows investors to piggyback on the trades of “genius investors.”  (NYTimes also New Rules of Investing, Technologizer earlier Abnormal Returns)

Noted author William Bernstein estimates only 1 in 1000 people are “competent investors.”  (Information Processing via Alea)

Julian Robertson likes gold stocks better than gold.  (market folly)

The banks are risking a populist backlash with their compensation plans.  (Free exchange)

Dr. Copper is not all that impressed with the economy to-date.  (The Money Game)

Just what is the Treasury market saying about inflation?  (EconomPic Data)

The typical excuse for paying traders enormous amounts of money is that if you don’t, they will leave for somewhere else…But after the crisis, the options for someone hoping to leave a major investment bank must have declined.”  (Baseline Scenario)

Thinking of opening a restaurant?  Take a deep breath and just walk away.  (Ezra Klein also Abnormal Returns)

The media and blog aggregators are at odds.  Why are sports blog aggregators get a pass?  (The Big Money)

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Sunday links: blog stars

How ETFs went from sideshow to the main stage.  (Barron’s)

The ways you can fight mutual fund “fee blindness.” (WSJ)

What stock do people feel is the best stock to hold for the next five years?  (market folly)

Michael Mauboussin, “My sense is that at least some of the appetite for bond funds represents less a love of bonds than a distaste for stocks.”  (Morningstar)

What commodities have yet to run?  (The Reformed Broker)

The state of investor sentiment at week end.  (Trader’s Narrative, The Technical Take)

What does it take to be a successful market timer?  (World Beta earlier Abnormal Returns)

A better way to structure hedge fund fees.  (Breakingviews)

Discretionary trading need not be reactive trading.”  (TraderFeed)

The golden age of insider trading yields a big fish.  (Deal Journal, Matthew Goldstein)

Expert networks, hedge funds and the rise of insider trading.  (DailyFinance also The Daily Beast)

Washington set the stage for this year’s Wall Street bonus bonanza.  (NYTimes, Clusterstock, Zero Beta)

Goldman should announce that it’s taking itself private and becoming a partnership again.”  (The Stash)

Who is going to win in this era of cheap money and “state capture”?  (Baseline Scenario)

“..the deal Citi cut with Oxy struck strongly suggests that Phibro’s performance was in large measure the result of amped up leverage that no one outside Citi was able or willing to provide.”  (naked capitalism)

The worldwide recession appears to have ended, with surveys showing manufacturing activity is on the rise nearly everywhere.”  (NYTimes)

Real output grew significantly this quarter. Will employment follow?”  (Econbrowser also Calculated Risk)

Bruce Wassterstein was a complicated man.  (Epicurean Dealmaker)

Four places Google (GOOG) could put its money, but shouldn’t.  (GigaOM also Dealscape)

An extended interview with Howard Lindzon.  (Trading for the Masses)

Blog stars are real people, not companies.”  (A VC)

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Words from the Wise?

I just got back from The Economist's "Buttonwood Gathering" in New York and thought I'd share a few of the more interesting (and, in some cases, quite enlightening) quotes (in no particular order) from the movers-and-shakers at the (well attended) conference:

Secretary Tim Geithner, United States Department of the Treasury:

"Generally, we did not do enough." (Referring to the failure to address growing concerns over excessive risk-taking in the period leading up to the financial crisis.) [Editor's note: understatement of the year?]

Stephen Roach, Chairman, Morgan Stanley Asia:

Those who are looking for a "V"-shaped recovery are in for "a rude awakening."

"The imbalances going into the crisis were large to begin with. Now, they are bigger than ever."

George Soros, Chairman, Soros Fund Management:

"Bankers have too much power." (Referring to the hold that Wall Street has over Washington.)

The "globalization of financial markets is built on false premises: namely, that markets can be left to their own devices."

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation:

"Insured deposits are being used in ways that I don't like to see."

Wilbur L. Ross Jr., Chairman and Chief Executive Officer, WL Ross & Co.:

People were focused on "risk-ignoring rates of return." (Describing one of the things that went helped bring about the financial crisis.)

If regulators had taken the time to visit a Countrywide Lending office, they would have seen something akin to "a Wall Street boiler room," rather than a bank branch. (Referring to regulator's unwillingness to go out into the field and see what was really going on during the housing boom.)

"Government is its own systemic risk in the mortgage market."

Lawrence H. Summers, Director of the National Economic Council, The White House:

The root of most financial errors is "when you try to do today what you wished you had done yesterday."

"I can assure you that on Main Street, it is a very different conversation." (Referring to the contrast between the optimism on Wall Street and the more pessimistic mood of those struggling to get by in other parts of the country.)

"It is not the administrations's view to bribe those who have been part of the problems we have experienced to do what is in the national interest." (Referring to the suggestion that banks and other financial institutions need financial incentives to support proposed regulatory changes.)

Jeffrey D. Sachs, Director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management, Columbia University:

"It was grotesque." (Referring to fact that, despite its extraordinary size, the $62 trillion credit default swap market was essentially unregulated.)

"This was a crisis made in the U.S." (Referring to the suggestion that China's export policies played a key role in creating the credit bubble.)

Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University, William Ziegler Professor of Business Administration, Harvard Business School:

"We are living though a gradual shift away from a dollar-centric system."

"Is China the Germany of our time?" (Referring to the combination of economic dynamism and growing nationalism that stoked the aggressive ambitions of Nazi Germany.)

"The problem of being a declining empire doesn't have a solution." (Referring to the suggestion that a great many, if not all, of America's problems are fixable.)

Robert J. Shiller, Arthur M. Okun Professor of Economics, Yale University:

"Look up 'bubble' in an economic textbook and it's not there." (Referring to the shortcomings of the traditional economic curriculum.).

People "are living in a 'pretend-and-extend' environment, waiting  for the economy to recover." (Referring to the precarious state of the commercial real estate market and the wave of resets coming due between 2011 and 2013.)

Elizabeth Warren, Chair, TARP Congressional Oversight Panel:

"The reason banks lost confidence in each other is because they looked at their own books." (Referring to the loss of confidence that roiled markets during the darkest days of the crisis.)